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More SOCs set to default

Interest payments to increase by 40% over three years.

More state-owned companies are due to default on their debt as their interest payments rise beyond their ability to pay it, National Treasury warns in its Medium-Term Budget Policy Statement (MTBPS).

Over the next three years, interest payments by state-owned companies are expected to increase by 40% from the current R49.8 billion per year to R69.3 billion.

National Treasury says: “Given the sharp increase in interest commitments, some entities may have insufficient cash to settle their obligations unless immediate reforms are implemented to improve governance and boost profitability.”

The trend however does not bode well for plans to boost the profitability of state-owned companies.

National Treasury discloses that over the last five years the combined profitability of these entities, “measured by return-on-equity, declined from 7.5% to an estimated 0.2%. A growing portion of their operating expenditure is funded through debt”.

Apart from not being able to afford increasing interest payments, lenders are increasingly becoming fed-up with bad governance and therefore refuse to extend loans. The MTBPS states: “As a result, state-owned companies are having difficulty raising debt, or are forced to refinance debt at higher rates. This situation creates liquidity challenges, leading to greater demands on the fiscus.”

Government guarantees to state-owned companies, independent power producers and public-private partnerships currently total R688.8 billion, with total exposure at R455 billion. The difference refers to guarantees that are not currently being used.

Dealing with the largest recipients of state guarantees, National Treasury admits: “Eskom is experiencing financial turbulence because of weak governance. This has led to a qualified audit opinion and a violation of some debt covenants with lenders”.

Eskom relies on tariff increases to ensure revenue growth as sales stall, but history has taught it that national energy regulator Nersa might give it less than it applies for.

“There are also risks that sales growth will perform below projections, or decline as households and businesses improve their energy efficiency. If this happens, Eskom will likely apply for even steeper tariff increases.”

National Treasury describes a lose-lose situation where “Any of the options required to stabilise Eskom could have significant fiscal implications”.

Higher tariffs might limit economic growth while lower tariff increases may weaken Eskom’s financial position, necessitating another government bailout.

The R350 billion guarantees to Eskom have been extended to March 31 2023 to enable it to complete Medupi and Kusile and Eskom is expected to utilise the portion of the guarantees that is still available.

The plan is to appoint a new Eskom board before the end of November. The board will be tasked to improve governance. A positive decision on its various tariff increases “would represent a step-change in Eskom’s future revenues” (and significant pain for the consumer). “Combined with strong cost management, this could allow the utility to cover all its obligations without fiscal support.”

The South African National Roads Agency (Sanral) is expected to increase its borrowings against its R38.9 billion government guarantees as it continually battles to collect toll revenue. The MTBPS does not provide any solution to the tolling issue, but did say that “difficult trade-offs” will need to be made to prevent the deteriorations of the country’s road infrastructure if government decides not to toll major freeways in future.

Both arms manufacturer Denel and the water infrastructure utility Trans-Caledon Tunnel Authority (TCTA) are at risk of defaulting on their government-guaranteed debt, according to the MTBPS.

Denel carries a R1.85 billion guarantee. “The group has struggled to refinance debt due to concerns about corporate governance failures and corruption.”

TCTA has R25.7 billion worth of guarantees to the TCTA, but: “Weak financial management at the department threatens the ability of the TCTA to meet its commitments, raising the likelihood of a call on the guarantee.” And then the cherry on top: “In the long term, government’s ability to deliver water infrastructure could be compromised.”

As if the picture isn’t dark enough, the government’s contingency reserve that was recently used to give a R13.7 billion bailout to South African Airways (SAA) and the South African Post Office (Sapo) has been drastically reduced.

The MTBPS states: “Over the three-year spending period ahead, the contingency reserve amounts to R16 billion, which is considerably smaller than it has been in previous budgeting cycles. This diminishes government’s capacity to respond to spending risks.”

The corresponding number in the previous MTBPS was R42 billion.

This lower provision means that only R3 billion has been provided for unforeseen expenses in 2018/19, R5 billion in 2019/20 and R8 billion in 2020/21.

To read finance minister Malusi Gigaba’s full medium-term budget speech, click here

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