The recent appeal by Minister Pravin Gordhan for the banks and lending houses to come to the party and assist with finance solutions for our State-owned Entities (SoEs) is not without merit and, in fact, it could be said the banks and lending houses were part of the problem and why the SoEs are in the current mess they are in.
Before you shoot me down, let’s be under no illusion that the captured leadership within many of the major SoEs are to blame for the dire situation these entities are in today. In just a short space of time from around 2009, shortly after Jacob Zuma ascended to the Presidency, most of these government businesses were in relatively good health. What followed was the modus operandi of State Capture and the exploitation of massive capital expenditure projects within SoEs that became the playing fields for the Guptas and others, who raked in billions from corrupt transactions.
All it required was people on the inside to manipulate the procurement processes and steer big projects and business opportunities to the connected cronies on the outside.
The multibillion-rand projects linked to trains, power plants, roads and others, along with supplier contracts of coal, systems, security, computers etc. were there for the looting and continued unabated for a number of years.
So why and how are the banks and lending houses implicated? The answer to this question becomes clearer when taking a look at the balance sheets of these major SoEs over the past decade wherein around 2009 to 2012, most of the major SoEs began to apply the practice of substantive asset revaluation ahead of sizeable borrowings and infrastructure spend. The revaluation of their assets (roads, power plants, rail infrastructure, port cranes etc) had the impact of “improving” the balance sheets of these SoEs, making the Steinhoff saga look like a familiar play.
Strictly speaking, the international accounting standards (IAS) and international financial reporting standards (IFRS) allow for organisations to revalue their assets according to market value or depreciated replacement values; however, the questions required answering in the case of our SoEs:
- How independent were these asset revaluations done at Eskom, Sanral, Transnet, Denel and others;
- Are these realistic and a reasonably accurate portrayal of their asset values and;
- On what basis were these assets being treated as tradable by the lenders to these SOEs. After all, who’s buying our power plants, roads, trains etc. These are assets that belong to the public.
When taking a closer look at the performance of these SoEs and the mounting interest-bearing debt, most lending houses would probably not have extended the loans for as long as they did, if indeed these were stand-alone companies listed on the JSE. But the weren’t. The bonds on offer were backed by the government, meaning that there was virtually no risk for the banks, and what made matters even sweeter, they often came with higher than normal interest rates attached.
There is an ethical issue at play here.
Legal it certainly was, but ethical… highly doubtful.
In essence, if it could be said that not enough questioning of the SoEs’ flat or declining performances was undertaken by the banks. Combine the poor performance with questions about the SoEs’ abilities to service the mounting debt, combined with a dubious revaluation of their assets, and you have sufficient information that should have sounded warning bells to the banks.
This essentially makes the lending houses part of the problem and why they should now be compelled to participate in the recovery of the mess they help create.
Of course, we know they eventually did stop attending the SoE bond auctions by late 2016, but by then it was too late and the damage had already been done. Their absence from the bond auctions should have taken place a few years earlier, when the warning signs were already clear.
Where were the tougher questions before then? Why were they so lenient in their lending habits and flocking to SoE bond auctions? Clearly the comfort of the government-backed guarantees was all too alluring. Add to this backdrop the country’s biggest lender in the form of the PIC with billions incestuously invested in government companies, and a false assurance was given to the banks to keep the loans flowing.
Minister Gordhan has every right not only to urge, but to compel the banks to assist him, Treasury and ultimately the nation in finding solutions to undo the SoEs’ State Capture mess. After all, one could argue that by looking away the lending houses became complicit in the near demise of our SoEs. DM