State-owned entities (SOEs) will not be spared from government’s zero-based budgeting approach, which Finance Minister Tito Mboweni says will be piloted in the upcoming mid-term expenditure framework.
Reigning in the costs of financially-distressed SOEs will be central to the government’s efforts to stabilise public finances and reverse spiralling debt.
National Treasury said the revised budget deficit for 2020 is sitting at 15.7% in 2020 while the early projection for debt to GDP ratio is 81.8%
Under this backdrop, Treasury needs to find spending adjustments of about R230 billion over the next two years.
In the Supplementary Budget Review, Treasury says the Covid-19 pandemic stressed the need for urgent reforms in SOEs so they can become financially stable and sustainable.
Using the principles of zero-based budgeting, government will only focus on necessary and performing expenditure as opposed to using the previous budget as a base.
Departments would have to justify expenditure on their programmes from scratch, which Mboweni hopes will result in significant cuts on spending.
Mboweni’s supplementary budget was also mum on allocating funding towards the restructuring of South African Airways (SAA), leaving the question of how the government is planning to fund the R10.3 billion needed for the new company’s take-off plan unanswered.
In fact, the supplementary budget provides no new money for SOEs, barring a R3 billion allocation to recapitalise the Land Bank.
SAA has been in business rescue since December 2019. On Thursday the airline’s creditors are expected to convene to vote on the final rescue plan, whose complete funding has been placed squarely on government’s shoulders in the absence of any investors.
Delivering the supplementary budget to Parliament on Wednesday, Mboweni said outside of the R16.4 billion that was allocated to SAA in the February budget for guaranteed debts and interest, any additional money “will follow the principle of zero-based budgeting approach”.
In a media briefing following his budget speech, Mboweni would not be quizzed on SAA, referring all questions to the Department of Public Enterprises (DPE).
He added that the rescue proposal published by business rescue practitioners Les Matuson and Siviwe Dongwana “will be put into the budget process and evaluated against our other priorities.”
The DPE has been lobbying labour and creditors to approve the proposed plan, saying it would be in the best interests of all stakeholders. The plan proposes a slimmer, restructured SAA where over 70% of the current workforce is retrenched and offered severance packages totalling R2 billion.
This will leave 1 000 employees during the period in which the airline only operates domestic routes.
In a letter sent to workers on Tuesday, signed by DPE Acting Director-General Kgathatso Tlhakudi, the department urged the unions to accept the severance package agreement in order to increase the chances of creditors voting in favour of the plan.
Separately, the DPE also urged creditors to vote in favour of the plan saying this would be the most “expeditious option for the national carrier to restructure its affairs” while launching a more viable national carrier.
The plan has overcome its first hurdle, after a court application by creditor SA Airlink to interdict Thursday’s meeting failed on Wednesday morning.
In what appeared to be a warning to Eskom, Mboweni said progress in the unbundling the electricity utility has been slow – this was not the expectation when the government allocated R23 billion a year over three years in the 2019 budget.
“The principle of zero-based budgeting is that we must see demonstrable value for money. Eskom will need to show progress in meeting the milestones as laid down in the Roadmap.
“This is non-negotiable,” said Mboweni.
In February, Treasury revealed that it has spent R162 billion on financially-distressed SOEs over the previous 12 years – of which Eskom accounted for 82%.
The reforms that government plans on instituting in SOEs will involve rationalisation, described as “reducing the number of and merging some state-owned companies, and incorporating certain functions into government.”
Further reforms will involve equity partnerships, and stronger policy certainty and implementation.
Treasury Director-General Dondo Mogajane said it’s embarking on fiscal reviews as a “stepping stone” towards the zero-based budget process. Different government departments have been asked to identify entities which should cease to exist because they are not needed and the ones that have to be merged with departments.
“As we approach the MTBPs we will be more detailed on exactly which ones will be closed and which ones will be supported further and which ones will be merged with programmes in various departments,” said Mogajane.
Treasury says any transfers from the fiscus to SOEs will be strictly conditional on them improving their balance sheets.