National Treasury on SOEs Funding Requests, Conditions & Malpractices

Meeting report

The Chairperson opened the meeting and welcomed everyone. He said that the sitting occurs within the provisions of the Parliament of South Africa. Therefore, it is an official and formal meeting of Parliament. The briefing today will be done by National Treasury, on funding requests and attached conditions with State-Owned Companies. The Chairperson said that senior officials from Treasury will lead the briefing today, and asked the National Treasury delegates to introduce themselves and start the presentation.

National Treasury Briefing:  Experience on Funding Requests and Attached Conditions, and Identifying Early Warning Signs of State-Owned Companies’ Malpractices

Mr Ravesh Rajlal, Chief Director: Sectoral Oversight, National Treasury, led the presentation.

Over the last decade, there has been a significantly declined in the performance of major SOCs, operational costs have increased, net profits have fallen, and debt levels have become increasingly unsustainable. A number of these companies do not have sustainable business models and cannot continue to operate or honour their obligations without state support. That led to increased fiscal risk and multiple bailouts that crowded out important social and other critical expenditure.

To reduce SOC demands on limited public resources, SOCs need to develop and implement sustainable turnaround plans that align with their mandates, incorporate long-term structural considerations in their sectors, and identify appropriate funding models. There is an urgent need to review and enhance legal and institutional arrangements that will improve the financial oversight of SOCs, ensure accountability for their performance, and manage the current fiscal risks, requiring multiple stakeholders and projects. Executive authorities of SOCs are currently tasked with undertaking structural and policy reforms to ensure the financial sustainability of the SOCs under their ownership control.

Pending these reforms, it has nevertheless become necessary for National Treasury (NT) to pursue opportunities to catalyse progress in the necessary reforms and one way is through funding/guarantee conditions. The work of the Presidential State-Owned Entities Council (PSEC) and supporting government structures is also critical in facilitating and expediting SOC reforms.

Historical Bailouts

Government has granted R326 billion in recapitalisations over the period 2013/14 to 2022/23, of which Eskom was the biggest beneficiary. Recapitalisations were granted for implementing turnaround plans, to repay debt/government guarantees, to improve liquidity, and for capital expenditure.

Mr Rajlal pointed Members to a table on slide eight, which gave a detailed breakdown of each recapitalisation received by each SOC from 2013/14 to 2022/23.

Evolution of Approach to Funding Conditions

Historically, the government has provided funding to SOCs to ensure that they meet their obligations and operate as a going concern. Generally, government support was provided without any conditions being attached, e.g., Vodacom shares worth R23 billion were sold to recapitalise Eskom.

Over time, National Treasury realised that there are negative consequences associated with providing funding to SOCs without imposing conditions such as:

- Poor oversight on how funds are used

- Misuse of funds and lack of accountability

- SOCs frequently return to government for more bailouts

- National Treasury’s inability to influence the required reforms/changes.

 

Realising the limited impact post government support, National Treasury began imposing pre and post-conditions. Section four of the Appropriation Act empowers the Minister of Finance to:

- Impose conditions on an amount in the Schedule to the Appropriation Act to promote, transparency and accountability and effective management of the appropriation;

- Stop the use of the allocated amount if conditions are not met.

 

Furthermore, National Treasury has progressed to developing conditions in consultation with the SOC and Executive Authorities/Policy Department to enhance accountability, and influence underlying root causes for failure and instability. These conditions have been tightened to ensure efficient use of financial resources as far as possible and include the following:

- Pre-disbursement conditions prior to funds being disbursed: SOC is required to meet certain conditions such as identifying non-core assets, considering introducing Strategic Equity partners to the business, shareholder approval of turnaround plan;

- Post-disbursement conditions: these require continuous monitoring through monthly and quarterly meetings, enforcing accountability by disbursing funds according to the achievement of the conditions and monitoring progress on the implementation of the turnaround milestones.

Failure to adhere to these conditions results in the funding being withheld until the SOCs remedy the non-compliance. However, some SOCs fail to adhere to these conditions, forcing National Treasury to disburse the funds to avoid a default by the SOC and thus increased fiscal exposure.

