BIG ISSUE: SOEs: A big drain for years to come

As the government runs out of practical ways to raise revenues and cut costs in the face of declining economic growth, fixing up its failing state-owned enterprises (SOEs) is one of the few ways out of its fiscal quagmire.

Certainly, in finance minister Tito Mboweni’s ideal world, economic growth should be spurred, not hindered, by SOEs.

Unlike private companies, SA’s SOEs are not mandated to generate handsome profits, but rather to drive development in the country. Even so, the Public Finance Management Act does require that they sustain themselves.

They have fallen short. Gutted by maladministration and corruption, and weighed down by operational failure and financial distress, they are sucking the life out of the economy.

"The financial performance of several large state-owned companies continued to deteriorate sharply over the past year, leading to an increasing drain on public resources," the 2020 Budget Review says.

Few SOEs are able to wash their own faces, and liabilities are growing faster than assets. Just a sampling shows the dire state of affairs.

Eskom remains the single largest risk to the economy amid a financial and operational crisis. SAA, now in business rescue, has been loss-making for a decade and has failed to produce financial statements for the past two years. SA Express, illiquid and insolvent, was recently placed under involuntary business rescue (something it intends to appeal).

The state-owned military and aerospace equipment manufacturer, Denel, faces serious liquidity problems and will get state funding on condition it speedily implements a turnaround plan. The SABC is in a similar position.

According to the Budget Review, the net asset value of SA’s SOEs declined from R354bn in 2016/2017 to R342bn in 2018/2019. Their average return on equity — a measure of how effectively net assets are used to create value — fell sharply over this period and deteriorated from -2.5% to -8.2%.

"As the scale of financial challenges in state-owned companies has become apparent, many have struggled to access capital markets," the Treasury noted in its budget documents.

The government has provided many guarantees to SOEs, which account for most of the R484.4bn in contingent liabilities on its books.

But for some state companies, even a government guarantee is little advantage to the market. SAA in particular is borrowing at double the cost of the government — even with government guarantees behind it.

One Treasury official agrees it’s odd, but says it shows just how much risk the market attaches to the airline.

The difficulty in accessing funding, paired with weak cash flows, has reduced capital spending at SOEs, and delayed delivery of "much-needed social and economic infrastructure". It has also affected their ability to meet debt commitments, which is worsened by rising interest costs as perceived risks grow.

Too often, the government has stepped in to save SOEs. Most notable is Eskom. Once a world-class utility, it has proved the biggest SOE drain on public finances. This year it is expected to match the record R20bn loss it made last year. Over the past 12 years, the government has allocated R162bn to the financially distressed SOEs; of the total allocations, Eskom accounts for 82%. In 2019/2020, the government allocated R49bn to the utility and committed R112bn in medium-term funding.

"These allocations generally provide short-term support, but cannot substitute for the far-reaching structural reforms needed to return them to operational and financial stability," the Treasury says in its budget documents.

"Overall, these trends reflect the deteriorating financial state of major SOEs. Without effective structural reforms, this cycle of lower funding access and higher reliance on the government is set to continue."

Though reform is under way at Eskom, Mboweni did not wish to dwell on it much.

Addressing the media ahead of his budget speech on Wednesday, he said: "I don’t want to speak a lot about Eskom. It’s tired. We don’t really have anything new to say."

Certainly, the budget documents don’t hold any surprises on the Eskom front.

"Fiscal support for Eskom remains unchanged. The roadmap on Eskom, published by the minister of public enterprises, outlines the reform process. Eskom has begun the process of separating its three operating activities — generation, transmission and distribution — each of which will soon have its own board and management structure," the 2020 Budget Review states.

The Treasury has left it to the department of public enterprises to report on progress in reforming Eskom at key milestones. The budget documents did, however, re-emphasise that the support to Eskom is conditional and the utility must reduce its primary energy cost, contain other costs and make progress on the restructuring. Any failure to do so could widen the budget deficit and raise debt service costs, the Treasury says.

Asked about Cosatu’s proposal that the Government Employees Pension Fund should be used to pay down Eskom’s debt of R450bn, Mboweni did not seem opposed to the idea.

However, he said: "If we go the pension route it must be all of us, not just about public servant pensions but all pensions."

For SAA, which has been placed in business rescue, the rescue practitioners have drastically cut domestic routes. A business rescue plan is expected to be ready in weeks.

"The SAA sword of Damocles has now fallen upon us," said Mboweni in his speech.

The Treasury says an extra R16.4bn has been set aside to repay SAA’s guaranteed debt and interest costs.

"It is the very sincere hope of many that this intervention will lead to a sustainable airline that is not a burden to the fiscus," Mboweni said.

For Transnet, one of the few profitable SOEs, issues of access, cost and the reliability of its port, rail and pipeline infrastructure have undermined SA’s export competitiveness.

In the budget document, the Treasury says "urgent regulatory reforms" are needed in the ports sector to reduce the cost of trading.

The Treasury says the "corporatisation" (read: privatisation) of the National Ports Authority — a division within Transnet that regulates port operators and undertakes infrastructure investment — should be accelerated.

"Corporatising the authority would allow for better independent regulation of SA’s ports and increased competition in terminal operations. It would also support greater investment in ports from operating profits, free from Transnet group considerations," the Treasury says.

For rail, the Economic Regulation of Transport Bill has been approved by the cabinet for submission to parliament, and will improve third-party access to freight rail, generating efficiencies in the sector.

In its budget vote, the department of public enterprises said it would continue to exercise oversight of the SOEs for which it is responsible (Alexkor, Denel, Eskom, SAA, SA Express Airways, the SA Forestry Company and Transnet) in a bid to have them create jobs and sustain economic growth.

The department’s programmes which fund its oversight activities, will, however, decrease at an average 67% a year over the next three years, from R56.7bn this year to R1.9bn.

According to the budget documents, the government wants to develop an SOE bill and a shareholder management policy in the coming financial year.

"The legislation and policy," the Budget Review says, "will be drafted with the intention of improving state-owned companies’ overall performance in terms of: setting explicit goals; ensuring that boards and management monitor performance effectively; and transparently and directly linking executives’ performance incentives with desired outcomes, including audit outcomes.

Once it is in place, boards of directors will be evaluated every year.

The budget seeks to reduce the wage bill of national and provincial departments, but SOEs are also in the line of fire. This year, the government plans to legislate a remuneration framework for public entities and SOEs to improve alignment of pay with the public service, and contain excessive salaries.

While the state clearly has its hands full with its existing SOEs, in Wednesday’s budget speech Mboweni announced that a state bank would be established and would take the form of a retail bank operating on commercial principles, subject to the Banks Act and regulated by the Prudential Authority.

In his speech, Mboweni again referred to the symbolic succulent that has come to feature in his budget speeches.

"Our aloe ferox [also known as the bitter aloe] can withstand the long dry season because it is unsentimental. It sheds dead weight, in order to direct increasingly scarce resources to what is young and vital."

If SA’s ailing economy is to emulate the survival prowess of the indigenous plant, it will have to do better to release itself from the deathly grip of its failing SOEs.