Do state-owned enterprises pose a threat to Government’s finances?

As a result of the publicity which several state-owned enterprises have enjoyed recently, especially from a governance and finance perspective, the logical question is to what degree they pose a real danger to the health of the State’s finances. This brief by Charles Collocott is based on the detailed Budget Review, as published by National Treasury on the date of the budget speech on 22 February 2017.

General comments in the Budget Review

Capital expenditure by state-owned enterprises (“SOEs”) over the next three years is projected at R432bn.  To put this all into context: capital expenditure by SOEs represents about 42% of total public sector infrastructure expenditure.  For the 2015/16 period Eskom and Transnet made up 74% of the R128bn total borrowing by state-owned companies.  Government’s borrowing requirement for 2016/17 is R32.8bn higher than projected due to higher borrowing estimates by SOEs, primarily Eskom and Transnet. 

Some of the major SOEs are dealt with below individually.  All statistics and quotes are taken from the Budget Review [1], unless otherwise specified.


Government has extended its existing guarantee of R350bn in favour of Eskom to 31 March 2023, which will allow it to complete its current capital expenditure programme up to that date (Note: this does not include any new nuclear construction).  At the end of 2016, R187bn had been drawn under these Government guarantees (out of Eskom’s total debt of R322bn).  Foreign loans are expected to account for over 77% of total funding for Eskom by 2017/18.  

Even if not mentioned in the Budget Review, it is clear that the potential nuclear construction programme needs to be included in any analysis, simply because of the sheer amount of money involved.  If this programme goes ahead, Eskom has declared that it will finance it on its own balance sheet.  If a cost of R650bn is assumed (accepting Government’s extremely conservative estimate, widely seen as unrealistic), this will have to be funded by foreign debt, to be supported by whatever country provides the power stations.  There is insufficient liquidity and appetite within South Africa to fund this locally.  It is assumed that debt of this magnitude will have to be covered by a South African Government guarantee  -  and this would increase total Government guaranteed debt for SOEs from the current R469bn (of which R350bn is for Eskom), to well over R1 000bn.  This excludes Government guarantees to Independent Power Producers of R200bn under the renewable energy programme. 

In the normal course of events, one would not assume that Government would be called on to honour its guarantees for any substantial part of the SOE debt that it has guaranteed.  However, if the guaranteed SOE debt reaches very significant levels, it is to be expected that concern will rise in the financial markets as to the possibility of some guarantees being called. This is especially so if negative reports regarding SOE governance and financial management continue to hit the headlines.  Calls on the guarantees would lead to an increase in Government expenditure and the question would then arise: how are these increased spending levels going to be funded?  Current Government revenue is insufficient to fund such payments (unless spending in other areas is cut, which is highly unlikely) and Government debt already represents 50.7% of GDP.  Whilst this level is not in itself excessive, red lights will start flashing at increases of any substance beyond this level.  Current debt service is already at 11.2% of Government expenditure and any further debt service will simply eat into other budget items, especially against the background of an economy which is showing very modest annual growth of 1.3%.  This pedestrian growth makes any significant increase in Government tax revenue highly unlikely. 

It must be added that a major advantage for South Africa’s financial position is that its Government debt is only held in foreign currencies to a limited extent (11%).  Government debt is therefore shielded, to a large degree, from a substantial depreciation in the local currency  -  and this is a luxury most emerging market economies do not have.  However, keeping in mind the implications of a large increase in Eskom’s foreign debt in connection with any nuclear construction programme that is backed by a Government guarantee, not only could Government’s contingent exposure (and potentially, its actual exposure) change to a substantial degree, but its exposure may potentially balloon at the same time to frightening levels as a result of any meaningful currency depreciation. 


Transnet’s revenue grew 1.7% to R62.2bn during 2015/16 and capital investment came to R34.3bn. In the past 5 years Transnet has spent R122.4bn on capital expenditure. It plans further investments of R273bn over the next 7 years to be funded by earnings and borrowings. According to the Budget Review foreign borrowing will decline.

Transnet currently benefits from a very limited Government guarantee of R3.5bn.

The Public Protector stated in her State of Capture report of October 2016 that her office will be investigating Transnet regarding the awarding of contracts previously held by Regiments Capital, to another company, Trillian Capital, a mere 11 months after Trillian Capital's registration. Trillian Capital is 60% owned by Salim Essa who is a former business partner of Transnet board chairwoman Linda Mabaso's son Malcolm, a former business partner of Iqbal Sharma (chairman of Transnet's tender committee until December 2014) and a Gupta associate.

The Road Accident Fund (RAF)

The RAF received a lot of attention in the Budget Review.  It has been insolvent for over 30 years.  Its liabilities exceed its assets by R145bn for 2015/16 and this is set to increase to R329bn by 2019/20.  The Budget Review states that the “marked decline in solvency poses a risk to the RAF’s operations and the fiscus”.

