Futuregrowth Asset Management, which manages about R193bn in assets and is one of SA’s biggest institutional bond investors, says the successful Renewable Energy Independent Power Producer Procurement (REIPPP) programme can be used as a template to ensure sustainable funding for state-owned entities (SOEs).
Olga Constantatos, head of credit at the Old Mutual-owned fixed-income investment house, said adopting an REIPPP-like framework would provide a clear template for structuring public-private partnerships (PPPs) that spells out the responsibilities of both the state and private investors, as well as the available legal remedies should obligations not be met.
SOEs could use a REIPPP-like framework to enter long-term concession agreements with private investors and enable them to operate specific pieces of state infrastructure for periods of 15 to 20 years in exchange for agreed fees or tariffs. That would allow SOEs to avoid the thorny issue of privatisation, a politically sensitive option that would involve selling off government entities or ceding equity stakes in some of their infrastructure, which is vehemently opposed by unions.
Under a REIPPP-like framework, the state would provide a financial backstop for PPPs, thereby effectively guaranteeing tariffs agreed with prospective private investors in long-term concessions.
While Constantatos said the goal should be for SOEs entering into such PPPs to be self-funding, guarantees by the government would be a necessary trade-off to reduce project risk. The resultant payoff would be to lower the cost of capital provided by private investors.
“The REIPPP is the classic example of where public-private partnerships have worked really well, so let’s do more of it,” Constantatos told Business Day in an interview.
“It would obviously have to be tweaked for SOEs, but it could potentially be repurposed to encourage private sector involvement in rail or ports.
“The REIPPP provides a crystal-clear framework with no ambiguity. Each party knows exactly what their responsibilities are as well as their legal remedies should a counterparty not fulfil their obligations.”
Futuregrowth has been at the forefront of pushing for better governance at SOEs ever since it famously announced in August 2016 that it would temporarily suspend funding for SA’s six largest government-run companies — Land Bank, the Development Bank of Southern Africa, the Industrial Development Corporation, Sanral, Eskom and Transnet — pending detailed governance reviews.
Constantatos said there have been improvements at some SOEs but she confessed to feeling “disheartened” by the slow pace of reform. The government needs to do more to translate its vision into action, she said.
“The intent to fix SOEs has always been there but the issue historically has been in the execution, the willingness to make the hard decisions,” she said.
Constantatos cited as an example the presidential review on SOEs conducted under the Zuma administration in 2013, which identified tangible steps needed to improve performance. A decade later the majority of SOEs remain in financial and operational dire straits while the performance of many, such as Transnet, has deteriorated.
“We need to relook all the SOEs but government has been talking about relooking them for more than 10 years,” she said.
“At some point the rubber has to hit the road and they have to start making decisions. I’m not saying it’s easy, but it’s definitely not 10 years hard.”
Constantatos suggested that SOEs adopt approaches similar to those of the private sector in appointing boards. The process ministers use now is “opaque”, she said. In the corporate sector, board members are appointed by a nominations committee, a subcommittee of the board that runs a formal process to determine candidate competence and tests thoroughly for possible conflicts of interest.
“It’s not clear that a similarly transparent, needs-based approach is used when appointing the board of an SOE,” said Constantatos.
“The processes as we understand them do not appear to be designed in line with governance best practice.”
Another suggestion she has is for SA to follow the example of Namibia, which conducted a diagnostic study of all its SOEs in about 2016 and then reclassified them into three categories: commercial, noncommercial and those that require extrabudgetary funds. This was done largely on the basis of whether they had the capacity to be self-funding or whether their mandates were more social.
Namibia also identified SOEs it deemed no longer necessary and took action accordingly, such as putting Air Namibia into voluntary liquidation. “I would agree that operating an airline is not government’s business at all,” said Constantatos.
Arranging SOEs into appropriate categories would then allow the government to establish appropriate funding models for each one, with those considered capable of being financially independent earmarked for private sector involvement. Others, such as municipalities or water utilities, could remain firmly in the public sector realm.
Constantatos acknowledged that implementing a REIPPP-like model for SOEs is not a panacea for their ills, but said it would be a starting point to eliminate the “sluggishness in the system.
“The extent of the decay is decades in the making so it’s not going to be fixed in a year or two, or even five,” she said.
“The perfect solution is never going to arrive and if we keep waiting for the perfect solution, we’re going to wait forever. We need much more dynamic decision making and action to address the problem.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.