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Land and asset sales on cards as government seeks revenue-neutral support for State firms

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Land and asset sales on cards as government seeks revenue-neutral support for State firms

Photo by Duane Daws

21st February 2018

By: Terence Creamer
Creamer Media Editor


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Finance Minister Malusi Gigaba used his maiden Budget to reinforce President Cyril Ramaphosa’s recent announcement that stakes in cash-strapped State-owned companies (SOCs) could be sold to reduce their reliance on bail-outs and debt.

Ramaphosa made the announcement in his response to the debate on his State of the Nation address on Tuesday, when he also announced that he would be chairing a new State-owned Company Coordinating Council to help improve governance at the country’s SOCs, which are at the centre of corruption allegations.

Gigaba said that, during the coming year, government might be required to provide financial support to several SOCs. This, he said, would be done through a combination of disposing of noncore assets, securing strategic equity partners, or through direct capital injections.


The National Treasury stressed that it would be seeking revenue neutral mechanisms to support the SOCs, some of which had already been mandated to pursue noncore asset disposals.

This more pragmatic approach has been necessitated by the weakening of government’s fiscal position, which has been made even more precarious by the poor operational and governance performance of many SOCs, whose debt is backed by government guarantees.


In fact, SOC contingent liabilities were identified, along with outstanding wage negotiations with government employees, as a key risk to the 2018 Budget balance.

As with Ramaphosa before him, Gigaba promised that actions – ranging from board changes to turnaround interventions – were being taken to reduce the risk posed by companies such as Eskom, South African Airways (SAA) and Denel.

Government guarantees to public entities stood at R466-billion, while government’s exposure, defined as the total amount of borrowing and accrued interest made against the guarantees, stood at R300-billion.

“To respond to unanticipated economic and fiscal developments, a R26-billion contingency reserve has been set aside over the medium term,” the National Treasury reported in its Budget Review, with R8-billion allocated for 2018/19.

In parallel, government would finalise a framework on guarantees aimed at both reducing the exposure and improving the quality of the guarantee portfolio.

In addition, government would pursue noncore asset sales, the proceeds of which could be used to support, in a revenue-neutral way, those SOCs in need of recapitalisation.

Government had already identified 195 000 State-owned properties, valued at R40-billion, which it could begin disposing of in earnest in the coming months.

It could also sell a further stake in telecommunications group Telkom, in which it retained a 39% interest, and was preparing to offer a stake in SAA for sale to a strategic equity partner.

Cabinet had also approved a framework on private-sector participation in various sectors currently dominated by State firms.

“The 2017 Medium Term Budget Policy Statement warned that the liabilities of several State-owned companies were falling due, and without an improvement in cash flows and governance they would be unable to meet these obligations,” Gigaba acknowledged.

However, given South Africa’s “limited fiscal room”, government was increasingly “loathe” to use that room to subsidise inefficiency at SOCs, rather than use it to address social needs and invest to "improve our economic competitiveness".

“State-owned companies are expected to fund their own operations,” he added, while stressing that government recognised that the business models of some SOCs were unsustainable and that their capital structures were too reliant on debt.

“To confront these issues, we will assist them to develop and implement robust turnaround plans. This needs to be part of a holistic reform programme which considers the role we want SOCs to play in our economic development. Some will require restructuring with equity investment.”

Responding to a question as to whether South Africa and Eskom would continue to pursue a large nuclear build programme, Gigaba again stressed that such a programme was not affordable in light of government’s and Eskom’s weak financial positions.

While nuclear remained part of government policy for an “energy mix”, there was also no intention of pursuing the development of nuclear reactors in light of the country’s prevailing surplus of power.

"We believe that we have sufficient electricity to power us for the foreseeable future."

Therefore, South Africa was under "no pressure" to start a significant build programme of the nature and size of nuclear, particularly with the Medupi and Kusile coal projects still being integrated into the grid and following government's directive to Eskom to sign power purchase agreements for 27 more renewable-energy projects.

Even when the country’s electricity supply-demand balance was restored, “we will have to look at all the least-cost measures, before we take the decision that we move in the direction of baseload electricity supply that nuclear can provide”.

“So, the reason why the Budget doesn't give any allocation [to nuclear] is because we are not anticipating that, during the course of this year, we are going to have to start implementing. I have said that, over the foreseeable future, I don't foresee that we are going to be needing nuclear generation," Gigaba said.


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