Budget: SOEs remain a major budget nightmare.

SAA

Finance Minister Malusi Gigaba confirmed in his mini-budget speech that State Owned Enterprises (SOEs) remain a big drain on government resources, and are contributing to the current R50.8bn hole in the country’s finances.

“Recent years have seen several worrying developments with regard to state-owned companies, with worrying trends of governance failures, corruption, operational inefficiency and the need for government bailouts,” said the minister.

“In this way, state-owned companies (SOCs) are developing a poor reputation with the public at large, and have become a major fiscal risk to the country due to government guarantees of their debt.”

He vented his frustration in his mini-budget speech: “As the Shareholder, we are tired of being dragged into crises by those we employ to govern and manage state-owned companies. This must end.

“The trend of SOCs seeking bailouts to finance operational expenditure, inefficiency and waste must also be brought to an end.”

The government’s expenditure ceiling could be breached by R3.9 billion in the current fiscal year, mainly as a result of government’s recapitalisation of South African Airways and the South African Post Office.

Gigaba said that he is considering the disposal of assets – notably the sale of a stake in Telkom – to find extra cash.

Telkom disposal alone could bring in R14bn to R20bn.

Meanwhile, private equity partners will be sought for some state companies – most notably SAA.

The Treasury warned: “State-owned companies that have been able to roll-over maturing debt have done so on an increasingly unsustainable basis, with shorter repayment terms, higher interest rates or reliance on government guarantees.

“Several lenders have declined to roll-over debt falling due and required settlement.

“Government stepped in to bail out SAA, preventing a call on guarantees or the liquidation of the carrier.

It is unlikely that SAPO (the Post Office) would have been able to settle its loan without state support, given the deficit, it has been running for months.

Several others, including Denel, South African Express and the South African Broadcasting Corporation face liquidity shortfalls, and will likely require some form of intervention from government.

Despite the financing needs of the SOEs, it is becoming more difficult to borrow.

“Lenders, alarmed by governance failures, are taking a more active stance. As a result, state-owned companies are having difficulty raising debt, or are forced to refinance debt at higher rates,” said the treasury.

“This situation creates liquidity challenges, leading to greater demands on the fiscus. Addressing this requires not only stabilisation measures at troubled entities, but a broader restructuring of state-owned companies and an acceleration of the reforms highlighted in recent editions of the Budget.”

Treasury is especially worried by the situation at troubled state airline SAA, and hence the decision to seek an equity partner, who would inject cash into the business.

“Government has issued a R19.1 billion guarantee facility to SAA to ensure the company continues to operate as a going concern. Total recapitalisation of R10 billion will be provided in 2017/18,” the Treasury announced.

“An amount of R5.2 billion has already been provided, with the remaining R4.8 billion to be transferred by 31 March 2018.

“These funds will be used for working capital and to settle debt, enabling the airline to reduce its interest expenses. Even after the capital allocation, government’s exposure to SAA debt remains significant at R15 billion.

“There is a risk that if SAA’s financial fortunes do not improve, there will be further calls on the remaining guarantee. A new, full-strength board has been tasked with returning the airline to financial sustainability.

“The appointment of a permanent chief executive officer, who will start on 1 November 2017, is a critical step in ensuring that the airline’s turnaround strategy is aggressively implemented.

“If SAA executes a successful turnaround in line with its projections by 2019/20, its reliance on guarantees will subside, as will government’s risk exposure.”

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