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Treasury sounds SOE alarm

Oct 02 2016 06:30
Justin Brown

Johannesburg - Treasury this week expressed concern about the disarray in which state-owned enterprises (SOEs) find themselves – and the devastating effect their continued slide would have on the economy, given scant growth and the country’s risk of a credit downgrade.

Deputy Finance Minister Mcebisi Jonas told City Press: “If SOEs continue on their current trajectory, they will pose a serious fiscal risk to the country and the economy. They must do something to change this. We cannot forever postpone the need for reform.

“We have to be more focused on ensuring that we improve the financial performance of our state-owned companies,” he added.

“Given the huge amount of guarantees [provided by Treasury to the SOEs], any slippage or failure implies that it might affect the fiscus. This underscores the importance of SOEs for government.”

In February, Treasury had provided state-owned companies with R467 billion in guarantees, of which R258 billion had been drawn down.

“SOEs need to be financially viable. Governance of SOEs needs to be strengthened so that proper due diligence is undertaken before decisions are made and implemented,” said Jonas.

In August, Futuregrowth Asset Management, which manages R170 billion in funds, announced it would halt funding to six key parastatals – Eskom, Transnet, SA National Roads Agency Limited, Land Bank, Industrial Development Corporation and the Development Bank of Southern Africa – citing concerns over a newly formed council to oversee SOEs and over “conflict between branches of South Africa’s government, the possible machinations of patronage networks, and a seeming challenge to the independence of National Treasury”.

This week, Futuregrowth lifted its freeze on funding the Land Bank, but has kept its capital boycott in place for the other five parastatals.

The move by Futuregrowth “was an unfortunate situation”, Jonas said.

“When that starts happening, it carries with it the potential of posing a bigger risk because many entities could start pursuing [the same policy].”

READ: Allan Gray warns of SOE uncertainties

GROWTH

Jonas also warned about the potential danger posed by negligible growth. “If we do not grow the economy, we will confront huge challenges. Growth is probably central to turning around our fiscal position.”

Despite low growth, government tax revenues had been buoyant “as a result of a number of factors, which are fast disappearing”, said Jonas.

“We are getting to a more difficult space.”

Regarding the decision by Moody’s, taken two weeks ago, to place the rating of five SOEs on review for downgrade, Jonas said: “It is a very sensitive period. We must consistently demonstrate that we are committed to reform.”

Moody’s said the move was prompted by “increased risk of funding and liquidity challenges, following some signals of risk aversion by funding counterparties owing to market concerns regarding the governance of South African state-owned enterprises”.

Moody’s warning comes ahead of the impending review of government’s credit rating, to take place in December. It currently sits just above the investment grade threshold.

“Doing things around rationalising SOEs, managing costs and improving efficiencies have become central to improving our credibility,” said Jonas.

“People look at [the parastatals] and say, ‘You provide guarantees to so many entities.’ So, if you look how the SOEs perform in terms of those criteria, it immediately creates uncertainties.”

He added that a key issue regarding SOEs was sectoral policy and concentration of ownership.

“Take the transport and logistics sector as an example. How you transform it as a whole and reform it as a sector might have an impact on Transnet. The same applies to the energy space,” said Jonas.

“The bigger policy debate about energy is whether you would continue to have Eskom as a vertically integrated [power utility] with generation, distribution and transmission in one entity.

“At some point, you need to confront this policy debate.”

READ: Six SOEs on guard

VESTED INTERESTS

Jonas made mention of “vested interests” that had developed within SOEs, referring to the battle between Eskom and the independent power producers as a case in point.

“This demonstrates the contestation,” he said.

“With renewable energy we are not going to have a choice. We must drive the energy mix articulated in the Integrated Resource Plan – promulgated in 2011 to determine South Africa’s long-term electricity demands, capacity, type and cost – quite vigorously. Renewable energy is a very important component of what we do.

“The independent power producers programme is a huge innovation as it has ensured that we bring the private sector’s participation into energy supply.”

Regarding the SOEs’ debt accumulation noted by Moody’s, Jonas said government had embarked on a process of greater fiscal discipline, including managing expenditure. “If Moody’s downgrade the five SOEs [placed on review], this will have an effect on government’s credit rating.

“We do not think it will happen,” he added.

The government is still looking to sell noncore state-owned enterprises. In February, Finance Minister Pravin Gordhan said moves were afoot to merge SAA and SA Express, which are both owned by government and are loss making.

A company had been contracted to do the work around the possible merger, Jonas said.

He declined to disclose its name.

“We have contracted an entity to do an assessment and analysis of a feasibility study ... We are still committed to that.”

Jonas added that merging the two airlines was likely to include a process of rationalisation and private sector participation.

READ: Treasury backs Brown on SOE issues

FICA

Regarding the Financial Intelligence Centre Act (Fica) Amendment Bill – which seeks to strengthen the country’s financial systems by clamping down on money laundering, tax evasion and illicit financial flows – Jonas stressed the urgent need to ratify it.

The bill, passed in May, has been awaiting President Jacob Zuma’s signature, but politically connected lobby groups have petitioned him to quash it as it will give authority to banks to scrutinise public figures, including business people and politicians’ bank accounts.

But Jonas stood firm.

“It is a critical component of improving our standing globally. It is fundamentally important. We have little choice as a country. Failure to sign will have huge consequences for our standing and the economy.

“We are part of a well integrated global system and our banks have corresponding banking relationships. If we do not move on this, we will fall foul of these. We adopted this policy long ago, as well as the twin peaks model [of financial regulation]. By delaying it we will create a problem for ourselves and the financial sector.”

The twin peaks model proposes to divide the existing authority, the Financial Services Board, into a “prudential authority” that will regulate the solvency of financial institutions, and a separate and autonomous “financial sector conduct authority” that will micro-manage banks and insurers under so-called market-conduct regulation.

Acknowledging that Treasury was under fire from some quarters, Jonas said: “In our underperforming economy fraught by joblessness, youth unemployment and poverty, there is always the lurking danger of growing populism. In part, that is how I see the challenges Treasury is facing.

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