Governance of State Owned Enterprises What we’ve learned...
Transcript of Governance of State Owned Enterprises What we’ve learned...
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Andrew Canter CIO
September 1, 2017
Governance of State Owned Enterprises What we’ve learned in a year
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…an economic growth trap impacts tax collection negatively and could lead to a wider budget deficit
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SA consolidated budget
We are skeptical about the ability/willingness of government to cut expenditure to offset possible tax revenue shortfalls
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One more local currency downgrade will trigger a RSA bond exit from some global indices (WGBI)Sovereign credit rating scale
Moody's S&P Fitch
Aaa AAA AAA Prime
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB-
Ba1 BB+ BB+
Ba2 BB BB
Ba3 BB- BB-
B1 B+ B+
B2 B B
B3 B- B-
High grade
Upper meduim grade
Lower medium grade
Non-investment grade (Speculative)
Higher speculative
FC -veLC -ve
FC -ve FC LC
LC -ve
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Foreign investors now own 40% of our government bond market!
Change in foreign ownership - RSA Government bonds (nominal & inflation-linked bonds)
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Loose fiscal policy funded by loans may lead to outstanding debt spiraling out of control
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Total outstanding SA government debt
Growing size of contingent liabilities and rising concerns
about the management of SOE’s
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2005-2014Prehistory
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2015Drama builds…
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Transnet Limited: 1064 ProjectLocomotive acquisition
Locomotive infrastructure funding opportunity
Market demand strategy (MDS)
Strongly negotiated legal agreements
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Request for Transnet to be probed over state capture allegations-
http://www.infrastructurene.ws/2017/06/12/request-for-transnet-to-be-probed-over-state-capture-allegations/
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2016Heating up…
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2016Breaking point….
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Why public?
/ Suspended 2 loans: Disclosures (to banks & SOEs) and client letters probably MNPI, and likely to have leaked.
/ R30 billion of SOE exposures in client funds demanded protection -- and that called for a speedy, detailed, and open discussion about governance.
/ Direct engagement with each SOE would take months, probably be dismissed out-of-hand, and likely be vague and uninformative (history of the bond market engagements)
/ In a capital market that has few protections, concerns are dismissed, and investors are fragmented, a public discussion is an effective tool to protect investors/clients.
/ All 6 names SOEs are active borrowers in public capital markets, and accept such scrutiny and commentary
/ Note: No trading of SOE debt by Futuregrowth before or after our announcement.
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Landbank discussions
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/ Publication of a range of policies, charters and documents on LB website:
/ Board of Directors Code of Ethics
/ Politically Exposed Persons Policy
/ Code of Ethics and Business Conduct
/ Fraud and Corruption Prevention Policy
/ Whistleblowing Policy
/ Board Credit and Investment Committee Charter
/ Domestic Medium Term Note Program Memorandum
/ Applicable Pricing Supplements of any listed note issuance under the DMTN Programme
/ Land Bank Governance Structure
/ Presentation of the governance structures of the Board
/ Procurement Policy
/ Agreement reached on changes that need to be incorporated into future bi-lateral loan agreements
/ Changes have been agreed in principle to their DMTN programme, in relation to covenants, reporting disclosures, etc
/ Proposal to make changes to the decision making requirements (majority vs 75%) will be made during the next round of meetings scheduled for November.
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Governance: It’s the ‘who’ as much as the ‘what’
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/ Checklists vs “Upward” vs “Inward” governance assessment
/ Each SOE has its own governance issues/challenges
/ Various founding legislation, but all SOEs have shareholder compacts
/ Seeking disclosure of KPIs
/ Board Appointment Process:
/ Nominations committee? Versus sole control of minister?
/ Board Composition & Stability:
/ Independents, term length, staggered terms, behaviors of ministries
/ Committees Composition, Mandates, Stability, Competencies
/ Conflict management
/ Lending Policies/Procurement Policies
/ Limits of authority/delegated authority (e.g. for loans, procurement)
/ PEP policies
/ “Cooling off” periods
/ Reporting on all of the above!
/ Third party governance reviews
/ We did not engage in remuneration
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SANRAL conclusions
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/ Generally sound governance
/ Needs a larger board, with more varied skills
/ Needs a larger Audit & Risk Committee
/ Board terms should be staggered (5 of 8 in 3/2018)
/ Ministerial power to sweep away Board has been used in the past. Minister has sole right to appoint Board, CEO, Chairperson. No nominations committee.
/ Agreed to:
/ Timely reporting of changes to board, committee or executive management
/ Timely reporting of changes to board or committee mandates
/ Timely reporting of changes to procurement policies or practices
/ KPIs in s/h compact may be reported (?)
/ Implement PEP policy
/ Implement Cooling Off policy
/ Futuregrowth did not “clear” SANRAL per se, as we remain concerned about imbalances.
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Governance: Some learnings
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/ Often the best we can achieve is disclosures and reporting: Hard to change legislation
/ The JSE’s bond listing requirements are very weak
/ Do not protect investors or require reporting.
/ The JSE is now an enabler of poor governance (both corporates and SOEs)
/ Why is a single investor the watchdog?
/ Neither Investors, Ratings Agents nor Auditors perform deep analysis of governance: The “who” is hard
/ The role of National Treasury for financial oversight is critical
/ Ill-intentioned entities and people are hard to stop: But the leaks are coming from somewhere.
/ Is there a larger role for internal and/or external auditors?
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Disclaimer
Futuregrowth Asset Management (Pty) Ltd (“Futuregrowth”) is a licensed discretionary financial services provider, FSP 520, approved by the Registrar of the FinancialServices Board to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. The fund values may be marketlinked or policy based. Market fluctuations and changes in exchange rates may have an impact on fund values, prices and income and these are therefore notguaranteed. Past performance is not necessarily a guide to future performance. Futuregrowth has comprehensive crime and professional indemnity in place.Performance figures are sourced from Futuregrowth and I-Net Bridge (Pty) Ltd.
This document is for information purposes only and is not intended as an offer or recommendation to buy or sell or a solicitation of an offer to buy or sell a financialproduct or security. The recipient is advised to assess the information with the assistance of an advisor if necessary, with regard to its compatibility with his/her owncircumstances in view of any legal, regulatory, tax and other implications.
Personal trading by staff is restricted to ensure that there is no conflict of interest. All employees of Futuregrowth are remunerated with salaries and standard short andlong-term incentives. No commission or incentives are paid by Futuregrowth to any persons. All inter-group transactions are done on an arm’s length basis.Futuregrowth has comprehensive crime and professional indemnity insurance.
Futuregrowth prepared this document in good faith. Although the information in this document is based on sources considered to be reliable, Futuregrowth makes norepresentation or warranty, express or implied, as to the accuracy or completeness of this document, nor does it accept any liability which might arise from making use ofthis information.