- The financial performance of State-Owned Enterprises (SOEs) continued to deteriorate in 2020/21, this with the Covid-19 pandemic and associated lockdown impacting plans.
- Several SOEs are at risk of defaulting on their debts, says Treasury. In the past year the Land Bank defaulted on its debt obligations.
- Mandates of SOEs are being reevaluated as part of a rationalisation process to make sure they respond to growth supporting and developmental mandates.
The Covid-19 pandemic and associated lockdowns have "upended" plans for state-owned enterprises (SOEs), compromising their revenue growth and contributing to the deterioration of financial performance, according to National Treasury.
Finance Minister Tito Mboweni tabled the national budget in Parliament on Wednesday. He said any support to SOEs and public entities will have to be done through budget reprioritisation - as outlined in the 2020 Medium Term Budget Policy Statement (MTBPS).
According to the budget review, the return on equity from SOEs stood at -7.9%, due to weak growth, high costs and elevated debt servicing costs. Several SOEs are at risk of defaulting on their debts – just last year the Land Bank defaulted on its debt.
Total debt of SOEs amounts to R692.9 billion – of this 60% or R415.5 billion is government guaranteed. Over the next three years debt repayments due total R183 billion – with Eskom responsible for the majority (R102 billion).
"Poor financial performance and governance problems were already limiting access to funding – especially at affordable interest rates – for major state-owned companies," the review read. The high levels of uncertainty brought about by the Covid-19 pandemic will exacerbate difficulties, Treasury warned.
Treasury highlighted that SOEs will have to expedite their implementation reforms – which includes partnering with the private sector and streamlining operations to focus on core mandates.
Notably, the financial performance of the three largest development finance institutions – including the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC) and the Land Bank – also deteriorated in 2019/20.
According to Treasury this is due to the reduction in the repurchase rate and interest income, increased impairments and projected or actual investment losses due to the impact of Covid-19 on financial markets.
"The net asset value of development finance institutions fell by 27% to R100.3 billion in 2019/20, mostly due to losses at the IDC and the Land Bank," the budget review read.
Financial distress
"The Land Bank is in financial distress," Treasury noted in the budget review. Last year, the bank was allocated R3 billion in the 2020 special adjustments budget. The October MTBPS also indicated it would require R7 billion to support the restructuring of the entity."This allocation will help to resolve the bank’s current default and re-establish the development and transformation mandate. This amount will not affect the expenditure ceiling but will be offset through an expenditure reprioritisation process, Mboweni said during his speech.
Treasury has proposed allocations of R5 billion in the 2021/22 financial year and R1 billion in each of the two subsequent years. "The Minister of Finance will impose appropriate conditions on the equity support to put the Land Bank on a stable and sustainable development path," the budget review read.
The review also provides an update on other SOEs:
Road Accident Fund
The Road Accident Fund (RAF) is government's largest contingent liability. In 2019/20 its liabilities of R332.6 billion dwarfed assets of R10.7 billion. "The RAF's accumulated deficit is projected to rise from R322 billion in 2019/20 to R518.7 billion by 2023/24," the budget review read.
Cash payouts by the RAF are expected to increase from R36.5 billion in 2021/22 to R42.9 billion in 2023/24 – by comparison claims filed by road accident victims is projected to increase from R86.8 billion to R102.9 billion.
Last year Parliament rejected the Road Accident Benefit Scheme – which aimed to reform the fund to a no-fault system that would provide "equitable, sustainable and affordable support" to accident victims, Treasury said. During 2021, government will table revised legislation to replace the RAF with the new system," the review read.
Eskom
The power utility remains dependent on government support and relies on debt to pay operational costs. While it has a growing debt burden nearing half a trillion, it also suffers operational challenges having to implement load shedding.
"Government's immediate focus is to stabilise Eskom's operations and improve energy availability, while implementing the 2019 roadmap released by the Department of Public Enterprises," the review document read.
Treasury noted efforts to improve generation capacity in the medium term- such as the announcement of successful bids of the 2 000 MW emergency procurement programme, as well as plans to launch bid window five of the renewable energy independent power producer procurement programme which would secure 2 600 MW of power.
No additional funding has been provided to Eskom. Government expects Eskom to complete its separation into generation, distribution and transmission entities by December 2022. The transmission entity is expected to be legally separated by the end of the year.
Transnet
The Covid-19 restrictions impacted Transnet's rail, port and pipeline sales between 1 April 2020 to December 2020 – which resulted in low revenue collections. its profit declined to R3.9 billion, from R6 billion reported in the prior year. The pandemic also impacted capital investment – with spending at R9.6 billion as at 31December 2020 compared to the budgeted R15.6 billion.
South African Airways
No new additional funding will be provided to SAA other than what has already been allocated – as per the 2020 budget review where R16.4 billion was set aside over the medium-term expenditure framework for it to settle legacy debt and associated interest costs. Treasury noted that SAA received an R10.5 billion allocation for the 2020/21 year to support its business rescue process.
Denel
The state arms manufacturer, Denel, has made little progress in its turnaround plan and has continued to deteriorate financially.
"Declining revenues, and high expenses and debt-service costs, mean little cash is available for operations. Unless funding challenges are resolved, the company will continue to find it difficult to meet financial obligations as they fall due," the budget review read.
Treasury previously warned that Denel could run out of cash by the end of March.
Public Enterprises Minister Pravin Gordhan previously told Parliament that Denel will have a new business model in the next two to three months, Fin24 previously reported.
Airports Company South Africa
Covid-19 lockdowns have restricted both domestic and global activity – impacting Airports Company South Africa's (ACSA) passenger numbers. The company had to negotiate new loans with commercial banks and request financial support from shareholder in the face of declining passenger revenue. ACSA is also selling its non-core assets to raise cash.
South African Broadcasting Corporation
Treasury noted that the SABC recorded a net loss of R511.4 million for the 2019/20 financial year. It also indicated that the SABC was working on reducing operational costs – including by implementing staff retrenchments.
The national broadcaster received R3.2 billion as part of the 2019/20 adjustment budget – this was used to invest The SABC recorded a loss of R511.4 million in 2019/20. R3.2 billion equity allocation to invest in new content. The SABC has also made progress in identifying non-core assets that can be disposed to meet funding requirements, Treasury said.