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Budget 2016: Gordhan puts state-owned companies on notice

24 February 2016   (0 Comments)
Posted by: Authors: Ranjeni Munusamy and Marianne Merten
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Authors: Ranjeni Munusamy and Marianne Merten (Daily Maverick)

State-owned entities (SOEs) will no longer be viewed as sacred cows with Finance Minister Pravin Gordhan warning of possible reforms, the shutting down of unnecessary entities, rationalisation and evaluation of operations and efficiency. Presenting the 2016 Budget, Gordhan said Presidential Review Commission on state-owned entities would guide the path ahead.

The word "bail-out” must be removed from the state’s dictionary, Gordhan said at a pre-Budget briefing on Wednesday. And while Treasury is looking into "minority equity participation at some state-owned companies, Gordhan warned against the temptation to use the word "privatisation” as government seeks to make these companies financially viable.

As the numbers of SOEs may be rationalised, some may be phased out, as government is looking as "minority equity participation” and/or "co-investment, Gordhan said.

According to the Budget Review, SOEs now need to "generate sufficient returns to contribute strategically to development without draining national resources”. Current government guarantees total R467 billion, or 11% of the gross domestic product (GDP). Over the past five years SOEs showed declining returns on equity; in the 2014/15 financial year there was a – 2.9% return on the SOEs combined equity. However, SOEs assets amount to over R1 trillion, equivalent to 27% of GDP, and they maintain key networks and services.

  • Transnet, which operates ports, railways and pipelines, has posted resilient growth in revenue, reporting a profit of R5.3 billion in the 2014/2015 financial year. Public Enterprises Minister Lynne Brown is discussing with Transnet measures to "accelerate private sector participation in the ports and freight rail sector,” according to Gordhan.
  • SAA remains financially troubled amid leadership turbulence and will post yet another loss. The Budget Review says government is looking at "strategic partnerships” to allow SAA "to draw on private sector capital and technical expertise to improve its performance and expand its network”. Discussions within government are also underway to explore a merger of SAA and SA Express. Importantly, Gordhan said at the pre-Budget briefing, steps were underway to ensure a new SAA board would be finalised over the next few weeks. He said a new board was "absolutely essential” for all other processes to unfold.
  • Eskom now has received R15 billion of the R23 billion special appropriation Parliament approved last year. However, of the R5 billion tranche due in February 2016, only R3 billion have already been transferred. A decision on the last R2 billion will be made by the end of March, depending on the power utility’s compliance with certain conditions relating to cost reductions and improvements in maintenance. As Eskom is awaiting the outcome of its application to hike tariffs outside the usual procedural timeframe, the Budget Review states: "Further efficiency improvements are necessary at Eskom to ensure moderation in future tariff increases”.
  • The South African Post Office has received R650 million for recapitalisation. "This allocation was funded by reprioritising other expenditure and does not affect the Budget balance,” according to the Budget Review. The Post Office remains in financial trouble with expected losses of R1.5 billion in the 2015/2016 financial year.
  • South African National Roads Agency Limited (Sanral) will receive R1.4 billion from the national coffers over the next three years to supplement the e-toll revenues in Gauteng. This is required so Sanral can service its debt commitments as they fall due, according to the Budget Review. The outlook for Sanral is that it would stabilise. In the 2014/15 financial year, the agency recorded total revenues of R11.7 billion, including R5.4 billion from government transfers and R3.8 billion from the e-tolls.

Gordhan said government was determined to take a hard look at each SOE and its efficiency and governance. The balance sheets of several entities with extensive infrastructure investment responsibilities "are now stretched to their limits”. Government guarantees totally R467 billion was a "source of pressure on the sovereign rating”, Gordhan said.

If companies were not operating efficiently, hard decisions in the current economic climate might have to be taken to phase out some small to mid range entities. Government could only spend what it had, not what it wished it had, Gordhan said.

The strength of our major state-owned companies does not lie in protecting their dominant monopoly positions, but in their capacity to partner with business investors, industry, mining companies, property and logistics developers…” said the finance minister delivering his Budget in the National Assembly.

Gordhan said the Budget was guided by the National Development Plan, emphasising "partnerships” amongst role players in the economy. Time frames for stabilisation and private sector partnerships could however not be provided as yet, Gordhan said.

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