Eskom blackouts and Transnet troubles imperil public finances, warns Godongwana

Finance Minister Enoch Godongwana said the intensity of Eskom blackouts and perennial inefficiencies at Transnet’s operations have undermined any efforts to grow the economy this year, which is also putting public finances under immense pressure.

The harm caused to the economy and public finances is so severe that Godongwana is expected to announce wide-scale cuts to the budgets of provinces for 2023 and 2024 when he presents the Medium-Term Budget Policy Statement on 25 October.

“There have been a number of changes since we presented the Budget [in February] and all those changes are beginning to impact negatively on the fiscal framework,” Godongwana told Daily Maverick.

Since Godongwana presented the 2023/4 Budget in February, South Africa’s economic fortunes have turned for the worse, with Eskom blackouts surpassing those of 2022, trains and ports operated by Transnet continuing to be unreliable and commodity prices tumbling. Because of these factors, the government is heading for a bigger-than-expected budget deficit this year, as its revenue from tax collections (especially from mining companies) is declining while state expenditure is rising.

“In that sense, we will apply some of these issues when we table the Medium-Term Budget Statement on 25 October,” Godongwana said.

The February Budget projections are now widely seen as having been too optimistic. The government was aiming to achieve a positive primary budget balance — where revenue exceeds non-interest expenditure — this year. But in the year to date, South Africa’s budget position is the inverse, with a deficit of R47-billion as revenue collection is estimated to be at R406-billion, whereas government expenditure is much higher at R453-billion.

Although Godongwana didn’t confirm that budget cuts are in the offing, the National Treasury has already informed provincial government departments that they should start cutting costs to prevent a collapse in public finances. Evidence of this can be seen from the technical budgeting guidelines document that the Treasury recently issued to provinces for the 2024 medium-term expenditure framework. 

The document reads: “The 2023 economic outlook has worsened, fiscal revenues are weaker than expected and the financing of the government borrowing requirement is under renewed pressure.” 

Provinces have been asked to cut expenditure this year by at least R25-billion, which is set to have a negative impact on crucial service delivery programmes in health, education and criminal justice, which have borne constant cuts over the past decade.

Read more in Daily Maverick: SA’s delivery of crucial services under threat after Treasury desperately calls for public ‘fiscal consolidation’

Also putting pressure on public finances is the 2023 public sector wage settlement, which exceeded the amount budgeted by the Treasury by R37.46-billion. Public servants were awarded a 7.5% increase in their pay for this year, according to the government, while the Treasury budgeted for a 1.6% increase. Provincial governments are expected to accommodate the wage increase from their existing budget of R728.2-billion because the Treasury refuses to raise new money.

Western Cape Premier Alan Winde said he was “deeply concerned” about the Treasury’s move, which will “fundamentally compromise the province’s ability to deliver critical frontline services such as basic healthcare, education and social development services.

“This would not only happen at precisely the moment when our poorest communities need these services the most but also when we face extensive pressure to expand services to accommodate a growing population in the province.

“Our view is that expenditure reductions that harm basic, constitutionally mandated services are thus neither credible nor rational, and would inflict severe and lasting damage on our service delivery platform,” Winde told Daily Maverick.

He said a major problem is that the national government centrally negotiates wage settlements, which are often unaffordable, only to deny the provinces the funds to implement them, affecting crucial service delivery programmes.

“When faced with tough choices, there can be no greater priority than ensuring the education and healthcare of our citizens and protecting the most vulnerable among us.”

The solution to South Africa’s fiscal challenges, Winde said, was to introduce urgent pro-growth structural reforms and reconsider unsustainable policy commitments.

Fixing Transnet

Godongwana believes getting Transnet working again — especially its rail operations — would be a key intervention to grow the economy and boost tax revenue.

Transnet’s rail network is a crucial cog in South Africa’s economy, responsible for moving to markets most of the iron ore and coal that is produced in the country. But Transnet trains are often delayed or don’t move at all due to poor management of rail systems, cable theft and vandalism.

Mining companies, including Kumba Iron Ore and other coal miners, continue to count billions of rands in load revenue stemming from inefficiencies at Transnet.

To fix some of the problems at Transnet, the New Development Bank (NDB), popularly known as the BRICS bank, is considering extending an R18-billion loan to Transnet to upgrade its locomotives, the heavy-haul ones that are supposed to pull the coal and iron ore wagons. The NDB will require the loan to be guaranteed by the government, meaning that the latter would be on the hook for repayments if Transnet defaults on the loan.

But Transnet is facing enormous financial problems and the chances of it defaulting on debt repayments are ever-increasing.

Read more in Daily Maverick: Transnet’s crumbling rail network and debt problems overshadow its profits

The government is already exposed to Transnet’s debt through guarantees worth R3.5-billion. Godongwana said the government was yet to decide on providing Transnet with more guarantees to cover the possible R18-billion loan from the NDB. Asked whether placing more debt in Transnet’s books (and that of the fiscus) is the right move to fix the entity, Godongwana said the cost of doing nothing was greater in terms of continued lost economic output.

“I’m not looking at this matter technically, but I’m looking at the opportunity cost. I’m losing more than R18-billion per annum just on the coal line [to the Richards Bay Coal Terminal] because we’re not putting through more coal as a result of Transnet challenges.

“I’m better off putting R18-billion more in Transnet [through the NDB loan] and getting Transnet to be effective and get more revenue to the state.” DM