It seemed like an excellent idea when first mooted in April: the major banks were going to play a significant role in government’s programme to help ensure businesses stayed afloat during the Covid-19 lockdown.
The guaranteed loan scheme would enable businesses with annual turnover of less than R300 million, who were financially distressed as a result of Covid-19, to apply for attractively priced loans to be used for operational expenditure such as salaries, rent and utilities. National Treasury would provide an initial R100 billion guarantee to the banks, with the option to increase it to R200 billion.
The plan was that the banks, which are not obliged to extend Covid-19 loans, would use their own risk-evaluation and credit application processes to decide whether or not to approve an application.
This seemed like a great opportunity for the private sector’s biggest players to demonstrate they were willing and able to play a decisive role in assisting government – an opportunity to show it was possible for the private sector to work with government. Who better to oversee the critical role of loan dispersals than banks that had established relationships with the borrowers?
So, what a tragedy it is that after five months all that has been dispersed is a meagre R16.08 billion, the biggest chunk by Standard Bank.
If SA suffers a second round of infections and lockdowns as Europe currently is, government might be better advised to pursue proposals to inject equity and not debt into the businesses.
The Public Investment Corporation (PIC), with the assistance of the banks (in a bid to avoid a repeat of the cronyism that has dogged the PIC for the past decade), is ideally placed to provide equity financing.
Properly managed, it would create a Covid-19 version of a sovereign wealth fund that could become extremely valuable.
The flaw in the plan
Perhaps the biggest thing missing from the loan guarantee scheme, and what ensured its lack of success, was the fact that no bank linked it to its executive remuneration scheme.
In fact it’s likely every remuneration policy announced since April implicitly discourages the dispersal of scheme loans.
The idea of providing ‘cheap’ loans to its customers must go against every instinct in our profit-driven bankers and overwhelm any inclination they may have to help save the economy and the country.
Within weeks of the scheme’s launch I was told about a business that would have been an ideal candidate for a loan. But instead of getting a loan, the bank hiked its overdraft rate on the grounds that Covid-19 had made the facility a riskier proposition. Why would it do otherwise? It reckoned it knew the limit of what its client could afford, so why lose out on a very attractively-priced overdraft facility by providing a cheap loan?
It was only when the client threatened to report the bank to the competition authorities for Covid 19 price-gouging that it reversed the already-implemented increase in the overdraft charge.
If the scheme is to have any chance of success it must be tied in to the executive remuneration schemes of each of the banks.
For the next three or so years short- and long-term bonuses should be heavily weighted in favour of the scheme.
That would help to get bank executives over their inbuilt resistance to margin-threatening cheap loans that are intended to save the economy.
Shoprite’s recently-released annual report reveals there was no increase in guaranteed pay for CEO Pieter Engelbrecht in 2020. Fortunately for Engelbrecht, who did have a great year, his bonuses more than made up for his unchanged R16.9 million guaranteed pay, ensuring that his total remuneration for the year was up 35% to R28.7 million.
Details of the fees paid to Shoprite’s non-executive directors (NEDs) highlight a disturbing trend evident at most JSE-listed companies. There was a time when NEDs would be happy to get significantly below R500 000 for this part-time job that consumes a few days of their lives each month.
Now, most NEDs are getting closer to R1 million.
Of course we have the remuneration industry to thank for this as well as the King Code, which keeps all the NEDs busy looking for boxes to tick.
Shirley Zinn’s R854 000 looks particularly generous given that she quit in dramatic fashion just six months into her stint as lead independent director. (For some reason, perhaps connected to the timing of the AGM, the Shoprite NED fees are paid for the period from beginning November to the end of the following October.) Zinn announced her resignation in early November 2019, days after what must have been Shoprite’s most heated AGM in its 40-year history. The board meeting held immediately after that AGM will also have been a dramatic affair.
News that Woolworths is ‘investing’ R750 million in reducing food prices is good news for its customers and is no doubt intended to help dispel notions that the retailer is only interested in catering to upper income consumers.
But assuming these price reductions – focused initially on chicken products – won’t all come from increased efficiencies, it’s not such good news for the retail group’s suppliers, who presumably will be expected to contribute to the price reductions.