Why Futuregrowth is suspending loans to S.A's state-owned enterprises

As fiduciaries for its investors’ interests, Futuregrowth has taken a decision to suspend any additional loans to some of the largest State Owned Enterprises (SOEs).  Futuregrowth and the asset management industry are substantial funders to South Africa’s SOEs — notably Eskom, Transnet, Sanral, Landbank, IDC and DBSA — via direct loans and capital and money market instruments.  Futuregrowth’s decision initially includes the suspension of new loans, and roll-overs of existing debt, to those particular entities.   This decision is driven by growing concerns about the governance and decision structures of the SOEs and will remain in place pending a review thereof. We have now suspended negotiations on over R1.8bn of debt finance to three different SOEs.

We have observed recent reports which strongly hint of conflict between branches of South Africa’s government, the possible machinations of patronage networks, and a seeming challenge to the independence of the National Treasury.  This follows many months of such information flow, and stories of evidently patronage-driven contracts/potential contracts by SOEs to what appear to be politically connected persons.

Into this already unsettling environment, we note the recent and sudden announcement that the Presidency would chair a “council” to directly oversee the SOEs.  The meaning, timing, and intent of this announcement, particularly at this juncture, is entirely unclear – and, lacking clarity and context, we feel compelled to view this announcement with concern.  As rational and fiduciary investors we must adapt our views and investment strategies when circumstances change.

Appropriate credit analysis covers a range of factors such as financial analysis and forecasts, strategy and operations, governance and management, and more.  Inevitably, a material risk to the governance, budgeting and approval processes around spending or lending by the SOEs has meaningful impact on any forward looking credit assessment.  Given the shifting circumstances, it is difficult to make a reasoned and defensible decision to continue providing additional funding to the SOEs from client funds until we have re-assessed the veracity of the SOEs’ decision structures.  Ultimately asset managers must answer to their investor clients for decisions made on their behalf.

As Responsible Investors – and signatories of the PRI and CRISA – we have a duty to ensure the entities in which we invest have suitable governance and decision-making structures.  The asset management industry is the caretaker of, and gatekeeper to, peoples’ savings and it is entirely suitable for capital to be provided, or denied, to various companies or sectors based on our considered assessments.

While we have initially identified the six large SOEs (principally due to their capital/money market funding), we may expand that list as we consider appropriate.  However, Futuregrowth presently envisions continuing to provide funding to various government-related entities and private entities that do substantial business with government – thus we presently see no suspension of funding to entities such as alternative energy companies, water boards, municipalities, and the like. 

Undertakings

In taking our decision, Futuregrowth intends to engage pro-actively with each of the SOEs affected in order to gain understanding about the independence of Boards, Investment Committees, Credit Committees and Procurement processes.  We will be seeking to assess the mandates and independence of each SOE.  We will engage with each affected entity individually in order to ask the relevant questions for their business and circumstances.  We are particularly concerned about large procurement contracts, asset sales, and lending decisions.  Thus, as part of our engagement process, we may seek further transparency around material spending or lending decisions, and may seek such disclosure in loan documentation.  

We consider it likely that other investors will share Futuregrowth’s concerns, and thus we intend to engage pro-actively with our industry colleagues through ASISA so that key concerns can be communicated to the SOEs in a joint manner by the investment industry.

Conclusion

Futuregrowth takes this step with dissonance: We have very long-term relationships with these very same SOEs and for decades we have considered ourselves to be their partners in South Africa’s development.  It is certainly not our desire nor intent to undermine their developmental missions, nor disrupt their ability to deliver on-the-ground impact for the country.  But in the current environment, our message is clear:  We cannot provide finance without having clearer sight of, and comfort around, the governance and decision-making of the SOEs.

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