Strengthening Our SOEs

Budget 2018/19 - Deloitte Expectations

South Africa has several state-owned entities (SOEs) which implement particular economic policy objectives. However, government guarantees, used to facilitate SOEs access to the capital market, as contingent liabilities are a top risk to the fiscus, financial metrics, gross national debt, Department of Public Enterprises, PRASA, SANRAL, TRANSNET<ESKOM,SAA, corporate governement

Indicators of national debt are a good measure of fiscal sustainability. The government has concluded R350 billion guarantees in favour of Eskom, accounting for over 73% of government guarantees to public institutions. Other notable recipients of guarantees include the South African National Roads Agency Limited and the South African Airways.

The likelihood of these guarantees being recalled is increasing as some of these entities’ key financial metrics continue to deteriorate. At 50.7% of GDP, gross national debt is approaching the prohibitive 60% for an emerging economy experiencing no growth. For an emerging economy, a debt level exceeding 60% becomes expensive and unsustainable. Although debatable and not given as an optimal level, the suggested debt-to-GDP for emerging economies is 40% and 60% for developed economies.

Even more concerning is the cost of servicing this debt. Debt-service costs account for 11.2% of the national expenditure and 3.3% of GDP, making it the fifth largest national expenditure item. It is expected to grow on average by 10.5% between 2016/17 to 2019/20. This is the fastest growth of all expenditure items.

Government measures to improve SOE performance should include the total overhaul of the existing shareholder structure, which is partly responsible for corporate governance lapses at some institutions. The entities are required to account to various government departments, including parliamentary structures and regulatory bodies, which often send conflicting directives and objectives to SOEs as well as blurring of responsibilities between the departments. As a result, entities may be left rudderless and unaccountable.

Thus, a myopic focus on reforming SOEs which disregards the same need for shareholder role reform would be ineffective. The reform should include overhauling the ownership oversight structures focusing on the roles of policy departments, the National Treasury and the Department of Public Enterprises. There is a need for a uniform ownership oversight structure across all major SOEs. At present some sectoral departments fulfill both policy and executive authority functions as well as regulatory responsibilities over SOEs, example is the Department of Transport with respect to SANRAL and PRASA. In this case, there is clear need to separate the ownership and regulatory roles of the department. While some SOE have separate departments responsible for policy and executive authority functions examples Transnet and Eskom. This lack of a coordinated approach to SOE oversight complicates the adoption of coherent corporate governance practices in SOEs.

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