Parastatal paralysis: South Africa’s state-owned enterprises are debt traps and urgent intervention is necessary

State-owned enterprises (SOEs) make up a not-so-modest share of the government’s liabilities, but have few tangible returns to show for the generous financial safety net provided to them. 

For entities that pose a significant risk to the country’s debt profile, the deep-rooted rot within SOEs is now endemic. Good governance and sound financial management systems remain threadbare and elusive. Rising losses, rapid institutional decline, loss of market share – despite monopoly status in some sectors – and increasingly shaky balance sheets are the order of the lot. The income statements are equally distressing. 

The return on investment for the South African government is a rolling loop of bad organisational performance, loss of talent and capacity, and a bottomless pit of financial losses. There is no room to hide behind Covid-19 and point an accusing finger at the pandemic for the poor state of SOEs. The crisis is far deeper and more sinister than the coronavirus outbreak.  

While the pandemic is a partial contributor to the sad state of affairs, it isn’t the primary cause of the systemic decline of SOEs. Most disturbing is that the contagion effect is catching on, and well-governed entities are becoming outliers instead of being the norm. 

The overall picture of parastatals is coloured by years of decline punctuated by a sustained lack of consequences. 

Any day now, expect more SOEs to be closed off from the capital markets. The signs are already there. All it takes is a cursory glance at the forays into capital markets and assess which entities have been successful in this endeavour. It wouldn’t be surprising to see banks and other funders shutting off SOEs from short-term and long-term credit facilities because of the rising financial risks associated with these entities. 

The main underlying assumption of lending is a borrower’s ability to service the principal debt and interest imposed. Weak balance sheets, an inability to generate revenue and poor financial fundamentals strengthen the case against advancing more loan facilities to these institutions. 

Furthermore, environment, social and governance (ESG) demands on financial institutions are becoming onerous. In the realm of ESG, the governance component is especially exacting. Most SOEs cannot stand up to scrutiny on the governance pillar. Moreover, with limited fiscal room for guarantees and bailouts, the outlook is bleak for most of the country’s SOEs.

The Auditor-General, the International Monetary Fund (IMF) and S&P Global Ratings have all identified the country’s parastatals as a problem in the broader context of SA Inc. The overall sentiment among all three is that SOEs have been turned into repositories where “misuse and leakage of public funds” are commonplace. That is polite-speak for rampant corruption.

In the Auditor-General’s 2020/21 Public Finance Management Act audit outcomes general report, Auditor-General Tsakani Maluleke dedicates a segment to SOEs, explaining the drivers of the decline and noting patterns underscoring the deterioration. 

In its concluding statement on South Africa’s Article IV mission – which constitutes a preliminary view of the IMF staff responsible for the process – the IMF notes the “continued worsening performance of SOEs”. The IMF advises the government to carry out a “full inventory of all SOEs”. 

There is also a suggestion that entities which carry out government business ought to be incorporated into the relevant departments. 

SOE boards – collectively the accounting authorities at the entities – are not much use in reversing the slide. At least, that is what can be deduced from the Auditor-General’s report. Executive oversight is not much help either.   

In the report, the Auditor-General notes: “The audit outcomes of SOEs have regressed due to weak controls… over financial and performance management, as well as compliance.” 

The deteriorating financial health of SOEs has increased the financial burden on the government. In addition, “these concerns spill over into the ability of SOEs to fulfil their mandates and directly affect the South African economy”.

The Auditor-General says: “[It] is… important for the executive and oversight to pay attention [and address]… the deficiencies at SOEs and ensure appropriate interventions are urgently implemented to enable [SOEs] to fulfil their mandates.”  

It’s over to the executive, then, which is ultimately responsible for all the moving parts of government. BM/DM

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