2017 Budget puts focus back on SOCs

Wednesday, February 22, 2017

Cape Town - Finance Minister Pravin Gordhan on Wednesday reemphasised the important role that State-owned companies play, saying their governance must be sound as government has high expectations of them.

“State-owned companies (SOCs) are governed by a strong legal framework and Cabinet has endorsed a series of measures to reinforce governance and accountability, and clarify their development mandates.

“This imposes substantial obligations and responsibilities on boards and senior managers. We expect the highest standards of ethical leadership and understanding,” the Minister said when he tabled the 2017 Budget to a Joint Sitting of Parliament.

With a combined asset base of R1.2 trillion, the SOCs are well-placed to partner with private sector investors in growing the productive capacity and infrastructure of the economy.

“They must be financially strong, governance must be sound, and boards and executives must have the necessary competencies to run complex business enterprises,” Minister Gordhan said.

Eskom and Transnet, the Minister said, have especially large responsibilities as dominant suppliers in major network industries. Their investment programmes are important foundations for more rapid economic growth.

Addressing the media at a briefing before tabling the Budget, Minister Gordhan said government would like to see these entities run effectively.

In the 2017 Budget Review, government has extended Eskom’s R350 billion guarantee from 31 March 2017 to 31 March 2023. The extension will allow the utility to use the remaining portion of the guarantee to complete its current capital expenditure programme to 2023.

As at 31 December 2016, R187 billion of the R350 billion government guarantees had been drawn down and it is expected that R218.2 billion will be used by 2016/17 year-end.

Eskom increased planned borrowings in 2016/17 from R46.8 billion to R68.5 billion. The increase results from Eskom’s revised assumptions of cost savings and lower-than-anticipated tariffs during the current price determination period. From 2017/18, foreign loans are expected to account for 77.3% of Eskom’s total funding.

Transnet

South Africa’s freight rail, ports and pipelines utility grew revenues by 1.7% to R62.2 billion during 2015/16. Transnet has adjusted to the weak economic environment by rescheduling part of its capital spending plans.

Over the next seven years, it plans capital investments of R273 billion, to be funded by earnings and borrowings against its balance sheet.

Foreign borrowing will decline.

SAA

Minister Gordhan said he met with members of the board of South African Airways (SAA) to discuss its turnaround plans.

“I am pleased to report that the challenges are well understood, and the advisory work that is in progress has clarified the way forward,” he said.

The Budget Review noted that the national carrier remains technically insolvent. Its going-concern status depends on State guarantees totalling R19.1 billion.

“Government continues to help SAA secure funding with its existing lenders,” it said of the carrier that appointed a new board in September 2016.

The board is finalising the recruitment process for a CEO and a Chief Financial Officer.

The process will be submitted for government’s consideration and approval.

“SAA’s liquidity constraints are expected to persist over the medium term. Government will work closely with the board to reduce associated risks. During 2017/18, government will provide some financial support to SAA in a manner that does not increase the budget deficit.

“The support will strengthen the new board’s ability to effect a comprehensive turnaround strategy that allows SAA to function on a financially sustainable basis,” it said.

Meanwhile, advisors are assisting government with a review of the State’s aviation assets. The review is expected to be complete by the end of March 2017.

The goal of the review is to develop a stronger, more efficient and sustainable State aviation sector. The possibility of merging SAA with South African Express, and introducing a strategic equity partner, will be considered.

South African Post Office (SAPO)

SAPO is working to stabilise its traditional mail service, grow its logistics and parcel delivery business, and expand Postbank.

The entity will also offer voluntary severance packages to reduce high staff costs.

Since 2014, government has granted SAPO guarantees of R4.44 billion, enabling it to raise R2.7 billion to fund its operations and execute a turnaround.

Government reprioritised other expenditure to provide SAPO with a recapitalisation tranche of R650 million in April 2016. Government continues to closely monitor the financial position of SAPO.

Postbank has a temporary banking licence and will be corporatised over the medium term. Postbank’s application for a full banking licence has been submitted to the Reserve Bank. The appropriate holding company structure, as well as the additional capital that may be required to give effect to this structure, is under discussion.

“During the next few months, proposals for putting the capital structure of SAA and the Post Office on a sound footing will need to be agreed. I hope that this can be dealt with in the Adjustments Budget later this year,” Minister Gordhan told Parliamentarians.

Passenger Rail Agency of South Africa

The Passenger Rail Agency of South Africa (PRASA) is in the third year of a 10-year, R53 billion capital expenditure programme to renew its fleet of rolling stock. It expects to deliver 70 new train sets, 1 230 refurbished coaches for Metrorail and Shosholoza Meyl, and complete 141 train station improvement projects over the medium term.

Over the medium term, the Department of Transport will provide a capital transfer of R49.3 billion to PRASA. - SAnews.gov.za

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