Financial Mail - Investors Monthly
Free-spending SOEs gobble up government funds
SOEs’ R1.2 trillion asset base can be used to improve the economy’s productive capacity, but they have to address their operational management and governance problems
National treasury has increased government guarantees to state-owned enterprises (SOEs) to R477.7bn in the current financial year, up from R469.9bn a year earlier.
The amount is equivalent to a quarter of government’s total national debt, allowing companies such as Eskom, the SA National Roads Agency and SA Airways (SAA) to access cheaper funding to continue their operations.
These companies have borrowed R308bn against this guarantee so far, treasury says in the Budget Review.
“A government guarantee is a commitment to take responsibility for a loan in the event of default; it enables the beneficiary to access funding that would otherwise be unavailable, or to borrow at rates that reflect lower-risk premiums,” it says. These guarantees, however, pose the biggest risk to the fiscus and serve to increase the risk premium on the nation’s debt, and government seeks therefore to maintain “these liabilities within prudent levels”.
Treasury aims to use the combined R1.2 trillion asset base of SOEs to partner with private investors and improve the productive capacity of the economy, finance minister Pravin Gordhan said.
These entities, however, have to improve both their operational management and governance on their boards to be effective agents, said the minister.
“There’s no doubt about that,” added Gordhan. “There’s room for significant improvement in governance. State-owned enterprises are the major risk we face.”
While the country relies on SOEs to execute its service delivery programmes, many of them are going through operational and management turmoil, largely as a result of political meddling by government ministers and officials, negatively affecting their ability to execute the mandate of government.
Gordhan said treasury will use the legal mechanisms available to it to support these entities, including leveraging the Public Finance Management Act to achieve financial sustainability.
SA is in the middle of a large capital investment programme in the energy sector, where Eskom is investing in build two coal-fired power stations.
At completion in 2022, Medupi and Kusile power stations will add a combined 9,600MW of generation capacity, taking Eskom’s total output capacity to more than 53,000MW.
As such, the utility has the biggest exposure of this debt guarantee, at R350bn. Eskom will have borrowed R218bn against the guarantee by the end of next month, according to the Budget
Review . It will this year probably use another R43.6bn of the guarantee, followed by R22bn for each of the following two years.
Eskom will continue to draw down on this debt while it works towards the completion of the 12 generating units of the coal-fired power stations. Only one unit is in commercial production at Medupi; the second generating unit was synchronised into the grid in September last year and will enter commercial production in March next year.
The first generating unit of Kusile is expected to only enter commercial production in July next year, with the last of six units being completed in 2022.
Earlier this year, Eskom announced the completion of
While the country relies on SOEs to execute its service delivery programmes, many of them are going through operational and management turmoil, largely as a result of political meddling by government ministers and officials
building activity at its Ingula Pumped Storage Scheme in the Drakensberg, which adds another 1,332 MW of capacity.
Eskom has already used up almost twothirds of its guarantee on its current capital build programme, and it will need a whole lot more when it launches its ambitious nuclear power investment programme.
This month the utility announced that it had received an overwhelming response from nuclear vendors to its request for proposals to build the next fleet of nuclear power stations.
Eskom has admitted that its balance sheet cannot fund the nuclear programme, and that it will ask the government for the required funds.
The next-biggest guarantee, at R200bn, went to independent power producers, which have had to contribute renewable energy to help Eskom meet demand over the past three years. These companies have already used up R125.8bn of the debt.
Other companies making up the R477.7bn in government guarantees include roads agency Sanral, which manages a national road network of just under 21,000 km.
Its R39bn guarantee is followed by the R25.7bn guarantee of debt owed by the TransCaledon Tunnel Authority, which is responsible for the construction and maintenance of the country’s dam and water-provision infrastruc- ture, mainly in Lesotho, where SA draws the bulk of its water.
The riskiest debt profile, however, is the total R19.1bn guarantee afforded to SAA.
The national carrier still doesn’t have a management team in place, with a succession of executive directors and top management coming and going under controversial circumstances over the past four years.
Nonexecutive chair Dudu Myeni, whose term was extended by a year to September, has been accused of crippling the airline through interference in executive roles.
In the next few months SAA will appoint its fifth CEO in four years, and adopt its 10th turnaround plan in 15 years.
Together with subsidiary Mango, SAA has retained Bain & Co to advise it on the proposed merger with sister airline company SA Express, also a perennial loss maker.
Gordhan said the merger would optimise the use of its resources and consolidate the government’s exposure to the aviation companies.
His plan of part privatisation of the combined entity through a sale of stock will, however, be met with stiff resistance by his colleagues in cabinet.
Government formally abandoned the privatisation of companies it owned about a decade ago, and has since resisted all efforts to sell its many loss-making entities.