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SOEs advised to increase efficiency, profitability

Moody’s has placed the ratings of five SOEs on review for a downgrade due to funding risks.

FILE: Eskom's head office at Megawatt Park in Johannesburg. Picture: Reinart Toerien/EWN

JOHANNESBURG - State-owned enterprises (SOEs) have been advised to set out measures to increase efficiency and profitability in order to avoid a ratings downgrade.

Moody's has placed the ratings of five SOEs on review for a downgrade due to funding risks.

Eskom, which is one of the affected parastatals, also faces the threat of a downgrade due to the increasing costs of buying power from independent producers, as well as its construction of new power stations.

Chief Economist at Investment Solutions Lesiba Mothatha says there are already proposals to reform SOEs which must be implemented.

"And any decision to increase efficiency, productivity and also profitability. There's a way to make sure that these state-owned enterprises are great assets, are better run and they can avert adverse credit ratings."

Asset manager Futuregrowth, which manages client assets of about R170 billion and rival Abax Investments announced this month that they have reduced or stopped lending to several state-run firms due to political uncertainty and governance issues.

In a statement, Moody's says its put Eskom's BA1 rating on review for downgrade on the grounds that its funding needs have been exacerbated by the rising cost of buying power from independent producers, as well as its spending to revamp and build new power stations.

Eskom is building new plants and transmission lines to augment a power grid that nearly collapsed in 2008 and forced the company to implement controlled blackouts, or load shedding, early last year that dented economic growth.

Chief Financial Officer Anoj Singh called the review "unfortunate" and said Eskom would meet Moody's to resolve its concerns.

"The review by Moody's is unfortunate given the progress made towards improving the company's financial profile, successful implementation of the operations turnaround plan and Eskom's healthy liquidity position," Singh said in a statement.

Moody's is also reviewing the ratings of four other state-controlled entities: the Development Bank of Southern Africa, the Industrial Development Corporation , the South African National Roads Agency (Sanral) and Land Bank.

"Today's review for downgrade ... primarily reflects the increased risk of funding and liquidity challenges, following some signals of increased risk aversion by funding counterparties owing to market concerns regarding the governance of South African state-owned enterprises," Moody's said.

Many of South Africa's 300-odd state-owned companies, including South African Airways, are a drain on the government's purse and rating agencies have singled out some as threat to the country's investment grade rating.

South Africa's President Jacob Zuma last month defended plans to give his office supervision over state-controlled companies after allies of under-fire Finance Minister Pravin Gordhan said it was a tool to limit his control.

Analysts have said Zuma's team and the Treasury under Gordhan have disagreed about government spending, including on loss-making state firms, such as South African Airways.

Gordhan has pledged to rein in government spending to limit rising inflation, narrow a gaping budget deficit and appease ratings agencies considering cutting South Africa to "junk" status in reviews expected by December.