Still waiting for 2021 results from some state-owned companies

More than 18 months after the end of the financial year, several state-owned companies or enterprises (SOCs or SOEs) have not yet published their results for the financial year to end March 2021.

These include the SA Post Office, PetroSA, Denel and Alexkor, while South African Airways (SAA) only recently published its 2018 figures.

In contrast, listed companies with March or June year-ends have all published their annual reports for the 2022 financial year; the JSE and shareholders expect to see results three months after year-end. Some SOEs have also already published their 2022 results, such as Eskom, which is reliant on private investors purchasing their bonds to ensure funding.

Disarray

It is no coincidence that the five state companies that are derelict in this very important aspect of corporate governance are in disarray. The rot starts when managers and directors stop counting and start hiding figures from stakeholders.

The declining fortunes of SAA proved this. It was eventually put in business rescue. Unfortunately, even now, taxpayers have no idea of the financial performance – and the extent of the corruption – during the last four years.

Read: The Zondo Report on SAA, SAAT and SA Express

SAA’s board did issue a statement about its financial reports recently when it criticised the Auditor-General (AG) for making public statements about the airline’s lack of governance.

“The fact that the 2017/18 audited financial statements were finalised in 2022 is not unreasonable given SAA’s history of not being a going concern at the time of the audit and SAA’s subsequent entry into business rescue in 2019.

“Annual financial statements for the 2018/19, 2019/20 and 2020/21 financial years have been prepared, but external audits were not conducted as the airline was in business rescue,” it said.

“The 2021/22 annual financial statements are currently being prepared and will be submitted timeously to the AG for audit.”

The argument that SAA couldn’t publish its results as it was not a going concern, and was waiting for government funding to ensure its status as a going concern, was also put forward by SAA’s previous management.

This argument is invalid. A balance sheet gives the financial status of an enterprise at a specific date and the income statement shows its performance during its financial year. Whether a going concern or not is irrelevant.

PetroSA

PetroSA confirmed to Moneyweb – a few weeks ago already – that it completed its financials for the year to March 2021 and is awaiting the auditor’s report.

The figures for the 2020 financial year indicate that the entity is also struggling to survive. At least management is honest about its problems.

Chair Frans Baleni says in the 2020 annual report: “Without painting an unnecessarily gloomy picture, it is important to state upfront that the business-as-usual approach will not be of any help if we hope to successfully turn around this company into a sustainable business.

“Any hope for a better future requires an honest appraisal of the current situation, new mindsets, and robust internal engagements to map out a new path for the company. PetroSA is currently at a crossroad, a critical point in the company’s history.

“We collectively have to do everything within our powers to save PetroSA and keep it afloat or we’ll sink together. Primarily, the natural gas wells, which for more than two decades were a stable and cost-effective supplier of natural gas feedstock to our gas-to-liquid refinery in Mossel Bay, are close to the end of their operational lives.

“This constitutes a serious threat to the sustainability of the current operating model in the absence of any affordable alternative feedstock.

“Unfortunately, the costs of alternative feed stocks are disproportionally higher than the cost we are used to and could raise our already high operational costs even further.

“Issues of governance and leadership instability in the organisation have not helped to change the status quo and shift the business trajectory in the right direction.”

Read: PetroSA seeks CEO to lead revamp in SA

PetroSA reported a loss of R5.6 billion in the year to March 2020 compared to a loss of R2.1 billion the previous year, while the AG noted in his report that the financial position is “an area for concern”. Total group assets decreased to R14.4 billion and net asset value fell to a negative R4.5 billion.

SA Post Office

The SA Post Office is another big SOE that failed to publish its annual report on time and another with management admitting to failures.

Chair Tia van der Sandt noted in the 2020 annual report that the Post Office experienced instability within the leadership of the organisation.

“The position of CEO became vacant in July of 2019, followed by the suspension of the acting CEO in December 2019 following a whistle-blower report. The key position of CFO has not been filled on a permanent basis and the COO position also does not have a permanent appointment. Key critical vacancies have not been filled.

“The SA Post Office has a reputation for its inability to implement strategic initiatives. Capital injections have been utilised without marked improvements in financial losses year on year.

“In addition to the above, a majority new board was appointed by the minister in the third quarter of the financial year, resulting in insufficient time to address key strategic issues,” says Van der Sandt.

The report states that the entity has an unsustainable cost base, built up over time “without proper consideration for a workable operating model”.

“This as a result of years of growing losses that deplete cash reserves, which in turn have operational consequences resulting in the inability to implement initiatives,” says Van der Sandt.

