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Pretoria - Government needs to leverage off state-owned companies (SOCs) strategically to develop the economy, Finance Minister Malusi Gigaba said in his Medium-term Budget Policy Statement on Wednesday.
He explained that historically, SOCs have helped to advance black professionals but in recent years have become burdensome and require government bailouts due to governance failures, corruption and operational inefficiencies.
“State-owned companies are developing a poor reputation with the public at large, and have become a major fiscal risk to the country due to government guarantees of their debt,” he said.
Previously these SOCs have played a “leading role” in developing “world class infrastructure” needed for the SA economy. They have also helped provide services to historically neglected communities and invested in skills development, among other things, he pointed out.
“SOCs like Eskom, Transnet and SAA are multi-billion rand companies by revenue, with enormous value chains. We have increasingly begun to use these strategically, incorporating localisation and preferential procurement into their operation philosophy and investment plans,” said Gigaba.
Transnet particularly has established a trend of appointing black accounting firms as external and internal auditors. These contracts are worth “tens of millions of rand” annually.
“Government can manage SOCs well, and will act decisively to stabilise those which are experiencing challenges,” said Gigaba.
Given that executives of these SOCs are paid competitive salaries, the public and government are correct to expect a great deal of them, he added.
“As the shareholder, we are tired of being dragged into crises by those we employ to govern and manage state-owned companies. This must end.”
Bailouts
Gigaba added that SOCs’ reliance on bailouts to finance operational expenditure, inefficiency and waste must be brought to an end.
“In due course, National Treasury will make proposals to make our government guarantee framework more stringent.”
Several SOCs “persistently” demonstrate operational inefficiencies, poor procurement practices, weak corporate governance and failures to abide by fiduciary obligations", Treasury said in the policy statement. These SOCs pose fiscal risks.
They include SAA, where Treasury intervened to avoid a bailout, the South African Post Office (SAPO), and Denel, SA Express and the SABC which face liquidity shortfalls that may require government intervention.
Total government guarantees issued to public institutions, independent power producers and public-private partnerships came to R688.8bn in 2016/17.
“Total guarantee exposure was R445bn, because several entities had not fully used their available guarantee facilities,” the policy statement read.
According to the policy statement, between 2011/12 and 2016/17 the combined profitability of the SOCs, measured by return on equity, declined from 7.5% to an estimated 0.2%.
“A growing portion of their operating expenditure is funded through debt,” said Gigaba.
Lenders are also taking a more active stance, making it difficult for SOCs to raise debt, or to refinance debt at higher rates.
“This situation creates liquidity challenges, leading to greater demands on the fiscus,” Treasury said.
Total interest payments by SOCs are projected to increase from R49.8bn in 2016/17 to R69.3bn by 2019/20.
“Some entities may have insufficient cash to settle their obligations unless immediate reforms are implemented to improve governance and boost profitability,” warned Treasury.
During his address, Gigaba expressed the importance of ensuring the board of directors at SOCs are “properly qualified”, ethical and provide the required skills sets to ensure that they are soundly and profitably run.
“If board members do not exercise the leadership, good governance and financial management expected of them, government must act quickly and decisively,” said Gigaba.
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