Bad news for state companies in South Africa
South Africa’s state-owned enterprises (SOEs) have been shown some tough love in the country’s medium-term budget policy statement (MTBPS) tabled on 30 October 2024.
National Treasury has indicated that it will limit further financial support to SOEs.
The Centre for Development and Enterprise (CDE) recently said that “a key reason for South Africa’s exceptionally low growth rates over the past decade and a half has been the ongoing operational and financial crises that have characterised large SOEs.”
“Many of the challenges in the SOE sector should be seen as at least the indirect consequence of the SOEs’ existence as legally protected monopolies [as it] shields them from the competitive pressures that would force them (and their shareholder) to behave differently,” said CDE executive director Ann Bernstein.
Finance Minister Enoch Godongwana said at a MTBPS press briefing that the cost of SOE bailouts had reached over R520 billion since the 2008/09 financial year, which had significantly undermined social spending on things like health, education and policing.
The 2024 medium-term strategy identifies six key priorities, one of which is “limiting further financial support to state-owned companies,” while completing the resolution of the debt obligations of Eskom and the South African National Roads Agency Limited (SANRAL).
Godongwana explained that SOEs are being shown “tough love” amid a drive to reign in state expenditure, with the Treasury pushing private investment and public-private partnerships instead to turn around their operational performance.
“I said, tough love. I think we’re on that path of making sure that not every SOE is going to say we want money. By the way, they told us D-day for the post office is today and there’s no money in the adjustment as we speak.”
Not out of the woods
While tough love has been announced as the way forward, this does not mean that it all all smooth sailing for SOEs.
“The financial position of state-owned companies remains distressed,” said Treasury.
The MTBPS outlined that despite several notable operational improvements, such as at Eskom, most major state-owned companies continue to post net losses and fall short of performance targets.
“Many remain unable to fund their operations and debt obligations adequately [and] are also unable to optimally invest in infrastructure, with many entities requiring some form of state support to implement their recovery plans.”
“State-owned companies are likely to continue to face high borrowing costs as poor governance and operations limit their access to funding.
“Although global interest rates are expected to decline, those entities with weak and highly leveraged balance sheets, poor cash generation and significant refinancing risks may face difficulty in raising finance until they return to better form,” said National Treasury.
As shown below, SOE debt amounting to R37.7 billion will mature in 2024/25 – much of which is domestic debt and is expected to be refinanced.
Maturing debt between 2024/25 and 2028/29 is expected to total R122.6 billion, of which R18.2 billion (or 15 per cent) is guaranteed by government.
Foreign capital repayments are expected to amount to R30.5 billion or 25% of maturities.
“Government is pursuing a sustainable turnaround at these companies while maintaining service delivery,” said Treasury.
“The intent is to attract private-sector involvement to improve efficiency and increase competition [and] after a period of little movement, turnaround plans have begun to yield some initial results,” it added.
Reaction
The CDE welcomed the tougher stance on SOE bailouts. However, it said that the ability to maintain this position is uncertain, as Eskom and Transnet face significant serious challenges.
It added that non-strategic SOEs like Denel, Safcol, and SAA should be denied future bailouts and called for a comprehensive competition policy for SOEs to address the broader crisis and foster competition.
The “CDE proposes (among other immediate recommendations) that government appoint a high level team led by business leaders to conduct a review of the financial position of all major SOEs in order to identify solutions (including asset sales and an explicit commitment to generate income from privatisation) to the most pressing challenges,” said the think-tank.
Business Unity South Africa CEO designate Khulekani Mathi said that “business welcomes the lack of further bailouts for state-owned enterprises.”
However, he said that it is equally mindful that reforms to the logistics industry “will require substantial amounts of private capital and some state support to right-size Transnet’s balance sheet for its future role in a reformed industry.”
“This can only happen after, as National Treasury points out, a firm view on its future balance sheet has been completed.
“Broadly, it seems evident that National Treasury is following a similar strategy to the one it has successfully followed with Eskom,” said Mathi.
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