CAPE TOWN, The government has announced that it will give South African Airways (SAA) a further 4.8 billion Rand (about 341 million US dollars) government guarantee by March next year.
The 2017 Medium Term Budget Policy Statement (MTBPS) presented in Parliament here Wednesday by Finance Minister Malusi Gigaba states that the government had issued a 19.1-billion Rand guarantee facility to the airline to ensure it continued to operate as a going concern.
Total recapitalisation of 10 billion Rand will be provided in 2017/18. An amount of 5.2 billion Rand has already been provided, with the remaining 4.8 billion Rand to be transferred by 31 March 2018.
The funds will be used for working capital and to settle debt, enabling the airline to reduce its interest expenses.
Despite the capital allocation, the government’s exposure to SAA debt remains significant at R15 billion. There is risk that if SAA’s financial fortunes do not improve, there will be further calls on the remaining guarantee, noted the MTBPS.
SAA, which was moved from the portfolio of the Department of Public Enterprises to the National Treasury in 2014, has been struggling to pay its lenders and service providers.
At the end of September, National Treasury announced that government had approved a 3.0-billion Rand transfer from the National Revenue Fund (NRF) to SAA to meet its debt obligations to Citibank. This transfer followed another one made in July.
Last week, Treasury announced the appointment of six new members to SAA’s board. The MTBPS noted that the appointment of a new Chief Executive Officer, who will commence his duties on Nov 1, is a critical step in ensuring that the airline’s turnaround strategy is aggressively implemented.
In his address to Parliament, Gigaba said that following his meeting with the SAA board, the government would make pronouncements on plans to consolidate aviation assets.
After we meet the new board of SAA, we will pronounce on our plans to consolidate aviation assets and bring in a strategic equity partner. We believe a strategic equity partner can play an important role in SAA’s turnaround as well as unlocking value for the fiscus which has invested significantly in the airline over the years, he said.
If SAA executes a successful turnaround in line with its projections by 2019/20, its reliance on guarantees will subside, as will the government’s risk exposure, added Gigaba.
He said that despite the current challenges faced by SAA, the government remains convinced that retaining a national carrier is in the public interest.
The MTBPS, which is also known as the mini-budget, said the profitability of State-owned companies since 2012 had declined due to a combination of operational inefficiencies, governance failures and weak demand. These factors have increased reliance on borrowing to fund operations, leaving several entities heavily indebted, without sufficient cash to service their debt obligations or even to run their operations.
The document noted that the government’s major explicit contingent liabilities are its guarantees. Total guarantees issued to public institutions, independent power producers and public-private partnerships stood at 688.8 billion Rand in 2016/17. Total guarantee exposure was standing at 445 billion Rand, because several entities had not fully used their available guarantee facilities.
Between 2011/12 and 2016/17, the combined profitability of state-owned companies (SOCs) measured by return-on-equity, declined from 7.5 per cent to an estimated 0.2 per cent with a growing portion of their operating expenditure being funded through debt.
The National Treasury said lenders, alarmed by governance failures, were taking a more active stance and that as a result, the SOCs are having difficulty raising debt, or are forced to refinance debt at higher interest rates. This situation creates liquidity challenges, leading to greater demands on the fiscus.
Addressing this requires not only stabilisation measures at troubled entities, but a broader restructuring of state-owned companies and an acceleration of reforms.
Meanwhile, total interest payments by SOCs are projected to increase from 49.8 billion Rand in 2016/17 to 69.3 billion Rand by 2019/20. Some entities may have insufficient cash to settle their obligations unless immediate reforms are implemented to improve governance and boost profitability.
Source: NAM NEWS NETWORK