Eskom

National Treasury has evolved from attaching largely operational compliance conditions on Eskom. These required Eskom to report on measures being implemented in areas such as coal contracts, improving Energy Availability Factor (EAF), and progress on unbundling. However, these conditions were not able to introduce operational reforms or direct the business to invest in certain priority areas such as Capital Expenditure, Maintenance, etc.

Hence, despite the continued financial support, the entity continued to experience financial and operational decline. Although Eskom conditions require that the government funding be used to pay off only the debt and interest, the entity has not been able to improve its financial position because it still relied on borrowings to fund its capital investment requirements.

New Approach to Conditions: Eskom

National Treasury is now considering a new approach to Government Support which include the following:

- Directing the funding to settle debt and interest only and not for operational purposes;

- Forcing Eskom to identify efficiencies within the business which should contribute towards reducing the funding gap;

- No new borrowing, unless the Minister of Finance grants written permission;

- Encouraging management to actively consider Strategic Equity Partners (SEP) to assist the business with balance sheet and expertise;

- Limiting the capital investment focus to certain areas of the business, e.g., Eskom is not allowed to invest in new capital expenditure;

- Additionally, National Treasury is now proposing that all future bailouts be provided as loans which will only be converted upon the SOCs achieving its conditions;

- Failure to achieve the conditions will result in the loan being repayable with interest.

- This approach will encourage SOCs entities to achieve their conditions to benefit from the conversion to equity as it will improve their balance sheets;

- National Treasury is also undertaking an independent assessment of all Eskom coal fleets. It envisages that some of the recommendations will be incorporated into Eskom’s corporate plan and be monitored quarterly jointly with the Department of Public Enterprises (DPE).

New Approach to Conditions: Denel

In the case of Denel, the following conditions have been imposed:

- Written confirmation that the Shareholder (DPE) supports the turnaround plan, including the identified restructuring initiatives;

- Alignment amongst stakeholders (Executive Authority and Policy Departments) on the disposal of non-core assets by SOC;

- Strategic Equity Partnerships (SEP) strategy identifying dependencies, blockages and mitigating strategies developed in consultation with relevant key stakeholders (i.e., Policy Departments);

- Funds are earmarked specifically and exclusively for obligations and initiatives outlined in the turnaround plan;

- Funds can only be drawn upon realising proceeds from remaining identified non-core assets (promotes accountability and self-help mechanisms).

Government Guarantees

Guarantees were intended to be issued based on the following 1996 Cabinet-approved guidelines:

- Limiting the issuance of guarantees to reduce the gross contingent liability obligation;

- Allowing public entities to borrow on the strength of their balance sheets using guarantees;

- Using guarantees, in exceptional cases, to support restructuring objectives and to meet international agreement obligations;

- Levying guarantee fees to equalise benefits on borrowing cost margins of public entities borrowing with a guarantee and those borrowing without a guarantee.

To improve the quality of requests submitted to the Fiscal Liability Committee (FLC) and Minister of Finance, an instruction note outlining minimum criteria to be met before guarantees are considered was issued by the Minister of Finance in December 2020. The minimum criteria include:

- There should be a demonstrable need for government to accept risk (i.e., the underlying transaction must be necessary to fulfil the applicant’s mandate in accordance with government’s overall strategy).

- The applicant must demonstrate adequately that it will generate sufficient cash flows during the term of the underlying transaction that will enable it to settle its obligations in line with the terms of the transaction timeously.

- The guarantee, security, indemnity, borrowing limit, or transaction for which approval is being applied should be offered by government and should be in line with all applicable legislation.

Government Guarantees - as at March 2023

Government’s exposure to contingent liabilities emanating from guarantees issued to public entities (representing utilised guarantees) is expected to reach R396.1 billion, from R384.7 billion as of 31 March 2021. The total issued guarantees declined from R581.6 billion in 2020/21 to a projected R478.5 billion as of 31 March 2023. Exposure to Eskom comprises 85.3 per cent of the total.

