/ 23 February 2022

Budget 2022: Godongwana sticks to tough love talk on SOEs, but dishes out funding to Denel

According to OUTA
The finance minister made a smallish exception for Denel in terms of funding but warned that the government wants to push ahead with plans to consolidate SOEs that no longer served a function

Finance Minister Enoch Godongwana on Wednesday mostly stuck to his “tough love” approach on state-owned enterprises, with Denel proving the predictable exception after cabinet colleague Pravin Gordhan reaffirmed plans to rebuild the arms manufacturer.

The treasury has allocated the cash-strapped entity another R122-million to meet its debt obligations, after giving it a cash injection of R2.923-billion in November’s medium-term budget policy review after it defaulted.

Overall though, Godongwana signalled that the government intended to push through with a rationalisation process that may see it dispose of parastatals that no longer added value to the economy.

“Denel cannot meet its obligations as they fall due … Broader alignment is required between the department of defence, the department of public enterprises, the treasury and other relevant stakeholders to guarantee Denel’s future,” according to the budget review.

It added that this would enable the company to implement its strategic plan to consolidate, sell non-core assets and forge ahead with identified strategic equity partnerships.

Denel was devastated by state capture and had its bonds suspended by the JSE recently after delaying interest payments on two notes, although the state has over the past two years stepped in to slash its debt from R3-billion to R290-million.

A conditional allocation of R5-billion to the troubled Land Bank in the current financial year — with an additional R1-billion per year to follow for the next two years — was “unlikely to materialise” by month end, because of delays in concluding negotiations with lenders.

The 2022-23 fiscal framework now makes provision in the contingency reserve for a R5-billion conditional allocation.

Under pressure

The budget review notes that the aim is for parastatals to make profits and to borrow on the strength of their balance sheets. 

In reality, however, it says their collective financial position of big state-owned companies remains under pressure, and their combined cash flow has consistently declined for the past five years.

“Falling profitability led to a 47.4% decrease in net cash operations, from R56.3-billion in 2019-20 to R29.6-billion in 2020-21.

“Average return on equity — used to gauge efficiency in generating profits — has deteriorated to negative 14.6%. Burdensome cost structures, mainly consisting of high-debt service costs and employee compensation, continue to hinder profitability.”

The treasury said it plans to introduce a framework outlining the criteria for government funding of parastatals during the course of 2022-23, adding: “The future of state-owned companies will be informed by the value they create and whether they can be run in a sustainable manner.

“To reduce their continuing demands on South Africa’s public resources, the treasury will outline the criteria for government funding of state-owned companies,

during the upcoming financial year.

This builds on Godongwana’s statement in October that the country should prepare to consolidate some of its SOEs and let go of those that are no longer strategically relevant. 

“I think what I want to do is practice tough love,” he said at the time, and on Wednesday reached for the same phrase to say it was given practical meaning by the introduction of the framework with its criteria.

Past government equity injections to parastatals — amounting to some R290-billion since 2013 — have helped to reduce their combined liabilities by about 11% to a total of R853.4-billion.

Eskom’s ongoing debt wows

Eskom will remain by far the largest borrower over the medium term. In the past year, it accounted for 49% of the R38-billion in budgeted borrowings parastatals managed to raise off their own bat.

The electricity utility faces maturing debt of R67.4-billion over the next three years. It also continues to rely on government guarantees and equity to keep operations going, with the latter coming to R31.7-billion in 2021-22 as part of the R230-billion bailout over 10 years to service its debt which has been front-loaded in recent years through a special appropriations bill tabled in 2019.

Godongwana is on the record as saying the treasury has no plans to dig deeper than that to help Eskom solve its debt woes. In his budget speech on Wednesday, he stressed that a return to load-shedding, together with the July unrest and renewed Covid-19 restrictions, eroded the economic gains of the first half of 2021.

By the beginning of this financial year, the company had used R281.6-billion of its R350-billion government guarantee, with another R7-billion committed. It had the benefit of a special dispensation of further guarantees of R42-billion in this financial year and R25-billion in the next, and at this point remained within these limits.

The long-awaited restructuring of the utility hit a hurdle in December 2021 when it missed a deadline to complete the legal severance of its transmission as a subsidiary, partly because its lenders had not yet approved the restructuring. 

The treasury said it was now expected to complete the legal separation of its generation and distribution sections by the end of this calendar year.

The budget review stressed that most parastatals deferred their capital investment projects to hold cash in hand to meet short-term commitments. In 2020-21 this resulted in a 6.2% decline in their consolidated asset base.

The budget nodded to the difficulties at Transnet, the SABC and state insurer Sasria without dipping into the coffers to offer them relief. Sasria was given R22 million in the current year but, going forward, the treasury said it would increase premium prices, review insurance arrangements and explore ways to increase its client base “to strengthen its ability to respond to risks without relying on the government”.

It said the department of public enterprises aims to finalise the partial sale of SAA to its strategic equity partner and to reintroduce long-haul routes in the second half of this year.

The airline will get R1.8-billion in the coming financial year. The money was earmarked as part of its business rescue process and will settle historical debt.