Gordhan and Nene’s problem children

Turning around SOEs is a mammoth task.
Nhlanhla Nene, Minister of Finance has his work cut out for him, the author writes. Picture: Moneyweb

With about half of South African state-owned enterprises posting huge losses during the last financial year – some R22 billion for the year to March 2017 – all eyes are on finance minister Nhlanhla Nene and Minister of Public Enterprises Pravin Gordhan to save these entities from total collapse.

At least four state companies are already technically insolvent, many more are at risk and only a few do not have serious financial problems. Few received a clean audit report from the Auditor-General or their external auditors.

Department of Public Enterprises

As Minister of Public Enterprises, Gordhan will be responsible for Eskom, Denel, Alexkor, SA Express, Safcol and Transnet, all of which are plagued by financial and corporate governance problems.

All of the entities have received qualified audit reports from their respective external auditors, while SA Express has not published its latest results yet.

The regional airline warned of big losses – which will probably wipe out its equity and plunge it into a state of insolvency. SA Express has requested a postponement of the publication of its results. This was after it said its loss for the 2016/17 year would be about R234 million. At the end of March 2016, SA Express had shareholders’ equity of only R128 million.

The Auditor-General’s (AG) report on SA Express in the 2016 year contains several pages of concerns, among them issues relating to governance, leadership, accounting problems and legal matters.

However, Gordhan’s biggest problem is Eskom, which suffered a loss of R6.4 billion in the 2016/17 financial year.

Eskom assets total R710 billion, while the corporation has liabilities of more than R534 billion. Its gross finance cost – interest on bank loans and bonds – amounted to around R37.8 billion last year.

It is crucial that Eskom honours its interest payments as this has a direct impact on the credibility of the SA government and its obligations as a whole. The loss of R6.4 billion in the last year, compared to a profit of R11.7 billion in 2015/16, is concerning.

The AG accused Eskom of irregular expenses of nearly R3 billion during the last year. It is anybody’s guess how much more was spent unnecessarily.

Transnet, the second-biggest state company, also has management and governance issues with more than R700 million identified in irregular, fruitless and wasteful expenditure in the last financial year. Assets (R351 billion) exceeded liabilities (R208 billion) at year end, but the short-term component of the debt at R13.8 billion indicates that Transnet might still be vulnerable. Fortunately, it showed a profit of nearly R2.8 billion last year.

While Safcol (SA Forestry Company) returned to profit in the last financial year, state diamond mine Alexkor suffered a loss of R5.8 million. And while Denel posted a profit of R333 million for the year to March 2017, things have worsened to such an extent that management was unable to pay employees recently.

SAA, which is technically insolvent, is another problem. While Eskom has a strong revenue base, after all it is a monopoly selling a necessity, SAA is operating in an extremely competitive market in a very difficult industry. At the end of March 2016, liabilities of R27.7 billion exceeded assets by nearly R11 billion.

Results for 2017 will again be delayed, but the AG stated in his recent report to Parliament that the loss for the year to March 2017 amounted to about R5.6 billion compared to the previous management’s forecast of R2.8 billion. This loss worsened the airline’s state of insolvency to the tune of nearly R18 billion, which will frighten away any potential equity partner, lender, supplier and international airline looking for a reliable route-sharing partner.

SAA is heavily reliant on short- and medium-term debt. At the end of March 2016, more than R6 billion of SAA’s total debt of R27 billion was repayable within 12 months of its reporting date and another R5 billion within two to five years. News reports of missed payments and new promises to lenders indicate that the situation is now probably even worse.

Management reported that low oil prices and overall good passenger numbers helped SAA perform better in the year to March 2016. However, the oil price has more than doubled since its low of around $30 per barrel in May 2015 to the current $64 per barrel.

Aviation fuel is the single biggest cost item, amounting to R7.3 billion out of total costs of R30 billion in the 2016 financial year. Wages and salaries are not far behind at R5.8 billion as reported in the last available annual report. The new CEO, or any possible private partner, has little chance of reducing the staff numbers or employment expenses to such an extent that it will make a significant difference to SAA’s performance.

PetroSA and CEF

PetroSA and the Central Energy Fund (CEF), reporting to the Ministry of Energy, are also riddled with problems. PetroSA suffered a loss of R1.6 billion in the 2017 financial year and is effectively insolvent if taking the cost of the abandonment of operations of R9.6 billion into account.

It lists assets of R17.2 billion and liabilities of R14.6 billion, leaving a positive equity value of R2.5 billion. But, the AG points out that its abandonment provision is underfunded to the tune of R7.4 billion. That leaves a negative value of nearly R5 billion.

