PETER ATTARD MONTALTO: Zondo reports remind us of the pong and the value of sniff tests

People have remarkably short memories.

The use of the Zondo reports, the latest instalment of which is due now (possibly on Eskom specifically), is not so much to tell us anything on the narrative of state capture that is not in the public domain. Instead, it is to ensure that no-one forgets what happened before the cleanup is complete (it’s still far from it, of course) and pull it all together into one place that then looks forward with recommendations.

The reports are a useful, official reminder that some people at the very top of government still don’t pass the smell test amid the lingering pong of the Zuma years. There has also been enough subsequent drama and mismanagement for the ouster of some, one random example being energy policy.

The problem of the Zondo reports is that by pulling together the narrative into one place and making specific recommendations on individuals, they raise the bar on the National Prosecuting Authority (NPA) for success. There used to be a view in 2018, post-Nasrec, that a few orange overalls would be sufficient, and we could all move on. That is no longer true. The level of NPA action required to move the business and investor sentiment dial is not so low.

Herein lies the complexity of what will happen next as the NPA still struggles to drive a lift-off in conviction rates and orange overalls. We can see this in much of the frustrated media coverage of the NPA. Without successes, it is only likely to become more intense.

Reinforced outrage

The lack of consequence management in general worries foreign direct investment (FDI) corporate and portfolio investors. One of the most frequent questions I still receive from such people is, what happened to the instigators of the July 2021 unrest? It’s the same for Russia.

SA’s all-but-support for Russia in the past month has reinforced not so much eye-rolling among investors and many SA business leaders as outrage. I’ve rarely seen a situation in which people have been so angry at a government stance.

Memories can be temporarily frozen however, and so some businesses welcomed the opportunity to fist-bump the president at the recent investment conference with no real mention of the issues such as the Russia-Ukraine conflict or the xenophobia gripping parts of Gauteng and spreading elsewhere.

I do wonder if this reinforces a bubble mentality around the president, though equally there are very good people around him who do know exactly what’s going on. Yet, puzzlingly, the president often seems surprised by events.

The recommendations, particularly in the final report due in a month, are likely to burst several bubbles. It will be important to watch in this key ANC election year.

Widely known

Markets have a loose relationship with retrospective introspection and popping its own bubbles. Through the period of the state capture of Eskom yields rose on the state-owned entity’s (SOE’s) debt and became too juicy versus the government’s backdrop of the entity for most investors to consider taking a higher road. True ESG (environmental, social and governance)  investing from 2014-2017 was not as entrenched as now.

Yet at the time events at Transnet before its leadership moved across to Eskom were widely known in the markets. Indeed, I remember writing quite openly about it at the time a new Eskom CEO was appointed. Similarly, the plundering of Eskom was clearly laid out in due diligence reports that banks and investors all read during the period. Markets should have been more worried when a CFO didn’t pass the sniff test.

Nenegate was so frustrating because it was the bringing into the open of more of what was going on — yet markets shrugged and moved on quickly in the face of attractive carry trades. Few investors boycotted Eskom debt. The rest would appeal to benchmarks and indices that must be religiously tracked.

Futuregrowth needs praise exactly for being so brave to stick its neck out, though a handful of investors onshore and offshore did similar things less vocally. By contrast, some individuals were intent on buffing up the image of the Zuma administration with investors.

Moral compass

Things started to change a little towards the end of the Zuma administration, in 2017, and financial conditions tightened meaningfully for SOEs and the sovereign. Yet the involvement of Gupta entities was widely discussed in markets from the start of the second Zuma administration and the Transnet-Eskom switcheroo in 2015.

ESG investing is a hideous term for applying common sense and a basic moral compass. After the Russia-Ukraine war, ESG lenses will be applied much more widely and rigorously by global investors, and it will affect SA.

But it is a useful moment, as we reach the end of the Zondo reports being released in the next month, to think a missing part of the narrative has been that markets did not re-price risk and do their homework sufficiently during the Zuma years of state capture. Things could have turned out very differently had that happened.

Investors should react faster than outsourcing common sense to “ESG governance score providers” who can take an age to update ratings in response to reality. Similarly, being index bound should never be an excuse. These issues are beyond Zondo’s scope, but yet important.

It is critical for the future that we shouldn’t fall into the “Mandela trap” of assuming benign leadership forever — as the ANC inexorably loses its grip on power and the NPA’s actions possibly fall short of requirements, risks will rise. Vigilance and appropriate applications of the ESG lens will be required.

Or perhaps just a simple sniff test to future-proof SA from another round of state capture.

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