Business rescue for SAA could hurt country’s image
South Africans have recently become more vocal about the risks state-owned enterprises’ (SOEs) debts pose to the economy. Some economic observers argue that “the horse has already bolted” because the government wasted opportunities to rein in SOE borrowing over the past five years, despite warnings from organisations including the World Bank, the Organisation for Economic Co-operation and Development, and the IMF.
Over the past three years these organisations have noted that the main risks to SA’s debt sustainability arise from rising contingent liabilities in SOEs.
Similar sentiments have been expressed by all the major credit rating agencies.
The government is already facing exposure of more than R900bn, mainly because of state guarantees to SOEs, so these companies will require firm management as they pose a huge risk to public finances.
In September 2017, the national temperature was raised by what many considered as unnecessary South African Airways (SAA) bailouts by the Treasury. At the time, the Treasury correctly justified the bailout of Citibank debt as a proactive measure “to prevent cross defaults, which would have exposed the national fiscus as the guarantor for a total debt exceeding R16bn”. A cross default would also have affected SA’s credit rating, further worsening the country’s debt sustainability in the short term.
The seriousness of the debt crisis meant SOEs became the first order of business for President Cyril Ramaphosa. His responses followed a warning in January by then finance minister Malusi Gigaba that Eskom could “collapse the South African economy”.
Since then, several interventions have been put in place to stabilise SOEs and Public Enterprises Minister Pravin Gordhan is well positioned and expected to deliver on this mandate.
Despite a more targeted approach to reforming SOEs, some remain under pressure. Eskom and SAA appear to be the most vulnerable.
Afriforum has announced that they will approach the courts to place SAA under business rescue. They believe this would support SAA’s return to profitability. A similar view has been expressed by the DA.
This strategy is misguided, as were previous calls to let SAA default on its debt obligations in 2017. Allowing SOEs to default would be more costly as it would trigger cross defaults, affect the country’s credit rating and worsen SA’s debt matrices.
However, these proposals provide an opportunity to examine the effect of business rescue regimes on SOEs and perceptions about SA’s approach to its commitments.
In the mid-2000s, I was part of the team that negotiated the new Companies Act and co-ordinated responses from business on the bill to submit to Parliament’s portfolio committee on trade and industry.
Chapter 6 of the act replaced judicial management provisions of the old Companies Act of 1973 with a modern business rescue regime.
Styled on the US Chapter 10 provisions, business rescue is intended “to facilitate the rehabilitation of a company that is financially distressed by providing for the temporary supervision of the company and of the management of its affairs, business and property, as well as a temporary moratorium on the rights of claimants against the company or in respect of property in its possession”.
In effect, business rescue provisions place a general moratorium on legal proceedings against a company and no legal proceeding — including enforcement action — against a company or in relation to any property belonging to the company, or lawfully in its possession may be commenced or proceeded with in any form.
Under business rescue regimes, the practitioners may “entirely, partially or conditionally suspend, for the duration of the business rescue process, any obligation of the company that arises under an agreement to which the company was a party at the commencement of the process and would otherwise become due during those proceedings”.
“No party can apply urgently to a court to entirely, partially or conditionally cancel — on any terms that are just and reasonable in the circumstances — any obligation of a company which arises from an agreement to which the company is a party. Any party to an agreement that has been suspended or cancelled by a business rescue practitioner may only assert a claim against the company for damages.”
Although they changed aspects of contract law in SA, the drafters of the new act were mindful to tackle glaring contract law challenges. And so, business rescue provisions are generally positive in support of private and public companies.
However, for SOEs, business rescue provisions appear to be more complicated, with significant consequences for the companies. The act defines a ‘‘state-owned company” as an enterprise that falls within the meaning of ‘‘state-owned enterprise” in terms of the Public Finance Management Act (PFMA) of 1999.
It could also be a company owned by a municipality as contemplated in the Local Government: Municipal Systems Act of 2000.
The complication that arises is that, in many cases, SOEs possess government guarantees, and the PFMA provides clear guidelines for dealing with guarantees.
If an SOE is placed under business rescue, the unilateral suspension of any contract could be interpreted as a sovereign default, possibly triggering defaults at other key SOEs. Whether this would constitute a credit event depends on individual investors and rating agencies.
Examining the experience of Mozambique, where SOEs defaulted (albeit for different reasons), provides a useful lens to understand the potential consequences for SA.
In 2017, the IMF halted financing to that country, after which a group of 14 donors followed suit.
SOE defaults in Venezuela have also been heavily penalised by the market and contributed to liquidity challenges in that economy, which predated the current governance-induced debt and economic crisis.
Current business rescue provisions assign the responsibilities and authority of a company’s accounting officer to a business rescue practitioner, a clear deviation from the PFMA.
It is not clear which act would prevail in the case of an SOE — the Companies Act or the PFMA.
The drafters of the Companies Act might have not envisaged the possibility of SOEs facing insolvency.
Perhaps the biggest concern about the proposals to place SAA under business rescue is the signal this would send to investors and bondholders.
This is not to suggest that drastic action is not required to tackle SAA’s and other SOEs’ challenges, but rather to caution that placing the state airline under business rescue could possibly trigger an even bigger fiscal headache and reduce the attractiveness of SA as an investment destination.