The rescue of African Bank has been one of the Reserve Bank’s greatest success stories. But it brought a big headache: how to get out of it without too big a loss. Last week it said its preferred exit strategy is an initial public offering. It is going to be hard.

It is easy to forget just how serious the collapse of the bank was back in 2014. It was unusual in that it raised cash in the money markets instead of from deposits. As the bank headed for trouble, a run was triggered on money market funds, even though African Bank paper was a small part of these. The run potentially meant these funds had to pull funding from the rest of the banking system, setting the stage for a contagious financial crisis.

The National Treasury and Reserve Bank had to act fast. The rest of the banking sector, plus a set of international experts, was summoned to help — it was in all banks’ interest to find a solution. The result was unprecedented in SA’s banking history but drew inspiration from international rescues, particularly after the financial crisis.

African Bank was split into a “bad bank” and “good bank”. Its worst loans were put into the bad bank, along with all shareholders and all subordinated creditors. The senior debt holders went into the good bank but took a 10% haircut, along with the handful of depositors.

In an unprecedented step, the Reserve Bank, the Government Employees Pension Fund (GEPF) and the six other largest banks all agreed to refinance the good bank, pumping in R10bn of new equity, with the Bank contributing half of it. The Reserve Bank and commercial banks are also on the hook to underwrite R8.3bn of funding until the end of March 2024.

That stabilised the system. Shareholders in African Bank, including thousands of poor black shareholders and many who pumped in billions shortly before its collapse in a vain attempt to save it, lost everything. Preference shareholders and subordinated debt holders received an interest in the bad bank and the possibility of recovering money if it could recover the bad loans (as it turns out, they’ve received more than I think they could have hoped for).

The good bank went back into business, saving jobs and ensuring that clients who depended on it could continue to be serviced. Five years down the line, the bank is trading profitably.

But it immediately presented a headache. Its shareholder structure consisted of its regulator, with another 25% held by its competitors. The conflicts of interest are obvious. The GEPF owns a quarter. The international precedents suggested they might be able to make a profit — the UK government managed to do that with Northern Rock and Bradford & Bingley but no-one expects that with African Bank.

The ownership structure made African Bank the safest bank in the land. As it stabilised its funding, it had to find new cash to settle the bond holders who were keen to realise the 90% they held from the old African Bank bonds. The bank resumed trading with bonds of R31bn, which has since whittled down to R3.3bn.

To fill the gap it has been raising deposits, which it has built steadily to R13.1bn. It has also tentatively begun issuing new debt, with a three-year floating rate bond in 2021. The sustainability of this approach is one concern I can imagine investors having — just how sticky are African Bank’s deposits without the current shareholder structure?

The Bank has been attempting to sell African Bank to a single buyer, a much neater way to exit, but it hasn’t been able to find any serious offer it considered acceptable. It has also fended off an attempt to turn African Bank into the state bank much desired in corners of the ANC.

There is apparently a lack of appreciation in political circles that the Bank and other banks would want to get back as much as possible of their R10bn of equity. The Bank has written down its exposure to R3.5bn, but it is not going to give that away. Then there is the funding commitments that its existing shareholders have made that African Bank is going to want from somewhere.

All told, the IPO that the Bank now says is its preferred exit route, is going to be tricky. Banks are not well rated by the market, thanks in large part to the Covid-19 pandemic. Most struggle to trade at a price:book ratios above 1 — implying that they are worth less than the equity on their balance sheets.

Back in 2019 you could be confident of a price:book between 1 and 1.5. Plus the specifics, including whether it will keep the funding guarantees that it gets from its shareholders, are going to be critical to anyone thinking of investing through an IPO.

This is not something that will happen quickly.

• Theobald is chair of research-led consulting house Intellidex. This article first appeared in Business Day.

Intellidex‘s Peter Attard Montalto joined Bruce Whitfield on 702‘s The Money Show to weigh in on the 4th Annual Investment Conference, held at the Sandton Convention Centre on 24 March 2022.

“As an event I think the conference went very well. There were actually some interesting panel discussions particularly on impact investing which I think shows that South Africa has a huge amount of thought leadership in these kinds of areas.”

“Overall, in terms of the actual purpose which is to make a commitment to go up to shake or fist-bump the President, which is the point of this whole event, there was very little new money. I mean we’ve heard all of this announced before, either buried in company reports or given to investors on investor days. There was some new money from AFDB the announcement was new albeit there have been chatter in the markets for some time.”

Listen to the full interview below:

Intellidex’s Chairman Dr Stuart Theobald joins Michael Avery on Business Day TV’s Business Watch to discuss the recently gazetted National Infrastructure Plan 2050.

“One has to have action that is guided. Our task is to develop plans that are realistic and then to focus on the implementation. Implementation is obviously where it is all at and I think the cynicism is in the past is that plans are developed and then we don’t get the follow through into implementation,” says Theobald.

Watch the full video below.

Intellidex has produced a major new publication, in collaboration with Business Day, on the future of the electricity sector in SA. It follows two previous publications focused on the birth and progress of South Africa’s renewable energy industry.

