The South African National Roads Agency Limited (Sanral) has repeatedly expressed caution and fear of a credit rating downgrade to sub-investment level, one that has hung over its head for the past year or more.
This time around though, Inge Mulder — Sanral’s chief financial officer — implies in her Business Day article (Another downgrade for SA would means another blow for Sanral), that Sanral’s looming downgrade might be the outcome of the nation’s recent sovereign rating downgrade, as opposed to Sanral’s own financial predicaments and management decisions.
Even if SA’s sovereign rating remained above junk status, Sanral’s downgrade to sub-investment grade would probably have been inevitable at some stage this year, due to its rising debt, made worse by the failed e-toll scheme, of which the public owes about R11bn today.
Sanral’s financial problems began in part in 2010, when it embarked on a plan to revalue its assets (predominantly its road network), thereby generating an attractive balance sheet for lucrative borrowing purposes. A similar strategy was hatched at Eskom and other state-owned entities (SOE), enabling a lot of borrowing for large-scale capital expenditure projects.
The now wiser South African public needs no reminding of what happens with large, capital-intensive government projects where tender irregularities, scope creep and cost over-runs end up costing SOEs (and ultimately the public) a lot more than they ought to.
In Sanral’s case, its total asset value rose from R8bn in 2004 to R12bn in 2008, before soaring to R30bn in 2009, then to R187bn a year later and, six years after that — by 2016 — to R334bn.
Its ability to borrow against this massive asset base "improvement" enabled the Gauteng Freeway Improvement Project (GFIP) bonds. But the problem of rising debt was triggered by poor project management and the unwise decision on the e-toll mechanism, which culminated in:
• Cost over-runs and overpricing on the GFIP, estimated by the Organisation Undoing Tax Abuse (Outa) to be about R9bn of the R18bn paid
• Delays in launching e-tolls due to the scheme complexity and an unsuitable regulatory environment
• Lower than originally envisaged e-toll tariffs
• Vastly lower than anticipated e-toll compliance levels
By the end of the 2016 financial year, Sanral’s cumulative debt had risen close to the government guarantee cap of R47bn. Although Sanral is an SOE, it has sufficient independence to avoid a sub-investment grade on many of its bonds, even when SA’s sovereign rating is lowered to junk.
However, it has become almost impossible to achieve this due to the ongoing financial strain and mounting burden caused by the e-toll decision, and despite the fact that Sanral has had its annual Treasury grant increased by about 55% over five years — from about R10bn in 2011 to R15.5bn in the new financial year — to address the non-tolled portion of the roads under its management.
With e-toll compliance levels vastly lower than expectations after a year of operation, their income of less than R1bn a year was barley able to service the outsourced Electronic Tolling Collection Consortium (ETC) collection costs. Compliance dipped throughout 2015 and 2016 to below 25%, despite a multi-million rand marketing budget and a massive discount dispensation to entice the defaulters on board.
This dismal progress sent a strong signal to the investment community, which had previously been assured that Sanral’s tactics would revel positive results. It now became clear that Sanral’s original e-toll compliance expectation of 93% to generate planned annual e-toll income of over R3.2bn was extremely ambitious.
Something had gone horribly wrong. The GFIP bonds were not being serviced and new bond auction spreads widened to reflect investor concerns. Sanral’s debt spiral grew worse by the day.
Despite the odd murmurs of alternative financing options being considered in place of the e-toll mechanism, Sanral’s leadership and their bosses at the Department of Transport are still unable to make the calculated decision to find an alternative funding solution. The only clarity emanating from the Sanral stable, is the continuation of its "lawfare" strategy, which has now become a serious matter, as the battle lines are being drawn between the state (Sanral) and its citizens. And it’s going to get ugly.
Once again, the investment community is watching, less convinced today than they were two years ago about Sanral’s debt resolution plans. The investment community knows all too well the general outcomes of a mass litigation war between a government and its people. Some issues take a while for sanity to prevail, while others are resolved quickly and painlessly through proactive leadership.
Whatever the journey, the general outcome on matters of such significance and quantum ultimately goes the way of the people.
The investment community is watching, less convinced today than they were two years ago about Sanral’s debt resolution plans
The investment community is also very aware of civil society’s collective effort, driven by Outa, which has the impact of a counter-weight to the state’s fight with its citizens. Investors also know by now that even if Sanral achieves a court victory or two against members of the public, or a few default judgments against individuals or businesses, none of these would set precedent. Each and every case is different, and each person has the right to a defence on their own e-toll account.
Investors know that, eventually, an Outa member’s case will have to be heard and the defensive challenge raised will include arguments and facts gathered from years of preparation by a top senior counsel team.
The prognosis of Sanral winning this war is slim and thus the investment houses will prefer to steer clear of Sanral bond auctions. Their appetite to return will only happen once the lawfare has ceased, but this could take years and the costs to Sanral could be much higher than the few million they may be able to retrieve.
Consequently, Sanral’s next downgrade is imminent, unless it is able to find a sustainable solution to cover the costs of servicing the bonds over time.
Eskom and the nuclear procurement is another example of what transpires under poor leadership. Fortunately, though, in the case of the nuclear deal (despite the pending appeal), as it was with Sanral’s Western Cape toll-road plan, civil society caught these irrational and costly projects ahead of the massive capital spend that was about to spew forth, and nipped these plans in the bud.
We believe that both Sanral and Eskom’s future leadership will thank society for taking the corrective action to halt these disastrous schemes. In Sanral’s case, the current leadership is probably silently wishing, in hindsight, that the e-toll scheme was halted back in 2007, when it was mooted. It might very well have been halted, had the process been more transparent and inclusive at the time.
• Duvenage is chairman of Outa
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.