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Government guarantees are not a free pass for lenders

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Sasha Planting is a seasoned financial journalist and Associate Business Editor at Daily Maverick Business.

I stuck my neck out on Twitter the other day and had it chopped off.

First published in Daily Maverick 168

I probably deserved it. Actually, I was agreeing with Business Day editor Lukanyo Mnyanda, who was arguing that reckless lenders to state-owned enterprises need to be held to account.

But I went a step further and argued that if a project or company can’t stand up without a government guarantee, it shouldn’t be funded. That’s because guarantees, in my view, mask the risks associated with a transaction and make lenders complacent. And the taxpayer ends up footing the bill when it goes wrong.

SAA is the obvious example, but there are others too. In SAA’s case lenders have piled debt worth R19.1-billion into the airline, as of March 2020. Did the banks’ credit committees do a risk analysis and give the thumbs-up? “All clear to invest, this one’s a multi-bagger boss.” A multi-bagger is an investment that has gained several times its original value. That’s not the SAA story.

Now SAA is looking for more funding. What are the credit committees saying? Is it a case of, “Oh it’s okay, let’s go ahead, government will step in, in the event of a default?” That was the view of DBSA when it provided SAA with R3-billion in bridging finance in January – its board knew full well that SAA would never repay that debt.

If I were a Standard Bank/Absa/Nedbank/FNB shareholder I would be watching very carefully, and if necessary I would bang on the door, demanding answers.

Of the state-owned enterprises, Transnet is the only one that has consistently raised capital off its own balance sheet – by virtue of the fact that it has, historically, been extremely profitable. This is changing. Rating agencies downgraded Transnet earlier this year, citing increased liquidity risk as a result of loan covenants triggered by an audit qualification on the 2019 annual financial statements. The results to March 2020 have not been released yet, but it isn’t a stretch to imagine that its financial standing has deteriorated materially. Will it get to the point that the state needs to provide a guarantee for Transnet to raise further debt? Transnet CEO Portia Derby and her team have their hands full if they are to arrest the decline.

Increasingly, entities like Denel, SABC, ACSA, the Post Office and the Land Bank require state guarantees to borrow. Furthermore, much of the debt that is being raised is in short-term instruments and is used for refinancing and operations rather than capital investment. Some, like the Land Bank, have defaulted on previous loans and require the state to step up and bail them out.

This is not to say that there isn’t a place for guarantees. There are many examples of good projects that have come to market at a reasonable cost because they are backed by government guarantees. The Lesotho Highlands Water Project is one of them. And the Land Bank – when it was functioning – could lend money to farmers at cheaper rates because its cost of funding was lower.

One set of “good” guarantees that I do have a concern about, which accounts for just under half of government’s published exposure of R385-billion, is that  of the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme.

Let me say, before I get shot, that this is not a criticism of the REIPPP programme itself, or of SA’s transition to a greener economy, which is imperative, or even of our efforts to diversify power supply. But does this mean we should be divorced from the economic reality that Eskom cannot afford to pay for that power? Just because the country needs the power the private sector has built does not mean that the debt that government is guaranteeing is sustainable.

Eskom’s debt is now an estimated R480-billion and climbing. In addition to the pure Eskom debt, the contingent debt via the IPP programme increases this to in excess of R600-billion. Eskom or its successor is saddled with the debt, which, by the way, includes any other new build, whether it is executed by Eskom or a DoE-driven IPP programme.

Eskom support and the resultant argument for government guarantees in support of IPP generation are not sustainable in the long term. If we continue down the path of providing government guarantees to energy suppliers, the need for adequate due diligence as to the sustainability of the tariff will not receive adequate attention. Something has to give. DM/DM168

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