SOE solutions: All stakeholders have a role to play

Given their critical role in the economy, government shouldn’t only pay attention to SOEs when they’re in crisis: Bakang Letshwiti, Absa Corporate and Investment Banking.
Averting a water crisis while fixing the Eskom crisis, the top two priorities identified by Absa’s post-budget review panel. Image: Shutterstock

 

TEBOGO TSHWANE: Most of South Africa’s state-owned enterprises [SOEs] hold developmental rather than profit-driven mandates, but that doesn’t mean they shouldn’t be financially self-sustaining. Years of unfettered financial and operational mismanagement as well as poor governance at major SOEs has led many of these entities into financial distress, eroding their ability to fulfil their mandates and increasing their reliance on taxpayer support through the national budget. A key focus of President Cyril Ramaphosa’s presidency is to erase the financial deterioration of SOEs so they can play their role in fostering economic growth.

To expand on this from a private sector perspective is Bakang Letshwiti, the coverage sector head for state-owned companies [SOCs] at Absa Corporate and Investment Banking.

Bakang, there’s no doubt that SOEs have a crucial role to play in supporting growth in the country, but how can they do this more effectively than they have been?

BAKANG LETSHWITI: Thank you. I think it’s important to highlight up front that the solution and the answers are not going to come from the SOCs alone. There is a role that the shareholder needs to play. There is a role that the private sector – including the lenders and the investors in the market – can play, making sure that we all get to a solution that is workable and sustainable.

Read: Fix the nuts and bolts of SOCs

We continue to emphasise that SOCs are a catalyst to economic growth and so, in the era and in the space where we find ourselves as a country, we are not going to succeed – we are not going to achieve any economic growth – without our SOCs tagging along. And making sure that they have been stabilised and are profitable and not continuing to be a drain on the fiscus [is necessary].

We held a forum after the minister’s budget speech where we were debating issues like this one and trying to come up with solutions. We had representatives from state-owned companies, we had the investors, National Treasury and the shareholder ministries in one room where we realised that we cannot continue doing things the way we were doing them before. We need to continue in this effort to reposition and restabilise our state-owned entities.

At the forefront of this discussion is the government’s role, which can only be played by government in their capacity as the shareholders to strategise, prioritise, and inform the rest of the stakeholders which ones are the key entities.

Once that has been discussed and agreed to, then it’s a question of government’s oversight role. Once there’s a proper governance structure in place, there are executives and a board in place, the next question is sorting out and making sure that everybody understands the role that the shareholder plays [in terms] of oversight.

We have seen a lot of going wrong in the past and we have had a lot of complaints about interference from the shareholder.

It’s not a usual scenario where private companies find themselves with shareholders who maintain a distance and allow the board and the executives to play the role that they need to play and hold them accountable. We need to get that right in ensuring that our state-owned entities can be repositioned and stabilised to play this crucial role that they need to play in supporting our economic growth.

Critical SOCs

TEBOGO TSHWANE: Now, speaking of supporting that drive for economic growth, what are the critical SOCs that you have identified to support in order to ensure that there is growth and job creation?

BAKANG LETSHWITI: As one of the major commercial banks in the country, it’s important for us to support the plan that is communicated to us by government. In deciding which SOEs we support, we are to a large extent led by the shareholder, we are led by our clients, and at the top of the list is Eskom.

If you look at the amount that government has committed towards assisting Eskom, R112 billion now in the medium term, R56 billion of that will be flowing in the 2020/2021 financial year followed by R33 billion and R23 billion. Alone when you look at that and when you combine it with the statements that have been made in the past by the president, the minister of finance and the minister of public enterprises, Pravin Gordhan, it’s clear that Eskom is the key entity that needs to be supported.

Also when you look at Eskom and its systemic impact on the entire economy, without power, there are so many sectors in the economy, the banking, financial services sector alone will not be able to function without power. The mining sector will be impacted, the manufacturing sector, tourism will be impacted without power. And apart from the power utility Eskom, which is quite an obvious one, the next important sector to look at in the cluster of state-owned entities is in the water sector.

We need to do a lot of work around the water infrastructure now before we get to a crisis, similar to the one we are [in] now with load shedding.

So when we look at prioritising and where our efforts we think as a country and maybe as a bank can be focused on, we think it’s power and water. Water is a critical one, I think the country had a sense and an experience of how difficult it can get if the water resources are constrained, as when we saw the Western Cape scenario. But we actually need to start doing something now in supporting our water-infrastructure SOCs before we get into a crisis mode.

Preventing collapse at SOCs

TEBOGO TSHWANE: Bakang, you’ve mentioned that a collapse of SOCs would be catastrophic for the country, because of the systemic impact it would have across the economy. So then how do we prevent this from happening? You’ve mentioned issues around governance so far. You’ve mentioned issues of ensuring that we get clarity on government’s oversight role. Who is normally the sole shareholder in these institutions? What else can we be looking at?

BAKANG LETSHWITI: There’s a number of things that needs to be done and some of them are actually being done even at the moment.

Government is not sitting back and waiting for the SOCs to collapse. There is the work that was done at Eskom leading up to the roadmap that was announced last year; the SOC council that is being spoken about right now that we are all waiting for; forums like the one that Absa facilitated on Friday – these are various ways in which we continue to engage and hold each other accountable as citizens, individual and corporate citizens of this country, to make sure that we don’t leave things up until we get into a catastrophe.

So I think one shouldn’t get a sense that there is nothing that is being done at the moment. Is it enough? Maybe not. Is it happening at a pace that satisfies all of us and is going to get us to a quicker result? Not necessarily, but we continue to engage.

Eskom, SAA assistance

TEBOGO TSHWANE: Eskom, as you said, has been identified as a key institution which is central to government’s investment drive and SAA is another state-owned entity which is in crisis and which also received a lot of government backing over the years. And even in the current budget, with the R16.4 billion bailout to cover, it’s guaranteed debt as well as interest. Speaking to SAA in particular, how can this institution post-restructuring, post the business rescue plan being implemented, be assisted to ensure that it fulfils its mandate?

BAKANG LETSHWITI: So with Eskom, we’ve already seen R112 billion being allocated to the entity over the medium term period. We have seen the Department of Energy also moving in terms of just the integrated resource plan and I think where the entity is now is with implementation of the separation [of divisions] that they embarked on last year. The roadmap was announced and we continue to engage with the shareholder, we continue to engage with the entity.

At SAA there is a team, being led by the business rescue practitioners, in place and I guess once the plan has been articulated and they start implementing it, the lending and whether the entity will be able to continue functioning, those things will be determined by the plan itself. [Whether] the plan [is] one that will allow the new restructured SAA to be able to be competitive and participate alongside its peers in the market and whether or not they will be investors or equity providers who actually take an interest in SAA will really depend on the plan and the support of that plan by the shareholder, which is government.

Similarly, with Eskom there is a plan for separation that is in place, and really what happens afterwards is to make sure that all of these things are implemented on time. There is communication with the market and ultimately Eskom needs to be put back into a position where it can go into the market and be able to raise its own funding like it used to. So there is a role to be played by all the stakeholders in the public and in the private sector, but ultimately these will all be determined and underpinned by the plans that are being led by the shareholder.

TEBOGO TSHWANE: Thank you Bakang, That was Bakang Letshwiti, coverage sector head for state-owned companies at Absa Corporate and Investment Banking (CIB).

Brought to you by Absa CIB.

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