In a normal functioning economy, the word “bailout” should be akin to obscene language. It should be describing failure or mismanagement, of sorts. There are several reasons why state intervention would be necessary for State-Owned-Corporations (SOCs). Some reasons cannot possibly be averted. These include any external factors that would relocate the status of the entity into an undesirable position. For example, a global economic meltdown similar to the one witnessed in 2008. In these cases, government intervention is more accepted and justified, to mitigate against any material adverse effects on the entity and the macroeconomy.
South Africa’s context is quite different, and unique in a way. Here the question is never if a bailout is necessary, it’s how much will be provided in this round. The entire fiscal framework has become familiar with the process of state bailouts. Some of these state entities have required bailouts to fund expenditures as basic as salaries and wages or tax obligations, which should be of great concern to the state.


Chief amongst these badly managed entities is Eskom – the biggest threat to our economic growth – and the most crucial of the lot. Eskom has been a serious conundrum for at least three administrations. Former President Thabo Mbeki admitted in a recent speech that mistakes were made when it came to the issue of Eskom. “Eskom was right and government was wrong,” Mbeki said, after indicating that government was asked earlier to invest more in electricity to keep up with the country’s growth.
After years of maladministration, corruption and incompetence, the entity sits with more than R400bn in debt on the balance sheet and a failing infrastructure that cannot support the country’s economy. In 2019, President Cyril Ramaphosa said that the entity would be split into three divisions: transmission, generation and distribution, to improve the management of the entity that has required frequent bailouts to stay afloat.
Things have deteriorated to new lows, however, as we have seen more load-shedding days this year than any other year, with the threat of stage 8 seeming more likely at some stage. Treasury has accelerated the plans to fix the debt-laden utility by announcing during the Medium-Term Budget Policy Statement (MTBPS) that the state will take a portion of Eskom’s debt off the balance sheet to allow for a more viable unbundling process. This will be between a range of R133bn to R266bn of the entity’s debt.


For an economy such as South Africa’s, this is a significant amount of debt to take on, but we risk far greater fiscal risks if the problem is not resolved in the short-to-medium term.
The biggest concern, however, remains be the unintended consequence of this debt-swap to the rest of the struggling SOCs. Does this move not breed moral hazard to the other entities? The concept of moral hazard simply means the lack of incentive to guard against the risk where one party is protected against it. SAA was another SOC that was prone to financial assistance in the billions, but the board could not shake off a governance issue that resulted in the complete collapse of the company that was eventually sold for R51 to a private consortium.
Does Denel sit and wonder if the government will step in to take care of its creditors? What stops Transnet from putting its hand up and requesting similar favour from its major shareholder? The truth of the matter is that South Africa has created a culture of bailouts and other financial interventions that have somehow affected how SOCs are run as companies.
One could argue that we are in this state because of the so-called “9 wasted years” where premium corruption stripped all our SOCs of the ability to remain self-sufficient, however, it has been four years since we have attempted to recover from the damaging mismanagement of the past. Surely there needs to be tangible progress in the process, minute as it might be, not the regression we are currently witnessing.