The decision by two credit providers to cease new funding to several State-owned enterprises (SOEs), including Eskom and Transnet, is not really surprising. It was actually inevitable and may gain more momentum in the weeks to come.
It would not have been an easy decision and in an earlier conversation with Moneyweb an obviously stressed Andrew Canter of Futuregrowth articulated the commercial consequences of the current disturbing political infighting within the ANC and government structures.
These consequences are not unique to Futuregrowth. It should have been obvious that the continued financial mismanagement of state-owned enterprises would impact their long-term financial position. And, due to the massive enabling role companies such as Eskom, Transnet and SAA play in South Africa, the impact will be felt throughout the economy.
SAA, which ironically is not on Canter’s list, is a prime example of how political interference, secondary agendas and blatant (and arrogant) corruption have destroyed an organisation. Which fund manager, local or international, will invest in long-term debt where the long-term future of the company is unpredictable?
It is therefore not surprising that Futuregrowth’s announcement was quickly followed by a similar one from the much smaller Danish group Jyske Bank. Don’t be stunned if more names are added to the list. It will also not be surprising to see foreign investors selling bonds over the next few weeks and months.
Another example that justifies Canter’s concerns is the fight between the Treasury and Eskom about the coal supply contract awarded to the Gupta-owned Tegeta mine.
I managed to lay my hands on the “controversial” letter the Treasury’s chief procurement officer, Kenneth Brown, wrote to Eskom CEO Brian Molefe in April. The letter raises concerns about many governance breaches in the awarding and management of the contract.
The contract between Tegeta and Eskom was signed on March 10 2015 and commenced on April 1, a month prior to Brian Molefe’s appointment as acting CEO. Eskom suspended Tegeta’s contract five months later on August 31. According to the letter the contract was suspended after the SABS found the mine’s coal to be substandard (some experts described this coal as nothing more than rocks or concrete) and that it did not comply with the quality stipulated in the original contract.
On September 1, the day after the contract was suspended, Eskom suspended two Eskom scientists that flagged the poor quality of the coal. On Saturday September 5 – five days later – the Tegeta contract was reinstated.
During this period between April and August Eskom paid Tegeta R134 million. Presumably, much more has been paid subsequently.
The letter suggests that Eskom was very lenient on Tegeta during the whole process. The key question is whether other suppliers were also treated with similar leniency. I doubt for example if Glencore would agree.
When brought before parliament, a defiant Molefe strongly denied any untoward activities. He denied that the SABS found that the coal was substandard and said it would be unconstitutional for Eskom to blacklist a supplier without reasons. His precise words were: “By saying so, that makes me a captured person. I am captured by the constitution”.
I hold Molefe in high regard, but the facts and current political developments demanded a more substantial explanation to show that Eskom’s governance structures were impeccable. Unfortunately, this was not forthcoming.
It is therefore not surprising that funders such as Futuregrowth and Jyske Bank are walking away. It would not only be irresponsible but also in contravention of their investment mandates, to invest pension funds in these companies. The risks are just too great.
It is not only fund managers that are alarmed and are taking action. I think there is no doubt that South Africa will be downgraded to junk status in December, maybe even sooner.
Earlier this year all three major rating agencies identified political instability and uncertainty as issues government must address to avoid downgrades. But despite Gordhan’s effort earlier this year to restore confidence and remove uncertainty, the developments of the past two weeks have made Nenegate look like a slight scuffle.
Such downgrades will, of course, trigger more aggressive disinvestments.
Futuregrowth and Jyske Bank’s decisions are critical in this context. They invest savings and pensions and need to mitigate risks. Their decision will add much more fuel to the political fire. Hopefully, it will also contribute to accelerated political change.
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