Concerns persist over state-owned entities

Gordhan did not mention additional funds for the technically insolvent SAA. (Waldo Swiegers, Bloomberg)

Gordhan did not mention additional funds for the technically insolvent SAA. (Waldo Swiegers, Bloomberg)

Finance Minister Pravin Gordhan deliberately avoided the word privatisation in his budget on Wednesday.

His decision not to mention it, given the crisis at many state-owned entities (SOEs), has disappointed analysts, who believe more drastic action is needed to relieve the strain that many of these entities place on the government’s finances.

Nevertheless, the entities, which have been associated with overspending and serious underperformance in recent years, have not escaped the minister’s cost-cutting gaze, and some of the measures taken are “a step in the right direction”.

Gordhan said the government had changed its approach to these institutions. They were no longer “sacrosanct”, he told journalists at a press briefing before his budget speech to Parliament.

“Often the view within both government, but outside as well, is all state-owned companies are sacrosanct, they can’t be touched,” he said.

“There is evidence now that these are not sacrosanct, that we are ­willing to take a tougher look at each of these entities.

“I have not used the P-word [privatisation],” Gordhan said. Instead the focus was on “minority equity participation and co-investment”.

One example of this is the plan to introduce a minority equity partner for the beleaguered state carrier SAA to “draw on private-sector capital and technical expertise to improve its performance”.

The treasury, with the department of public enterprises, will also explore the merger of SAA and SA Express, he said.

The extensive government support for these entities is becoming untenable. Government guarantees for ­state-owned entities’ debt now total R467-billion, or 11.5% of gross domestic product.

The portion of these guarantees that the government is directly exposed to – known as the exposure amounts – and recorded as contingent liabilities in its books will rise from R225.8-billion in 2014-2015 to R258-billion by March 2016, according to the budget review.

The largest exposure is to Eskom debt, which accounts for about 65% of the total exposure amount.

In addition, in the interests of reporting transparency, the power purchase agreements Eskom has signed with independent power producers will now be recorded as contingent liabilities in the budget, adding about R200-billion.

Rationalise and consolidate
In line with the president’s State of the Nation address, Gordhan committed himself to implementing the recommendations of a 2013 report of the presidential review committee on state-owned entities. The proposal is to rationalise and consolidate them, particularly the smaller and medium-sized ones, where their mandates overlap.

The National Housing Finance Corporation, the National Urban Reconstruction and Housing Agency and the Rural Housing Loan Fund are already being merged. This is being done by the department of human settlements and is expected to result in a “more efficient housing finance delivery mechanism”.

The state is also overhauling the governance framework of these entities, with plans to standardise board appointments and remuneration to ensure that “compensation growth is contained and linked to efficient performance”.

But this will not happen overnight. The treasury’s Avril Halstead said the shareholder management model, which includes different components, is being reviewed, but it is likely to take three years until legislation gets drafted.

Gordhan also committed to greater participation by the private sector, not just in terms of co-investment in major infrastructure projects, but also to allow for greater private competition in “well-­regulated sectors”.

The budget review said the economy has been characterised by high levels of economic concentration “with many state-owned companies enjoying a monopoly or dominance of the sectors in which they operate”.

Allowing competition would improve efficiency and increase investment levels, entrepreneurship and employment, according to the budget review.

An obvious example would be the electricity generation sector, Halstead said, but could also include areas such as port operations.

The treasury is already getting tougher on state-owned entities such as Eskom.

It has delayed some of the payment of the R23-billion it raised through the sale of government’s stake in Vodacom until Eskom complies with several conditions that were attached to this, including cost reductions and improvements in its maintenance and capital expenditure programmes.

Gordhan also warned that Eskom needs to improve efficiency to ensure a ­moderation in electricity price increases.

Private-sector capital
He did not announce further guarantees for the technically insolvent SAA, which the airline needs to remain a going concern.

Instead, the government is seeking to draw in private-sector capital and technical expertise to improve SAA’s performance and continue with turnaround efforts such as reducing leasing costs, ending ­unprofitable routes and making ­savings on procurement.

But experts were cautious about whether these efforts go far enough, considering the expectations built up in the run-up to the budget, including calls for the all-out privatisation of ailing state companies.

Nosibusiso Ngqondoyi, the head of research at Novare, said, although some of the measures were a step in the right direction, such as the merger between SAA and SA Express, they have not gone far enough. The government’s position on privatisation is “neither here nor there”, she said.

Great expectation had built up in the investment world on this issue ahead of the budget and the government “needed to be seen to be doing something in that respect”.

The introduction of a minority partner at SAA was “something to dangle”, but much more decisive action was needed, Ngqondoyi said. She was sceptical about how much interest there would be in a loss-making airline, especially when a minority share in the company meant any private sector player would not be allowed to exert much influence over how the company operated.

The state should have agreed to the outright privatisation of loss-making state institutions, she said.

She welcomed proposals to rationalise the SOEs where mandates overlapped, though “logistically, this may be a challenge to implement”.

To begin with, they employed many workers and where there was a duplication of roles, rationalisation might mean getting rid of employees.

“Is this something that government wants to be seen to be doing?” she asked.

Razia Khan, the chief economist for Africa at Standard Chartered, said SOEs still pose a risk to public finances and “deeper reassurances on reforms will likely be needed to mitigate this threat”.

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