SOEs’ results proof of massive problems

An analysis of the results of state-owned enterprises (SOEs) that were published during the last few weeks shows that only eight of the 28 larger companies posted results that were not utterly shocking.

The other 20 all have serious problems and most suffered larger losses than in previous years.

Only two, the Development Bank (DBSA) and South African National Parks (SANParks), posted results that shareholders would have been happy with if the entities were private companies, with private investor shareholders.

Read: Development Bank reliant on raising new debt to fund liabilities

Six have not published their results yet, with the worst offenders being South African Airways (SAA) and SA Express. Financial management at the two state-owned airlines is in such a bad state that they have not published annual reports with audited results since 2017. Last year, Parliament’s oversight committees, bankers and taxpayers had to be satisfied with an oral presentation from SAA management, disclosing that it suffered a loss of around R5.6 billion in the year to March 2018.

Read: SAA may have recorded a loss of more than R9bn in the past year

There is no way to tell if the figure is reliable without full financial statements and the notes that usually accompany the income statement and balance sheet.

Nine SOEs announced that they suffered losses during the last 12 months, while it is general knowledge that SAA and SA Express also made huge losses.

Estimating that the airlines lost at least R6 billion in their last financial year would increase the total loss of the loss-making SOEs to nearly R34 billion.

This figure might be even higher, depending on SAA’s real loss. The losses exceeded the good work and profit from other state companies and the SOEs chalked up a total loss of nearly R14 billion compared with a profit of R8 billion in 2018.

SOE profit and loss

R million 2017 2018 2019
Airports Company South Africa (Acsa) 2 005 842 504
Alexkor* 6 34 6
Armscor – 127 2 235
Air Traffic Navigation Services (ATNS) 185 190 188
Broadband Infraco – 127 – 113 – 14
Council for Scientific and Industrial Research (CSIR) 76 – 14 8
DBSA 2 821 2 283 3 097
Denel 282 -1 084 -1 749
Eskom -4 608 -2 337 -20 729
Industrial Development Corporation (IDC) 2 200 3 224 720
Land Bank 367 254 181
Mintek 6 – 6 6
South African Nuclear Energy Corporation (Necsa)* – 29 98 98
PetroSA -1 608 – 676 -1 575
Public Investment Corporation (PIC) 533 411 301
Post Office – 967 – 908 -1 174
Passenger Rail Agency of South Africa (Prasa) – 928 1 442 -1 685
Rand Water* 2 414 3 173 2 800
SAA* -5 431 -5 600 -6 000
South African Broadcasting Corporation (SABC) -1 040 – 744 – 482
South African Bureau of Standards (SABS) – 46 – 71 – 4
SA Express* 17 – 360 – 300
SANParks 257 202 414
South African National Roads Agency (Sanral)** -4 962 – 260 3 026
South African Special Risks Insurance Association (Sasria) 543 1 025 – 1
Sentech 105 153 183
Trans-Caledon Tunnel Authority (TCTA)* 2 304 2 087 2 200
Transnet 2 765 4 851 6 047
Total -2 987 8 098 -13 699

Source: Compiled from companies’ annual reports.
* Estimates
** Adjusted (see text for details)

This is the third time that Moneyweb has compiled a summary of SOE results and this year’s figures show a marked decline. Nearly all the companies performed worse, with Eskom the biggest culprit with a loss of more than R20 billion. PetroSA, the Post Office and Prasa also posted significantly bigger losses.

Read: Most state-owned companies show improvement

The disappointing results are even worse than what the figures show, given that a lot of the companies receive grants and subsidies from the government as well. For instance, Prasa posted a loss of nearly R1.7 billion after receiving a total of more than R10 billion in operating subsidies and grants for capital expenditure.

The struggling Alexkor diamond mine, Necsa, Rand Water, and the TCTA also failed to publish their results on time and the figures are still outstanding.

Delays in publishing financial results are usually a bad sign, indicating problems with financial management and governance.

The best of the bunch

Only a few of the SOEs performed relatively well. The bankers at DBSA run a tight ship and once again posted decent numbers, with profit increasing to R3.1 billion in the year to June 2019 compared with nearly R2.2 billion in the previous year. The Auditor-General (AG) was pleased with the bookkeeping and whatever else his staff checked.

The balance sheet is also healthy. It is not surprising – actually a it’s relief – that the government picked DBSA to manage another R100 billion earmarked for infrastructural development spread over the next few years.

SANParks is the only other entity whose annual report made for relaxing reading. Profit increased from R202 million to R414 million and the balance sheet looks healthy, with assets exceeding liabilities more than two to one. The AG only had one serious problem, that SANParks needs to guard its assets better.

Acsa and ATNS performed nearly acceptably, if one sets the bar low. Acsa posted a profit of R504 million in the year to June 2019, but it is 40% lower than the R842 million of the previous year. In turn, that was 58% lower than the R2 billion of 2017.

The profit does not look that good considering that Acsa holds a monopoly on big airports and their huge shopping centres, car parking garages and aircraft parking bays, with their exorbitant charges.

Its balance sheet looks healthy if the valuation of the land, buildings and other infrastructure is realistic.

ATNS more or less maintained its profit (R188 million) over the last three years and its balance sheet is also strong, thanks to its expensive equipment and low debt.

Armscor posted a turnaround in its financial fortunes over the last three years. It posted a profit of R235 million in the 2019 financial year compared with a loss of R127 million in 2017. Prospects are good given the recent announcement of new contracts and joint ventures, as well as a balance sheet that can actually take on more debt to chase opportunities.

