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

Financial Mail - Investors Monthly - - Budget 2017 - Sikonathi Mantshantsha mantshantshas@fm.co.za

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.

Sun­day Times

SA Air­ways and other state-owned en­ter­prises will have eas­ier ac­cess to fund­ing

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