Departures at South African state firms could drag out
Ramaphosa's reforms
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[June 04, 2019]
By Alexander Winning and Olivia Kumwenda-Mtambo
JOHANNESBURG (Reuters) - President Cyril
Ramaphosa's mission to fix two of South Africa's most troubled state
companies, power firm Eskom and South African Airways (SAA), could take
longer than planned after their chief executives quit within a week of
each other.
Investors say the CEOs' resignations could slow the implementation of
turnaround plans seen as critical to shoring up confidence in Africa's
most industrialized economy, which has for years struggled to grow and
whose last investment-grade credit rating is hanging by a thread.
Since becoming president in February 2018, Ramaphosa has pledged to woo
investment, create jobs and tackle deep-rooted corruption. But his
agenda suffered a major setback on Tuesday, as data showed the economy
saw its sharpest contraction in a decade in the first quarter of 2019,
as power cuts by Eskom hurt sectors like manufacturing and mining.
The roles at Eskom and SAA are some of the most challenging in corporate
South Africa, with fierce disagreements over how the companies should
operate, meaning it will be difficult to find replacement leaders
quickly.
Both have received government bailouts in recent years but executives
say that financial support was insufficient.
Eskom is choking under 440 billion rand ($30.3 billion) of debt --
equivalent to around 9 percent of South Africa's 2018 gross domestic
product. It said last month that CEO Phakamani Hadebe would step down in
July for health reasons.
But two sources close to Hadebe told Reuters that another reason for his
departure was that he felt frustrated at being excluded from important
decisions affecting the utility.
Ramaphosa has appointed a raft of advisors to come up with solutions to
Eskom's woes and has preferred to listen to their views rather than
consult Hadebe, the sources said.
"The government needs to understand that if it wants these companies to
be run properly, then it needs to create an environment where the new
CEOs can function," said Pavel Mamai, partner at fund manager ProMeritum.
"The CEO changes make the task of fixing Eskom and SAA more urgent."
SAA CEO Vuyani Jarana wrote in his resignation letter last week that his
plans to revive the loss-making airline were being undermined by a lack
of state funding and too much bureaucracy.
Jarana, who will leave SAA at the end of August, told Reuters in a May
2018 interview that government funding was critical to fixing the
airline.
Hadebe and Jarana had both been in their roles for less than two years
when they resigned -- a common trend at South African state firms.
"The revolving-door policy at key state-owned enterprises does little to
instill investor confidence," said analyst Shaun Murison at IG Markets.
Hadebe's phone was switched off when a Reuters reporter called on
Monday. An SAA spokesman said Jarana was not available for comment.
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Passengers board a South African Airways plane at the Port Elizabeth
International Airport in the Eastern Cape province, South Africa,
September 30, 2018. REUTERS/Siphiwe Sibeko
MONUMENTAL CHALLENGE
The search for replacements for Hadebe and Jarana has only just got under way.
But the new Eskom and SAA executives will face monumental challenges, which
include navigating the competing interests of different sections of government
and society.
Eskom and SAA report to South African Public Enterprises Minister Pravin Gordhan,
a close Ramaphosa ally respected by investors for running a tight ship while
finance minister but whose management style opponents call interventionist.
Gordhan's aides told Reuters on Monday that the financial and operational crises
at Eskom and SAA necessitated close attention from the minister.
They said the scale of the problems facing Eskom, which range from liquidity
issues to coal quality, meant it was unrealistic to expect the CEO alone to
solve them. Fiscal constraints meant the government had to opt for a "phased
recapitalization" rather than giving SAA all the money it wanted in one go, they
added.
The new executives will also have to establish a close working relationship with
Finance Minister Tito Mboweni, who this year likened giving state funds to Eskom
to pouring water into a sieve and last year said SAA should be closed down. The
airline has not made a profit since 2011.
A further complication comes from labor unions and sections of Ramaphosa's
governing African National Congress party that vehemently oppose efforts to trim
the two firms' bloated workforces.
Analysts say job cuts should be a key component of the companies' recovery plans
and that the stakes are high if those plans fail. Eskom employs roughly 48,000
people, after hiring about 12,000 additional employees in the past decade. A
World Bank research report published in 2016 said it was significantly
overstaffed.
"If Ramaphosa does not come up with a solution to this crisis soon, there is a
good chance Moody's will remove South Africa's last investment-grade credit
rating," said Nigel Rendell, a director at Medley Global Advisors.
"Eskom is the biggest issue hanging over financial markets, and there won't be a
happy ending unless there is a significant capital injection from somewhere."
(Reporting by Alexander Winning and Olivia Kumwenda-Mtambo; Editing by Catherine
Evans)
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