Financial condition of state-owned companies in South Africa

The financial condition of many state-owned companies remains weak, says finance minister Enoch Godongwana, who delivered his Medium-Term Budget Policy Statement (MTBPS) in Cape Town on Wednesday (26 October).

He said that some state-owned companies had difficulty meeting their funding requirements because of their low credit quality and, for certain development finance institutions, the prolonged Land Bank default position.

“Overall investment in infrastructure slowed as entities managed their budgets and operations by cutting costs, enhancing revenue and managing capital. Government has maintained the liquidity support extended to Denel and Eskom and continues to closely monitor implementation of turnaround plans,” said the minister.

Total debt redemptions for state-owned companies will average R33.1 billion a year over the medium term, with foreign debt making up 19% of the total. Godongwana said that state-owned companies have reduced their participation in the listed debt capital market in recent years, as reflected on their lower gross issuances relative to all other non-government issuers on the Johannesburg Stock Exchange.

Between 2018 and 2021, state-owned companies’ gross listed issuances declined from 18% to 8% as a share of total listed issuances. Issuances grew marginally in 2022. “However, state-owned companies continue to borrow and refinance at high costs, largely because of poor cash generation, weak revenue performance, poor operating performance, and unsustainable balance sheets and financial metrics,” he said.

Debt maturity profile of largest state-owned companies

Denel

South African state-owned aerospace and military technology conglomerate, Denel remains in financial distress and cannot meet its financial obligations as they fall due, noted the minister. The government allocated R3 billion in 2021/22 to cover capital and interest payments on guaranteed debt, he said.

In September 2022, as part of clarifying Denel’s future role in the economy, Denel and Armscor signed a memorandum of understanding covering defence equipment and operational requirements. “Denel is implementing its turnaround plan and has disposed of some non-core assets, which provided funds to partially finance legacy obligations and immediate working capital requirements.

“Chapter 3 discusses further allocations for Denel to pay off debt and complete implementation of its turnaround plan,” Godongwana said.

Eskom

Eskom is the largest long-term risk to the economy, given its high debt levels and unsustainable business model. In 2019, government announced a R230 billion support package for Eskom to remain financially viable, the minister pointed out. To date, R140 billion of this package has been disbursed. In addition, Eskom had used R323.9 billion of its R350 billion government guarantee facility as at 30 June 2022, he said.

“The National Treasury is leading a process to design a debt relief programme that will address the utility’s financial challenges, as discussed in Chapter 3. Debt relief will be guided by strict conditions that emphasise progress in significant reforms, such as the unbundling process and financial sustainability.”

Road Accident Fund

The Road Accident Fund remains a significant contingent liability despite receiving a growing share of fuel tax revenues, said Godongwana. “It is estimated that the accumulated deficit will grow by an annual average rate of 7.5%, from R385.5 billion in 2021/22 to R479 billion in 2024/25.

“A change in disbursement strategy could accommodate a larger share of claims if loss of income support is paid as annuities instead of as lump sum payments. This change in strategy could lead to improved cash flow management, which
in turn will help manage short- and long-term liabilities,” he said.

South African Airways

Godongwana noted that in the 2020 Budget Review, R16.4 billion was set aside for South African Airways (SAA) over the 2020 MTEF period to settle government-guaranteed debt and interest costs. The final tranche of this debt was repaid in July 2022, eliminating government-guaranteed debt-related exposure to SAA.

“Government financial support to repay debt and implement the business rescue plan has resulted in a significant improvement of the airline’s balance sheet. SAA exited business rescue on 30 April 2021,” he said.

South African National Roads Agency

The South African National Roads Agency Limited (SANRAL) remains in limbo given policy uncertainty over the government’s position on the user-pays principle, said Godongwana.

“As a result, SANRAL cannot collect sufficient cash from its toll portfolio to settle maturing government-guaranteed debt. This balance sheet weakness is affecting SANRAL’s ability to maintain the broader road network and as such also presents a medium-term risk to economic growth. Chapter 3 outlines in-year allocations to address this risk.”

Transnet

Transnet generated a net profit of R5 billion for 2021/22, noted Godongwana. The state rail and ports operator suffered severe and widespread damage to assets, installations and operations from the heavy rains and flooding in April 2022, resulting in unexpected repair costs and loss of revenue, he said.

While the Port of Durban is now operating, major repairs are still required to fully restore Transnet Freight Rail operations in KwaZulu- Natal.

“Chapter 3 outlines allocations to Transnet to repair rail infrastructure and to increase locomotive capacity, both of which are expected to support economic growth.”

Evaluating the viability of state-owned companies

Godongwana said that the government continues to review the value created by state-owned companies as part of evaluating whether they can be run sustainably. The Presidential State-Owned Enterprises Council has developed a draft framework to guide decisions on disposing of and retaining state-owned companies, he said.

To complement this work, the National Treasury has begun developing a state-owned companies funding framework, which will be finalised in 2022/23. A discussion of government’s contingent liabilities appears in Chapter 7 of the Budget Review, he said.

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