State-owned companies in financial distress that have relied on government bailouts to remain afloat, will not be allocated any additional funding over the next three years as the government moves to rein in public spending.
The announcement by finance minister Enoch Godongwana in his maiden medium-term budget policy statement (MTBPS) is expected to be welcomed by economists and ratings agencies who have previously flagged the poor financial performance of state-owned enterprises (SOEs) and their long-standing governance problems as risks to the country’s economic growth.
“What we want to do is to practise tough love,” Godongwana said during a pre-MTBPS media briefing, adding that the Treasury would review its allocation for state-owned enterprises by the 2022/2023 budget in February.
The economy is forecast to grow by 5.1% in 2021, revised up from 3.3% in the February budget as the economy has recovered from Covid-19 more quickly than anticipated. This has been spurred on by the recent spike in commodity prices, which have boosted the growth outlook and tax revenues.
But as the revenue windfalls will probably be temporary, government will not inject any additional funding to SOEs as it moves to rebuild public finances after the third wave of the pandemic and the July unrest, which wiped out an estimated R50bn from GDP and led to major disruptions to infrastructure.
Financial mismanagement and corruption have led to a severe deterioration of many SOEs, which are now unable to deliver on their mandates and require bailouts from the fiscus. These bailouts have often crowded out government spending on socioeconomic needs.
Since 2013, government has directed more than R290bn to bail out SOEs at the expense of important social expenditure, Godongwana said.
For example, SAA which is expected to be majority owned by a private equity partner by early 2022, received R21bn on in support from government in 2020/2021. That included R10.5bn for its business rescue process. Those funds were reallocated from essential social spending budgets such as health, education and police.
SOEs in financial distress will now be required to expedite reforms to put them on a sound financial footing, Godongwana said. This includes facilitating private sector participation in executing some of their core mandates.
Since the 2021 budget, the Treasury has imposed stringent criteria for additional government funding, leading to a decline in requests for bailouts, yet “the broader context of financial distress, poor governance and unsustainable operations in many entities remains unaddressed,” Treasury said.
SOEs are now required to prove that they will be able to meet their debt obligations before being allocated funding among other criteria, Godongwana said.
“The poor financial condition and operational performance of several of these companies remains a large contingent risk. A number of entities may request further bailouts,” he said.
Despite the enforced criteria, the underperformance of many public entities including power utility Eskom, arms firm Denel and the SA National Roads Agency (Sanral) are expected to be a burden on the fiscus.
Eskom is moving to bring in private partners to its generation units and is on track to complete the unbundling of its transmission unit by December. The unbundling of the other two units, generation and distribution, is expected within the next 12 months.
“To enable Eskom to execute its borrowing plan, the Minister of Finance approved a special dispensation to allow Eskom to access additional guaranteed debt of R42bn in 2021/22 and R25bn in 2022/2023, which falls within its existing [R350bn] government guarantee facility,” Treasury said.
For Sanral, policy uncertainty over government’s position on E-tolls has severely limited its ability to access capital funding. Sanral has been able to collect just R5.5bn in toll fees compared with an initial projection of R20.2bn .
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.