The writer has analysed Pravin Gordhan’s portfolio of shares – banking and real estate – and exposes the influence they have on the state. Les Ma-Ada can be reached on Twitter on @lesmorgp
In recent history, the buzz word in South Africa has been #StateCapture. The President has been accused, primarily by those who support Finance Minister Pravin Gordhan, of been captured by the Guptas. The public has readily accepted this information without stopping to seek a counter balance. If there’s anything I’ve learnt in life, it is that no-one is ever right all of the time. If they are then they can only be conmen.
It was therefore with interest that I read the contents of the finance ministers register of assets to Parliament.
Is it really possible for an entity to capture the interests of a finance minister and manage to keep this from everyone? Our transparency laws make this diffcult to achieve unless the minister or his cohorts are cunning. The short answer is that an enity wouldn’t be able to do so. However that doesn’t stop a “loose’ structure of seemingly random participants from being able to do so. But even they would have to ensure their actions were not seen as having occurred in concert. Simply put, co-incidents. The problem is, there is no such thing as a random occurence. Even co-incidents require two (CO) or more to act in concert.
The finance minister’s shares reveal a Capture of the State at a special level. The conquerers have become so enmeshed in the state that it becomes opaque for an outsider to recognise that the state, and all its instruments, continue to be directed from elsewhere. In my view, pressure brought on Pravin reduces his independence and he would be inclined to make decisions for the benefit of Capital and not necessarily for us as a nation.
Given the myriad of shares that he holds, I wish to focus on a few that point me in that direction. Real Estate and Banking (Specifically the Preference Shares).
Gordhan’s Preference Shares in banks
Preference shares by their nature are shares one holds as security for some sort of loan one has made to the entity, not in the ordinary course of business. In other words, these shares are different from Ordinary shares in that the risk undertaken by their holder is specifically mitigated through a percentage return and not through an uncertain dividend declaration. In return, the entity gives those shares preference over Ordinary shares when profits are realised, or in the worst case scenario, when the entity is wound up. Hence the name Preference. It was with this eye that I wanted to know why the Finance Minister would hold Preference shares in Banks that he is entrusted to oversee. Turns out that Bank Preference shares are an interesting animal.
Lets begin by dealing with the latter part of my statement on when payouts are due. In the manner that these shares are structured, they only pay when Profits are realised. Remember, these are equity instruments. The bank carries no interest rate risk nor does it pay when there are no profits. Apart from the Monetary Policy Committee (MPC) who else determines whether banks make or lose money? Why – it’s our Finance Minster, of course. That’s a handy thing to have. A Finance Minister with a vested interest in the outcome of your very private business.
Bank Preference shares until say 2013, were seen as Tier One shares. In simple English, these Tier One shares are made up of: (1) Shareholders Equity and (2) Retained earnings. Shareholders Equity or in Standard six Accountancy, Owners Equity (we could get technical, but this is the Nett effect), and Retained Earnings being profit after tax and dividends. It therefore stands to reason that Gordhan holds shares in banks while also holding the status of fractional owner. Not just any owner but one with a special concessionary relationship.
Conflict of Interest
In governance terms, it shouldn’t matter how many shares he holds. How many is ever enough? Should a guy tasked with running a department that directly interacts with the banks on many levels – especially the important issue of the Financial Intelligence Centre (FIC) – the same one that failed to see that the banks were rigging interst rates for years, hold shares in the entity that he’s supposed to be regulating? Conflict of interest much!
Banks bidding for their own mole
Another way to look at this is that when Des van Rooyen was fired after that 4 days in December and replaced with Gordhan, the banks were actually bidding for their own mole. But hang on, that’s not where it ends. Its never that simple in South Africa. Trevor Manuel ran this department for many years before being replaced by Gordhan.
Here’s an interesting bit – essentially, the structure of Gordhans shares (share portfolio) which I looked into is such that the banks buy shares in each other. The shares are then used, I suppose as a hedge against profits made by the others, or losses that could be realised. I’m not sure what the rationale is but I can tell you that it has money-making at the end of it.
I suddently understood why under Basel III http://www.investopedia.com/terms/b/basell-iii.asp, these shares were being phased-out. What is interesting is that the period of buy-back or phasingout is 10 (ten) years. That should be more or less the time Pravin would need to set his policies in place such that his Ordinary shares at the same banks will give him a healthy annuity till the end of his days. And how would he go about ensuring that? Hand the South Africa Social Security Agency (SASSA) account to one of the Big Four banks. My bet is that Maria Ramos at ABSA – wife of Trevor Manuel who has run the finance ministry forever. That’s just my view. You’ll be able to draw a parrellel later on.
Grindrod Bank & SASSA
In one of Gordhan’s portfolios was a certain Grindrod. It seemed strange to me that the entire portfolio would hold Banking shares – and then this diversified entity called Grindrod. Then looking deeper I realised that Grindrod was actually Grindrod Bank.
