Signs of recovery at some state-owned companies

The debate around whether each state-owned enterprise (SOE) should report to its relevant state department and minister or be housed in a new holding company seems irrelevant when considering their bad performance and governance failures. Maybe the focus should be to hold the management responsible for their failures instead of moving the chairs around on a sinking ship.

President Cyril Ramaphosa mooted a new holding company for all the SOEs, effectively creating a new legal entity that would report directly to the president’s office. This would be in contrast with existing policy, which places the responsibility of oversight of these companies with different state departments.

The reorganisation came about with the demise of the Department of Public Enterprises, a move announced by Ramaphosa in July.

Eskom, Transnet, South African Airways (SAA), SA Express (liquidated in 2022), arms manufacturer Denel, Alexkor diamond mine, and forestry company Safcol reported to the department.

Last week, Ramaphosa issued a proclamation to transfer Eskom to Minister of Electricity and Energy Kgosientsho Ramokgopa.

Transnet and SAA, as well as the remains of SA Express, were moved to the Department of Transport, and now report to Transport Minister Barbara Creecy.

Alexkor will now report to Minister of Mineral Resources and Energy Gwede Mantashe, Denel to Minister of Defence Angie Motshekga, and Safcol to Minister of Forestry, Fisheries and the Environment Dion George.

However, Ramaphosa noted that everything will move to a new holding company in due course, eliciting some criticism from ministers who say that current policy dictates that oversight should rest with the relevant department tasked with the function.

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Recovery

The financial statements of the large state companies show there are definite signs of recovery at many, although this conclusion comes with the caveat that a few of them are still posting huge losses. The extent of the losses is unknown because a few of the large, poorly-managed SOEs have not published annual reports for years.

PetroSA and Denel have not published financial statements since 2020. PetroSA’s losses have probably continued, while Denel management has stated – without evidence or convincing arguments – that things are improving.

The Post Office has not reported its results for 2022 yet, and our analysis assumes a loss of R2.5 billion based on losses of more than R2 billion in the last few financial years.

We have not seen the financial statement from SAA either, with the national airline embarking on a spending spree and introducing new routes and aircraft. We have assumed a loss of R2.5 billion for 2022.

Taking into consideration the gaps in the data, it is still acceptable to conclude that the aggregate financial performance of SOEs has improved since 2021.

Source: Compiled from annual reports. Figures in bold were sourced from verbal reports by management to different oversight committees or assumptions in the case of SAA and the Post Office. 

The first thing apparent from the table is that the aggregate performance of the state companies deteriorated from 2017 to 2021.

The total loss increased from R3 billion in 2017 to more than R36 billion in 2021.

However, the loss in 2021 most probably exceeded R40 billion because PetroSA’s loss must still be added. The (basically defunct) PetroSA posted a loss of nearly R5.6 billion in its 2020 financial year.

The biggest problem over the years has been Eskom, which saw its losses increase from R4.6 billion in 2017 to more than R20 billion in the 2021 financial year. Transnet, SAA, the Passenger Rail Agency of SA (Prasa) and the Post Office were the other big lossmakers.

Denel posted a total loss of R4.5 billion in only three years from 2018 to 2020, according to its annual reports. Management said in a report to parliament that it expected a loss of R859 million in 2021 and a loss of R747 million in 2022 – for a grand loss of R6.5 billion in five years.

Airports Company SA (Acsa), owner of SA’s large airports (and the high-rent retail space at airports), suffered an unusual loss in the year to end March 2021 due to the closure of airports during the Covid-19 pandemic, but recovered quickly in the next two years and reported a profit for the latest financial year.

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2022 and 2023

The years to March 2022 and 2023 were much better.

The aggregate losses reported by state companies decreased by around R10 billion from R36.4 billion in the year to March 2021 to R26.2 billion in the next financial year, and to around R20 billion in the 2023 financial year.

The bulk of the improvement in 2022 can be attributed to a turnaround at Transnet, from a loss of nearly R8.4 billion to a profit of more than R5 billion.

Losses at Eskom decreased by R7 billion, but the power utility unfortunately reported higher losses in 2023.

However, big improvements by the Industrial Development Corporation (IDC), Development Bank of SA (DBSA) and Sasria bolstered the overall figures.

The IDC posted profits of R6.3 billion in 2022 and R10 billion in 2023 (compared to a loss of a few million in 2021), while the much smaller SAA reported a smaller loss. Acsa showed an improvement, as did the DBSA and the Land Bank.

In fact, the majority of state enterprises have shown signs of improvement since 2021, if only marginal improvement in many cases. At least things were not out of control as seemed to be the case a few years earlier.

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Biggest hit

The biggest negative impact on the overall picture was the huge loss of more than R23 billion posted by Sasria in 2022.

The government’s insurance company – which provides cover against damage due to civil unrest, public disorder, strikes, riots and acts of terrorism – had to pay out huge claims after the unrest and looting in KwaZulu-Natal and parts of Gauteng in July 2021. It has also since recovered.

Eskom’s loss increased again in 2023 to more than R14 billion.

Prasa is more of a long-term problem and one of the state companies where losses increased significantly in 2022. The loss increased from nearly R2 billion in 2021 to more than R14 billion in 2023, while management admits in its annual report that it “failed” to render the service that commuters expect.

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Corruption

There is probably a lot of truth in accusations that years of state capture and unchecked corruption – enabled by financial directors who were implicated or who lost control over their accounting systems – were at the root of the problems.

The spate of qualified audit reports and the Auditor-General’s conclusions that accounting systems at some state companies were in such as mess that it was not possible to give opinions on financial statements.

This article was republished from Moneyweb. Read the original here.