This week’s announcement by the South African fixed-income asset manager at Futuregrowth that it will no longer be lending money to six State-Owned Entities (SOEs), shortly followed by Denmark’s Jyske Bank, comes as no surprise to those who have delved a little deeper into the financial policies and activities of leadership within many of these SOEs.
OUTA has for some time studied the questionable accounting practices of a number of SOEs, and observed over the past seven to nine years a surge in SOEs’ revaluation of fixed assets to current day replacement costs.
Having inherited these healthy and well maintained but highly depreciated assets until around 2008 to 2011, leadership within many SOEs began applying an “overnight asset revaluation” to provide a sudden and massive improvement to their asset to liability ratios. This in turn enabled a sizeable increase in their borrowing abilities and, hey presto, the piggy banks began to overflow and the spending frenzy on capital projects, more often than not at grossly inflated costs, began to flow. Projects with trains, planes, roads, stadiums, power plants and homesteads galore were the order of the day, and Tenderpreneur Central was booming at an all time high.
Under normal competitive trading environments, companies and auditors have no problem with the application of International Financial Reporting Standards (IFRS) and the revaluation of capital assets at current day replacement values. However, the application of these standards is questionable when it comes to state-owned companies that do not operate in a competitive environment, and which begin to inflate their assets for borrowing purposes, often at high finance costs, and then are unable to sell off or trade these overinflated assets under normal business transactional conditions.
Regular bond trading auctions became the order of the day and SOEs which once borrowed to build began to borrow in order to finance debt and operating costs, due to inefficiencies and poor performance returns.
Some SOEs, such as Eskom, merely passed on their increased costs to a trapped customer base. Being backed by Treasury all these years was bliss for our SOEs, but the pressure brought to bear weighed heavily on the diligence of Nene and Gordhan, who sent strong messages of “curtailed bailouts” and fiscal prudence.
But the connected SOE leaders paid little heed and looked to the boss-man for sympathy and help. The bailouts and Treasury reallocations continued to flow (a la SAA and others), if under duress. And the people began to get angry.
And when the people get angry, they look for easy and valid reasons to stop paying their taxes (a la E-Tolls et al). The pressure on the Treasury grows and more demands for prudence and improved governance ring out at Budget time. Again. Alas, the connected few refuse to believe the warnings, their insatiable thirst to drink from the SOEs’ tender trough a little longer sets in, and the showdown between Treasury and the Almighty Purveyor and Overseer of all SOEs sets in.
For the millions who have watched this charade unfold with painstaking clarity over the past few years, Futuregrowth’s call is long overdue. The shocking governance and lack of oversight by these SOEs which spend and plunder like there’s no tomorrow needs more than a strong message from Treasury. We need broader signals of courage, just like this new call from the lending community.
In saying so, it’s a double-edged sword, as the pain that our nation will feel from the dampened investments and higher interest charges will hurt us all. But which is the lesser of the two evils? I for one prefer a current heightened pain to stave off the possibility of a delayed collapse. Pay high now, as opposed to double the rate of tomorrow, if indeed there is a tomorrow.
Yes, Futuregrowth and Jyske, your concerns of the meddling, inefficiencies and corruption within the South African SOEs are well founded. We share your worry about the political uncertainty created through greed and self-interest, as opposed to that which would be best for nation building. We ask furthermore that your analysts and leadership express in no uncertain terms to our governing authorities that, until those in power and who created the mess are removed, your lending decisions will remain missing in action.
These are the decisions of the moral investor. No money should flow, not at any interest rate, for irrational and wasteful spending. For these are the decisions that favour the longer-term health of the entire nation and its people.
The time has finally arrived to see new players and stakeholders enter the fray and help South Africa to remove the rot, fix the broken parts and watch the healing of our SOEs unfold. DM