Like many people in black business, I cannot help but suspect that the attempt by Transnet CEO Maria Ramos to present evidence of her predecessors’ incompetence is little more than an attempt to create a compelling rationale for the public to support sweeping changes at the transport and logistics company.
Management theorists talk about creating a burning platform; a new CEO must create a sense of deep crisis to be able to push through radical changes. If there is no crisis, the CEO must invent one or exaggerate the problems. Yet, a few months before Ramos arrived at Transnet, the company had reported a 248% increase in operating income to R5,1-billion. Even after stripping out an extraordinary item, there was still a 144% increase in operating income.
This year further losses at South African Airways would not have constituted grounds for dismissing the board and senior executives because Transnet would still have reported a decent operating profit of about R4-billion.
Transnet eventually impaired SAA assets worth R3-billion, while reporting hedging losses of R6-billion at the airline. Spoornet impaired assets worth R4,5-billion. The Transnet Pension Funds reported a deficit of R7,6-billion.
But there is also mounting evidence that the National Treasury was party to the financing decisions, which led to the current problems at SAA — or, at the very least, knew enough about them to share the blame for allowing the situation to deteriorate into its present mess, which has cost R11-billion.
A letter dated July 18 2003, written by former SAA chief financial officer Richard Forson to Director General of the Department of Public Enterprises Eugene Mokeyane, explains the relationship between the National Treasury and SAA. It confirms that nothing happens at SAA without the Treasury knowing about it, and that Transnet and SAA executives had been in favour of rand financing, which would not have required a hedge.
The letter reads: “SAA enjoys a close relationship with the National Treasury. All transactions involving the funding of SAA’s fleet have to be discussed with the National Treasury first. It is fair to say that the conflict of interest that exists between the National Treasury and SAA is that, whereas the airline would like to fund as much of its fleet programme in rand, the National Treasury’s requirement is for the airline to borrow as much [United States] dollars as possible to fund aircraft acquisitions.”
Rand financing would not be as risky as a hedge.
“Before any aircraft financing structure is implemented, discussions are held with the appropriate representatives at the National Treasury, including Brian Molefe and Lesetja Kganyago.
“A meeting was held with representatives of the National Treasury, including Messrs Molefe, Kganyago and Malan in April/May 2000. At the meeting, the approval for the utilisation of SAA’s US dollar funds was requested. In addition, authority to commence hedging was also requested as the Reserve Bank would have referred the application made by SAA to it, to the National Treasury.”
Later the document says: “A letter dated June 3 2002 was received from the Reserve Bank, under the authority of the minister of finance, approving SAA’s request to hedge its fleet exposures arising from the Airbus deal.
“It was agreed at a meeting in November 2003 that SAA could finance two of the aircraft using US dollars and one using rands. SAA also gave the undertaking that it would not enter the currency markets during the period November, December and January 2003 so as not to increase volatility at a time when the markets are traditionally very illiquid. We would also advise them once we intended to re-enter the markets in 2003.”
This report confirms the account given by numerous Transnet executives and previous board members that SAA dealt directly with the National Treasury on the issue of hedges, even to the extent of ignoring the Department of Public Enterprises, then headed by Jeff Radebe. SAA executives were acting with the knowledge of the National Treasury, which had provided a macroeconomic rationale for dollar financing.
Previous board members say the first discussions about hedges began long before they were appointed in November 2001. “I may be wrong, but I cannot recall a single meeting where the issue was discussed before it became clear that there was a big problem,” a former board member says.
“SAA is corporatised and has its own identity and its board that did not believe itself to be accountable to Transnet. We wrote letters to the government complaining that we had no control over the airline. We asked the shareholder to get the corporate governance in order because the parallel structures had blurred the lines of accountability,” he says.
Ramos eventually found her reason for dismissing the former board in the form of a report by Quindium, an adviser to the board, which put the potential liabilities from a derivative contract at Spoornet at R25-billion. A derivative contract carries a similar risk to hedging. (The contract had been negotiated before the previous board was appointed and signed in January 2002.)
She took the report to the board meeting on August 11. For a while, taking a R25-billion impairment of assets was on the table. But it soon became clear that it would result in Transnet breaching loan covenants. This would enable creditors to seize the company’s assets.
At the board meeting different views were expressed. One was that there was no need to take a knock until 2006. Another was that there was only a need to write off R1-billion this year. Eventually, a figure of R9-billion was agreed to, based on a recommendation made by Deloitte. The R9-billion — of which R4,5-billion was written off Spoornet’s accounts during the 2004 financial year — refers to a scenario that may arise over the next 23 years. It is an outrageous thumbsuck based on dodgy assumptions. The pension fund deficit is not a real deficit; it refers to a scenario that may arise after 30 years.
The questions that should now be asked are: What role did the government and the National Treasury play in creating the mess at Transnet? Why has it taken a decade to come up with a plan for Transnet? Has Ramos been deployed to Transnet to fix problems she helped create while at the National Treasury?
Why did the National Treasury sit on the sidelines while the albatross of the pension fund decimated the company’s balance sheet? The first prize would have been for the government to take over the obligations to pay existing pensioners, thus freeing Transnet to invest in infrastructure.
It should be remembered that most of the inefficiencies at Transnet arise out of a failure to invest in infrastructure over many decades. But the premise of the growth, employment and redistribution strategy was not to invest in infrastructure, which compounded the problems.
The government, as the shareholder, and, by implication, the National Treasury should take responsibility for the state of Transnet’s balance sheet and its impact on the company’s income statement; management should take responsibility for the company’s operating performance.
An insight about the future of Transnet: there is a new chemistry between Transnet and the National Treasury. Ramos will cherry-pick the best businesses that generated earnings of R2-billion this year, and shift the problem businesses elsewhere.
The government will take over the liabilities to the pensioners and rearrange the balance sheet; funds for infrastructure will now flow like manna from heaven. Transnet will start receiving privatisation proceeds. One can only imagine the bonuses that will be paid when today’s write-offs become tomorrow’s profits.
Duma Gqubule is a journalist and analyst. Transnet will reply next week