Unprofitable SOEs have become a ‘substantial’ risk on fiscus

2017-10-25 14:59 - Matthew le Cordeur
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Cape Town - South Africa’s unprofitable state-owned entities have become a fiscal risk for government, according to the 2017 mini budget.

“Continued financial deterioration of major state-owned companies is a clear and substantial danger to the public finances,” the mini budget states.

“Additional risks to the framework include more financial demands from state-owned companies,” it said.

Treasury said that global developments leading to broad aversion towards developing-country debt, or a sharp deterioration in the balance sheet of a state-owned company, could result in risk premium increases to varying degrees.

“A moderate increase in the risk premium could see growth slow to 0.6% in 2018 and 0.9% in 2019. A large increase in the risk premium could see growth contracting by 1.2% in 2018 and 0.8% in 2019.”

“Several state-owned companies persistently demonstrate operational inefficiencies, poor procurement practices, weak corporate governance and failures to abide by fiduciary obligations. The risk here is substantial.”  

Between 2011/12 and 2016/17, the combined profitability of the state-owned companies, measured by return on equity, declined from 7.5% to an estimated 0.2%, it said. “A growing portion of their operating expenditure is funded through debt.

“Lenders, alarmed by governance failure, are taking a more active stance,” it says. “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. Addressing this requires not only stabilisation measures at troubled entities, but a broader restructuring of state-owned companies and an acceleration of the reforms highlighted in recent editions of the Budget review.”

Finance Minister Malusi Gigaba said business and consumer confidence has been knocked by poor governance in several state-owned companies.

“A pattern of poor governance in several large state-owned companies, contribute to concerns about policy uncertainty,” the mini budget states. “Addressing these concerns would bolster confidence, supporting higher levels of investment and growth.”

Treasury explained that since 2012, the profitability of state-owned companies has declined due to a combination of operational inefficiencies, governance failures and weak demand.

“These factors have increased reliance on borrowing to fund operations, leaving several entities heavily indebted, without sufficient cash to service their debt obligations or even to run their operations.

“With no meaningful prospects of a short-term recovery in earnings, lenders are increasingly unwilling to roll over maturing debt or extend new loans, even with government guarantees.

“State-owned companies that have been able to roll over maturing debt have done so on an increasingly unsustainable basis, with shorter repayment terms, higher interest rates or reliance on government guarantees. Several lenders have declined to roll over debt falling due and required settlement.

“Government stepped in to bail out SAA, preventing a call on guarantees or the liquidation of the carrier. It is unlikely that SAPO would have been able to settle its loan without state support given the deficit it has been running for months.

“Several others, including Denel, South African Express and the South African Broadcasting Corporation face liquidity shortfalls, and will likely require some form of intervention from government.”

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