13 SOEs perform dismally, overshadowing the 17 that are looking better

A Moneyweb analysis on the latest results of South Africa’s state-owned enterprises (SOEs) shows that most performed satisfactorily in the year to March 2018, but 13 of the 30 are still performing dismally.

Nine of these – Eskom, SAA, SA Express, the SABC, the SA Post Office, Denel, roads agency Sanral, PetroSA and passenger rail agency Prasa – continue to bleed so much cash they dwarf the positive results from the rest.

The nine struggling companies posted total losses of nearly R20 billion over the 12 months.

Figures indicate that SOEs increased their profits in aggregate to a total of more than R5.1 billion compared with the aggregate loss of R3.1 billion the previous year. This increase comes mostly on the back of solid results from Rand Water, the Industrial Development Corporation (IDC), insurer Sasria and Transnet, which together posted an improvement of more than R4 billion in profit.

Transnet’s profit increased by more than R2 billion to R4.8 billion, while profit at the IDC increased by more than R1 billion. Rand Water showed an improvement of R759 million in its surplus for the year and Sasria posted an increase of R482 million.

Losses at Eskom reduced by R2.2 billion and PetroSA reduced its loss by nearly R1 billion.

Airline results delayed yet again

Results for the year to March 2018 are the latest figures that are available for SOEs, while SAA and SA Express could once again not even manage to produce their annual reports for the year to March 2018 – more than a year after the financial year-end.

Not surprisingly, SAA and SA Express are also two of the worst state-run companies. After months of badgering by parliament and the minister of public enterprises, SAA eventually revealed that it suffered a loss of around R5.6 billion in the year to March 2018. That SAA posted a loss more than twice as big as that of the bungling and corruption-ridden Eskom is telling in itself.

SAA’s annual report will make for interesting reading when it is published. An enquiry to SAA about when the annual report and audited financial results would be available was answered promptly by the airline’s spokesperson with: “When it is ready.”

The last audited figures that SAA’s management, bankers, suppliers, the department and taxpayers can rely on relate to the year to March 2017 and are thus more than two years old.

The old results showed that SAA suffered a loss of R5.4 billion in the year to March 2017, compared with a loss of nearly R1.5 billion in 2016. Liabilities of R33.7 billion were more than double the assets of R15.9 billion at the end of March 2017, leaving SAA with negative of equity of R17 billion. Things have deteriorated since then as SAA continued to raise more loans on the back of state guarantees, seemingly not knowing the difference between revenue and debt or profit and capital.

How another two years of huge losses and loans have affected the balance sheet is anybody’s guess, but it seems unlikely that even the most ardent believer in a national carrier would still believe that SAA is not totally bankrupt.

Luckily (all things being relative), the struggling airline is not a private company. A private company would have struggled to get loans with these old financial statements and, in the case of listed companies, would have been sanctioned by the JSE within three months of its year-end. Shareholders would have shown the directors the door long ago.

Nevertheless, SAA apparently succeeded in convincing its bankers to delay the repayment of loans due at the end of March to a later date. SAA chief executive Vuyani Jarana was reported to have made an announcement that agreement was reached with its bankers that payments to the value of R9.2 billion would be rescheduled.

There is even less information available about the state of affairs at SA Express. Last reports disclosed that it continues to operate only 14 of its aircraft, while still paying the overheads associated with the aircraft, such as leases and insurance. SA Express is also paying the salaries of its full contingent of employees.

Moneyweb’s summary of state companies’ results includes an estimate loss of R360 million for SA Express in the 2018 financial year compared with a small profit in 2017.

Profit/loss of state-owned companies in 2017 and 2018

Source: Compiled by Moneyweb from individual 2018 annual reports.

It is difficult to comprehend that SAA and SA Express were not the worst performers.

Denel did much worse – with a loss of R1.77 billion for the year, compared with a small profit of R282 million in 2016. In addition, the figures seems dubious, with the auditor-general stating that it was impossible to give an opinion on the financial statements because he could not verify revenue, costs, inventories, trade debtors or liabilities.

The auditor-general’s concerns with Denel’s financial statements run to eight pages and, in short, state that the Denel businesses did not have proper accounting systems in place to account for their projects, nor did they apply generally accepted accounting principles correctly.

The SABC also deserves a special mention. While management uses most of the annual report to praise itself on achievements during the year, the figures show that the state broadcaster suffered a loss of R622 million in 2018 after the loss of R1 billion in 2017.

The auditor-general could also not give an opinion on these figures, due to several shortcomings in the organisation’s financial management.

The audit report notes that the SABC is commercially insolvent as current liabilities exceeded current assets by some R291 million and the SABC was unable to pay debt on time.

It also states that the SABC failed to supply particulars of irregular expenditure and the auditor-general was unable to determine if the disclosure of irregular expenditure of nearly R5 billion over the past few years was accurate or if further adjustments would be necessary.

Some of the losses from state enterprises are worse than they look at first glance. For instance, Prasa suffered a loss of R925 million – after taking into account a R5.9 billion government subsidy. Armscor could eke out a R2 million profit after spending a R1 billion government subsidy. The CSIR received R722 million from government in 2018 and ended the year with a loss of R14 million.

Profit?

Sanral’s profit of R22.2 billion looks stunning at first glance, but upon closer scrutiny reveals that most of the ‘profit’ can be attributed to a gain due to the revaluation of assets to the tune of R22 billion, the second year in a row that a gain of this magnitude has been included in the income statement.

Most financial analysts will ignore these gains as the road network is hardly an asset that can be sold to realise this profit. We adjusted the figures in our analysis to reflect this in both 2017 and 2018.

Eskom halved its loss from R4.6 billion in 2017 to R2.3 billion in 2018 but such a massive loss for a monopolistic utility seems strange. Although reams have been written about allegations of corruption, inquiries and the general view that Eskom is inefficient, the 2018 annual report still delivered a few interesting facts, such that arrears debt exceeded R25 billion at year end.

Eskom noted that amounts owed by municipalities increased to R13.6 billion at year end (up from R9.4 billion at March 2017). Eskom reached payment agreements with 52 of the defaulting municipalities, but only 28 of these were honouring the agreements.

Just four municipalities, all in the Free State, owed Eskom more than R5.4 billion by March 2018. Eskom has started to supply big electricity users, such as mines, directly to ensure payment.

In addition, Eskom notes that a total of 98% of electricity accounts (totalling R12 billion) to Soweto residents are in arrears with only 15% of people bothering to pay anything at all. The installation of prepaid meters has encountered resistance and equipment is vandalised frequently.

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