The CSIR, IDC, Land Bank and Mintek also performed in a relatively satisfactory manner, if one moves the bar still lower. They all showed profits, either quite small or way below that of previous years, but they are not a drag on taxpayers, except for reasonable government grants and subsidies in certain cases.

Some intervention is needed at Sasria, which was created decades ago as an underwriter to insurance companies, to offset risks due to political unrest and riots. Sasria suffered a loss of R1 million compared with a profit of R1 billion in the previous year.

As in previous years, Sanral’s profit was adjusted to exclude the effect of an upward re-valuation of its roads network that was included as profit.

Problem children

The PIC posted a profit – R301 million compared with R411 million in 2018 and R533 million in 2017 – but this is overshadowed by serious concerns regarding the management of investments on behalf of government employees. Testimony to the Commission of Inquiry into the PIC has disclosed huge problems with investment decisions, for which taxpayers might have to pay in future if the Government Employees Pension Fund runs out of money to pay pensions.

The worst of the bunch as far as their huge losses are concerned include Eskom (R20 billion loss in 2019), SAA (estimated to exceed R6 billion) and Denel (a loss of R1.7 billion).

PetroSA, Post Office, Prasa and SABC are all a drag on taxpayers.

Broadband Infraco showed a loss of R14 million and it’s bankrupt, with liabilities exceeding assets by R1.2 billion. Sentech made a profit, but the AG stated that there is uncertainty about its status as a going concern, as its income is largely dependent on only one client: the SABC. The public broadcaster has suffered huge losses for the last three years and is struggling to pay its monthly bills.

Read: Does the SABC need 12 directors?

SOE assets and liabilities

R million Assets Liabilities Net
Acsa 31 548 9 455 22 093
Alexkor* 657 301 356
Armscor 3 436 673 2 763
ATNS 3 279 499 2 780
Broadband Infraco 1 347 2 555 – 1 208
CSIR 2 326 1 324 1 002
DBSA 89 448 52 315 37 133
Denel 8 561 10 255 – 1 694
Eskom 785 018 604 924 180 094
IDC 144 607 49 304 95 303
Land Bank 52 361 45 547 6 814
Mintek 929 267 662
Necsa* 6 962 5 765 1 197
PetroSA 18 512 18 013 499
PIC 3 240 450 2 790
Post Office 16 070 10 884 5 186
Prasa 78 508 55 486 23 022
Rand Water* 26 927 8 105 18 822
SAA* 15 916 40 000 – 24 084
SABC 5 293 4 216 1 077
SABS 1 437 612 825
SANParks 5 126 2 404 2 722
Sanral 412 921 119 110 293 811
Sasria 8 473 1 847 6 626
Sentech 2 639 429 2 210
TCTA* 33 489 28 736 4 753
Transnet 355 500 206 869 148 631
Total 2 114 530 1 280 345 834 185

Source: Compiled from companies’ annual reports.

A summary of SOE assets and liabilities shows that SAA is bankrupt to the tune of several billion. The 2017 annual report showed that liabilities exceeded assets by R17.8 billion, which would  have increased to around R24 billion if the estimated losses of the last two years were added.

Denel is also bankrupt, with liabilities exceeding assets by nearly R1.7 billion, if  one can believe the figures.

Read: Denel in 2019 – new board, same old problems

The AG with all his staff did not believe the figures after looking at the books and criticised every single accounting item and procedure that one can think of. Prasa’s balance sheet shows that assets exceed liabilities by R23 billion, but the AG had his doubts about these figures too.

One of his main reasons for not attempting to give an opinion on the financial statements was that Prasa could not present “a creditable fixed asset register”. Assets could not be identified and it was impossible to check if they really exist, while other assets were not recorded.

The AG listed 14 pages worth of problems with Prasa’s financial management.

Prasa also included in its assets its claim against Swifambo Rail Leasing, to pay back the money it paid for the Spanish trains that did not fit on our railway tracks. Although Prasa won the case, Swifambo is in liquidation.

The huge PetroSA, with assets of R18 billion, has been milked dry and its net assets amount to only R499 million. The AG questioned its ability to continue as a going concern.

He also pointed out that PetroSA has a responsibility for rehabilitation that will cost R9.8 billion, but only set R2.4 billion aside for rehabilitation.

The Post Office and SABC both received qualified audit opinions from the AG, due to a long list of accounting and governance issues. An equally long list of concerns was added to Eskom’s financial statements, including concern over irregular expenditure of more than R25 billion.

In addition, the AG says that irregular expenditure was not always recorded at the right amount and his office was unable to determine the full extent of the understatement of irregular expenditure. Fruitless and wasteful expenditure increased from R143 million in 2018 to R641 million in 2019 and these figures could also not be verified by the auditors.

The AG also raised a material uncertainty whether Eskom can be seen as a going concern.

“The group’s current liabilities exceed its current assets by R44 billion. The current and prior year’s losses, deterioration of most of the group’s financial indicators and the impact of reduced generation performance indicate that a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern,” says the auditor’s report.

Although Transnet produced a solid operating performance – mostly due to coal, iron ore and bulk chemical transport – it received a qualified audit opinion. It was largely due to management not following correct and proper procedures in ordering R41.5 billion worth of new train sets, as well as fruitless and wasteful expenditure of R507 million.

Sanral received a clean audit report, but it was noted that “the public entity’s funding strategy for the next 12 months relating to toll operations is dependent on positive developments to resolve the e-toll impasse and the public entity raising funding either from government grants or further borrowings”.

Read: Government back-tracks on Tito Mboweni’s e-toll comments

Thus the AG concluded that “a material uncertainty exists that may cast significant doubt on the public entity’s ability to continue as a going concern”.

In short, things look bad at the SOEs – and also for taxpayers coming next year’s budget.