Founder: Turnaround Talk
It is no secret that the poor performance, and financial position, of South Africa’s State-Owned Entities is one of the main drivers of the economic crisis that the country is currently facing.
President Cyril Ramaphosa, and Finance Minister Enoch Godongwana, are facing mounting calls to address the situation and come up with solutions to address the issue. But just how bad is the situation? I recently read an article by Business Tech which discusses this in detail.
Denel
The article points out that 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 (of the MTBPS) discusses further allocations for Denel to pay off debt and complete implementation of its turnaround plan,” Godongwana said while delivering his Medium Term Budget Policy Statement at the end of October.
Photo By: Eskom
Eskom
The article points out that 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 article adds that 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
The article pointed out that 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.
Photo By: SAA
South African National Roads Agency
The article adds that 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
The Business Tech article points out that 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 (of the MTBPS) 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
The article points out that 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.
