SOEs could undo the best laid plans
In the past few months, much work has been done to stabilise the country’s most precarious state-owned enterprises (SOEs) but it is nowhere near finished.
In the 2018 budget tabled by Finance Minister Malusi Gigaba, he made the point that state-owned entities still represent one of the largest, if not the largest, threat to the government’s carefully laid financial plans.
Although the budget did not set aside specific amounts to recapitalise the parastatals, the treasury said some, such as the South African National Roads Agency Limited (Sanral), are going to need additional funds in the coming years.
In outlining the main threats to the budget, the treasury said that if the risks posed by SOEs materialise, it could trigger a fiscal crisis and a downgrading of South Africa’s local currency credit rating. This could increase the cost of borrowing by an average of 2.4 percentage points in the coming three years and plunge the country into a multiyear recession. Economic growth would contract by 3.1% in 2018 and 0.3% in 2019, only recovering to 1.1% by 2020.
“There will be SOEs that will still need support from government,” Gigaba told journalists at a press conference.
Discussions regarding which ones and the amounts involved are ongoing but the government is making preparations for this, he said.
In the case of Sanral, despite work under way by the Cabinet to create a tariff determination framework, the agency’s finances remain weak, thanks to the imposition of e-tolls and opposition to the Gauteng Freeway Improvement Project. As a result, Sanral may require recapitalisation in the 2018-2019 financial year, according to the budget documents.
Gigaba also said national airline SAA will need an additional R3-billion in the 2019-2020 year, in addition to the R10-billion the carrier has already received.
This bail-out and the R3.7-billion provided for the South African Post Office to pay off debts risked the government breaching its expenditure ceiling by R2.9-billion. This is slightly below the initial expectations in the medium-term budget of R3.9-billion breach. The reduction has come about from the use of the contingency reserve fund and projected underspending.
But Gigaba re-emphasised the government’s commitment that any assistance to state-owned entities will be “budget neutral”, which will be achieved by selling noncore state assets, and from strategic private investment participation and capital injections.
The sale of the state’s holding of Telkom shares was initially mooted as a way to fund SAA and the Post Office to avoid breaching the spending ceiling. Although the plan is not off the table, director general Dondo Mogajane described it as selling off the family silver and alternatives are being examined.
“Our options are open. We have been in intensive discussion in the last few months within government to identify certain assets,” Mogajane said.
The sale of some of the state’s 195 000 properties — with an estimated total value of R40-billion — is one option.
Efforts to address corporate governance failings have seen changes to the leadership of both SAA and electricity utility Eskom, but Gigaba warned that the boards of some other state firms are in the firing line.
When this will happen will be clarified when President Cyril Ramaphosa takes over the running of the state-owned companies co-ordinating council, Gigaba said.
“What is clear though is that the Denel board is next in line for review. South African Express is [also] going to need a review, given that we are moving ahead with the plans to consolidate our aviation assets and so the governance mechanism has to be looked at.”
According to the treasury, in the past the defence equipment manufacturer had been able to secure funding from capital markets “but lenders have become increasingly cautious following widely reported lapses in corporate governance”.
This culminated in a liquidity “shortfall” in December last year when it was reported that Denel might not be able to pay salaries. But guarantees were provided by the government on condition that the group fixes its corporate governance failings.
The budget also emphasised greater use of private-sector participation to right the poorly performing SOEs. The Cabinet has adopted a private-sector participation framework and the government will review the funding models of state-owned companies. Part of the process will include inviting the private sector to take equity stakes in state-owned companies.
Transnet, the state-owned logistics company, has plans to develop partnerships to build several port terminals and Eskom intends to use the framework to improve its capital structure and strengthen its balance sheet.
These partnerships will enable state companies to deliver infrastructure without overextending their balance sheets or depending on the fiscus.
Nevertheless, the major state-owned entities will still need to raise money on the capital markets, with the largest of them needing to borrow R360-billion in the coming three years. For the current year, most (54.7%) of this money will come from foreign loans from development finance institutions and export credit agencies.
But this mix is expected to change, with domestic loans making up 51.6%, 53.1% and 56.9% in the following few years.