The government has committed to avoid further bailouts of state-owned enterprises (SOEs) over the next three years and confirmed it will “let go” of some SOEs that are no longer considered strategically relevant.
Finance Minister Enoch Godongwana said on Thursday the government was going to practice “tough love” with SOEs and that the restructuring of SOEs is a priority.
“We must be prepared to consolidate some of our state-owned entities and let go of those that are no longer considered strategically relevant,” he said when delivering his Medium-Term Budget Policy Statement (MTBPS) speech.
Godongwana added that the government has directed more than R290 billion to bailout SOEs since 2013 “at the expense of important social expenditure”.
“In this MTBPS, no additional funding is provided for state-owned companies.
“The exception to this is where guarantees have been called by creditors and conditions have been met by the SOC [state-owned company] in question, within the context of their strategic importance,” he said.
Godongwana said he also doubted provision will be made for the bailout of SOEs in his February 2022 main budget.
He stressed that state-owned companies are intended to be important enablers of economic development but many have been badly managed and have failed to deliver.
“In many instances they have also been devastated by state capture, making them increasingly reliant on government support,” he said.
The commitment to avoiding further bailouts to SOEs was made despite the admission in the MTBPS that certain domestic risks identified in the 2021 budget have begun to materialise, including the poor and continued deterioration in the financial position of several major state-owned companies, which remains a large contingent risk.
The MTBPS said most contingent liability risk originates in the poor financial performance of major state-owned companies and represent financial commitments the government may have to fulfil in the future if particular events materialise.
Contingent liabilities are expected to exceed R1 trillion by 2023/24.
They consist of government guarantees to state-owned companies, the Renewable Energy Independent Power Producer Programme, public-private partnerships, and obligations to the Road Accident Fund and other social security funds.
The MTBPS says short-term tax windfalls will be targeted to reduce the budget deficit and fund temporary priorities, such as extended support for poor households and public employment, instead of bailing out SOEs.
The MTBPS said the poor financial condition and operational performance of several large state-owned companies is one of the significant risks to the economic and fiscal outlook.
It said government’s strict enforcement of minimum criteria before guaranteeing state-owned company debt, as outlined in the 2021 Budget, has led to a decline in bailout requests.
“Yet the broader context of financial distress, poor governance and unsustainable operations in many entities remains unaddressed,” it said.
The MTBPS said access to capital markets has become more restricted for state-owned companies as a result of weak revenue growth, poor operating performance and mounting debt-service costs. Rising interest rates and increasingly unfavourable loan terms also raise the risks associated with borrowing, it said.
The MTBPS said the Covid-19 pandemic and associated restrictions on economic activity have delayed the execution of capital investment projects, muted tariff adjustments and slowed the collection of payment from users.
Total debt redemptions for state-owned companies will average R73.4 billion a year over the medium term, with foreign debt making up 45% of the total, it said.
In a breakdown of the financial position of several state-owned companies, the MTBPS said:
– Eskom continues to pose a significant risk to the public finances, as it relies on government guarantees to finance its operations and financial support for Eskom is assumed to amount to R224.6 billion from 2019/20 until 2025/26.
– Denel is experiencing difficulties in meeting its obligations and is negotiating with stakeholders on a way forward.
– The Road Accident Fund (RAF) receives about R42 billion in fuel levies each year and pays out R40 billion in claims but has a growing backlog of unpaid claims that reached R14.8 billion in 2020/21.
– South African Airways (SAA) received R21 billion in support from government in 2020/21.
The MTBPS said Eskom had used R281.6 billion of its R350 billion government guarantee facility by March 31, 2021 – 80.45% of this guarantee – with another R7 billion committed.
It said equity support of R31.7 billion was provided to Eskom in 2021/22, with the last tranche of R11.7 billion disbursed on July 1.
“To enable Eskom to execute its borrowing plan, the Minister of Finance approved a special dispensation to allow Eskom to access additional guaranteed debt of R42 billion in 2021/22 and R25 billion in 2022/23, which falls within its existing guarantee facility,” it said.
The MTBPS said Eskom has made progress in its unbundling plan by establishing a transmission company that is now registered with the Companies and Intellectual Property Commission and developed a new corporate structure and allocated debt between its proposed electricity generation, transmission and distribution entities.
It said this proposed restructuring needs to be approved by lenders but the utility has a deadline of December 31, 2021 to complete legal separation of the transmission unit, with the other two units following in the next 12 months.
Godongwana said all of government’s efforts over the past 13 years have been to fix Eskom, instead of addressing security of supply by adding additional capacity to the grid.
He said they have already made significant progress in correcting this through the amendment of Schedule 2 of the Electricity Regulation Act of 2006, which has raised the licensing threshold from 1MW to 100MW, and allowing private power generators to sell directly to customers will alleviate the risk of power cuts.
Godongwana added that creating a competitive energy market will in the longer term help to contain the costs of generating electricity and support GDP growth.
Turning to Denel, the MTBPS said government has provided the defence SOE recapitalisations of R1.8 billion in 2019/20 and R576 million in 2020/21, and extended a R5.9 billion guaranteed debt facility.
It added that several Denel repayment obligations have fallen due this year and government has allocated R2.9 billion in 2021/22 to settle these repayments.
Public Enterprise Minister Pravin Gordhan announced in June this year that the government had agreed to sell a majority stake in SAA to a consortium comprised of Johannesburg-based Global Airways, which owns recently launched domestic airline Lift, and private-equity firm Harith General Partners.
The consortium will take a 51% shareholding in SAA, with the government retaining a minority stake.
The R21 billion in support to SAA from government in 2020/2021 included R10.3 billion for the settlement of government guaranteed debt, R7.8 billion for the implementation of the business rescue, R2.7 billion for SAA’s subsidiaries and R267 million for calls on guarantee obligations on which the airline had defaulted.