Mini budget - Godongwana goes against ‘tough love’ approach to SOEs by giving them more taxpayer bailouts

26 Oct 2022

Transnet, Denel, and Sanral will receive government bailouts worth R30-billion. The support to Transnet is a big deal because the state-owned ports and freight rail operator hasn’t received government bailouts or government support for over 20 years.

Struggling state-owned enterprises (SOEs) have again approached the government with a begging bowl and have succeeded in getting more taxpayer-funded bailouts.

Transnet, Denel, Eskom, and the South African National Roads Agency Limited (Sanral) are SOEs that will either receive bailouts or some form of government support. This arguably flies in the face of the promise by finance minister Enoch Godongwana to show SOEs “tough love” when he was first appointed in August 2021.

Godongwana said the culture of SOEs relying on government bailouts for survival would end and that financial support to such entities would only be provided in exceptional circumstances.

In the Medium-Term Budget Policy Statement (MTBPS) on Wednesday 26 September, R30-billion was allocated to Transnet, Denel and Sanral. Eskom didn’t get additional financial support but the government unveiled a broad plan to take over a portion of Eskom’s debt, which is nearly R400-billion.

https://www.dailymaverick.co.za/article/2022-10-16-ailing-transnet-on-the-brink-of-becoming-south-africas-next-eskom/

In a press briefing with journalists about the MTBPS, Godongwana said bailouts to SOEs are a “complicated” matter, which must be assessed on an individual basis. This underscores how Godongwana is struggling to wean off SOEs from constant bailouts.

The financial support to Transnet is a significant move by Godongwana and the National Treasury.

Transnet, a ports and freight rail operator, hasn’t received government bailouts or government support for over 20 years. Over this period, Transnet has not even received government guarantees, which the entity can use to borrow money in debt capital markets. If Transnet failed to pay back the borrowed money, the government would be on the hook for debt repayments.

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Transnet problems are so daunting that it cannot fulfil its most basic function; moving goods through ports or its rail network, especially for the mining sector.

Some of Transnet’s many problems are self-inflicted, including more than a decade of State Capture plunder, underinvestment in its operations, poor management of rail and port systems, theft of 1,500km of copper cable in five years, and vandalism of its infrastructure. Others are out of its control, such as the Covid lockdowns, the July social unrest, and April floods.

The Treasury has allocated R5.8-billion to Transnet. The funding will be used to repair Transnet’s rail and port infrastructure damaged by the recent floods and maintain its freight rail locomotives.

Transnet, like Eskom, has a smothering debt problem. With borrowings of R129-billion, Transnet doesn’t have room to raise more debt to fund its operations, fix its existing infrastructure and seek new growth opportunities in the ports and rail universe.

A day before it published its results on 27 July, Transnet came close to defaulting on a 10-year foreign currency debt of $1-billion (about R16-billion), which was due to be paid on 26 July. A default on this debt would have pushed other lenders to call for immediate loan repayments, creating an Eskom-like crisis for Transnet.

Other SOEs returned again for more bailouts.

Arms manufacturer Denel will be allocated R204.7-million to reduce its debt levels. Denel is also on the line to receive an additional R3.4-billion to fund its turnaround plan, only if “set conditions are met”. Confirmation of the additional bailout might be included during the main budget in February 2023. Denel struggles to service its total debt of R3.6-billion and has failed to fulfil arms orders from customers. Godongwana has also allocated R23.7-billion to Sanral to help it pay its debt, some of which will mature soon.

The Treasury is working on a plan to help SOEs to be able to stand on their own and not rely on government bailouts. This plan will also include determining which SOEs are considered to be strategic to South Africa’s ambition to grow the economy and create jobs.

"These companies should be self-sufficient and must contribute to economic growth...The financial support to SOEs recongnises their potential to contribute to our long-run growth prospects," said Godongwana. DM/BM

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