/ 26 February 2015

Parastatals weigh on SA’s future

Nene's "different" structure failed to hide the fact that this new finance minister had nothing much extra to offer anyone in search of any high-quality education or training.
Nene's "different" structure failed to hide the fact that this new finance minister had nothing much extra to offer anyone in search of any high-quality education or training.

Future bailouts for and guarantees required by the parastatals are one of three key threats to South Africa’s fiscal future, according to the treasury.

The other two are weaker-than-expected economic growth and above-inflation public sector wage settlements.

The financial health of the country’s parastatals is so important that the budget review document has a new chapter dedicated to it, titled Financial Position of Public-Sector Institutions.

It signals a radical change from the days when bailouts and government guarantees were hidden deep in the departmental budget votes in the estimates of national expenditure document that accompanies the review.

The government has currently issued R461.1-billion in guarantees to state-owned entities and is exposed to R224.9-billion of this, which has been borrowed against the guarantees. This exceeds the total asset base of the country’s 717 parastatals, which was reportedly R364-billion in 2012.

Eskom has been the biggest recipient. It has received R350-billion in guarantees to date and has borrowed R144.5-billion against these.

Roads agency Sanral has received guarantees valued at R38.9-billion, against which it has borrowed R30.2-billion.

The budget review states that the government would need to consider “contingency measures” if any parastatals required additional bailouts or guarantees.

According to the review, the government is taking measures to manage the risk of parastatal funding by working with state-owned entities to develop and implement realistic turnaround plans.

“Many of the interventions that have been launched will, in the short term, focus on stabilising the finances of these institutions, in particular bolstering liquidity,” it states.

But despite the threat that financially unstable and underperforming state-owned entities pose to South Africa’s fiscal outlook, the government continues to insist that new guarantees issued to SAA and the South Africa Post Office will have no effect on the country’s budget deficit.

Yet, if the parastatals fail to correct their unsustainable financial trajectories, these guarantees – given by the government to allow them to borrow money from the financial markets at more favourable rates than they would other­wise receive – will have very serious financial implications for the state and the budget deficit.

Answering questions during the budget lock-up session this week, treasury officials from the state-owned entity division said that, right now, the guarantees are not affecting the budget deficit. However, they could in the future if the treasury didn’t exercise oversight and insist on structural changes that could improve profitability.

“We need to crack the whip,” one official said.

A treasury official told Parliament in September last year that the government had reached its “prudency” limit regarding state guarantees.

Peter Attard Montalto, the emerging markets analyst at Nomura Inter­national, said that if the loan guarantees to state-owned enterprises were counted, government debt would be close to 65% of gross domestic product (GDP).

SAA insolvency

Detailed in the 2015 budget is an almost doubling of the government guarantee given to SAA, which the budget review states is “technically insolvent”. Its guarantee has been raised from R7.9-billion to R14.4-billion.

According to Finance Minister Nhlanhla Nene’s budget speech, SAA has already drawn R400-million of this additional guarantee.

“South African Airways has been granted a R6.5-billion going-concern guarantee to finalise its 2013-2014 annual report,” according to the review.

Nene became SAA’s executive authority with effect from December 2014 and is working with the airline to refine its long-term strategy.

SAA’s loss-making routes to Beijing and Mumbai have been cancelled, and it has entered into a partnership agreement with Etihad Airways to connect passengers via Abu Dhabi International Airport to four Chinese cities and nine Indian cities.

South African Express Airways also received an additional R600-million in government guarantees in the 2014-2015 financial year, taking its total guarantees to R1.1-billion.

The Post Office has received an R1.9-billion guarantee, which Nene said in his speech was subject to the implementation of its turnaround strategy. An administrator has been appointed to lead it.

The review reaffirmed the already announced allocation of R23-billion to Eskom, which will be raised through the sale of noncore government assets. “In October 2014, we announced a broad package for Eskom, including a capital injection of R23-billion, governance improvements, operational cost containment and additional borrowing and support for required tariff increases,” said Nene in his speech. 

“The fiscal allocation of R23-billion will be paid in three instalments, with the first transfer to be made in June 2015.”

Public institutions

According to the budget review, “given current fiscal constraints, government will address the funding needs of public institutions in a manner that does not increase the budget deficit. 

The sources of such funds can include the disposal of nonstrategic assets such as property, direct and indirect shareholdings in listed firms, nonstrategic shareholdings in state-owned companies and surplus cash balances in public entities.

“Where government support is provided in the form of funding or guarantees, public entities will be required to demonstrate sound business plans, strengthen internal governance and improve operational performance,” it states.

Public institutions often turn to the government to provide a lifeline with public funds without addressing their unsustainable financial position. 

Unless the underlying imbalances are resolved such interventions are at odds with sustainable public finances, the review states.

In 2012, the presidential review committee on state-owned enterprises drew up a report that proposed measures to reform South Africa’s parastatals.

These included a framework for appointing boards, a clarification of the roles of parastatal executives, clear approaches to funding models, the expansion of private sector partnerships with parastatals and improved monitoring and evaluation.

The report also recommended a rationalisation process for a number of entities.