South Africa’s list of failure – the state-owned companies that are in a financial crisis

Auditor-General Tsakani Maluleke has published the consolidated report on national and provincial outcomes, showing that South Africa’s state-owned companies continue to haemorrhage money, despite repeated attempts to turn financials around.

The auditor-general noted that the government cannot afford to lose money because of poor decision-making, neglect or inefficiencies. However, high levels of fruitless and wasteful expenditure continue, with 224 auditees losing a total of R1.72 billion in the current year.

“Again, key service delivery departments and state-owned enterprises were the main culprits, wasting a combined R900 million (52%). Over the last three years, R6.71 billion of government expenditure has been fruitless and wasteful, as it was made without reasonable care.”

The report notes that several state-owned enterprises are in serious financial difficulty, with the following companies disclosing uncertainty in their financial statements about whether they will be able to continue their operations:

• Denel;
• South African Airways;
• South African Express Airways;
• The South African Broadcasting Corporation;
• The South African Nuclear Energy Corporation.

The auditor-general said that this is list is likely not complete and that it expects to see more such disclosures at some of the state-owned enterprises with outstanding audits.

It added that some state-owned enterprises continued to ask for – and receive – funding from the government, diverting funds intended for primary service delivery.

“If we exclude state-owned enterprises, the 31% of public entities with expenditure that exceeded their revenue incurred a total deficit of R7.58 billion,” the auditor-general said.

“Thirteen public entities disclosed uncertainty about whether they will be able to continue their operations. Many of these are key development and delivery entities that have been disclosing their vulnerable financial position for many years, including the South African National Roads Agency, the Property Management Trading Entity and a number of provincial public entities.”

Controls needed 

At the heart of the financial management deficiencies, the auditor-general identified auditees a failure to institutionalise mature preventative controls that were responsive enough to prevent and detect misstatements, non-compliance, losses and signs of financial distress during the year, and to correct these timeously.

“Our detailed recommendations in the SOEs’ management reports can only succeed if the entities have sound internal control environments and effective governance structures and processes in place,” it said.

“This links directly with some of the initiatives government is implementing to strengthen the governance of SOEs, including establishing a Presidential State-Owned Enterprises Council.”

The council’s mandate covers strengthening the framework governing SOEs, which includes introducing an overarching act to regulate SOEs and determining an appropriate shareholder-ownership model.

The auditor-general noted that the government is also drafting an SOE bill that aims to:

• Determine an appropriate shareholder ownership model;
• Inform institutional arrangements for overseeing SOEs, including the future role of the Presidential State-Owned Enterprises Council;
• Integrate lessons from various investigative commissions of enquiry;
• Ensure that competent people of integrity are appointed to SOE boards and executive positions via a transparent and robust process;
• Clarify the respective roles and responsibilities of the executive authority, boards and executives;
• Regularly review and update various guidelines.

“Many SOEs continue to face challenging and tumultuous conditions, and boards need to be ruthless in executing their fiduciary duties to safeguard the entities’ best interests,” it said.

“Government as a shareholder also needs to accelerate the bold and decisive implementation of initiatives and interventions for those SOEs facing governance, financial and other challenges.”

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