Futuregrowth Asset Management, one of SA’s biggest institutional bond investors, has expressed its alarm over the lack of executive oversight at government-run port and rail operator Transnet, saying it may cause investors to baulk at buying the state-owned enterprise’s (SOE) bonds.
The Cape Town-based fixed-income investor has been a leading voice in the call for better governance at SOEs since it announced in August 2016 it would temporarily suspend funding for six SOEs: Land Bank, the Development Bank of Southern Africa, the Industrial Development Corporation, Sanral, Eskom and Transnet.
While it began lifting the suspension less than two months later, its status as one of the biggest buyers of SOE debt makes the Old Mutual-owned group an influential voice among fellow bond investors on matters such as governance.
Lindani Vezi, a listed credit investment analyst at Futuregrowth, wrote in an investor note issued to media on Tuesday that the asset manager was concerned by the “significant operational challenges” and “evolving governance weaknesses” at Transnet. The note, titled “Executive Oversight at Transnet Derailed?” also expressed concern about top-level resignations and retirements.
“Of the 12 independent non-executive directors, six have subsequently resigned or retired without being replaced,” wrote Vezi. “Alarmingly, four of these vacancies have been open for more than a year.”
In May 2018 public enterprises minister Pravin Gordhan appointed an entirely new board at Transnet in an attempt to clean up governance after years of state capture. The new board’s 12 independent non-executive directors and two executive directors were tasked with tackling years of corruption allegations while also improving Transnet’s management of its rail, port and other assets.
However, since then former CEO Siyabonga Gama was fired; Vivien McMenamin resigned; Tau Morwe, who was acting CEO after Gama’s exit, left after his contract expired; Edward Kieswetter resigned to become appointed head of the SA Revenue Service (Sars); Joyce Ramasela Ganda resigned; Oupa Motaung passed away; Gratitude Ramphaka resigned; and Louis von Zeuner retired.
At present Transnet’s board has only eight members: the six remaining nonexecutive directors appointed in 2018 and the two executive directors, CEO Portia Derby and CFO Nonkululeko Dlamini. Both were appointed in 2020. Transnet’s six nonexecutive directors are Popo Molefe, Ursula Fikelepi, Dimakatso Matshoga, Mpho Letlape, Aluwani Percy Ramabulana and Sydney Mufamadi.
“Our view is that a company of the size and complexity of Transnet needs a larger board, with a broader array and depth of skills than it currently has. We believe that the shareholder — as represented by the minister — should be speedily filling the vacancies with appropriately qualified, skilled, ethical and suitable people,” Vezi wrote.
“That these key positions remain unfilled at this moment in Transnet’s history, and with the significant operational challenges it faces, disturbs us as investors in Transnet, together with its implications on the broader SA economy.”
The terms of the remaining nonexecutive directors all expire in May 2024. This, according to Futuregrowth, creates a real risk of a sudden and immediate loss of continuity and institutional knowledge. Given Transnet’s existing operational woes, the investment group said the protracted process of appointing directors at SOEs could prove “catastrophic” for Transnet.
Futuregrowth also expressed concern that Transnet’s audit committee does not include a nonexecutive director with a finance or accounting qualification and questioned its committees for risk as well as finance and investment.
Pressure
The execution of the group’s R99bn capital expenditure programme is overseen by the finance and investment committee, which Futuregrowth says lacks “critical strategy and finance experience”. This could cause further delays in the implementation of the five-year programme, placing more pressure on the undermaintained Transnet infrastructure.
“Considering the glaring skills mismatch evident in the three subcommittees’ membership, we question the level of due diligence and oversight provided by these subcommittees,” Vezi wrote.
Futuregrowth castigated Transnet for tardiness in announcing changes to its audit, risk and finance and investment board subcommittees. JSE debt listing requirements oblige Transnet to issue Sens statements by no later than the end of the business day after the change. Transnet made such announcements only on June 6.
Futuregrowth said this was more than two months after the most recent board subcommittee appointments, which were announced on January 11 and March 14, respectively.
“The delay in the publication of the Sens announcement leads us to question the effective date of these changes, and whether any decisions that may have been made by these subcommittees during this time were made by a subcommittee that may not have been appropriately constituted,” Vezi wrote.
Futuregrowth expressed concern about Transnet’s poor profitability and reduced cash flow, which required a R5.8bn bailout from the government as announced in the October 2022 medium-term budget, as well as the continued locomotive shortage, persistent cable theft and underinvestment in infrastructure at Transnet Freight Rail, the volumes of which are at a 10-year low.
“Later this year, Transnet will be looking to raise R7bn in the debt capital market when it refinances some maturing bonds. The investor community will surely consider the additional uncertainty introduced by the depleted board and resultant governance shortfalls in assessing the investment case,” Vezi wrote.
“If the operational and governance shortfalls are not addressed with urgency, we believe the number of investors willing to extend funding to Transnet will likely reduce; Transnet’s cost of funding may continue to increase; and additional support — including a possible government guarantee — may become a necessity in order to ensure a successful refinance.”
At the time of publication, Transnet had not responded to questions seeking comment on Futuregrowth’s views.
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