Since government implemented a lockdown at the end of March 2020 to stop the spread of Covid-19, financially distressed state-owned entities (SOEs) including SAA, SA Express, the Land Bank, and the Airports Company SA have sought urgent assistance from the public purse.

But Tito Mboweni, who is under pressure to stabilise rising government spending and smother debt levels that will burden future generations, is only willing to entertain a funding request by the Land Bank. 

In his supplementary Budget speech on Wednesday, 24 June 2020, Mboweni has thrown a R3-billion financial lifeline to the Land Bank because, like Eskom, the SOE is too big to fail.  

This is because the Land Bank loans money to emerging and established farmers, and provides 28% of SA’s agricultural debt. It’s funding to farmers is crucial to keep their agricultural operations going while maintaining SA’s food security, especially during the pandemic.

In recent months, the Land Bank has become another basket case, missing loans and interest payments to lenders. Having defaulted on repayments to lenders of about R738-million towards the end of April 2020, the Land Bank is on track to miss another set of debt and interest payments that are due in June 2020. The Land Bank recently said there is R119.8-million in interest and R200-million in debt, which are both due between 22 and 26 June, that it cannot pay.

The Land Bank’s financial problems, caused by an exodus of executives in recent years, junk downgrades of its credit rating by Moody’s and drought conditions that have made it difficult for farmers to pay back their loans, have hobbled its ability to extend new loans.

But Mboweni has come to the Land Bank’s rescue, allocating a R3-billion equity investment to recapitalise the company. The allocated money is in line with the Land Bank’s emergency funding request from the government to fund its operational expenses, disburse already approved loans to farmers and pay lenders outstanding money. 

Land Bank is not an Eskom or SAA

Mboweni has a soft spot for the Land Bank because it doesn’t have the hallmarks of SAA and Eskom; both SOEs have been given multi-billion rand taxpayer-funded bailouts funded without restructuring their operations. 

Unlike SAA and Eskom, the Land Bank has, since 2006, shown itself to be largely self-sustaining and profitable, and has enjoyed no government guarantees (an agreement that the government would pay an SOE’s debt if it defaults on payments).

The Land Bank is working on a restructuring plan that involves the sale of assets to free-up cash, possibly introducing strategic equity partners to its ownership structure and cutting costs through the early retirement of senior workers. Mboweni said the restructuring plan would “inform possible further funding requirements to ensure the Land Bank’s sustainability”.

But there isn’t fiscal room to support SOEs because Covid-19 has accelerated the deterioration in public finances. The ongoing financial support of SOEs over many years has led to the budget deficit – which is the shortfall between revenue and expenditure – increase from 2.3% of gross domestic product (GDP) in 2004 to 6.8% in the February 2020 Budget. But the R145-billion in government spending towards Covid-19 health and welfare responses will push the deficit to 15.7% in 2020/21.

Mboweni said the large gap between revenue and expenditure – which in graphs depicts an animal’s open set of jaws (see below) – reminded him of the mouth of a hippopotamus.

No money for SAA

Another SOE that will approach Mboweni with a begging bowl is the troubled SAA. But Mboweni, who previously said the government should not bail out SAA “forever”, didn’t allocate money to the airline in the supplementary Budget. SAA is in the throes of a business rescue process.  

A final business rescue plan has proposed launching a new and restructured SAA, which relies on raising a further R10.4-billion in funding from the government to settle the airline’s historical debt and provide it with start-up capital. On 25 June 2020, SAA creditors will vote on the adoption or rejection of the airline’s business rescue plan. 

At a media briefing after his supplementary Budget speech, Mboweni refused to answer questions about whether he is prepared to provide SAA with an additional R10.4-billion. He referred further questions to the Department of Public Enterprises, the sole shareholder of SAA. 

SA has more than 500 SOEs, which are overseen by the department.

Mboweni said the Covid-19 pandemic has accelerated the need for reforming SOEs, including reducing or merging SOEs and introducing equity partnerships in their ownership models. He said government departments will need to determine which “SOEs will be closed or supported further”. And any additional financial support of SOEs in the future will be “strictly conditional on improving their balance sheets”. DM/BM