Solly Moeng | First things first: We must be able to trust those running our SOEs

According to copies that have been seen of the ANC’s economic reconstruction document, there are plans afoot to establish a state bank and a state-owned pharmaceutical company.

It is hoped that once in place, these two entities will help government decrease the price of medicines; and for the pharmaceutical company and for the state bank to enable the state to play a bigger interventionist role in the economy, specifically in mining, manufacturing, energy and other sectors.

No one on the political left can deny that all of these are noble aims. The only worry is that no one on the political left will admit that the state has a poor record in managing anything that involves a lot of money. It has, over time, squandered its credibility in this respect. We know how the story ends, and it’s a major concern when the money involved belongs to someone else.

In truth, it always belongs to someone else.

And if credibility is currency, SA’s government has spent its share unwisely.

Having run the economy to the point of a total sovereign credit rating junk status – and we were most of the way there before we faced Covid-19 – and having managed to come up with a R500 billion stimulus package made, in part, of loans that will have to be repaid over many years, it is clear that the state has run out of sources of easy, relatively cheap, funds. (Well, not quite; there are the pension funds of South Africans. First, government employee pension funds, next, those of everyone else.)

The aims are good – but the means?

Enoch Godongwana, head of the ANC’s aptly named Economic Transformation Sub-Committee, will not refer to what the governing party aims to do as prescribing assets – those are not the words markets would like to hear. So there will be no force used to access pension funds. Instead, there is a proposal to amend Regulation 28 of the Pension Funds Act to enable trustees to look beyond the stock market and bonds when making investment decisions. According to Godongwana, this isn’t a veiled attempt to introduce prescribed assets.

Now, few will disagree that there is a need to kickstart, restructure, and to grow an economy in South Africa that is a lot more stable and inclusive than we have known for too many decades. It is therefore not the aims of government we should be worried about, but the means. And our worry should be informed by our experience of at least the past decade; certainly more. That past cannot be erased.

Government, in other words, has some work to do if it wants to live down that past and convince South Africans that it is trustworthy.

Has it done that?

The case of a state bank

Before we can contemplate the establishment of a state bank, we must consider the woes currently faced by the Land Bank for a minute. This a critical institution in the agricultural sector. It has extended approximately 28{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of agricultural debt in South Africa and, by implication, its funding support benefits more than 200 000 jobs and up to a third of the country’s annual agricultural GDP. Should the Land Bank be unable to support these commercial farmers, an alternative funding mechanism would have to be found quickly to replace it and to avoid a systemic risk in the agricultural sector.

In addition, the Land Bank needs to support a sizable number of smallholder and emerging farmers and enable them to graduate to become commercial farmers empowered to contribute to food and job security. An unchecked failure of the Land Bank can therefore result in less funding support in the immediate future for ambitious smallholder and emerging farmers.

The Land Bank gets little direct funding support from government and is therefore required to raise funding from the expensive and volatile capital and debt markets. It cannot operate like a commercial bank by taking deposits and offering transactional accounts.

This results in it having an uncompetitive cost of funding, low interest margins and limited, non-interest revenue. Given its status as a state-owned entity with concentration risk exposure in the agricultural sector, capital and debt market funders will have high yield expectations when they grand any funding to it, further increasing its cost base. These structural realities make it impossible for the Land Bank to earn enough interest revenue to cover its costs. The high fixed operational cost base is also not sustainable.

There is an opportunity for government to consider a different business model for the Land Bank, one that would enable it, for example, to partner with a commercial bank to drive its commercial mandate. Such an arrangement would make it easier for the bank to fundamentally restructure its operations to focus predominantly on the development of smallholder and emerging farmers and enable them to graduate to become commercial farmers.

This is a critical and much-needed role in support of land reform initiatives. It is known that South Africa is in dire need of more commercial farmers to support job creation and food security.

The notion of a state bank, which could incorporate the commercial part of the Land Bank, is theoretically possible, but there are two concerns. First, such a state bank should be regulated by the Prudential Authority of the South African Reserve Bank (SARB). This could take at least five years to implement all the risk management processes, develop quantitative credit models and implement technology to make it compliant with the regulatory environment. The Land Bank’s current dire straits do not allow that kind of time.

Secondly, the implementation track record of our government leaves a lot be desired. It is therefore hard to imagine how government as we have come to know it can successfully deliver the establishment of a state bank.     

Furthermore, nothing can improve at the Land Bank without its Board taking some blame for the lack of clarity and decision-making since December 2018. After many years of mismanagement up to 2009, this bank began to experience some positive turn-around between 2015 and 2018 under a stable executive team led by TP Nchocho as CEO and Bennie van Rooy as CFO. People closer to the action agree that once these two executives left the Bank, its fortunes turned around quickly and deteriorated almost overnight. It did not help that it until early 2020 to appoint a permanent CEO and CFO.

No business can survive this level of uncertainty, especially when potential debt investors lose faith and begin to look elsewhere. The Land Bank situation is not helped by the fact that an acting-CFO was suspended following suspicion of procurement irregularities in Quarter3 2019 and that no outcome has yet been announced in the disciplinary process that has now been continuing for several months. The downgrade by Moody’s also did not help.

In the end, government will likely simply add to the number of publicly funded institutions that will end up like the Land Bank and other SOEs if their mandates and business models – supported by strong and decisive Boards with needed space to take sound decisions – cannot be shielded from political interference.

Without public and market credibility, government will find itself relying instead on manipulation and the use of force to ram down unsound decisions that will further erode trust.

* Solly Moeng is brand reputation management adviser and CEO of strategic corporate communications consultancy DonValley Reputation Managers. Views expressed are his own.

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