South Africa: Cabinet Mulls Government Guarantees Proposal


A proposal to end the issuing of guarantees to state owned companies for operational purposes is being considered, Finance Minister Tito Mboweni said on Wednesday.

Tabling the 2019 Budget speech at a joint sitting of the two houses of Parliament, namely the National Assembly and the National Council of Provinces, the Minister gave an update of the state of affairs of State owned companies (SOCs).

“Cabinet is considering a proposal to end the issuing of guarantees for operational purposes,” he told the house.

In addition to the reviewing of the framework for SOCs, expiration dates on guarantees will also be strictly enforced.

“As the President [Cyril Ramaphosa] announced, strategic equity partners will be found where possible,” said the Minister, adding that there are no “holy cows” when it comes to the approach of dealing of SOCs.

Eskom

While the main focus is on stabilising power utility Eskom, government is working to review the framework for SOC enterprise support with government revising the contingency reserve upwards to R13 billion for 2019/20 to respond to possible requests for financial support.

“Financial support will be budget neutral as far as possible,” he said.

In the last financial year, total guarantee use increased by R51.1 billion with Eskom taking the lion’s share by using an additional R50 billion of its R350 billion guarantee in 2018/19.

Denel

Meanwhile, aerospace and defence technology company Denel was granted a further R1 billion guarantee while national carrier South African Airways (SAA) guaranteed debt increased by R6.2 billion.

In 2017/18 Denel reported a net loss of R1.8 billion in 2017/18 which resulted in negative operating cash flows of R717 million, compared with a positive R376 million in the previous year.

The company financed the shortfall by increasing its borrowing with the group’s gearing ratio increasing from 122 %to 361%, meaning that its debt is more than triple its equity.

“Denel’s cost structure is unsustainably high. Since 2017, it has faced severe liquidity problems. Negative operating cash flows have affected the company’s ability to deliver on projects and meet creditor obligations,” said the review.

In September 2018, government provided Denel with a R3.4 billion guarantee to address its liquidity problems and support a turnaround plan.

Meanwhile, Mboweni said SOCs pose a very serious risk to the fiscal framework.

“Funding requests from SAA, SABC, Denel, Eskom and other financially challenged state-owned enterprises have increased, with several requesting state support just to continue operating. Isn’t it about time the country asks the question: do we still need these enterprises? If we do, can we manage them better? If we don’t need them, what should we do?” he said.

Mboweni also spoke of the importance of tightening the guarantee rules.

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Publish date : 2019-02-20 17:14:41

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