State-owned companies are being overhauled in South Africa

 ·11 Feb 2024

South Africa’s state-owned enterprises (SOEs) are gearing up to undergo major structural changes as the government seeks to consolidate the National State Enterprises Bill, promising to change how SOEs operate in the country.

At the 2023 State of the Nation Address, President Cyril Ramaphosa said that “our greatest weaknesses are in state-owned enterprises… many of our SOEs are struggling with significant debt, under-investment in infrastructure, the effects of state capture and a shortage of skills,” – promising legislative and structural reforms to turn around its fate.

Consequently, the Minister of Public Enterprises, Pravin Gordhan, introduced the National State Enterprises Bill, which currently sits in the National Assembly. 

Broadly, the bill provides for:

  • “The development of a strategy for national state enterprises”;

  • Establishment of the State Asset Management SOC Ltd with the State as the sole shareholder;

  • Provides for various mechanisms to operationalise a state-owned holding company for national commercial state-owned enterprises.  

“While some view the introduction of the SOE Bill as a positive step towards the achievement of improved coordination and an important milestone towards streamlining oversight and enhancing governance of SOEs, critics…question whether it resolves the issues currently faced by SOEs, including political interference, corruption and mismanagement,” said ENS Africa’s Pippa Reyburn, Yana van Leeve, and Alexandra Maree.

The State Asset Management SOC Limited will hold ownership interests in thirteen key national government commercial enterprises capable of being subsidiaries.

According to Ramaphosa, this centralised shareholder model will “ensure effective oversight of SOEs.”

The asset management company and its subsidiaries are outlined to be guided by a national strategy developed by the President. The strategy will be subject to public consultation and advised by a Presidential Advisory Committee, while the first board of directors will be appointed through an independent panel chaired by a retired judge.

Additionally, it is said that future regulations will guide future appointments – underpinned by public participation and limited Presidential involvement.

Limiting the influence of the President while amplifying public participation “is an opportunity to create legitimacy through an independent, transparent and participatory process,” said the legal experts.

Aligning with international practices

Back in 2015, South Africa participated in the drafting of the Organisation for Economic Co-operation and Development (OECD’s) Guidelines on Corporate Governance of State-Owned Enterprises.

The guideline outlines that “governments should endeavour to create simple and standardised regulatory frameworks under which SOEs operate while allowing SOEs full operational autonomy to achieve their defined objectives,” said the ENS practitioners.

“Governments should refrain from intervening in SOE management and avoid redefining SOE objectives in a non-transparent manner,” they added.

The guideline states that “government should allow SOEs full operational autonomy to achieve their defined objectives.”

The role of government in SOEs outlined by the guidelines include:

  • Representation at the general shareholders’ meeting and exercising voting rights in the interest of the enterprise;

  • Development of a well-structured, transparent, and merit-based board nomination process;

  • Setting and monitoring of board mandates and objectives, including financial targets, capital structure objectives, and risk tolerance levels;

  • Setting and monitoring of broad mandates and objectives for SOEs;

  • Regular performance monitoring, auditing, and assessment of SOEs;

  • Establishment of a disclosure policy;

  • Development of a clear remuneration policy for SOE boards.

“In our view, the SOE Bill is a nod in favour of South Africa’s approach of aligning the corporate governance arrangements for SOEs with international best practices, as outlined by the guidelines,” said the practitioners.

The experts added that the true test of the bill lies in the details, much of which will be the subject of yet-to-be-drafted or announced regulations.

“We anticipate significant negotiation and planning being required to transfer the shareholding in complex national commercial enterprises into the State Asset Management SOC Limited, to develop new financial and risk management systems, as well as establish other critical governance structures… we are no doubt in store for fundamental change in the SOE landscape,” they said.

Read: New state-owned company for South Africa – government clarifies changes

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