First published in the Daily Maverick 168 weekly newspaper.

The country is facing its worst drought in decades, severely constraining its electricity generation at hydropower plants. It is now on the brink of the kind of power rationing South Africa has suffered since the early 2000s.

The logic of selling off state entities and bagging some much-needed loot to spend on pressing matters elsewhere in society will appeal to South Africans who have seen Eskom hoover billions of rands from the public piggy bank with one hand, while flicking the lights on and off with the other.

In fact, the trend of governments looking to cull cash-guzzling state companies from their balance sheets has been gathering pace globally in recent years.

South Africa itself has for years toyed with the politically volatile idea of selling off stakes in SOEs, sometimes doing it by stealth by speaking of non-core assets, and on other occasions doing it outright, most recently the near-final sale of a 51% stake in South African Airways. The plan to split Eskom into three distinct entities also seems to be a path to privatisation.

Naturally, privatisation has been highly contested in SA, but the worsening economic and fiscal crisis of the past decade and a half, along with massive lapses in governance at state companies, has made it more palatable. More a matter of when, not if, especially if it can ease the government’s debt burden.    

The truth, part of it at least, is that the government, through the Treasury, has been laying the groundwork for privatisation for a while. The Treasury has been treating SOEs more and more like private firms, in preparation for life outside of the nest.

In 2013 or so, the Treasury established the independent Fiscal Liabilities Committee (FLC) to “manage contingent fiscal liability exposures” – the government’s growing credit exposure to SOEs.

It was less than 24 months before the country faced its biggest financial and political crisis when then president Jacob Zuma fired the finance minister.

The crisis that ensued coincided with massive deterioration in the financial position of major state firms, as management teams in the firms were purged, questionable procurements ballooned, and infrastructure projects critical to maintaining national growth fell into (further) disrepair. The number of state firms requiring bailouts from the government grew, starting a share increase in debt-to-GDP and a slew of credit rating downgrades to below investment grade.

Back then, the FLC never quite got off the ground, and in the years after, contingent liabilities have nearly doubled to more than R1-trillion, close to 20% of GDP. In the past 12 to 18 months, however, the committee has been resuscitated, one of the less remarked upon developments in SA’s slow path back to fiscal rectitude, but a significant indicator of what the turnaround will look like.

Under the FLC’s auspices, unconditional guarantees to state-owned agricultural lender Land Bank and other firms have been rejected, with the Treasury drawing up a memorandum reiterating five key conditions for granting bailouts:

1. To limit the issuance of guarantees;
2. To borrow on strength of balance sheets;
3. To use guarantees to support restructuring objectives and infrastructure development programme;
4. To meet international agreement obligations; and
5. To levy guarantee fees to equalise the benefits on borrowing cost.

Two consequences of the government’s new approach are worth noting.

The first is that debt issuance by SOEs has fallen off dramatically in the last 12 months.

The tentative ventures into debt markets by the SOEs have been met with higher interest demands by lenders, and shorter durations on new debt.

For the local credit market, still characterised by high levels of risk aversion and a sustained flight to high quality issuance, namely debt issued by local banks and corporates, this has led to excess demand for this high quality paper, something likely to push yields on SOE debt even higher.

The second consequence is policy related, linked to mooted changes in South African investment regulations to remedy this dearth of capital. Pension funds are being encouraged to invest more in infrastructure and alternative investments. This may see pension funds consider SOE bonds even more, but their investment committees will consider the risk more closely than the government would have, and will insist on stronger controls and a healthier return on equity.

The implications of now-tighter controls on extending bailouts to the state firms, on governance, operations and their fiscal positioning, are multiple. One is SOEs’ reduced access to capital. SOEs in need of money may be forced to clean up governance, rationalise operations, and pay more heed to things like transparency and accountability.   

Rating agencies have noted this change, albeit in cautious tones, attributing this to the restrained fiscal space of the government rather than a change in the political situation. What ratings firms don’t say, sometimes counts just as much as what they do.

It may be that SOEs, forced to trade their way back to black without easy money from the government, are ripe for private investment. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.