Tight squeeze

Balancing the Books Nhlanhla Nene broaches the taboo of privatisation of parastatals that are not developmental

FINANCE Minister Nhlanhla Nene has broached the taboo subject of privatisation with a frank explanation of why his government wants to enlist private-sector help in its bid to haul state-owned enterprises (SOEs) back from the brink of disaster.

In his maiden medium-term budget policy statement on Wednesday, Nene announced an uncompromising strategy to get finances of the cash-strapped entities back on track, saying their balance sheets posed one of the biggest risks to the country's finances.

Strict new reporting guidelines would require groups such as Eskom, SAA and SA Express to produce sound business plans before they get any support from the government, which would only provide cash raised through the sale of its nonstrategic assets.

At the same time, a team drawn from ministries was working to distinguish between developmental and commercial components of parastatals to decide how to treat them, avoiding "the mistakes of the past".

"We need a combination of the two which we are able to justify to the nation, to say we are going to carry this one because it fulfils a particular developmental agenda," Nene said in an interview.

"If it doesn't, we should be brave enough also to go to the public and say this isn't part of what we are supposed to do. Whether we sell or ... get somebody to run it on a commercial basis is something else.

"My view is that the state has a role to play, the private sector has a role to play and there are instances where the two need to work together. We should be open-minded about it."

Konrad Reuss, the managing director of Standard & Poor's in Southern Africa, described Nene's comments as almost "revolutionary" for a country that had been constrained by ideology limiting the options for structural reforms.

"It is significant that topics which were taboo before are being discussed openly now. It is certainly a noticeable change ... and one step in bringing about structural reforms."

But Reuss said implementing the new strategy would be difficult as there would be obstacles in the political alliance grouping of the ANC, Cosatu and the SA Communist Party.

Treasury officials warned last month that loan guarantees for SOEs - which stand at R466-billion - had reached the limit of what could be deemed "prudent" within the context of high government debt and weak economic growth.

Drawdowns on these guarantees have taken the government's exposure to R209-billion, and the Treasury expects this to increase in the next few years. The trend is dangerous as it means the government must step in if the SOEs become unable to service their debt.

Nene unveiled further details of a rescue package for Eskom aimed at convincing rating agencies not to downgrade the power utility's debt to "junk" status, which would sharply raise the cost of the borrowing needed to finance its investment in new power stations.

In the short term, the government would provide at least R20-billion raised through the sale of nonstrategic state assets. If required, consideration would be given to a partial equity conversion of the R60-billion loan that it had already provided.

Nene said these measures should help the utility "stand on its own feet" and if necessary borrow R250-billion over the next five years to fill an estimated R225-billion funding shortfall.

But Nene did not say what assets the government might sell, saying it was "mapping the scope" of available resources, which could include direct and indirect shareholdings in listed firms and nonstrategic state shareholdings in SOEs.

Many analysts said details were still sketchy, but Nene said the package had been discussed with rating agencies, and he was fairly confident they would not downgrade Eskom until it was clear whether it would work.

"It should prevent a downgrade. We haven't had feedback yet, but it is something we have shared with the rating agencies ... they gave us an undertaking that they will watch and see as we progress," he said.

Moody's Investors Service reiterated after the announcement that the R20-billion equity injection was "credit positive" as it would provide much-needed liquidity and ease the short-term funding pressure on Eskom.

But it said: "The effect of the proposed measures on Eskom's credit metrics would be marginal. This underlines the need for tariff increases to ensure the sustainability of Eskom's financial profile, for which no additional clarity was provided at this stage."

Earlier this month the National Energy Regulator of SA granted Eskom a 12.69% increase in electricity prices for next year, up from the 8% originally agreed for each year up to 2018.

Nene said the government was pleased that the regulator had approved a higher tariff, as in the long run Eskom required one that was cost reflective.