The AG said in his report that he could not express an opinion on the consolidated and separate financial statements of the group because of the significance several matters. His list of problems with regards to governance within the SA Post Office runs to eight pages.

It includes gems like: “I was unable to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.”

The Post Office incurred losses of R1.77 billion for the year to end March 2020 and current liabilities exceeded current assets by nearly R1.5 billion.

“The group and company were therefore commercially insolvent because they were unable to pay their debts as and when they were due, even though their total assets exceeded their total liabilities,” says the AG.

Denel

It is not surprising that Denel fails at corporate governance too.

It has been in the news for years for all the wrong reasons, such as the inability to pay salaries, failure to pay pension fund contributions and tax, and even using money that employees had voluntary saved themselves for year-end bonuses – while requesting taxpayer-funded bailouts.

Denel announced on 11 August that the outstanding salaries of current and previous employees had been paid.

“All outstanding salaries owed to employees of Denel have now been fully paid.

“We are pleased to report that this process has been completed. We also have payment plans in place for Sars (PAYE) and the pension fund.

“This demonstrates our commitment to the welfare of our employees and the high value we place on sound labour practices,” says Gloria Serobe, chair of Denel.

The cash to pay the outstanding salaries was obtained from excess funds in the Denel Medical Benefit Trust.

The trust was established in 2002 to ensure that Denel meets its medical aid obligations towards employees who joined the company before 2002.

Serobe says a new restructuring plan is supported by the government and will create a self-sustaining business with a significant order pipeline.

However, the 2020 annual report painted a bleak picture. “The 2019/20 financial year proved to be another challenging year for Denel, with a total comprehensive loss of R1.962 billion for the year, compared to a loss of R1.469 billion (restated) in the previous year.

“This net loss can primarily be attributed to a delay in sales, an inefficient cost structure and poor programme execution. Denel has further been negatively impacted on by reduced margins due to labour under-recoveries as a result of lower operational activities and little to no production activity,” according to the report.

It also reported that Denel received a R1.8 billion bailout from government, which went to pay long-overdue creditors, settle debt and restart operations that had slowed down significantly due to some suppliers requesting upfront payments.

“Despite the recapitalisation, Denel’s cash flows from operations remained negative at R811 million in delayed deliveries to customers due to poor contract and working capital management,” noted management.

The report also disclosed that R3.2 billion of the total debt of nearly R3.7 billion at the end of March 2020 was unconditionally guaranteed by government. Denel spent R614 million on interest then, when interest rates were much lower than currently.

The AG did not express an opinion on the consolidated and separate financial statements of Denel for the 2020 year, listing 10 pages of concerns.

“I am unable to obtain sufficient and appropriate audit evidence to support some of the key assumptions included in the management’s going concern assessment. Therefore, I am unable to confirm whether it is appropriate to prepare the consolidated and separate financial statements using the going concern basis of accounting.

“The group did not include all irregular expenditure incurred in the notes to the consolidated and separate financial statements. This was because the group did not have adequate controls to maintain complete records of irregular expenditure” said the AG.

The AG went further: “I was unable to determine the full extent of the misstatement of the irregular expenditure disclosed at R3.19 billion (2018/19: R2.9 billion and 2017/18: R2.55 billion)” because “it was impracticable to do so”.

Alexkor

It can be argued that the worst of the lot is Alexkor.

How difficult can it be to write up the annual financial statements for a small diamond mine?

Read: Alexkor teetering on the brink

Management failed to publish results for the year to end March 2020, despite admitting the importance thereof to its shareholder (government), potential investors, National Treasury, major contractors, diamond marketers and the Richtersveld community.

“The report may also interest other stakeholders wishing to make an informed assessment of Alexkor’s ability to create sustainable value over time,” the directors said in the 2020 report.

In that year, revenue declined by 19% to R170 million from R209 million in the previous year as result of significant declines in carat production and subsequently carat sales.

Production declined from more than 48 000 carats to less than 29 000 carats, meaning that Alexkor lost out on rising diamond prices during this period.

Alexkor reported a loss of R109 million in 2020, with management saying that material uncertainties cast significant doubt on the company’s ability to continue as a going concern due to its history of losses.

Once again, the AG could not give an opinion on the financial statements as he had “not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion”.

The office of the AG also noted that Alexkor did not comply with tax legislation in that it did not submit an income tax return for the 2020 financial year, nor VAT returns.

Alexkor did not pay all PAYE amounts to Sars within due dates and did not submit a royalty tax return for 2020.