South Africa

Another taxpayer bailout on the cards for struggling state-owned enterprise

Another Transnet bailout, possibly to the tune of R50 billion, is the largest financial risk the South African government faces in 2025. 

This is feedback from Sub-Saharan economist at Bank of America, Tatonga Rusike, who outlined South Africa’s financial difficulties at a recent media roundtable. 

Rusike said that South Africa’s fiscal metrics are gradually improving and are heading in the right direction, with Bank of America predicting a possible credit rating upgrade within the next two years. 

The National Treasury has managed to keep a tight lid on spending growth, and the reduction in load-shedding will boost tax revenue in the current year. 

Rusike said the latest data shows that tax revenue has grown 5.3% in the current financial year compared to the 2023/24 period. 

Government expenditure has only risen 4% year-on-year so far, indicating that the National Treasury will meet its target of a primary budget surplus and reduced full budget deficit. 

This is positive for the country’s finances as it prevents further growth of the government’s debt burden and, over time, should enable the debt pile to be reduced. 

Rusike also said that improved confidence in the government and the National Treasury’s ability to keep spending in check has reduced the premium investors charge to hold South African government debt. 

This, in turn, should result in lower debt-servicing costs and further improve the government’s financial health. 

However, this positive picture faces a significant threat in the form of Transnet, whose financial performance has continued to deteriorate. 

The company revealed that it had breached its debt covenants in its most recent interim results for the six months ended 30 September 2024. 

The state-owned enterprise’s revenue increased by 6% to R41.5 billion, in line with the weighted average tariff increases in the rail, port, and pipeline businesses.

However, operating expenses increased even faster. It jumped 10.2% to R27.9 billion due to increased personnel, security, energy, maintenance, and material costs.

This resulted in a loss of R2.17 billion for the six-month period, up from a loss of R1.58 for the comparable period the previous year.

Rusike said this deterioration puts the government in a tricky position, with it having to balance its ‘tough love’ approach to state-owned enterprises with the need to keep them afloat. 

The government may have to bail out Transnet again to ensure it can fund its operations and the company’s turnaround plan. 

This would follow the R47 billion pledged by the National Treasury in December 2023, which came with strict conditions. 

Rusike said the government may grant Transnet a similar bailout in 2025, which could derail the progress it has made in improving state finances. 

Rusike has previously said that Transnet is too big to fail in a similar vein to Eskom and, as such, the government will have to continue to step in to bolster its finances. 

As long as no structural reform occurs at Transnet to improve its operating performance significantly, the utility will be unable to generate enough cash to service its debt without the government’s help. 

The struggling utility has been in the process of implementing a turnaround plan to overhaul its rail and ports services since October 2023. 

Transnet’s management team has been overhauled, with former CEO Portia Derby replaced by stalwart Michelle Phillips, and a new board was appointed. 

Transnet told Daily Investor that its leadership remains cautiously optimistic about the progress achieved under this plan. 

“We have seen encouraging developments, particularly in areas like operational efficiency, strategic collaborations, and financial discipline,” the utility said. 

Transnet has entered into partnerships with key industry stakeholders, and private sector participants have started to materialise and deliver value to the utility’s operations.

Transnet said this has led to improved operational capacity and stability in critical sectors like mineral and bulk cargo transport.

The utility highlighted the implementation of its locomotive restoration programme by contracting with Original Equipment Manufacturers (OEMs) as one of the significant milestones achieved. 

However, these operational improvements have not translated into better financial performance for the utility as its loss widened in its latest interim results compared to the prior period. 

Transnet’s loss was R2.2 billion in the six months through September, compared with R1.6 billion a year earlier. 

Without any financial support given to Transnet in the Medium-Term Budget Policy Statment (MTBPS) in October 2024, asset manager Stanlib believes the government has just kicked the can down the road. 

While Stanlib is encouraged by the National Treasury’s tough-love approach, these companies will need government assistance sooner or later. 

“By not making provisions for SOEs now, the minister is simply delaying the inevitable and pushing the problem down the road.”

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