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In his “New Deal” for reigniting job creation and economic growth, President Cyril Ramaphosa identifies the need to restore state-owned enterprises as drivers of economic growth and social development.
President Ramaphosa admitted in his state of the nation address that state-owned enterprises “are experiencing severe financial operation and governance challenges”.
Finance Minister Malusi Gigaba is scheduled to deliver his 2018 budget speech on Wednesday, and is expected to make particular reference to the financial health of state-owned enterprises.
These enterprises have a crucial role in maintaining the basic infrastructure of South Africa, ensuring long-term economic development and transformation, economic growth and job creation.
Unfortunately, numerous state-owned enterprises are facing financial difficulties, which has led to credit rating downgrades and, in turn, increased financial deficits. This puts the fiscus as well as South Africa’s competitive position on the continent at risk.
Government’s exposure to state-owned enterprises increased from R255.8 billion in 2015/16 to R308.3 billion in 2016/17. The two state-owned enterprises with the largest exposure (power utility Eskom and roads agency Sanral) currently have sub-investment credit ratings.
Some of the reasons stated for the most recent downgrades are the preceding sovereign credit rating downgrades, governance challenges and the state-owned enterprises’ deteriorating liquidity levels. The downgrades limit state-owned enterprises funding options, since it deters risk adverse investors and investors with specific limitations to investing funds in sub-investment rated entities.
The poor credit rating also influences the cost of lending.
There were recent outcries from the Public Servants Association after the Public Investment Corporation (PIC) provided Eskom with R5 billion in financing, which consists mostly of government employees’ pension funds. The main concerns from the Public Servants Association are that this transaction contradicts previous assurances from the Government Employees Pension Fund that pension fund money will not be used to finance struggling state-owned enterprises.
In turn, the PIC argued that it was “encouraged that the new Eskom board and the new management team has moved with the necessary speed to restore good corporate governance at Eskom”. The PIC indicated that it provided the money at a favourable rate of interest and that the loan was due in 30 days. Elsewhere, Eskom reported that three commercial banks had indicated that they were willing to extend their credit facilities, pending the outcome of their respective due diligence processes.
President Ramaphosa promised in his state of the nation address that the government would “intervene decisively to stabilise and revitalise state-owned enterprises”. He acknowledged that some of these entities “do not have a sufficient revenue stream to fund their operational costs”, and that they “cannot borrow their way out of their financial difficulties”.
Budget 2018 needs to set in motion tangible plans to achieve Ramaphosa’s ideal of restoring state-owned enterprises as drivers of economic growth and social development. Proper accountability structures should improve the quality of governance at these companies which, in turn, would aid the financial health of state-owned enterprises. Improved financial management would eventually translate into improved credit ratings which will encourage a greater volume of financiers to invest in state-owned enterprises.
Although this sounds like a perfectly reasonable plan on paper, this is unfortunately not something that will happen overnight. Making the right decisions around leadership at a ministerial and state-owned enterprise board level, would be critical to kick-off the process.
Looking beyond Budget 2018, President Ramaphosa is planning to undertake a process of consultation with a variety of stakeholders to comprehensively review the funding models of state-owned enterprises. The question is: will the Ramaphosa administration be willing and able to make politically unpopular decisions (such as privatisation or partial privatisation) in the interest of fiscal sustainability.
• Lullu Krugel is chief economist for PwC Africa
