How once-off gains are masking financial strain at SOEs

Judging by the latest reporting season, and on the face of it, state-owned enterprises (SOEs) have staged a remarkable financial turnaround after many years of decline.

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The biggest – Eskom, Transnet, Airports Company South Africa (Acsa), the Development Bank of Southern Africa (DBSA), and the Public Investment Corporation (PIC) – reported profits collectively worth nearly R45 billion during the year ending March 2026.

So profitable are some SOEs (mainly Acsa and DBSA) that they even declared dividends to the government, contributing to the fiscus instead of taking from it.

At first glance, the SOE universe has reformed and reversed its perennial decline marked by years of financial losses, mismanagement, operational failures, and dependency on taxpayer-funded bailouts for survival.

However, for some of these SOEs, profits were not generated organically – or, where profits existed, they were boosted by once-off events.

In other words, some SOEs were able to report increased profits not because their underlying operations had improved but largely because of once-off or non-operational factors.

SOEReported profitMain non-organic/once-off itemsApproximate underlying profitAssessmentTransnetR4.6bnR12.5bn once-off profit on disposal of discontinued operations (DCT Pier 2)R7.9bn lossNot organic; headline profit entirely dependent on the once-off disposal gainPICR869mR501m unrealised fair-value revaluation gain on financial assetsR369mHeavily reliant on a non-cash accounting revaluationDBSAR7.82bnR1.37bn net gain on financial assets/liabilities: R832m equity revaluations, R510m derivatives, R48m loan FVTPLR6.45bnLargely organic; driven by core banking net interest income of R8.85bnAcsaR1.2bnR574m non-cash investment-property fair-value gainR628mOrganic; R2.8bn Ebitda covered depreciation and net financeEskomR30.3bnR80bn debt relief was balance-sheet support, not a profit lineR30.3bnOrganic; driven by R108.6bn Ebitda from electricity operations and tariffsSource: Moneyweb calculations using SOE annual reports

Problems at Transnet

This was largely the case at Transnet, the state-owned freight rail and port operator.

It swung back into profitability for the first time in four years, reporting an after-tax profit of R4.6 billion. Although Transnet’s operations are starting to stabilise (with rail volumes improving and more containers being moved through its ports), its return to profitability was largely due to an accounting gain.

During its reporting period, Transnet sold a 49.99% interest in Durban Gateway Terminal – the entity holding the Durban Container Terminal (DCT) Pier 2 assets – to International Container Terminal Services Inc (ICTSI) for R10.5 billion, resulting in an accounting profit of approximately R12.5 billion, which included remeasurement of its retained interest.

This is a non-recurring, non-operating item that helped Transnet record that profit of R4.6 billion.

Without the R12.5 billion accounting gain from selling a stake in the Durban terminal, Transnet would have been loss-making by roughly R7.9 billion.

This is mainly because finance costs of about R16.4 billion – mostly interest on total borrowings of R150.7 billion (R115.7 billion long-term and R35 billion short-term) before R626 million finance income – overwhelmed operating profit.

While Transnet Group CEO Michelle Phillips hailed the return to profitability as positive, she was frank that the company’s turnaround journey is still far from complete.

“Is the turnaround job finished? Not by a long shot. We have a lot of work to do. The business still has to be financially sustainable.”

Sign of brokenness

Iraj Abedian, an economist who served on the Transnet board from 2004 to 2009, said the reliance on once-off accounting gains is an indication of how broken SOEs are.

“The real issue is an embedded culture of mediocrity, in which poor performance is tolerated and even rewarded, and a reluctance to benchmark operations against international competitive peers – both of which perpetuate inefficiency, undermine service delivery and erode public trust.”

Speaking to Moneyweb, Abedian said the first prize is for SOEs to be generating profits organically from their operations.

He added that if Transnet’s underperforming assets were benchmarked against peers in countries like Brazil or Argentina, many would need to be written down, not up.

“Which auditor or expert would claim Transnet’s capital base matches the efficiency and technology of peer countries? If it doesn’t, it should be written down, not up.”

The roots of balance-sheet engineering

Abedian traced the origins of the trend, involving balance-sheet engineering to show profit, to the early 2000s, when state-owned airline South African Airways (SAA) began selling aircraft to demonstrate profitability.

“This notion that people revalue balance sheets, sell assets in order to show profit, goes back to early 2000,” he said.

“When SAA started it, it became embedded in the SOE space.”

He argues that asset revaluation is a normal accounting practice – but only when applied honestly and in both directions.

“There is nothing wrong with a market-related, suitably benchmark asset valuation. An asset valuation always doesn’t go up; it also goes down. This direction must be accurately reflected in the financial statements, otherwise you’re misrepresenting the value of the company.”

He stressed that profitability alone is not enough – returns must exceed the cost of capital deployed. “If profit as a ratio of the capital you employ is less than, say, the borrowing cost of replacing that capital, then the entity is effectively making losses,” he said.

Why is this tolerated?

Abedian questions why such accounting practices are tolerated in the SOE space when they would attract far more scrutiny in the private sector.

“In the private sector, you have an audit committee that is properly populated with competent people,” he said.

“They scrutinise the auditors and the revaluations, both up and down, every year. In the private sector, such re-evaluations would not be celebrated as an indication of profits or a turnaround story.”

Mixed results for other SOEs

While Transnet’s headline profit depended on a once-off disposal gain, other SOEs largely relied on operations for organic profits, though some included once-off accounting measures.

For the PIC, the state-owned asset manager, its after-tax profit was R869.3 million, but R500.7 million came from a non-cash, mark-to-market fair-value revaluation. Without it, operating profit would be about R360 million, still positive but far smaller.

The DBSA’s R7.82 billion profit was driven by core banking net interest income of R8.85 billion. Its inorganic gain was R1.37 billion (17.5%). Excluding that, profit was still about R6.45 billion – showing strong lending-book earnings. The R1.37 billion gain came primarily from unrealised fair value adjustments on equity investments (R832 million) and interest rate derivatives (R510 million), with smaller contributions from development loans and investment securities.

Acsa’s profit was also organic.

The owner and operator of SA’s nine biggest airports generated R2.8 billion in cash from its airport operations.

Even after paying R1.3 billion in depreciation and R151 million in net finance costs, its core operations were profitable. The R574 million fair value gain on investment property is a non-cash accounting adjustment that boosted the final profit, but the fundamental business (passenger fees, retail, parking, and other commercial activities) generated enough revenue to cover its costs and deliver a real profit.

Eskom’s profit of R30.3 billion was organic.

The R80 billion government debt relief provided crucial liquidity support, but the profit itself was earned through operational improvements (the end of load shedding and an increase in electricity sales) and tariff adjustments, not through a once-off asset sale or accounting gain.

This article was republished from Moneyweb. Read the original here.

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