Business model reform also needed to lower SoE risk to fiscus

13th April 2018

By: Terence Creamer

Creamer Media Editor

     

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The risk posed to government’s fiscal position as a result of contingent liabilities linked to South Africa’s State-owned enterprises (SoEs) will be only partly alleviated by governance reforms, S&P Global Ratings warns, arguing that greater attention will also have to be given to reforming SoE business models.

Associate director Gardner Rusike says that, while S&P noted recent efforts to address governance problems, particularly at SoEs with weak balance sheets, such as Eskom, the contingent-liability risk has not only persisted, but also increased.

When government’s total guarantees exposure was combined with government debt, the figure stood at 62.5% of gross domestic product, up from 60.4% in 2016 and 58.3% in 2015.

“It is important to sort out the governance issues, which is about the boards and the executive management. That is an important stating point,” Rusike told participants at S&P’s yearly conference in Johannesburg.

“But, more than that, there are still fundamental issues, which relate to the business models. So, reforms at SoEs are still ongoing and we look forward to more that can help with governance, as well as on the business model side.”

National Treasury director-general Dondo Mogajane has indicated that government is entering a phase of reassessing SoEs, with Cabinet having approved a private-participation framework. However, he stresses that SoEs, such as Eskom, are complex in the challenges they present to the fiscus.

“Addressing the boards is one thing. These companies have liquidity challenges. We should decide if we have money to throw at the companies or try to reposition them,” Fin24 quoted Mogajane as saying during a recent panel discussion at the University of Cape Town’s Graduate School for Business.

Eskom acting CEO Phakamani Hadebe also confirmed that, while Eskom’s capital structure was not sustainable in its current form, the utility was considering ways to strengthen its balance sheet in the absence of any injection from government. Eskom chairperson Jabu Mabuza indicated that “everything is on the table” as part of the capital-structure review, including possible asset disposals.

Likewise, SAA was considering various restructuring options, including the sale of a stake to a strategic equity partner, the sale of noncore assets and a merger with other government-owned airlines as part of efforts to turn the lossmaking national carrier around.

However, there would be strong opposition to any attempt at privatisation, with various trade unions already opposing a greater role for independent power producers in the electricity supply industry. In addition, any proposal that could involve job cuts would be strongly opposed.

Eskom in Focus

In February, S&P downgraded Eskom’s long-term foreign and local currency corporate credit rating to an even lower ‘speculative grade’ of CCC+, from B– previously, while sustaining its negative outlook, owing to ongoing liquidity concerns.

In its review, the ratings agency lowered, from ‘very high’ to ‘high’, the assumed likelihood of “sufficient and timely” government support to address Eskom’s liquidity challenges.

Eskom described the timing as unfortunate in light of improved market sentiment towards the utility, while Hadebe said he was “comfortable” that government had provided tangible support to ensure that Eskom’s governance-related and liquidity challenges were resolved expeditiously.

However, S&P director Omega Collocott stressed that the key issue related to whether government’s support had been “sufficient and timely”.

She explained that, while the prospect of government support for Eskom had previously been considered ‘extremely high’, this had subsequently been lowered to ‘very high’ and, most recently, to ‘high’, owing to a lack of evidence of “timely” action during a number of “crisis points” relating to Eskom’s cash-flow statement in recent times.

“The two recent downgrades, in November last year and February this year, had everything to do with liquidity and with the sufficiency and timeliness of government’s response to Eskom’s critical financial and liquidity challenges,” Collocott explained, noting that, from November, Eskom’s finances had been reduced to the point where the parastatal had less than six months of cash holdings.

She admitted that a few eyebrows had been raised, particularly with the February downgrade. “But we had Eskom running out of money, we had a State of the Nation address and a Budget Speech, and [we are still] unclear how this issue is going to be resolved. There is a short-term liquidity bank-funded line in place, which runs out in August 2018.”

Eskom’s Hadebe told lawmakers that the utility had raised R43-billion from the market and would finalise a comprehensive, integrated strategy for the entity by September.

“As of today, I’m happy to announce that Eskom has been able to raise, in gross terms, R43-billion from the market . . . in net terms, we have raised borrowings of R33-billion,” he told Parliament’s Portfolio Committee on Energy.

“This indicates that the market, or fund managers and investors, are beginning to welcome Eskom back into the financial market. It also highlights that Eskom can begin to diversify its funding because it is attracting various investors.”

Despite the risks posed by the SoEs, S&P had revised its growth forecast for South Africa to 2% for 2018, from 1% previously, and expected the economy to expand by 2.1% in 2019.

However, the agency still felt justified in having downgraded South Africa’s local currency debt to ‘junk’ in November.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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