Mr Rajlal pointed the Members to table 11, on slide 17. This slide shows the full list of guarantees, total amount of borrowing, and adjustments to inflation-linked bonds due to inflation rate changes and accrued interest.

[See presentation for further details]

The Chairperson had poor connection and lost access to the meeting. The Committee agreed Ms T Modise (North West, ANC) would be Acting Chairperson.

Discussion

Ms L Bebee (ANC, KZN) thanked National Treasury for an informative presentation. She said it gave the Committee an idea of what is currently unfolding at state-owned companies. She asked if National Treasury gets involved in the drafting or implementing shareholder compacts for distressed entities. She asked if the state-owned entities have declared dividends or profits to National Treasury in the last two decades. If yes, how much was it, or has there been no profit?

Ms W Ngwenya (ANC, Gauteng) said that both the National Assembly and NCOP are responsible for government oversight. She said only the National Assembly appears as an oversight body on slide four. Section 42 of the South African Constitution stipulates that Parliament consist of two houses, the National Assembly and the National Council of Provinces. Section 92 of the same Constitution stipulates that the government executive is accountable to Parliament. She asked National Treasury to add the NCOP as an oversight body. She said Ministers and State-Owned Entities account to Parliament which consists of two houses. She asked what happened to the Presidential Review Committee on State-Owned Companies. Does the Committee still exist? The Committee had 31 recommendations; were these recommendations implemented? Can the National Treasury report on the progress of these recommendations and the work of the Presidential Review Committee?

Mr M Nhanha (DA, Eastern Cape) said that there is a need for in-person meetings for committees. He knows there are space constraints in Parliament, but most Members cannot connect because of internet issues and load shedding.

He asked if National Treasury sees itself as a bailout parent. How often do SOEs not meet or implement bailout conditions? He asked if National Treasury provides funding for Eskom power stations such as Koeberg. He asked what work workstream six has done so far. Does National Treasury monitor corruption at Eskom?

On slide 13, he noted that National Treasury talks about restructuring and disposing of non-core assets. He asked how this takes place, if the general public gets informed of this, and what assistance Treasury gives. He said that when disposal happens, only the ANC elite benefit from these transactions. How does National Treasury ensure not only ANC members benefit from these transactions?

Ms M Mokause (EFF, Northern Cape) said that individuals and politicians within the ruling party use state-owned entities as ATMs and cash cows. She said that the Committee has the responsibility to ask difficult questions. If these structures exist to ensure entities receive bailouts or funding, what are their oversight role and how do they ensure funding is optimally used?

She said that Treasury advises on bailouts, and asked if National Treasury also plays a role in detecting early warning signs regarding possible mismanagement and corruption of funds. If this happens, who does the National Treasury report this mismanagement to? The continuous bailout of SOEs from National Treasury demonstrates non-commitment from Treasury to oversee the prudential life of these entities.

She asked if there is political pressure from Ministers or individuals from other ministries to release bailouts to these SOEs. She asked if National Treasury does investigations of its own, on bailouts or funding that was mismanaged. She said there must be some level of accountability from SOEs on what exactly happened to squandered funds.

The Acting Chairperson asked: when attached conditions to funding fail, what remedial actions does National Treasury take against these SOEs? She said that officials who engage and use SOEs as cash cows are not necessarily members of the ruling party. She asked what changes are being considered by National Treasury to strengthen not only their interventions, but the conditions attached to bailouts. She said that the way SOEs operate is dismally. She asked how National Treasury could change the borrowing powers of these companies.

Responses

Mr Rajlal responded. He said that National Treasury is not directly involved in drafting or implementing shareholder compacts, and this is in terms of the PFMA. He said that National Treasury only drafts shareholder compacts of SOEs directly under the control of National Treasury. However, National Treasury can get involved in drafting shareholder compacts for SOEs if there is a specific condition or a special request from the SOE and Ministry to draft compacts.

Regarding dividends paid out, National Treasury does not have all the information on this currently, but they can respond in writing to the Committee to give the necessary details. He said that the PIC and SASRIA have declared dividends, and SASRIA has declared and paid over R15 billion in dividends to the National, since 1998.

