Antionette Slabbert
3 minute read
22 Feb 2017
8:24 pm

State-owned companies are destroying value

Antionette Slabbert

State-owned companies that rely on expensive borrowings while delivering little or no return on equity are destroying value fast, says National Treasury.

According to the 2017 Budget Speech, the 16 largest companies are required to be financially stable under the Public Finance Management Act (PFMA).

In 2015/16 their combined return on equity was, however, only 0.8%. “Using the R186 bond as a proxy, government’s average cost of borrowing is 8%. When government borrows at 8% and provides capital to state-owned companies that are generating a lower return on equity, it represents value lost to the public finances,” Treasury states.

Treasury points out that several of these state-owned companies play a dominant role in key sectors of the economy. It states that government’s “twin objectives of growth and transformation would be well served by a shift from monopoly control to well-regulated, competitive markets that are open to new entrants”.

It says public companies would still play a strategic role in furthering developmental mandates.

In his budget speech, minister Gordhan said he met with the new SAA board last week. The board was appointed in September last year, with the retention of controversial chair Dudu Myeni.

During a media briefing before delivering his speech, Gordhan said Myeni did not attend the board meeting.

He said the board well understands the challenges the airline faces and that the advisory work in progress has clarified the way forward.

This is a reference to consultants appointed to review the state’s aviation assets and a possible merger between SAA and SA Express that was mooted in last year’s budget.

The review is expected to be completed by the end of March. “The goal is to develop a stronger, more efficient and sustainable state aviation sector,” the 2017 Budget Review states.

The embattled SA Express’ 2015/16 financial statements have not been finalised due to doubt about its going-concern status. It has underperformed on its long-term strategy developed in 2013 and has seen some of its aircraft grounded due to delays in raising funds for spares, according to the 2017 Budget Review.

It points out that SAA has narrowed its R5.6 billion loss in 2014/15 to R1.5 billion in 2015/16, largely thanks to lower fuel prices and lower asset impairments.

The airline is, however, still technically insolvent with its going-concern status relying on its R19.1 billion state guarantees.

SAA’s liquidity constraints are expected to persist over the next three years and in 2017/18 government will assist it financially “in a manner that does not increase the budget deficit”.

The South Africa Post Office (Sapo) hopes to return to profitability in the new financial year, following a R1.14 billion loss in 2015/16 and R1.5 billion in the previous financial year.

According to the 2017 Budget Review this was largely the result of reduced costs, while revenue dropped by R440 million as a result of the strike in the previous year and liquidity pressure, which limited its ability to pay creditors.

Government has granted Sapo guarantees of R4.4 billion, which enabled it to raise R2.7 billion to fund operations and a turnaround. In April last year government provided it with R650 million-worth of recapitalisation funds.

Sapo has applied for a full banking licence for the Postbank. It will be corporatised and further capitalised over the medium term.

To read Pravin Gordhan’s full budget speech, please click here.

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