The first two publications, Five Years of Renewable energy published in 2016 and The Future of Energy (2018) became the reference point on SA’s evolving energy landscape locally and globally. Those publications told the story of how, through South Africa’s Renewable Independent Power Producers Programme (REIPPPP, an entirely new industry started from scratch in South Africa and how the auction process through successive bid windows had brought prices down to what then were among the cheapest in the world. Following those publications, other countries emulated SA’s highly respected renewable energy procurement model.

Today South Africa’s energy market is in an entirely different place. The REIPPPP stalled due to politics and state capture but is back on track with bid window 5 completed. But private companies are now also allowed to generate energy of up to 100MW without a licence, Eskom is restructuring to separate its generation, distribution and transmission businesses and the entire country is preparing for the transition to a low-carbon economy.

This new publication presents a vision of what the energy landscape will look like in the future while outlining progress made so far in getting there, analysing the obstacles and highlighting what needs to be done. It is being developed by Intellidex’s highly respected team of analysts including its infrastructure and energy research teams. 

This publication was sponsored by Standard Bank. Read the full publication below:


 This publication first appeared in Business Day.

The public relations (PR) from the government on infrastructure has become profoundly unserious. The state of the nation address (Sona), in particular, was filled with too much hot air on the subject. A student housing project is done here, a motorway project there.

Infrastructure is proceeding, no doubt. Yet the budget documents told a separate story. Budgets are continually underspent — about 10% in this fiscal year versus the budget at the start of the year, but about 20% versus the estimates for the current year in the 2020 budget. Infrastructure budgets for the year ahead have been revised down 6% already given departments’ inability to convince the Treasury they actually have the preparedness to spend the money.

The latest GDP data doesn’t quite tell us what “infrastructure” spending is in real terms. But it does show that public and general government spending on fixed capital fell in the fourth quarter to 3.9% of GDP from 4.1% the previous quarter. This is one of the lowest shares yet — shares of output on public investment were last at these low levels at the start of 2002. Clearly not enough infrastructure is being built to fit the PR.

The picture is the same for the private sector. The cabinet statement last week glibly trumpets that of the investment conferences so far — some that attracted about 152 commitments — 45 projects have been completed and 57 are under construction. Overall it suggests that R314bn, or 40.6%, of total commitments have been expended. Amazing. But the data averaged only 10.5% of GDP in the fourth quarter of 2021 versus 11.4% pre-Covid. We have a vastly, crisis-screaming higher unemployment rate now than pre-Covid or at the start of the Ramaphosa administration and higher inequality to boot. All this, yet R314bn has been spent?

Some in government understand why this is so, though many — dare I say most — don’t. The problem is not an investment strike in either the public or the private sector. A total of R581.5bn was invested in the private sector in 2021 and there was R228.4bn of public and general government investment spending. It’s not that investments aren’t being made, it’s that it isn’t growing fast enough in real terms.

Inconsistent numbers

We need exponential growth in investment and infrastructure. Being able to point and count is not enough.

It is the same problem with the government’s infrastructure funding numbers being bandied about. The public and the private sector are indeed funding infrastructure, but the much-referenced numbers are inconsistent with a much faster-growing pipeline of infrastructure.

Much ink has been spilt in these pages to explain why neither public nor private investment spending is occurring. The reasons are well known. Yet most in the government have misunderstood, misdiagnosed and miscommunicated the issue. They also like to talk only about the jobs undertaken in constructing infrastructure as opposed to the catalytic effect in the long term of the job that the infrastructure is actually performing when complete — replete with talk of job opportunity years and other examples that murder statistical integrity.

We are still going around in circles. At the 2022 investment conference we are likely to see the usual dressing-up of operating expenditure as capital expenditure or brownfield investment plans local firms would have been doing anyway.

Exponential change is hard. We are seeing this now, of course, with actually trying to get wheeled and self-generation off the ground after 2021’s amendments for sub-100MW power  plants.

The signs are not good. In 2021, research & development (R&D) spending in the economy fell 5.1% in the private sector in real terms — there was less spending in real terms last year than in any year since 2011. Meanwhile, mining exploration fell 11.4% after a 18.3% decline. This was the lowest amount spent in real terms on mining exploration since the data set began in 1993.

Commodity cycles

How can this be? Can you call yourself a commodities or mining country if this is what the data is showing? Sure, there was a pickup in brownfield investment by mining companies. This year we will see increasing investment in own-generation projects. But it is saying something when at the start of the Just Energy Transition, with SA in a prime place on so many fronts including the availability of key mineral resources, that few are tapping it.

This is not new, alas. SA has “sat out” previous commodity cycles where you see tax, dividends and share prices move — but not volumes of output, number of people employed or number of mines. This is a nominal, not a real story. Investors are mulling this amid the illegal Russian invasion of Ukraine. There are benefits for commodity countries as people diversify away from Russia. Investors, however, are sceptical that SA will benefit in real (rather than nominal) terms. As the front page of this newspaper showed last week, Transnet is too stuck in the mud already to deal with existing export demands, let alone new ones.