After a long delay in implementing reforms, Treasury expects draft legislation to create a new Road Accident Benefit Scheme to replace the RAF to be tabled in Parliament this year. “The new arrangement is designed to provide equitable, affordable and sustainable compensation”.


SAA pared its losses from R5.6bn in 2014/15 to R1.5bn in 2015/16, mainly due to lower fuel prices and lower asset impairments.  Despite this, the Budget Review states that “SAA remains technically insolvent” and relies on government guarantees totalling R19.1bn. Treasury further states that “SAA’s liquidity constraints are expected to persist over the medium term.  Government will work closely with the board to reduce associated risks ... Advisors are assisting government with a review of the state’s aviation assets.  The review is expected to be complete by the end of March 2017.”

South African Post Office

The South African Post Office (SAPO) aims to return to profitability by 2017/18.  Postbank (owned by SAPO) has a temporary banking licence and will be corporatized over the medium term.  Postbank’s application for a full banking licence has been submitted to the Reserve Bank. SAPO has also been cited recently as a potential service provider to the South Africa Social Security Agency (SASSA) in the distribution of governmental social grants. SAPO CEO Mark Barnes said that he is “finding it difficult to understand” why SAPO is not tasked with distributing social grants and that “we do believe that the Post Office is the right vehicle for this in the long term - well, in the immediate term for that matter.” [2]

Passenger Rail Agency of South Africa

The Passenger Rail Agency of South Africa (PRASA) yielded savings of R403m in 2015/16 through cost-containment efforts but had a 7% (R205m) decline in revenue. PRASA is in the third year of a fleet renewal programme which is expected to cost R53bn in total with the Department of Transport providing a R49.3bn capital transfer over the medium term.

In 2014/15, PRASA audit findings reported irregular expenditure amounting to R550m prompting the board to institute a forensic investigation.  Subsequently the Public Protector issued a damning report on PRASA entitled Derailed.  Within the report the Public Protector made the general observation that “a culture of systemic failure to comply with the Supply Control Management policy, particularly involving a failure to plan for bulk procurement, test the market appropriately for competitive pricing and to manage contracts, which culture may have cost PRASA millions in avoidable expenditure and preventable disruption of services.”  The Public Protector has commissioned Werkmans Attorneys to conduct a forensic investigation into PRASA based on the Derailed report. By August last year the amount owed to Werksmans came to R80 million, with no end to the investigation in sight. [3]

Government Employees Pension Fund

The fund holds R1 600bn in assets, which is sufficient to cover 115.8% of its liabilities (down from 121.5% in 2014) on a best estimate basis. This liability measure refers to the present value of future pension payments should the fund theoretically be required to immediately fulfil its obligations.  On a stricter liability measure, assuming the fund is a going concern and reserves are required to take into account inflation, pensioners living longer and financial markets risk, the assets cover 79.3% of liabilities (down from 83.1% in 2014).  The assets are managed by the Public Investment Corporation (PIC), which delivered returns of 9.2% in 2015/16.

South Africa Social Services Agency (SASSA)

SASSA has received a lot of publicity of late but was not addressed in the Budget Review.  A crucial date prior to the expiry of the current service provider contract on 31 March 2017, will be the Constitutional Court hearing on 15 March 2017. For more background to the relevant issues, see our brief of 09 February 2017.

Treasury’s overall assessment of the SOE sector  

The Budget Review states that “At a consolidated level, the financial position of public entities improved in 2015/16”, but acknowledges that in spite of a sound legal framework that governs SOEs, “operational inefficiencies, poor procurement practices, weak corporate governance and failures to abide by fiduciary obligations have plagued several companies that are now in serious financial difficulty … While state-owned companies have a developmental mandate, the 16 largest companies are required to be financially sustainable under the Public Finance Management Act.  In 2015/16, their combined return on equity, which measures how much profit is generated with shareholder funds, was 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 public finances”.  


In assessing the overall financial performance of those SOEs which have a developmental or social mandate, it is not always helpful to draw comparisons with the financial achievements of large companies in the private sector.  However, in the case of SOEs such as SAA which operate in competition to private commercial entities, this comparison is more than appropriate and the question may be asked as to why such SOEs are effectively subsidised by Government.  Another factor that should be taken into consideration is that many of the important SOEs have an effective monopoly (for example Eskom, Sanral, ACSA and Transnet) and it is not difficult for them to survive in spite of their own inefficiencies  -  also since the the public/taxpayer will be there to plug any financial holes that may appear.  Recent news reports have indicated that the quality of general corporate governance at a number of these entities is clearly not up to scratch, and the main concern therefore remains the effect of inadequate governance not only on the SOEs’ own financial management but also on the national finances.  In the current economic situation, Government does not have much room to manoeuvre in a financial sense and if any of its contingent exposures are realised to a substantial degree, it will be faced with serious problems.

Charles Collocott



[2], “Post Office CEO: We are ready and willing to take over Sassa payments,” 3 March 2017
[3] Mail and Guardian, “War over Prasa’s multibillion-Rand inquiry of irregular tenders heats up,” 25 August 2016