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Magazine Issues » April 2020

South Africa asset management roundtable: Global rebound on ice

Funds Europe – In terms of Eskom and the two issues, operational and financial, how much of that is a microcosm of the ESG issues facing South Africa today, in terms of governance and social particularly?

Ambekar – The governance issue is probably more prevalent. We’ve had a decade of corruption under the previous presidency. That has hollowed out Eskom as an institution, so we are now left with a mismanaged entity which has overspent its budget and, as I said before, is not just had operational issues, but financial issues. Taking steps to address these two large burdens for this economy right now requires many of the parties to come to the table. In order to address Eskom issues, every single party that directly interacts with that business has to take a haircut in some way – whether it’s the consumer in terms of increased tariffs, whether it’s the debt holders in terms of maybe a potential haircut on the debt or in the longer term, and then of course the people who work for Eskom and the staff complement, and that is a much more difficult hurdle to overcome and there’s a lot of uncertainty about whether or not that will actually come to fruition, but the labour complement has to be reduced. 

Some of the positive steps we’re seeing from government, and especially addressed in the last budget, was that they are looking internally first and they are trying to address their own wage issues, and that maybe sets up a precedent for starting to address Eskom’s wage issues. So, the governance aspect is starting to move in the right direction, but we are a long way from having a complete solution and being on a more stable footing.

Moola – Having looked at a few of these state-owned enterprises over the last five to ten years, one of the things I’m trying to understand is what sort of a governance regime makes sense? We seem to be in a position where you set up these boards/committees/structures and then people spend a lot of time figuring out how to circumvent them. So, the board box-ticks the requirements without actually fulfilling the purpose that they’re meant for, and I don’t know what the appropriate structure is that actually does provide good governance. 

What is clear is the over-involvement from the shareholder, namely the government, in these entities’ boards is dysfunctional. Either the government became too involved on an executive level or they pushed objectives that were completely opposed to the long-term sustainability of the entities for which the boards were legally responsible. I’ve become a bit disillusioned with the idea of a traditional corporate board structure in a state-owned company. I’m not sure I know what replaces it, but I am not convinced that a board structure makes sense.

Funds Europe – So there could be a potentially more hybrid solution, rather than ridding the board altogether, or is that a question mark?

Moola – I think some sort of hybrid solution makes sense. The ultimate solution is much more clear private sector involvement in infrastructure provision wherever possible. It is a movement away from these mega-entities like an Eskom or a Transnet [the rail, port and pipeline company], which creates massive dependency of the country on any one entity and its governance structure – or flawed governance structure.

Ambekar – We are at such an extremely low base that private sector involvement would only improve the situation. This is unfortunately the situation we find ourselves in, nine hours of load-shedding in Johannesburg is just simply not acceptable, and if that reduces to two hours of load-shedding that’s already a huge improvement. I agree with Nazmeera – private-sector involvement and increased private-sector involvement in power provision is potentially a solution. Some of the government’s willingness to allow, for example, mining companies to self-provide and take some of the burden off the state. They will do it naturally anyway to the extent that they can, and you’ve already seen self-providing electricity and moving off the grid in households as well. Market forces will move you there, and the only caveat to that is that it doesn’t fundamentally solve Eskom’s problems and it’s the burden that it still presents to government from a debt point of view. 

This is a situation which will play out over a number of years, and the fact that it will take a number of years to play out is the reason why our businesses have to adapt and change the way they look at things in South Africa. One of the reactions to that has been that many corporates have started to look offshore and allocate their budgets offshore to find different growth avenues and diversification away from South Africa. Some of the risks that we think about when we look at investments in South Africa: moving offshore and looking elsewhere for growth seems like the right solution, but that in itself present some risks because it’s different jurisdictions, different political regimes, different regulations, and often our management teams who are very familiar with the environment here are moving into unfamiliar territory. If they are stretching their balance sheets to do so, that is another risk they have to contend with if things don’t go well in offshore jurisdictions. 

