Budget must set the tone for SOE overhaul

Embattled state-owned enterprises like Eskom pose the greatest threat to the South African economy and must be dealt with decisively in the 2018 budget and beyond.

The minister of finance will table the budget on Wednesday afternoon amidst renewed hope of economic recovery under the leadership of new president Cyril Ramaphosa.

According to the Democratic Alliance, the minister of finance will have to tackle a number of issues including a “dysfunctional institutions” and “zombie state-owned enterprises”.

Lullu Krugel, chief economist for PwC Africa, said numerous SOEs are facing financial difficulties, which has led to credit rating downgrades and, in turn, increased financial deficits. As such government must seek out solutions to provide more sustainable funding for these entities in order to turn the situation around, she said.

READ MORE: The Budget will test Cyril’s mettle

Data from National Treasury shows the state had extended almost R480-billion in guarantees to public institutions in the 2016-2017 financial year – R350-billion of which was extended to Eskom alone.

The guarantees and exposure to SOEs pose a significant risk to South Africa’s fiscal position, said Krugel who noted that the two SOEs with the largest exposure – Eskom and the South African National Roads Agency Limited – currently have sub-investment credit ratings.

Apart from the risks they pose, SOEs also play a crucial role in long-term economic development and transformation and are a key source of jobs in South Africa, employing more than 300 000 people, Krugel said.

But it is unlikely treasury can or will provide any more to these institutions, at least in terms of funding.

In 2017, finance minister Malusi Gigaba said there will be more stringent procedures in place regarding future SOE funding. He emphasised their reliance on bailouts must end, Krugel noted. In last week’s State of the Nation Address (SONA), Ramaphosa promised government would intervene decisively to stabilise and revitalise SOEs. “He acknowledged that some of these entities … cannot borrow their way out of their financial difficulties,” she said.

The finance minister must navigate an intricate balancing act between bailing out SOEs and dealing with credit rating agencies threatening more rating downgrades, said Krugel. “The 2018 budget needs to set in motion tangible plans to achieve Mr Ramaphosa’s ideal of restoring SOEs as drivers of economic growth and social development,” she said.

But it is proper accountability structures will improve the quality of governance at these companies which, in turn, would aid the financial health of SOEs. “Improved financial management would eventually translate into improved credit ratings which, in turn, will encourage a greater volume of financiers to invest in SOEs. The result will be a decline in fiscal exposure to the performance of SOEs,” said Krugel.

Already a new, credible board and chief executive officer have been installed at Eskom and controversial and compromised executives such as Anoj Singh and Matshela Koko, have been pushed out of the utility in recent weeks.

Looking beyond budget 2018, President Ramaphosa is looking to undertake a process of consultation with a variety of stakeholders to comprehensively review the funding models of SOEs, Krugel said.

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