Monday, January 24

Government willing to ‘divest’ of some state companies

The government has pledged to prevent further bailouts of SOEs over the next three years and confirmed that it will “let go” of some SOEs that are no longer considered strategically relevant.

Finance Minister Enoch Godongwana said Thursday that the government would practice “tough love” with state-owned companies and that restructuring of state-owned companies is a priority.

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“We must be prepared to consolidate some of our state entities and put aside those that are no longer considered strategically relevant,” he said while delivering his Medium Term Budget Policy Statement (MTBPS) speech.

Godongwana added that the government has allocated more than R $ 90 billion to rescue state companies since 2013 “at the expense of significant social expenditures.”

“In this MTBPS, no additional financing is provided for state-owned companies.

“The exception to this is when creditors have demanded collateral and the SOC has met the conditions [state-owned company] in question, in the context of its strategic importance, ”he said.

Godongwana said he also doubted that provisions for the bailout of state-owned companies would be made in his February 2022 main budget.

He stressed that SOEs are destined to be important facilitators of economic development, but many have been mismanaged and failed to deliver.

“In many cases, they have also been devastated by the capture of the state, which has made them increasingly dependent on government support,” he said.

The commitment to avoid further bailouts to state-owned companies was made despite the admission to the MTBPS that certain internal risks identified in the 2021 budget have begun to materialize, including poverty and the continued deterioration of the financial situation of several of the main state-owned companies, which remains. a large contingent risk.

The MTBPS said that most contingent liability risks stem from the poor financial performance of major state-owned companies and represent financial commitments that the government may have to meet in the future if particular events materialize.

Contingent liabilities are expected to exceed R1 trillion by 2023/24.

They consist of government guarantees to state companies, the Renewable Energy Independent Energy Producers Program, public-private partnerships, and obligations to the Highway Accident Fund and other social security funds.

The MTBPS says the short-term windfall fiscal gains will be aimed at reducing the budget deficit and funding temporary priorities, such as extended support for poor households and public employment, rather than bailing out state-owned companies.

The MTBPS said that the poor financial situation and operating performance of several large state-owned companies is one of the important risks to the economic and fiscal outlook.

He said the government’s strict application of minimum criteria before guaranteeing state-owned company debt, as outlined in the 2021 Budget, has led to a decline in bailout requests.

“However, the broader context of financial distress, poor governance and unsustainable operations in many entities remains unaddressed,” he said.

The MTBPS said that access to capital markets has become more restricted for state-owned companies as a result of weak revenue growth, poor operating performance and rising debt service costs. Rising interest rates and increasingly unfavorable loan terms also increase the risks associated with borrowing, he said.

The MTBPS said that the Covid-19 pandemic and the restrictions associated with economic activity have delayed the execution of capital investment projects, silenced rate adjustments and slowed down the collection of payments to users.

Total debt repayments for state-owned companies will average R73.4 billion a year in the medium term, and external debt will account for 45% of the total, he said.

In a breakdown of the financial situation of several state-owned companies, the MTBPS said:

– Eskom continues to pose significant risk to public finances as it relies on government guarantees to finance its operations and financial support for Eskom is assumed to amount to R24.6 billion from 2019/20 to 2025/26.

– Denel is experiencing difficulties in meeting its obligations and is negotiating with stakeholders the way forward.

– The Highway Accident Fund (RAF) receives around R42 billion in fuel taxes each year and pays R40 billion in claims, but has a growing backlog of unpaid claims that reached R14.8 billion in 2020/21.

– South African Airways (SAA) received R21 billion in government support in 2020/21.

The MTBPS said that Eskom had used R281.6 billion of its R350 billion government guarantee service by March 31, 2021 – 80.45% of this guarantee – with another R7 billion pledged.

It said that capital support of R31.7 billion was provided to Eskom in 2021/22, with the last tranche of R11.7 billion disbursed on July 1.

“To allow Eskom to execute its borrowing plan, the Minister of Finance approved a special waiver to allow Eskom access to an additional guaranteed debt of R42 billion in 2021/22 and R25 billion in 2022/23, which is included within of its existing guarantee mechanism. ” He said.

The MTBPS said Eskom has made progress in its separation plan by establishing a transmission company that is now registered with the Business and Intellectual Property Commission and developed a new corporate structure and allocated debt among its electricity generation, transmission and distribution entities. proposals.

He said this proposed restructuring must be approved by the lenders, but the utility has a deadline of December 31, 2021 to complete the legal separation of the transmission unit, and the other two units will follow in the next 12 months. .

Godongwana said that all government efforts over the past 13 years have been to repair Eskom, rather than addressing security of supply by adding additional capacity to the network.

He said they have already made significant progress in correcting this through the amendment to Annex 2 of the Electricity Regulation Act of 2006, which has raised the license threshold from 1MW to 100MW, and allowing generators to Private power selling directly to customers will alleviate the risk. of power outages.

Godongwana added that creating a competitive energy market will help in the long term to contain electricity generation costs and support GDP growth.

As for Denel, the MTBPS said that the government has provided recapitalizations to defense SOEs of R1.8 billion in 2019/20 and R576 million in 2020/21, and extended a guaranteed credit line of R5.9 billion. .

He added that several of Denel’s repayment obligations have expired this year and the government has allocated R2.9 billion in 2021/22 to settle these repayments.

Public Companies Minister Pravin Gordhan announced in June this year that the government had agreed to sell a majority stake in SAA to a consortium made up of Johannesburg-based Global Airways, which owns the recently launched national airline Lift, and the private equity firm Harith General Partners.

The consortium will take a 51% stake in SAA, and the government will retain a minority stake.

The 21 billion rand in support of SAA by the government in 2020/2021 included 10.3 billion rand for the settlement of the government guaranteed debt, 7.8 billion rand for the implementation of the business rescue, 700 million rand for the SAA subsidiaries and R 267 million for calls. on the warranty obligations that the airline had breached.

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