Can government walk away from weakening SOEs?

SOEs have become uncommercial and uncompetitive. Years of mismanagement makes near-term financial losses inevitable. If government does not provide additional support (or bailouts), then SOEs will need to tap capital markets to keep the lights on. But commercial financiers will not extend funding unless they see a viable business that has already begun to deliver on a coherent turnaround plan. This inevitably requires some form of support from the existing shareholder in the interim, preventing the government from fulfilling its ‘no bailout’ mandate.

Without short-term government funding, service delivery by strategically important SOEs will continue to deteriorate. In its latest visit, the International Monetary Fund notes that the economy is being hampered by “essential services such as electricity, telecommunications, and transportation, [that] are expensive and/or unreliable, contributing to the high cost of doing business”. As the adage goes, a stitch in time saves nine, and recent experience shows that limited funding today targeted at service delivery can prevent a huge bill down the road.

We believe that the government should perform a full inventory on its SOE portfolio:

• For SOEs of critical national importance, the government’s strategy of providing careful financial support while encouraging competition in the medium term is sound. This category includes Eskom, of course, but also key infrastructure assets such as SANRAL and SASRIA.
• SOEs that are not critical but could be financially viable in the medium term should be encouraged to prepare for life in the private sector. This means drawing up a coherent turnaround plan, supported by National Treasury in the short term, and finding a strategic equity investor to take the entity off government’s hands
• SOEs that are not critical and appear unviable should be weaned off government support. This withdrawal should be partnered with exemptions from onerous red tape to give these entities the best chance of realising value, e.g. the requirement for ministerial consent for non-core asset disposals. Any business units that carry out government functions should be integrated into the relevant organs of state.

Ultimately government does not have the luxury of just walking away from its weakening SOEs. Those that require bailouts should, as a condition of funding, be required to put together (with professional assistance) robust turnaround plans to which they are held to account. The funding gap – i.e. maximum bailout - should be clearly articulated and monitored with enhanced scrutiny to minimise slippage or at the very least, bring about more proactive, early engagement.

To the extent that the SOEs are required to go ‘cold-turkey’ without government bailout assistance, we are likely to see the continued poor management of cash resources which inevitably results in greater funding requirements in the future to prepare these SOEs for the support from capital markets.

Therefore, while an uptick in government support for SOEs may be unpopular in the immediate term, it will protect our economy and pave the way for possible reform.