25/10/2017 13:16 BST | Updated 30/10/2017 11:05 GMT

The Deadweights That Are SOEs: “They Pose A Clear Danger To SA”

State-owned enterprises are in strife. Eskom, SAA and Denel are now starting to drag SA down.

Siphiwe Sibeko / Reuters
South Africa's new finance minister, Malusi Gigaba.

The continued mismanagement of state-owned enterprises (SOEs) like Eskom and SAA pose a real and definite danger to South Africa's finances.

That much is clear from the budget review, National Treasury's eloquent and comprehensive overview of South Africa's finances and its economic outlook. SOEs – and their impact on the national accounts and the country's economic prospects – run like a golden thread through Treasury's diagnostic of government. Poor management and corruption are the main reasons for flagging SOEs, and if the trend isn't reversed, the consequences will be dire, Treasury warns.

South Africa's fiscal position is precarious, but government's continued support of non-performing SOEs has seemingly worsened the situation, with the expenditure ceiling (the spending limit imposed by Treasury) running the risk of being overshot by R3,9-billion -- thanks to the recapitalisation of SAA and the South African Post Office.

Treasury has identified five big risks to the fiscus over the next few years, with SOEs identified as one of them: "Continued financial deterioration of major state-owned companies is a clear and substantial danger to the public finances."

Treasury warns that government's exposure to badly performing SOEs in the form of guarantees can have a severe impact on South Africa's credit grade ratings. These guarantees have ballooned to R688,8-billion in the current financial year, although the full allocation has not been used. Furthermore, SOEs' profitability and performance have taken a nose-dive: SOEs' combined profitability, measured by return on equity, declined from 7,2% to 0,2%.

"Lenders, alarmed by governance failures, are taking a more active stance. 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. Addressing this requires not only stabilisation measures at troubled entities, but a broader restructuring of state-owned companies and an acceleration of reforms," Treasury warns.

Eskom and SAA have in recent times been under fire for poor governance and allegations of corruption around state capture. The power utility's leadership has been removed, and various investigations around alleged irregularities are ongoing. SAA – which has received government support of R10-billion – has also been a major headache. A new board was however recently appointed.

Some of government's largest guarantees include:

  1. Eskom: R350-billion, and according to Treasury "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."
  2. Sanral: R38,9-billion. The SOE is, however, struggling with collections that "remain lower than projected, making it difficult for the agency to service its debt."
  3. SAA: R19,1-billion. It will by the end of the financial year have received a further R10-billion in recapitalisation funding. "Even after the capital allocation, government's exposure to SAA debt remains significant at R15-billion. There is risk that if SAA's financial fortunes do not improve, there will be further calls on the remaining guarantee," Treasury notes.
  4. Denel: R1,85-billion: "The group has struggled to refinance debt due to concerns about corporate governance failures and corruption."