Investors beware of smooth-talking politicians

Two cases involving state-owned companies illustrate the perils of taking politicians at their word.

The first involves Airport Companies South Africa (Acsa), which two decades ago enticed investors with the promise of a stock exchange listing. That never happened, leaving minority shareholders owning 4.2% with no exit option other than to sell back to Acsa.

Minority shareholders and Acsa have been locked in dispute over the value of the shares for the better part of a decade. The parties reached a settlement agreement in 2017, which was made an order of court. Acsa was ordered to buy back the minorities’ shares at fair value, which was to be determined by an independent referee.

When the independent referee, RisCura, came to a valuation of roughly R78 a share, Acsa – realising it would have to pay out about R700 million – hired a valuator of its own who arrived at a valuation nearly half this amount.

The government has since entered the picture, and has applied to the court to appeal the court order and rescind the settlement agreement.

Politicians in investors’ crosshairs

The minorities, in their replying affidavit, argue that government’s conduct is of such bad faith and its arguments so spurious that they are seeking personal cost orders against the key personnel involved: transport minister Blade Nzimande, deputy director-general of transport Rejoice Phewa, and the state attorney Dovhani Mphephu.

Should the minorities win this case and get cost orders against these individuals, we can expect a multitude of other cases seeking to hold government officials to account where they have used the public purse to pursue illogical or frivolous cases.

SA has cycled through multiple transport and public enterprises ministers since investors were first lured into Acsa in 1998. Times change, and promises made under one administration can be vaporised by the next.

Telkom had been through a reasonably successful privatisation around this time, paving the way for Acsa. Government’s entry into the dispute last year is predicated on the impact the settlement will have on state finances, though minority shareholders point out that the state has neither invested nor loaned a cent to Acsa since the early 1990s.

A lesson for investors

“There is a lesson here for foreign or local investors looking at interacting with state-owned companies,” says Alun Frost, financial advisor to the minority shareholders. “Exercise extreme caution. Promises to investors apparently mean nothing to investors. In our case, we have argued that the government has acted oppressively against the minority shareholders over a sustained period of time.”

There is another troubling aspect to the Acsa business model, adds Frost: it went from a purely commercial enterprise to a developmental tool of government. Evidence of this is the costly King Shaka International Airport in Durban, which Acsa was forced to take on its balance sheet. The initial budget of R3.5 billion was blown out of the water, with final costs tallying around R10 billion. Then government mismanaged the Acsa tariff regulator, which has been dysfunctional since 2006 – further impairing Acsa’s ability to generate reasonable returns.

SAA …

The second case involves SAA, a coddled state-owned embarrassment with a shocking history of driving competitors out of business – quite apart from its more recent litany of mismanagement which last week forced Tito Mboweni to increase its debt guarantee by R6.2 billion.

Comair has argued in court that these guarantees shield SAA from the commercial realities confronting private carriers. So while SAA was able to use the public purse to pay travel agents to direct business its way, the result was catastrophic for the ‘level playing field’ between private operators and SAA that formed the bedrock of the 1990 transport policy. The politicians and advisors who drafted this policy have long since departed, creating a murky environment in which monopolistic tendencies were allowed to reassert themselves.

Earlier this month SAA agreed to pay Comair R1.1 billion for anti-competitive behaviour going back to the 2000s. Comair survived, but many others did not, including Flitestar, Sun Air, Trek Airways and Nationwide.

Recent statements from SAA indicate some contrition over this past behaviour. The future of the national carrier is uncertain, with calls to privatise it growing louder by the day.

All this is relevant in light of finance minister Tito Mboweni’s budget announcement on February 20 that Eskom would be split into three components which would “allow for more competition, transparency and a focused funding model”.

Unions see red

This was a red flag to trade unions, who see the ground being laid for privatisation, whether it be by outright sale of power stations or some other form of private participation.

Eskom is such a mess it will require R23 billion a year in financial support from the state, possibly for a decade, to help service its debt. As with the King Shaka Airport, Eskom is being driven by government into a direction that needs far greater scrutiny – especially by Treasury. The push for costly renewable energy is saddling the company and the country with massive debt, but with no appreciable gain to base load power generation.

It is not difficult to understand the tensions that can exist within cabinet over state-owned enterprises (SOEs). Treasury’s imperative to generate profits and reduce debt can, and has, been trumped by a culture of cadre deployment, or by policies that have catastrophic fiscal implications. This is the mess that Mboweni is trying to sort out by insisting on the appointment of independent ‘chief reorganisation officers’ in SOEs that demand fiscal support.

Public-private partnerships (PPPs), such as the 30-year concessions granted to private companies to operate SA’s main highways, will be offered as a solution for infrastructure development going forward, particularly as claims on government’s budget intensify. Perhaps we should be asking why we pay R240 in toll fees for a trip from Joburg to Durban, years after the concessionaires recovered their initial investment? If the answer is road maintenance costs, then perhaps we should demand to see the evidence of this from concessionaires such as Trans African Concessions (Trac) and N3 Toll Concession (N3TC).

If Mboweni’s budget taught us anything, it’s that we should be paying far greater attention to the intersection of state and public business arrangements.