Boynton – With Eskom, the difficulty is that you’ve got a set of circumstances at the moment that create a wickedly complex problem, and private-sector capital can step up rapidly with solutions – partial solutions or solutions that in some way can mitigate aspects of this complex problem. For instance, this issue of the mining sector being allowed to self-provide, or residential consumers who install rooftop solar being allowed to feed back into the grid in times of surplus. Modest regulatory reforms to the electricity space in terms of these feed-in tariffs would free a lot of private capital to invest in self-provision. These feed in tariffs should be time-based, so in other words if you’re feeding electricity back into the grid between six and eight o’clock at night, you’ll get a higher price than if you feed it in at three in the morning, when demand on the grid is low. These kinds of reforms can potentially mobile private capital in a profound way.

Technology is also moving in this direction; we’re going to see the same kind of thing happen in the power space globally as has happened in telcos. There’s going to be a lot more modest, small grid and self-provision as the whole space becomes deconstructed. These huge utilities that were the structure historically around providing power are not the solution for the future, and certainly the estimates for Africa as a continent going forward are that rooftop solar is 25% of the ultimate power capacity in Africa. It doesn’t make sense to build these huge utilities any more and link everybody up with lines, it’s not the most efficient way to go. 

Government needs to step into this new space with conviction and drive, and that really is the opportunity for us at the moment. Importantly, this all needs to be done conscious of the folk who are going to be negatively affected in that kind of outcome, and we need a just transition that looks to support people employed in legacy power businesses like coal mining into a new set of employment outcomes with retraining or reskilling against this new framework, but for us to remain entrenched in this historic construct is just crazy as a country.

Funds Europe – Overall, are you optimistic or pessimistic on South Africa and the African continent as a whole over the next 12 months?

Boynton – One of the issues for South Africa, and this is a little bit like Australia, is that we are more exposed to climate change than the average global exposure, so we’re going to heat up at a faster rate, the change in our agricultural outcome is more extreme, and it’s the same case in Australia. In a sense, although we are a culprit in terms of our current climate emissions, as is Australia, we’re a beneficiary of getting the climate transition moderated. So, we just need to be thoughtful about how we optimise our position.

Ambekar – I wouldn’t say I am optimistic or pessimistic, just realistic is probably the fair answer. Given where South Africa has come from, from a political point of view we are in a much better space than we were three to five years ago. We are still an integrated population, we are a young democracy, we enjoy basic human rights such as freedom of speech, which I think in some of the more developed markets is slowly dissipating, so there’s much to be positive about in South Africa. 

Now, the evolving global crisis of Covid-19 means that the next 12 months will be tough for South Africa. The African continent will also face challenges over the next 12 months – there are resource-heavy economies, pressure on oil prices will be quite a challenge for certain large economies in Africa which have already not shown significant growth over the last three to five years, so I think a very challenging 12 months both for South Africa and Africa. Longer-term, if some of the underlying local issues that we’ve spoken about are addressed, there is reason to be optimistic. 

Moola – South Africa’s outlook is going to be determined by our actions over the next 12 months in that the global environment has become distinctly unfriendly. As we started the discussion, I was saying it may reverse quite quickly if there’s stimulus and the virus subsides, but we don’t know, and we can’t count on that. So, it’s about self-help. 

To me, the two things that we need to be doing are: one, if the South African government was a company, it would be controlling costs, which means controlling the public sector wage bill. Two, South Africa should be doing everything we can to improve the top line, which would be the growth outlook. In this case, it means energy reform – the sale of spectrum, making it easier for small businesses to operate amongst other things. The regulatory reform we were talking about, essentially anything we can do to implement regulatory reform. 

That’s it. If we can actually do those things, and there’s some signs it is potentially possible, the next year could leave us in a position where locally we are in a really good space in two or three years. If the global conditions improve, that would set us up really well, but it is about self-help. Without self-help, an improving global environment is not going to help us nearly as much.

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