Big changes for state-owned companies in South Africa

During the announcement of South Africa’s seventh administration’s national executive on 30 June, President Cyril Ramaphosa announced a big shift for the country’s state-owned enterprises (SOEs), dissolving the Ministry of Public Enterprises and moving the portfolio into the presidency.

“The coordination of the relevant public enterprises will be located in the Presidency during the process of implementing a new shareholder model,” said Ramaphosa.

This move indicates that the new administration intends to pursue the National State Enterprise Bill tabled by Pravin Gordhan, the previous Minister of Public Enterprises.

Although the bill lapsed at the end of the last term, it is likely to be revived.

According to the South African Legal Academy, if enacted, the bill will:

• Enable the development of a ‘national strategy’ for state-owned enterprises.
• Establish the State Asset Management SOC Limited (SAMSOC), with the state as its sole shareholder.
• Consolidate the state’s shareholdings in “strategic” SOEs through a centralised shareholder model;
• Phase in these enterprises as subsidiaries of SAMSOC over time.

“The bill proposes a significant structural shift, changing the way SOEs are run in the country,” said Nicole Hendricks, investment analyst at Old Mutual Investment Group.

Although not all of the country’s SOEs at a national, provincial and local level will be included, those that have been earmarked as “strategic” entities for potential transfer include:

• Eskom Holdings SOC Limited;
• Transnet SOC Limited;
• South African Airways SOC Limited;
• South African Post Office SOC Limited;
• South African National Roads Agency Limited;
• Denel SOC Limited;
• Air Traffic and Navigation Services Company Limited;
• Airports Company Limited;
• Broadband Infraco SOC Ltd;
• Central Energy Fund (Pty) Limited;
• Sentech SOC Limited;
• South African Forestry Company SOC Limited;
• South African Nuclear Energy Corporation Limited.

These companies, previously supervised by the now-dissolved Department of Public Enterprises, will ultimately fall under their respective policy departments.

Those heading the departments will then act as shareholder representatives for SAMSOC.

This means that the shareholder representative of Eskom will now be Minister of Energy and Electricity Kgosientsho Ramokgopa, and the Minister of Transport Barbara Creecy will take charge of Transnet. 

The bill, however, is unclear on the timing and order of transfer.

Why the change?

Hendricks said that SOEs “play a pivotal role in the South African economy and serve as a vehicle for achieving improved economic growth,” with sound governance structures crucial for them to perform optimally.

However, “for more than a decade, SOE performance has been sub-optimal and characterised by poor governance, poor financial sustainability, and operational inefficiency,” said Hendricks.

“Corruption, state capture and the lack of a common SOE agenda/agreed strategy further added to the financial and operational woes.”

A prevalent example is that the South African government has invested R282.5 billion in various SOEs as “capital investments” since 2019 but has received just R1 million back in dividends.

Gordhan previously said that this proposed model will “separate the state’s ownership functions from its policy and regulatory functions, minimise the scope for political interference, introduce greater professionalism, and manage state assets in a way that protects shareholder value.”

The National Strategy

Both the Presidential Review Committee on SOEs and the National Planning Commission have endorsed the creation of a comprehensive long-term strategy for SOEs, consolidating their mandates, supervision, and operations under a unified law.

“Some of the key challenges identified… were that South Africa had no common agenda for and understanding of SOEs, there were no commonly agreed strategic sectors and priorities, and no clarity on the role of the executive authority,” said Hendricks.

The bill specifies that the strategy must encompass performance targets, sectoral and specific objectives, developmental obligations, matters related to financial turnaround, and provisions to facilitate private sector investment.

The President will play a central role in forming the strategy for the holding company and its subsidiaries, with guidance from the Presidential Advisory Committee to “limit political influence.”

The Committee must include three national executive members appointed by the President, one representative each from organised labour and business, sector-specific experts chosen by the President, and a representative from the holding company selected by its Board.

However, “with the President responsible for electing several Committee members, we question the actual mix of independence,” said Hendricks.

This strategy will then be published for public feedback. “It is important to note that the bill does not obligate the President to act on the advice/comments provided,” added Hendricks.

Olga Constantatos of Futuregrowth Asset Management noted concerns over clarity in the second version of the bill, particularly regarding the timeline for the President’s development of a National Strategy in consultation with the newly established Presidential Advisory Committee.

“We recognise that multiple strategies have been devised by the various administrations for SOEs, but there has been a crippling lack of execution or implementation of these. Consequently, we are concerned that this objective may turn into yet another example of failed execution,” said Constantatos.

State Asset Management SOC Ltd

The SAMSOC will hold all the equity of strategic companies engaged in trading. Capital is raised by selling stakes to equity partners or listing the firms on the stock exchange. 

Citing a bid to root out the corruption that has plagued SOEs, the new structure will see the board of the state asset management company (the holding company) appointed by an eight-person panel.

This panel will comprise:

• A retired judge appointed by the President to chair the panel;
• Two members of the national executive appointed by the President;
• One representative of organised labour;
• One representative of organised business;
• Three former and/or current CEOs of public companies to be appointed by the President.

The bill allows for the panel to determine its own rules to govern its proceedings.

However, the “bill once again allows the President to appoint several panel members, which raises concerns about actual independence,” said Hendricks.

Minister in the Presidency responsible for Planning, Monitoring and Evaluation, Maropene Ramokgopa, has been tasked with setting up the holding company. 

Public comments and amendments

The gazetted bill was out for public comment, and numerous inputs were made, particularly regarding worries over political interference, which were seen to have greatly hurt SOEs in the first place.

“While the revised bill does attempt to limit the powers of the President, the bill does still leave scope for the President to make regulatory changes in future and to delegate its powers to a member of cabinet. No guidance has been provided on who the electee could be,” said Hendricks.

“Possible political interference remains an area we do not believe has been fully mitigated, acknowledging that this risk has been reduced with the revised version.”

While numerous amendments have been made, Business Leadership South Africa (BLSA) said in a bulletin that there are requests for further additions to the bill, including:

• Limit presidential discretion on committee recommendations and support Parliamentary Advisory Committee oversight of board appointments;
• Business values national strategy but opposes legislating it due to future review burdens;
• Specify clear board nomination guidelines for the Hold Company, addressing concerns over political interference in appointments;
• Clarify funding mechanisms for the holding company, particularly private equity and share issuance processes, considering the financial diversity of SOEs;
• Ensure alignment of the bill with Companies Act and Public Finance Management Act (PMFA); highlight concerns over Schedule C amendments and PFMA provisions removal, emphasize public consultation and clarify land transfers;
• Recommend publishing white and green papers to justify the Holding Company’s rationale, and conduct economic and social impact assessments;
• Propose that SOEs develop rescue plans addressing operational, governance, and financial challenges within the new legislative framework.

“The introduction of the new holding company and the intention to improve on the shortcomings of the current regime is positive – there is a strong need to effectively address the issues these SOEs and the economy are facing and a strong requirement for the government to step up and implement turnaround measures with great intent,” said Hendricks.

“For the holding company to achieve its stated objectives, it needs a level of independence and autonomy to operate effectively and to achieve the desired performance targets,” she added.

Read: How Parliament will be keeping tabs on Ramaphosa’s new cabinet