Major red flags for new state-owned company in South Africa

 ·9 Apr 2024

The Department of Public Enterprises (DPE) has outlined its plans for—and the biggest risks and challenges facing—a new state-owned holding company that will house all the major SOEs in the country.

The DPE’s 2024/25 Annual Performance Plan forwards the department’s plans to establish a National State Enterprise Holding Company in hopes of turning around the fate of many ailing state-owned enterprises (SOEs) in the country.

“Unfortunately, the performance of SOEs’ has been undermined by factors such as poor governance, malfeasance, lack of accountability and consequence management as well as a loss/lack of skills amongst others [which] has impacted negatively on the respective SOEs’ finances and operations,” the department said.

A big part of what the DPE describes as “reform efforts for SOEs,” is seen in its gazetted National State Enterprises Bill (NSEB).

This bill proposes, among other provisions, the creation of a new state-owned holding company with the state as the sole shareholder – the State Asset Management SOC Ltd.

This would have commercial SOEs—such as Eskom and Transnet—as subsidiaries of the holding company, which would ultimately manage their finances.

According to the DPE, the establishment of a state-owned holding company is meant for effective oversight of previously eroded state-owned companies, while separating the operational, regulatory, and policy-making roles of government which had become blurred and unstable, particularly in the State Capture era.

“These initiatives aim to strengthen Governance systems, ensure board stability, and promote financial and operational stability across SOEs’,” said the report.

The board of the holding company, who would be recommended by an advisory committee, will be tasked with pursuing “a strategic direction consistent with Statements of Strategic Intent, Shareholder Compacts, Memoranda of Incorporation, and the SOE Performance Appraisal System.”

The department said that the board would need to regularly assess and improve the various business models while creating financial stability plans to ensure that the subsidiary SOEs become financially self-reliant.

In the report, DPE identified various challenges, risks, causes and mitigation plans for the proposed holding company – including red flags for state capture.

“State Capture 2.0”

Much of the annual performance plan outlines that some of the most prevailing threats to the DPE and SOEs are “State Capture, maladministration, and corruption.”

Pravin Gordhan, the Minister of Public Enterprises, said that “the DPE has been pre-occupied with cleaning up malfeasance that characterised the costliest period for our SOEs… [and are working on] reclaiming our SOEs’ from criminal syndicates who now want to subject us to State Capture 2.0.

The minister said that this is seen in “new forms of corruption and rent-seeking emerging” – however, he did not go into detail about these characteristics.

Fierce opposition

First, it faces an uphill battle in assenting the NSEB, as “key stakeholders could express resistance or opposition to the Bill,” the report said.

Opposition parties and market participants have been vocally sceptical that the model will insulate the companies from political interference. 

For example, the advisory committee, which was proposed following pushback to the recommendation that the President be the sole appointee, remains just that—an advisory body. The President could still technically overlook the recommendations of appointments.

Although the DPE said that it plans to “facilitate timeous consultations within government” in hopes of wooing potential opponents, it is unlikely that this bill will be passed by the National Assembly before the end of the current administration.

Funding issues

Additionally, the DPE said that the proposed National State Enterprise Holding Company lacks funding to start its operations adequately.

In hopes of overcoming this, the department said it would “engage National Treasury for working capital or secure alternative sources of funding.”

However, the holding company may not be able to acquire the necessary funding.

Skills shortage

Another challenge identified in the plan is that “poor management and shortage of skills, corruption and inadequate shareholder funding” have eroded current and possible future investment in SOEs.

The department said that it plans on countering this through the “recruitment of competent relevant skills by revising Boards and Management through turnaround strategies,” which is deemed necessary as “the failure of SO[E]s is viewed as a failure of the Government as a whole.”

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

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