Loss-making state-owned entities (SOEs) have been allocated a significant slice of the government allocations in the Medium-Term Budget Policy Statement (MTBPS), with Eskom receiving R23 billion.
The MTBPS said financial support for Eskom is reduced by R4.2 billion over the medium term and it is assumed to amount to R225.8 billion from 2019/20 until 2025/26.
The statement stressed that state-owned companies continue to present significant fiscal risks in the form of contingent liabilities and direct requests for state financial support, with Covid-19 and associated restrictions on economic activity increasing the financial pressures SOEs face.
“Changing debt market dynamics and other factors threaten the survival of some companies in their current form. Addressing these matters requires both decisive government action and determined implementation of turnaround plans,” it said.
The MTBPS said Eskom continues to rely on government support and borrowing to run its operations, with the power utility receiving R49 billion of its equity allocation by March 31, 2019.
It said Eskom used R320 billion of its R350 billion guarantee, with an additional R7 billion committed, leaving R23 billion available on the existing facility by June 30, 2020.
By September 30, 2020, R6 billion of the R56 billion equity allocation for 2020/21 had been provided to Eskom, it added.
“The utility has made some progress in implementing its turnaround plan by achieving some targeted cost savings, although lockdowns are likely to have reduced Eskom’s revenues during 2020.
“The utility began implementing revised business models for each division and appointed divisional boards at the end of March 2020.
“Eskom continues to report to the Ministers of Finance and Public Enterprises on its compliance with the conditions imposed in terms of the Special Appropriation Act (2019),” it said.
The MTBPS confirmed that the Airports Company of South Africa (Acsa), which is 75% owned by government, approached its shareholders for possible support.
It said travel restrictions imposed during the Covid-19 pandemic resulted in a sharp decline in air traffic volumes in 2020 and medium-term projections are also expected to be relatively low.
“As a result, Airports Company South Africa does not have sufficient funds for its operational requirements,” it said.
To address the shortfall, the MTBPS said that in addition to Acsa approaching its shareholders for support, it has secured short-term bank loans, reduced operational and capital expenditure and revised its corporate strategy.
The MTBPS said the Land Bank has also approached government for additional financial support.
Following a credit rating downgrade in response to its deteriorating financial position, the Land Bank experienced a liquidity shortfall as investors failed to refinance debt and began defaulting on its debt obligations in April 2020.
Government allocated R3 billion to stabilise the Land Bank through the June 2020 special adjustments budget, with this funding and collections from loan book repayments, allowing the entity to start paying overdue interest from August 2020.
The MTBPS saidthe Land Bank is engaging with its creditors to restructure capital repayments on debt that is in default.
“To ensure financial sustainability, the Land Bank is focused on optimising its equity base and restructuring its assets and liabilities. This process depends on further shareholder recapitalisation and the reduction of its loan assets to retire some of its debt,” it said.
The MTBPS said SOEs posed a risk to the fiscal outlook.
“Additional spending pressures from state‐owned companies. Several companies, including South African Airways, are insolvent and have insufficient funds to cover operational expenses,” it said.
The MTBPS said gross debt is projected to reach 81.8% of GDP in the current year, up from 65.6% projected in February 2020, adding that additional fiscal pressures from the broader public sector – including state-owned companies, social security funds and municipalities – remain unresolved.
“The fiscal trajectory is a major source of uncertainty, pushing up borrowing costs for the broader economy.
“The financial position of state-owned companies and public entities was weak before the onset of the pandemic. The current increase in requests for recapitalisation largely reflects the in-year deterioration in their operating environment.
“Lenders have called the guarantees of South African Express and the Land Bank, with a negligible effect on the fiscal framework. Larger calls on guaranteed debt are expected unless steps are taken to turn around the most indebted state-owned companies,” it said.
This article first appeared on Moneyweb and was republished with permission.