Into this breach steps the National Infrastructure Plan 2050 (NIP2050), finalised by the cabinet last week — to much eye rolling. Yet this document is interesting — remembering it has been signed off by the cabinet. It raises the bar quite high in laying out what “will” happen (not what should happen). As the plan runs counter to the hot air on the subject from the government it is a test. Do cabinet ministers actually know the radical agenda they have signed off on?

Interesting then that the language and specificity of the document allows the government to be held to account in a far more specific way than is possible with much of the existing hand-waving on infrastructure.

Total investment spending in the fourth quarter of 2021 was 14.4% of GDP. This needs to be at least 23% to be in line with peers and closer to 30% to be a dynamic economy.

Ultimately the data is all that counts. It  shows us the reality as we cut through the rhetoric — and it will show what success there is in reaching the NIP2050 vision in future.

• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.

When the president talks of eliminating red tape, as he did in the state of the nation address last month, what is it that comes to your mind? Do we have a list of the bureaucratic nonsense that needlessly costs companies time and money?

The president appointed Sipho Nkosi, former Exxaro Resources CEO and now chair of the Small Business Institute to tackle red tape. Here are a few suggestions for him.

There used to be an indirect list of things to tackle because the presidency was targeting the World Bank’s Ease of Doing Business rankings. Those were abruptly shelved in 2021 after it emerged that countries were gaming the numbers amid “ethical concerns” about the behaviour of officials and consultants. The World Bank has said it will replace the Doing Business report within the next two years.

Those rankings measured 10 issues, from the time taken to open a new business to the time and recovery rate for bankruptcy proceedings. However, these were applied globally (in theory) so were not responsive to the pain facing companies at national level.

For example, the World Bank rankings were blind to the impact of exchange control. When it comes to red tape, there is surely no greater source of it facing SA businesses, particularly those which either buy or sell across borders. Every single such transaction requires forms to fill out (though banks are better than others at managing these). Any time you receive payment from a foreign client you must fill out a form or you don’t get access to the money.

Any time you need to make a payment to a foreign client, forms, invoices, and contracts must be provided. Oh, and there are hefty fees for each bit of this charged by your bank. You are forced to work through an oligopoly of “authorised dealers” so don’t even think of using a global fintech that does foreign exchange for next to nothing in other countries. It still astounds me that the Competition Commission’s investigation into foreign exchange services in SA that has dragged on for years has never made the obvious point that the SA market is fundamentally uncompetitive because of regulations that block entry. But I digress.

Let’s talk about the red tape that besets any company that employs people. Have you ever tried to register with the Compensation Fund? In theory if you employ anyone — from a domestic worker in your home to a highly paid office worker — you need to be paying insurance premiums to the Compensation Fund. I suspect there are a great many employers who do no such thing, and I don’t blame them given how hard it is. This is not the Unemployment Insurance Fund (UIF) but an entirely separate insurance scheme under the department of employment & labour to cover workers for disability and death arising from the workplace. But registering takes months of frustration especially if you want a certificate proving you’ve done it, which the occasional client wants to see. I have no idea what would happen if you (or your employee) tried to claim, but my confidence is low.

Why on earth is the Compensation Fund separate from UIF? And why are premiums not paid to Sars like UIF premiums are? It is in theory a legal requirement, so it’s not like companies have any discretion. (By the way, Sars is the one exception — barring its wobble during state capture — which operates efficiently).

Then let’s talk about the Companies and Intellectual Property Commission (CIPC). This is a mixed bag — registration is quite easy, no doubt in part because this is the element that the World Bank was tracking. The government’s Bizportal is a good idea that notionally makes it easy to register your company simultaneously with most taxes, but it is often down. The problem is once you are registered. You are required to submit an annual return to prove you still exist and whether anything has changed, plus a fee, but the complexity of this form forces you to use an accountant to do it. A simple change of directors’ details can also take a long time before it reflects in records.

Then there is BEE. This has been made much easier for small businesses since 2015 as they need only sign an affidavit which can be obtained online for free. For slightly larger businesses, though, it is still extremely time consuming. The BEE Codes plus interpretation notes now rival the Exchange Control Manual in length and complexity.

Drawing up a full scorecard is difficult, time consuming and expensive. There is of course tension between public policy objectives and the extent of red tape that ties up business. Some information is necessary even if it is expensive for a business to provide (how much is spent, for example, on skills development of black female employees is quite a hard question for most businesses to answer). A straightforward digital portal with streamlined information requirements leading to BEE certification would go a long way to relieve businesses of red tape.

These are just a handful of the areas in which the presidency could make a difference. Cutting such costs would help improve the profitability of businesses which have been in the doldrums since 2008. Low profits mean a low incentive for businesses to open or invest. The president is on the right track and the closing of the World Bank rankings could help by focusing attention on what businesses actually find painful, rather than what would get you points in a ranking.

• Theobald is chair of research-led consulting house Intellidex. This article first appeared in Business Day.