While most of the state-owned entities are mired in debt, the Central Energy Fund (CEF) is sitting on R17bn of cash. That cash, it seems, is burning a hole in several pockets.
Mineral resources minister Gwede Mantashe wants to use it to buy a mine. Energy minister Jeff Radebe wants to buy an oil refinery. Officials in the CEF and its subsidiaries are looking at “downstream opportunities”, which include Engen, owned by Malaysian state oil company Petronas (which they have tried to buy before and failed) and other assets of the oil majors that might come on sale.
It appears past experiences, which have left several state-owned companies in debt and shunned by lenders, have not dampened the government’s enthusiasm for commercial adventurism.
The CEF is a holding company with several subsidiaries, including the Strategic Fuel Fund (SFF), PetroSA, the African Exploration Mining and Finance Corporation (AEMFC), iGas and the Petroleum Agency of SA.
Most of the CEF’s cash sits in the SFF and comes from the sale of strategic oil stocks over the years. Of the R17bn rolled up into the CEF, about a third is restricted cash and R3.38bn, which is the proceeds of the illegal sale of the strategic stock in 2015, is restricted until the outcome of the court application that is seeking to have the transaction set aside. Another R2.37bn is set aside for environmental rehabilitation. There is also some cash that is held on behalf of third parties.
The CEF’s gearing ratio is very low. The Treasury regulations limit the gearing ratio between interest bearing debt and equity to 40:60. At the end of March 2018 the ratio was 12:88. So in addition to its cash, it has lots of room to borrow.
That is why Mantashe thought it a good idea for state-owned mining company AEMFC to bid for the assets of Optimum, which was previously owned by the Guptas and is now in business rescue. A state-owned mining sector, which would leverage off private sector players so at least some of the profits of mining would flow to the SA people, is a long-standing dream of the ANC.
The AEMFC has partnered with Lurco, a black-owned company that itself tends to partner with other companies in mining services and related ventures. The CEF has promised R1bn in funding and Lurco has promised to raise the same.
The CEF’s cash pile is also the reason Radebe thinks it a good idea to make a foray into South Sudan, to explore an oil block and invest in a refinery. Like Mantashe’s vision for a state-owned mining sector, in explaining the CEF’s possible investment in South Sudan it is clear that Radebe is motivated by politics rather than commercial rationale.
Neither project has yet crossed the desk of the finance minister, who is required by law to sign off on joint ventures entered into by state-owned companies. But when they do reach the Treasury or the cabinet agenda, it would be wise for the government to take note of the enormous amount of money that has been blown by PetroSA in its exploration and drilling efforts over the past five years.
Oil blocks bought by PetroSA in Equatorial Guinea and Egypt were never drilled, and its exploration in Mozambique did not yield any gas. Worst of all though was the infamous Project Ikhwezi, in which PetroSA incurred a R13.4bn loss when the new wells yielded only 10% of the gas that had been expected.
While PetroSA’s evaluation of past projects is not publicly available, the report on the failure of Ikhwezi did find its way into the public domain. At the root of the problem, it said, was management’s headlong rush into the project, which meant the investment decision was made without the necessary technical information. Management instability — to which state-owned companies are particularly prone — also undermined the project.
The impact of these commercial ventures over the past five years has been to drain PetroSA of cash. For the past five years it has made a loss. While it had cash reserves of R12.78bn in 2012, by 2017 this had fallen to R2.13bn.
But these obvious trends have not been enough to diminish the faith of the government in its commercial capabilities. Grand dreams of a powerful state sector die hard, it seems, particularly when you are playing with other people’s money.
• Paton is writer-at-large.
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