Amanda Jitsing
SAA has recently requested a capital injection of R 6 billion from the fiscus. Requests from SAA for recapitalisation (or bailouts) must by this point create a feeling of déjavu for most South Africans. In 2009/10, national government allocated R1.6 billion to SAA, and in 2007/08, R744 million was injected into SAA to allow the entity to restructure its operations and improve its debt to equity ratio.
Unfortunately for taxpaying South Africans, our national carrier is not the only state owned enterprise to have asked for a bailout from national government. Between 2008/09 and 2011/12, government gave Denel R747.1 million to pay for claims under an indemnity agreement with Airbus Military for the commercially nonviable production of A400m aircraft, an agreement which Denel should not have been party to in the first place. Over and above this, Denel received capital injections of R2 billion in 2005/06, R 567 million in 2006/07 and R933 million in 2008/09. In the 2012 budget, an additional R700 million is allocated to Denel to recapitalise its aerostructures division.
Bailouts create a number of perverse incentives (what economists call moral hazards), which are illustrated by the behaviour of Denel and SAA. Because national government has created an expectation that they will provide bail outs, Denel and SAA have felt free to take on excessive and perhaps unjustified risks. See for example the hedging fiasco with SAA, where foolish financial practices resulted in it reporting a loss of R7 billion in 2003, requiring government to bail the airline out. It seems that pockets of tax payers run deep after all.
The arguments for the current bailout are unconvincing – SAA claims that the difficult economic environment has hurt its financial position. We therefore wonder how other commercial airline operators survive in this competitive market. Mr Gigaba claims that ‘United Arab Emirates’ support for its national carrier, Emirates, was a good example of what could be done by a government to open up opportunities for its carrier. Fortunately for the UAE, the proceeds of their oil revenues run even deeper than the South African taxpayer’s pocket.
Often the media, government and the political executive focus on the SOE’s need for money, and pay little attention to where the money comes from. SOE bailouts can create chaos in the country’s public finances. Financing a bailout can be done in a number of ways. Government can reprioritise funds from other programmes to finance the bailout without increasing the deficit. This often means that additional expenditure cuts are made on core programmes (or at least those large enough to accommodate the cuts) or alternatively on infrastructure projects. For example, the current R6 billion SAA request could be used to build roughly 45 000 RDP houses, or provide 93 600 tertiary students with bursaries. In this case, beneficiaries of such programmes or capital projects are likely to bear the brunt of the bailout. More importantly, as a country, we should ask ourselves whether the economic benefits associated with recapitalising SAA outweigh those arising from investing these funds in other alternatives. Government can also choose to increase the budget deficit to finance the bailout. Thus, should government choose to borrow in order to give SAA the additional R6 billion it is asking for, the budget deficit for 2012/13 will grow from 5.2 to 5.3 per cent of GDP. This in turn would increase state debt costs. Government could also choose to finance the bailout from its contingency reserve, and risk having insufficient funds to cope with a national disaster. In both these cases, the general taxpayer has to fork out additional monies to pay for the bailout.
Alternatively, government could issue a guarantee and raise a contingent liability on its balance sheet. As at 2011, government guarantees to state owned enterprises amounted to a substantial 15.7 per cent of GDP. There is however a limit to the volume of issuance of guarantees that can be undertaken before further harming the credit rating of the country.
What we know is that requests for bailouts from public entities and state owned enterprises has become a regular feature of the public finance landscape in South Africa. But as the amount of funds that we can extract from taxpayers become more constrained, it is imperative that the costs and benefits of these bailouts are rigorously analysed, and that alternatives are investigated before handing out the taxpayer’s hard earned monies.