Selling SOE stakes not a matter of selling out

The government may be forced to "bite the bullet" and sell its stakes in profitable entities such as Telkom, to prop up other loss-making but strategic state-owned companies, said former Treasury director-general Lungisa Fuzile.

Fuzile, speaking to Business Times before he stepped down last Monday after six years in the post, said: "It always makes sense for a government like ours, running a mixed economy like ours, to be open to the idea that you'd look at your portfolio of assets right across the length and breadth of the economy."

The state owns companies in energy, transport, telecommunications and water — responsible for infrastructure the economy relies on.

But the financial position of several state-owned companies such as Eskom, SAA, PetroSA and Denel has crumbled, weakened by poor governance and procurement practices.

Eskom, Transnet and the South African National Roads Agency account for 42% of the public-sector capital formation, according to the Treasury.

State-owned companies have a developmental mandate but the Public Finance Management Act requires the 16 largest companies to be financially stable. The government has extended guarantees to several, enabling them to borrow in the market.

The state would now have to scrutinise its portfolio of companies, Fuzile said. "Less from an ideological point of view of saying government must get out of here or get in here but more from a practical point of view, to say, 'Does it still make sense strategically to be involved in this sector and not that one on this scale?'"

Of the current suite of entities, Fuzile said some were profitable while others were loss-making, with very weak balance sheets and significantly "compromised capital structures", meaning too much debt and too little equity.

If the government viewed the entity as strategic for long-term developmental objectives but it displayed a weak balance sheet, it had to be strengthened.

"You must look at your portfolio at a time like now, when your fiscus is constrained. You can't borrow more, tax South Africans more, to capitalise such entities. So you reconfigure your asset portfolio."

In his nearly 20 years in government, "economically, I suspect this has been the toughest time". This was due to global factors but also domestic challenges , he said.

Former finance minister Pravin Gordhan, who was axed in March, said in the February budget that problematic state-owned companies would be recapitalised in a "deficit-neutral" manner.

His successor, Malusi Gigaba, has committed to financial assistance for SAA. The SABC may soon approach the Treasury cap in hand.

Two years ago Treasury sold its 13.9% stake in Vodacom to recapitalise Eskom.

It is understood that it took at least five to six years before consensus was reached in the government to sell the stake. The stake yielded a small dividend but the long-term outlook for the growth of Vodacom was positive.

Fuzile confirmed this.

"We had to make a judgment call at a certain point because if we hadn't capitalised Eskom by the full amount of the conversion of the loan of R60-billion guarantee, their ability to take up more debt would have been constrained."

SAA is another strategic entity of which the government could consider selling a portion. Business Day reported this week that the state would consider selling a stake in SAA to the Public Investment Corporation rather than sell it to a private sector company.

Fuzile said SAA was strategic for the role it played in linking countries in Africa to other continents.

"Many countries on the continent only have access to the rest of the world through South Africa ... It's very important and we happen to have the largest economy. We carry that responsibility," he said.

"We have been our worst enemies as a country, in the sense that we tend to want to use labels — is this privatisation, is this neoliberal, is this that? No, it is just practical ..."

The state holds a nearly 40% stake in listed Telkom.

Fuzile, when asked about possible sales of stakes in profitable entities, said: "If you think that the entity is strategic for your future purposes then you must confront the reality that you must place it in a position where it can play that role."

He added: "If placing it in that position you need capital and your capital is sitting in another entity, then you've got to make the tough decision and bite the bullet."

But he added: "What we couldn't do, and it wouldn't be wise to do, is to put capital into an entity whose business model and governance aren't in line with what our laws prescribe and what is expected. Now, we think we are on track to sort all of those things out."

A new board had been appointed at SAA last year to improve governance at the airline. A report on reforming state-owned enterprises that was conducted under the watch of Deputy President Cyril Ramaphosa has yet to be published.

Economist Iraj Abedian said the argument on keeping or selling SOEs was irrelevant as the focus should be on "the proper professional running of these entities". There had been no reform of SOEs except for the partial reconfiguration of boards. Any proceeds from the sale of stakes in profitable entities were unlikely to solve the problem and might disappear due to corruption, he said.

"You're not solving the problem. You're bandaging a cancerous body," Abedian said.

Meanwhile, the International Monetary Fund this week finished an article IV visit to South Africa to review the economic situation. The international lender met Gigaba, Reserve Bank governor Lesetja Kganyago, and leaders of unions, financial markets and business.

The IMF said: "Reforms of public enterprises would reassure investors and the public at large, with associated benefits for public finances and economic efficiency."

It said the reforms should focus on stronger governance, enhanced transparency and penalties for failure to adhere to public procurement guidelines. They should also focus on the "quantification of public service obligations".

speckmana@sundaytimes.co.za