Several investigations and legal cases at CEF, whose results are incorporated into those of PetroSA, are of significance. The largest of these is the suspicious selling of SA’s strategic oil reserves in 2014 at very low prices and the ongoing cost and cash flow implications of these transactions.

Insolvent and at risk

The latest results from the SA Post Office date from 2016 and show that it is insolvent with liabilities exceeding assets by R144 million at the end of March 2016 and probably worse by now. The Post Office suffered a loss of R980 million and has asked government for a bailout of up to R6 billion, later reduced to R4 billion.

The AG notes that “the company is not generating sufficient revenue to finance its high cost base” and thus the AG has “doubt on the entities ability to operate as a going concern”.

Broadband Infraco, the state’s venture to roll out internet access, posted a loss of R127 million and the balance sheet shows negative equity of more than R1 billion. The AG has raised concerns about the company’s financial reporting procedures, financial statements and internal control procedures.

The SABC is close to bankruptcy after posting another huge loss of nearly R1 billion. Once again, the auditor’s report lists pages of problems.

Prasa is financially vulnerable and operates under a cloud of corruption and irregular spending to the tune of billions of rand due to the farcical acquisition of Spanish trains that did not fit on our train tracks – a deal championed by an unqualified engineer who lied about his qualifications.

The AG points out that irregular expenditure in the past year amounted to R4.1 billion and nearly R10 billion in previous years.

Roads agency Sanral suffered a loss of nearly R5 billion in the year to March 2017. Management admits in the financial statements that it remains heavily reliant on government funding and government debt guarantees and fund raising from private investors. The AG notes that Sanral allowed R440 million of irregular and wasteful expenditure due to lapses in its tender processes.

Best of the bunch

There are some well-run state enterprises, mostly run by meticulous bankers and scientists. These include the Public Investment Corporation, CSIR, Land Bank, Development Bank of SA, Industrial Development Corporation, Sasria, Sentech, Acsa, ATNS, Mintek, Rand Water, SABS and SanParks. Usually these well-run entities attract strong business partners, private funding, clients from the private sector and reliable suppliers to maintain their operations.

These unfortunately are the exception. It is worth noting that the increase in VAT from 14% to 15% is expected to raise an additional R22.7 billion in revenue for the government, roughly what they need to cover losses from state-owned enterprises. Arguably poor people are funding the mistakes of highly-paid managers.

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Best place to start is with the ANC cadre deployees.

New Zealand government sold all buisinesses that they owned to private enterprise a number of years ago and now all the buisinesses are running at a profit and government reduced their size. They have all grown and employ more people and they are at a stage they do not accept immigrants anymore. South Africa should look at how other countries have become prosperous and follow their model and maybe we will also be prosperous and employ more local people as these other countries have done.

not the Africa way and too white. Wont happen here.

SAA etc not problem children. They are massive corrupt disasters caused by the ANC near you.At the expense of SA,the taxpayer and the poor.

The only ones which should be privatised are the businesses which government shouldn’t be in, like running airports, airlines, oil drilling companies, etc. But many the SOEs which are making the big losses are almost all ex-government departments which used to run effectively down to a budget. (The DoT is full of them, SANRAL and the RTMC being good examples, and there are dozens of others).

Government spun them off as “private” companies to try and turn them into cash cows, forgetting that the best cows need good farmers. So instead of making money, they drained the fiscus while simultaneously failing at their core mandates.

We need to put those SOEs back to what they used to be: government departments run cost-effectively. If you privatise essential government services like road safety and national roads, the private sector will demand their pound of flesh. Every billion Rand in profit is a billion Rand less disposable income in citizens’ pockets.

Government should do what government should do, and private enterprise likewise. Private enterprise is no good at running countries and government is no good at running businesses. If we stick to that principle, we can’t go wrong. But the idea that privatisation is the only solution to our SOE problem is untenable.

Way back in 2001 a friend of mine worked on a project at the Post Office when it was busy with yet another turn around strategy. That time they had the consultants in there who did the turnaround of the New Zealand post office with great success. I remember him telling me how these new cadres had absolutely no interest in cooperating with the turnaround strategy and loafed around all day. The instruction came from the Minister but they actually couldn’t care less. Eventually, the international consultants got so frustrated they left. The newspapers also reported how the Post Office spent R114 million on travel expenses, including overseas trips. Now for a company that only does business in SA, one really wonders why they need to spend so much on overseas travel. These people are like locusts – move in, eat to the ground and move on to the next patch.

End of comments.





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