Guarantees continue to weigh on budget

2017-10-25 15:49 - Matthew le Cordeur
iStock

Cape Town – Contingent liability, caused by guarantees for public institutions, independent power producers and public-private partnerships, continues to weigh on the budget.

Total guarantees stood at R688.8bn, while total guarantee exposure was R445bn for the 2016/17 financial year.

Finance Minister Malusi Gigaba pledged to reduce guarantees in a press briefing ahead of his mini budget speech. “We will be very strict going forward,” he said.

“No state-owned entity must feel like they have a special relationship with government. They are all equal. They must generate their own revenues.”

Eskom (R350bn), the South African National Roads Agency (R38.9bn), the Trans-Caledon Tunnel Authority (R25.7bn) and South African Airways (R19.1bn) were the biggest recipients of guarantees.

Contingent liability exposure from public-private partnerships occurs because of government’s obligation to a private party in the case of a contract termination, and if government decides to top up a shortfall if a project does not generate the minimum revenue set out in a contract with the private party.

Between 2011/12 and 2016/17, state-owned entities saw their profit decline from 7.5% to about 0.2%, Treasury explained. “A growing portion of their operating expenditure is funded through debt.

“Lenders, alarmed by governance failures, are taking a more active stance. As a result, state-owned companies are having difficulty raising debt, or are forced to refinance debt at higher rates. This situation creates liquidity challenges, leading to greater demands on the fiscus.”

Treasury expects interest payments by state-owned entities to shoot up by R20bn between 2016/17 and 2019/20. This is a move from almost R50bn to just under R70bn.

“Given the sharp increase in interest commitments, some entities may have insufficient cash to settle their obligations unless immediate reforms are implemented to improve governance and boost profitability,” it said.

Government extended Eskom's R350bn guarantee from March 31 2017 to March 31 2023 because of delays in Eskom’s capital investment programme, Treasury said. “The extension of the guarantee will allow Eskom to use the remaining portion to complete its planned capital expenditure programme.”

Government gave Sanral a R38.9bn guarantee to expand its toll roads portfolio. Despite Sanral's reduction of e-toll tariffs, collections remain lower than projected, making it difficult for the agency to service its debt, Treasury said.

Government gave SAA a R19.1bn guarantee facility to ensure the company continues to operate as a going concern. Total recapitalisation of R10bn will be provided in 2017/18: R5.2bn has already been provided and the remaining R4.8bn will be transferred by March 31 2018, it said.

Arms manufacturer Denel faces refinancing and default risk on government-guaranteed debt amounting to R1.85bn, Treasury said.

“The group has struggled to refinance debt due to concerns about corporate governance failures and corruption. Government has extended Denel’s guarantee to September 30 2018.

“The group has exited the Denel Asia Joint Venture, which it entered into with VR Laser Asia in January 2016, and has withdrawn its court case against the National Treasury and the Minister of Finance.”

Government issued a R25.7bn guarantee to the Trans-Caledon Tunnel Authority.

“The agency relies on payments from the Department of Water and Sanitation’s Water Trading Account to settle obligations with lenders,” Treasury said.

“Weak financial management at the department threatens the ability of the TCTA (Trans-Caledon Tunnel Authority) to meet its commitments, raising the likelihood of a call on the guarantee. In the long term, government’s ability to deliver water infrastructure could be compromised.”

The Road Accident Fund has been insolvent for over 35 years and its total liabilities continue to grow to unsustainable levels, Treasury said.

“An immediate concern is claim amounts that have been settled in court but not yet paid,” it said. “These amounted to about R8.5bn at the end of 2016/17 and are forecast to grow over the medium term.

“Government has tabled legislation to create an equitable and affordable benefit arrangement to replace the fund. The replacement scheme is expected to significantly reduce costs, but will not eliminate the accumulated liability of the current fund.”

* Visit our Mini Budget Special Issue for all the news, views and analysis.

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter: