R70 billion down the SOE drain in five years

State-owned enterprises (SOEs) have recorded irregular expenditures of R69.35 billion over the past five years, during which they received R280 billion in taxpayer-funded bailouts.

The Auditor-General (AG) revealed this in a briefing to the Standing Committee on Appropriations on 22 October.

According to the Public Finance Management Act (PFMA), irregular expenditures are expenditures that were not incurred in the manner prescribed by legislation, and they do not necessarily mean that fraud was committed.

This type of spending has sharply increased at SOEs over the past five years, and the AG says much of it is easily avoidable. 

The AG has repeatedly noted in previous reports that proper record-keeping and adequate governance structures could eliminate most irregular and wasteful expenditures. 

Another major factor is a failure to enforce required standards and punish employees involved in wasting state money. 

“Failure to implement consequence management encourages a culture where the disregard for legislation, policies, and procedures thrives,” the AG said.

In the past five years, the 27 SOEs the AG tracks recorded irregular expenditures of R69.35 billion. Over half of these SOEs engaged in irregular expenditures in each of the past five years. 

In the 2020/21 financial year, Transnet’s irregular expenditure totalled R31.1 billion. It is one of the worst culprits, alongside the Post Office and Denel. 

The AG further reported that for the 2022/23 financial year, there were 266 material irregularities pointing to non-compliance and suspected fraud, with an estimated cost of R14.34 billion. 

Material irregularities include cases where a hospital is built and millions of rands on equipment installed. Still, the building remains unutilised or inaccessible as intended.

Committee chairperson Mmusi Maimane said many of the problems in the government and SOEs had to do with leadership.

“You can have all the laws you like. If you’ve got dreadful leaders in our institutions, you are going to achieve dreadful outcomes,” he said.

“Part of what leads on from the question of leadership is this issue of aligning annual performance plans relative to financial support as it speaks to that because the strategic objectives of each institution seem nebulous at best.”

“You got institutions that come here, and they proudly boast. But when you ask, ‘What are your objectives relative to your achievements?’, sometimes departments lower their targets to achieve them and then claim, ‘Oh, we’ve done well’.”

Perhaps most concerning is that this irregular expenditure occurred during the same period that SOEs received R280 billion in bailouts from taxpayers. 

South African SOEs have been a drag on the country’s fiscus for the past two decades, with many running at losses and regularly turning to the government for additional funding. 

In the past nine financial years, state companies have cost taxpayers R456.5 billion, and nearly R70 billion is expected to be added before the end of the current financial year. 

Power utility Eskom has received the bulk of the bailouts – it will have received a total of R496 billion by the end of the current financial year.

South African National Roads Agency has been allocated a total of R47 billion, and South African Airways, the national carrier, has R49 billion. Transnet, the state logistics company, requested R61 billion late last year.

In recent years, the National Treasury has undergone a major shift regarding these bailouts, which are no longer unconditional. 

However, some of these conditions have been called into question. Last year, it was revealed that Eskom was exempted from reporting irregular spending for the next two years to avoid harming the company’s credit rating. 

This exemption was eventually removed, but it reflects the ongoing challenges at SOEs regarding the need to disclose irregular expenditures. 

The International Monetary Fund (IMF) has also said that the government is not recording its interactions with SOEs in line with international standards and guidance. 

“South Africa’s budget reports are not in line with international guidance when reflecting the impact of bailouts as they show it as equity investments,” it said. 

In some cases, an intervention made by the government may provide additional returns in the future. In other cases, there may not be a return at all. 

The IMF said bailouts typically do not result in a return for the government in the same manner as other investments and would usually be considered a capital transfer, which is a deficit-impacting transaction.  

“Therefore, it is important to ensure that the economic reality of the interventions is reflected accurately in fiscal reporting by following international guidance,” it urged.