Operational inefficiencies, poor procurement practices, weak corporate governance and failures to abide by fiduciary obligations have plagued many of South Africa’s state-owned enterprises (SOEs), said Finance Minister Pravin Gordhan in his 2017 Budget Review.
Several of these companies are now in serious financial difficulty which has in recent years led to lower rates of return and deteriorating balance sheets, prompting requests for capital injections and or state guarantees. Poor financial health makes these companies more susceptible to rating downgrades, which exacerbate their financial difficulties.
This can only be addressed through a broader restructuring of SOEs to ensure they can deliver on their developmental mandates,” Gordhan said.
Government’s programme to reform SOEs targets both short-term stabilisation measures and long-term efforts to strengthen the governance framework of these entities.
In 2016, Cabinet resolved that there needs to be:
– a framework to guide collaboration between SOEs and the private sector on infrastructure projects.
– a guideline for the remuneration and incentive standards for directors of SOEs
– a guide for the appointment of boards and executive officers and
– further consultation on the first draft of a new government shareholder policy, which will lead to overarching legislation for SOEs.
Gordhan said although the country’s SOEs have a developmental mandate, they need to be financially sustainable as stipulated by the Public Finance Management Act (PFMA).
“In 2015/16, their combined return on equity, which measures how much profit is generated with shareholder funds, was 0.8%,” Gordhan said.
“Using the R186 bond as a proxy, government’s average cost of borrowing is 8%. When government borrows at 8% and provides capital to SOEs that are generating a lower return on equity, it represents value lost to the public finances.”
He pointed out that none of South Africa’s public institutions should depend directly on the budget for revenue, but their financial condition has significant consequences for the fiscus.
“Well-managed and financially stable entities can support economic transformation and strengthen government’s ability to accelerate national development.”
At a consolidated level, the financial position of public entities improved in 2015/16 though.
State-owned companies continue to bolster their aggregate net asset position (assets minus liabilities), largely as a result of capital investments and positive earnings.