STATE-OWNED ENTITIES: Turning off the money taps

The government is focusing on structural reform to fix the problems with electricity supply, telecoms and transport logistics, because these hamper investment, growth, exports and the movement of goods, the National Treasury says.

This reform, which will include the sale of assets, is behind the government’s intention — evident in this year’s budget — to close the taps on state-owned entities (SOEs).

But the devil is in the lack of detail, given the challenges involved in weaning SOEs off their reliance on bailouts.

Deputy finance minister David Masondo says steps taken to date include reformed licensing requirements for self-generation of electricity, with 37 private sector projects under way, and Transnet allowing private operators access to its rail infrastructure. State-owned monopolies will also face more competition.

In his budget speech on Wednesday, finance minister Enoch Godongwana said more than R308bn has been used to bail out failing SOEs, while spending on frontline services and infrastructure has been cut by R257bn since 2013.

"Other than Eskom, which is a long outstanding commitment we made, no provision is made in this budget for any SOE," he said.

However, future payments include R21.9bn for Eskom and R1.8bn for SAA (the remaining tranche of R16.4bn set aside for the airline to settle debt and interest costs).

Denel has also been allocated R3bn to cover capital and interest payments on guaranteed debt.

And the Land Bank missed a deadline to conclude negotiations with lenders, so a 2021/2022 allocation of R5bn has been included as a contingency reserve in 2022/2023.

But SOEs are going to find it increasingly difficult to turn to the fiscus for bailouts. Under the new Presidential SOE Council, some will be retained and others disposed of or consolidated, based on "the value they create and whether they can be run in a sustainable manner".

Government expenditure on SOEs is expected to drop at an average annual rate of 79.5% from R36.2bn in 2021/2022 — when substantial allocations were made to Eskom, SAA and Denel to pay debt and interest — to R310.9m in 2024/2025.

Total liabilities of SOEs stood at R853.4bn in 2020/2021, while average return on equity was a negative 14.6%, drained by high debt-service costs and salaries. Infrastructure spending nearly halved to R44bn in 2020/2021, from R86.2bn in 2016/2017.

Interest payments fell marginally from R52.8bn in 2019/2020 to R49.7bn in 2020/2021 on loans where government guarantees run to just over R560bn.

Still ahead is the sale of assets — including the partial sale of SAA, expected this year. As for Eskom, the Treasury has made it clear it expects the ailing power utility to offload some of its assets.

In his speech, Godongwana said SOEs must show evidence of serious cost containment and proper management, and meet various conditions to prove they are "a good child" if they want further funding.

That the government is putting bailouts behind it is a significant matter of principle — and an important point of departure, says Gaba Tabane, public sector leader for Deloitte Africa. But, he tells the FM: "What’s going to satisfy the SA economy is putting this in practice so that social partners can know that the government is not going to feed and flog a dead horse.

"Either we need a new horse to pull the economy through, or [we need to] find ways to resuscitate it without throwing money at it."

He lists such options as consolidation and bringing in private sector investors, and says the right skills must be in place for SOEs to implement their mandates.

If SOEs aren’t efficient they should not exist, says Tabane, because they cannot meet the objective or strategy for which they were set up in the first place.

So if assets aren’t productive, they should be sold, or other assets acquired, or partnerships formed with similar entities, he says.

BDO partner and public sector head Yugen Pillay believes that expecting SOEs to stand on their own is equivalent to the government simply "standing back and seeing what happens". But that’s short-sighted, as some SOEs could, in fact, be facilitators of economic development.

Of course, to sell off SOE assets, the government would need to make sure they are buyable. Which means something of a clean-up would have to be on the cards: investors would shy away if assets are at risk of criminal activity, and there’s little in place to protect their value.