Why Grindrod bank? Simple. Grindrod banks SASSA. Yes, I said SASSA. Look it up before you take my word for it. Who cares who’s making R16 or R 25 per transaction when you could be making returns on the money banked on behalf of SASSA. Yes the profits are also a factor. R 3 427 200 000 (Three billion, four hundred and twenty seven million, two hundred thousand rands), but can you imagine service fees. All those below the line costs none of us bother to look at? It doesn’t matter, you make lots of money come dividend season.
Gordhan’s Real Estate Shares
SASSA had appeared earlier when looking at the Real Estate shares. Rebosis, seems to hold a portfolio of buildings whose main clients are government departments. In one building in the North West Province, SASSA is the main anchor tenant. In another, the National Prosecuting Authority (NPA), and in yet another they are directly advertising to a Governement departments, as the space can be used as a Revenue department…. methinks they mean SARS. Who gets final say on the budgets before these buildings go to “tender’? I don’t have to tell you who signs the budgets.
You see, when I was looking at the Real Estate shares, I was thinking small fry. I was thinking that shares like those held in Rebosis and Fortress, which is a sister fund to one known as Resilient, both holding lots of rural type shopping centres. I was thinking like a rural centre developer and not as a Property owner. Check this out:
In setting up one of these shopping centres you need to create a psychological reason why people should come to your centre. The ANC has often been criticised for using the grant system to entice voters. The reality is that rural economies are all but decimated, with farming not performing as it should or continuing to exploit the masses. However social services, such as clinics, Post Office or SASSA pay-points, are the biggest drawcards to get feet into these centres. So, who actually benefits? Is it the ANC through votes every four-year cycle or is it your Shoprites, Pick n Pays and Boxers (who actually belong to Pick n Pay)?
Let me show you something: You find a piece of ground near or on a taxi rank. Add social services and suddently your large national anchor stores are there in a hurry. So you often find post offices and SASSA offices there too to guarantee feet and also to guarantee your Shoprites that on pension pay days, their businesses will boom. I expect business to make money off the government but I just didn’t expect to find them doing it so boldy as to have the Finance Minister hold shares in their entities. After all this man is supposed to be above reproach.
One of the the shares that Gordhan holds is in a Real Estate Company called Growthpoint. On the surface of it Growthpoint is misplaced. They don’t operate in the rural and township sector. They own A grade malls like Hydepark and the like. In 2011 with Gordhan at the helm of treasury, government through the Government Employees Pension Fund brought 50% of the V & A Waterfront in Cape Town. The PIC through the Government Employees Pension Fund owns the other 50%.
In the world of finance, the story is in the “term sheet’. This sheet holds the story behind the terms of the deal which is later turned into a contract. How Growthpoint came to hold 50% of a building bought for R9.5 billion made dig a little deeper.
The V & A was sold to Dubai World in 2006 for R7 billion odd. Its previous owner was Transnet, Maria Ramos was the GCEO and Trevor Manuel was the minister of finance. In other words, the building belonged to the Pensioners of Transnet. Sold for R7 billion odd and then another group of Government Pensioners bought it for R3 billion premium and brought it back to South Africa. In finance and property terms, that looks like a property flip! In simple life terms, that deal was done in the short term.
Buy for cheap at one price and flip it for a quick profit in a short time horizon. In this instance, it was 3-4 years (I believe short term to be a period between 3-5 years). Who lost money? The Pensioners. R3b to be exact. They also lost out on the annuity income from the centre and the stripping of the rise in equity value of the asset.
You see, when you go through media reports of the time during which Dubai World owned this property, it’s clear to see that they were using this asset as a cash cow https://mg.co.za/article/2011-06-10-tenants-gatvol-of-the-va-waterfront. Tenants complained about a drop in service levels and general apathy by the new landlord despite this being South Africa’s premium and Africa’s most expensive piece of retail shopping centre. You don’t run a crown jewel like that unless there’s a back story. In any case, even with the bad management the property value went up. And this was during a recession.
Here’s a business question: Would Growthpoint buy this property at a loss? Would their shareholders allow them to pay a premium for this building given the above discussion? Hell no! They would have driven the price down and picked it up for less than Dubai World paid for it were it not for the BEE group involved in the repurchase. With BEE, you can create value where there is none. The money would have to be real cheap and they would have made sure that they put as little skin in the game as possible. Without being privy to the term sheet I can tell you that the pensioners got jacked. Pravin would have, again, been intimatly involved in this repurchase as the money came from one of his state owned enterprises (SOEs). It was Pension fund money and given that it was a public-private-partnership (PPP), he should have asked for a cheeper deal. But how can he when he’s a shareholder? Someone must open the files for us to see the intimate details.
The Gordhan/Manuel tag-team over another deal! Perhaps this is co-incedence, but I don’t believe in co-incedence.