He apologised and said National Treasury would include the NCOP as an oversight body. He said Treasury is aware that NCOP plays a key role in oversight of SOEs. There are no formal recommendations from the Presidential Review Committee on State-Owned Companies. National Treasury is part of the workstreams for the Presidential Review Committee and has been asked to present on the work currently being done. He said recommendations still need to go through the Cabinet process. The process is slow, and much of the work depends on the approved recommendations.

He said that bailouts and funding provided by National Treasury are an outcome of Cabinet processes. Cabinet recommends if funding must be provided. Funding goes through all the official MTEC and budget processes. Treasury can only make recommendations to Cabinet to approve or not approve funding, but the decision ultimately comes from Cabinet. When the Minister of Finance announces bailouts, it results from Cabinet process and not a National Treasury process.

On funding conditions not met, one of the key matters National Treasury focuses on is the turnaround strategy and making sure the SOE implement what is set out in this strategy to enable them to become financially sustainable. He said that all SOEs receiving bailouts had not implemented their turnaround strategies. All SOEs have had to come and ask for bailouts.

The announced debt package for Eskom includes debt and funding relief for Koeberg and other power stations. This helps Eskom to meet loan obligations and frees up funding. He said that no further support will be given to Eskom regarding funding.

National Treasury forms part of workstream six, but he is unaware of what work is currently being done. He said that National Treasury could respond in writing on this matter. NATJOINTS monitors corruption at Eskom and law enforcement institutions regularly brief on the matter at NATJOINT meetings. Treasury has however raised major concerns around the issue of corruption at Eskom.

In terms of bailouts provided, there are conditions that ensure funds are used for the purpose they were provided. He said National Treasury sets strict conditions that ensure funds are not used for any other purpose than those set out in the attached conditions. Internal and external auditors audit this. The monitoring committee also ensure these funds are not misused.

When corruption, mismanagement and misuse of funds occur. The accounting officer and the board are responsible for taking steps and implementing consequence management. Detection of corruption is also the responsibility of the board and accounting officer of the entities. Section 16 of the PFMA does allow National Treasury to investigate financial mismanagement but the board is the first point of reference. National Treasury only gets involved when auditors inform it of financial mismanagement or if it is a request.

He said there is no political pressure from other ministers to approve bailouts. All bailout cases are decided by Cabinet and the Minister of Finance. The new approach and evolution of funding request conditions from National Treasury have increased accountability, and they ensure that National Treasury can hold entities accountable.

On changing conditions, National Treasury has instructed Eskom through the provisional conditions that there will be no new borrowing, going forward. He said that the relief provided to Eskom was for debt relief and they cannot take on new debt. Attached conditions normally have strict borrowing limits.

National Treasury does not get involved in disposing of non-core assets, and this responsibility lies with the board and accounting officer of the entity. The disposal application comes through Treasury as a section 54 PFMA application, and Treasury only reviews it. He said that Treasury also cannot direct entities to dispose of assets.

He said National Treasury will respond in writing to questions not covered.

Further discussion

Mr Nhanha said he has always respected National Treasury’s resilience in fighting corruption. He said that officials at Treasury are an example of what it means to be a good and honourable public servant. He said that National Treasury is the last line of defence against corruption. Some of the matters raised today need to be taken up with the Department of Public Enterprises.

Ms Mokause said that she hopes the Committee can have more engagements with National Treasury and proposed that these types of engagements continue. This will help Members understand what is happening at State-Owned Companies. The Committee is entitled to know what happens to public funds and the oversight thereof.

The Acting Chairperson thanked National Treasury and said they would request National Treasury to come brief the Committee again. SOEs are in crisis, and the Committee is unhappy with what is happening. SOEs are falling apart. She said that National Treasury must continue to do their oversight and they need to inform the Committee of challenges they experience when monitoring.

Committee Members considered the meeting minutes of 03 May 2023.

The meeting minutes were adopted.

The Acting Chairperson thanked everyone for attending the meeting.

The meeting was adjourned.