How state-owned companies are sucking South Africa dry
The mid-term budget document tabled by finance minister Pravin Gordhan on Wednesday has revealed National Treasury’s exposure to state-owned companies – which are burning through the country’s money.
According to the document, government’s “major explicit contingent liabilities” are its guarantees to SOEs, which stood at R469.9 billion at the end of 2015/16.
Total guarantee exposure was R263 billion at the end of 2015/16, “because several entities had not fully used their available guarantee facilities”, the report said.
These guarantees remain a massive risk on the country’s books, as they rely on the companies that receive them to use the money to run a successful business – something which SOEs have proven time and time again to be incapable of.
“Government maintains its policy stance that any intervention to support state-owned companies must be deficit neutral,” Treasury said.
“Entities receiving support from government will be required to provide sound business plans, improve governance and address operational inefficiencies. ”
However, as detailed below, each SOE runs its own risks – with some more likely than others to fail, costing the country billions.
Eskom – R170 billion
The largest guarantee exposure – more than R170 billion – supports Eskom’s capital investment programme.
An exposure of R200 billion relates to the Independent Power Providers (IPPs). According to Treasury, Eskom is obliged to purchase power from these independent producers over a 20-year period based on a power-purchase agreement approved by the National Energy Regulator of South Africa.
“Should Eskom be unable to do this, government must purchase the power on Eskom’s behalf,” it said, hence the liability.
“The risk of default with the IPP guarantee is low as the regulator fully provides for IPP costs in the Eskom tariff determinations. These factors mitigate the risk arising from these guarantees. However, a deterioration in Eskom’s financial position would increase the risk of both exposures,” it said.
Passenger Rail Agency of South Africa – R53 billion
The fiscus has committed R53 billion to fund Prasa’s purchase of new rolling stock and signalling equipment. The Auditor General and the Public Protector have found weak expenditure controls and contract management in this programme.
“This raises concern that Prasa will not be able to complete the programme on time and within budget. In addition, projected declines in Prasa’s fare revenue and ridership numbers raise concerns about the company’s sustainability,” Treasury said.
South African National Roads Agency Limited – R35 billion
Fiscal exposure to Sanral debt stood at R35 billion as at 31 March 2016, Treasury said. The guarantee was put in place to support the expansion of the agency’s toll roads portfolio.
However, despite introducing a 60% discount, the collection of e-toll funds has consistently missed its targets, forcing government to step in, and putting future infrastructure projects at risk.
“E-toll collections and auctions are still closely monitored against projected collection levels to ensure recovery. Over the medium term, national government and the Gauteng provincial government will supplement e-toll revenue,” Treasury said.
“More generally, if government does not proceed with tolling to fund major freeways, difficult trade-offs will need to be confronted to avoid a deterioration in the national road network.”
South African Airways – R19.1 billion
Government has issued a R19.1 billion guarantee facility to SAA to ensure the company can continue to operate as a going concern – however, the carrier continues to post losses.
“There is currently a R14.3 billion exposure against the facility. Without the guarantees, SAA is technically insolvent. A new, full-strength board has been appointed and tasked with returning the airline to financial sustainability,” Treasury said.
South African Post Office – R4.4 billion
Currently, government has a R4.4 billion guarantee exposure to the South African Post Office.
“A new board and CEO were appointed, and the company has been able to raise funding to repay creditors, implement a turnaround plan and reach a settlement with labour to mitigate the possibility of strike action,” Treasury said.
Land Bank – R6.6 billion
Government provided the Land Bank with a R6.6 billion guarantee in 2014/15, of which R5.3 billion has been drawn down as at 31 March 2016.
The guarantee has helped the bank expand its lending by 10 per cent in 2015/16, despite a weak operating environment, and chart a path to stabilisation.
“The relatively short maturities of the bank’s funding liabilities are gradually becoming longer, relieving pressure on the institution’s cash flows, but they do still pose moderate risk to the fiscus.
“The bank is conducting an internal review to improve operational efficiency and developmental effectiveness,” Treasury said.
The Road Accident Fund – R155 billion
RAF liabilities at the end of March 2016 were revised up to R155 billion from the R132 billion reported in the 2016 Budget. These liabilities are projected to grow to R345 billion in 2019/20.
“The RAF has been insolvent for over 30 years, despite having a dedicated revenue stream in place to settle claims. Government has not yet tabled legislation to create a new equitable and affordable benefit arrangement to replace the fund,” Treasury said.
“Various options exist to reduce the RAF contingent liability, including increases in the RAF fuel levy. The new replacement scheme will be structured to ensure sustainability.”
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