Presidential powers in National State Enterprises Bill flagged as a threat to SOE reforms

By Ray Mahlaka

31 Oct 2023

Investment experts say the draft law creating a new company to manage state-owned enterprises is full of flaws.

In terms of a proposed new law, the President will be the sole representative of a holding company that will house state-owned enterprises (SOEs) and will have the power to appoint its board. This has alarmed the investment community, which is worried about political interference in SOEs.

There is growing scepticism among South Africa’s investors about the proposed legislation, which is purportedly aimed at strengthening the governance of SOEs and stopping their decline by reforming their ownership model.

The legislation in question is the draft National State Enterprises Bill, which was recently published for comment and has largely been trashed by prominent players in the investment sector for being an empty shell and an exercise in rearranging the deckchairs on a sinking ship.

The key proposal of the Bill is to shift some SOEs under a single state asset management holding company (holdco) instead of retaining them under the Department of Public Enterprises (DPE), which is likely to be closed after next year’s elections.

The Bill does not mention which SOEs are earmarked to be moved.

It is expected that the Industrial Development Corporation, Sentech, Safcol and the Development Bank of Southern Africa will be first in line to be transferred.

Basket-case SOEs such as Eskom, Transnet, Denel and the SABC are only expected to be added later, but will move to their line ministries as an interim measure. For example, Eskom will go to the Department of Mineral Resources and Energy, and Transnet will go to the Department of Transport.

Public Enterprises Minister Pravin Gordhan has defended the Bill, saying it follows international best practice of separating the state’s ownership of SOEs from their operational and regulatory functions.

Gordhan said the Bill would also “minimise the scope” for political interference in the operational affairs of SOEs from their line ministries — a common occurrence, according to the complaints of several board members and executives appointed to the entities. Ironically, Gordhan himself has been accused by former board members of Eskom and Transnet of meddling in their day-to-day affairs.

The holdco that will house the SOEs will have a board of directors and a CEO, and the Bill stipulates that the state will be the holdco’s sole shareholder. The President will be the sole representative of the holdco and will have the power to appoint its board.

Counterproductive

This has alarmed the investment community, which has argued that the Bill is counterproductive as the President’s power to appoint a board means political interference is unlikely to be stopped and the SOE universe will not be depoliticised.

Futuregrowth Asset Management, one of South Africa’s biggest institutional investors in the debt of SOEs, has warned that, in the absence of oversight or limits, the President’s powers in the bill are “potentially dangerous.

“We believe that this concentrates an ill-considered amount of authority and influence in one individual,” Olga Constantatos, head of credit at Futuregrowth Asset Management, said in a note to investors.

“The presidential role is a political one, and we fail to understand how this action would prevent some of the challenges experienced by many of our SOEs — challenges which, by the government’s own admission, include inappropriate political interference,” she added.

Futuregrowth has been a leading voice in the call for better governance at SOEs since it announced in August 2016 that it would temporarily suspend funding for six SOEs: the Land Bank, Development Bank of Southern Africa, Industrial Development Corporation, Sanral, Eskom and Transnet.

Rona Bekker, a senior policy adviser at the National Employers' Association of SA, which represents more than 8,000 businesses (some of whose fortunes depend on SOEs), agreed with Constantatos, saying the Bill requires more guidelines on the President’s role in the holdco.

“The holdco will need a level of independence from its political masters. It will need to make operating decisions that ensure the financial performance of the SOEs, and it should have budgetary autonomy,” Bekker said.

“Its legislation should give it full authority over the operating and financial affairs of the SOEs,” she added. For the holdco to work, it also needs a board of accomplished, experienced professionals with extensive corporate expertise and “not political cronies”.

“It must have authority over boards it appoints to manage SOEs to monitor performance and ensure delivery,” Bekker said.

More unanswered questions

There are concerns that the Bill does not mention how SOEs will be improved, ensuring that they are well run and governed, or how they will stand on their own without frequent taxpayer-funded bailouts.

The Bill allows for minority strategic equity partners to be brought into the SOEs, with the state retaining the majority stake. However, it is not clear how the new ownership model will make private participation in SOEs any easier.

A source close to business investments and government processes described the transfer of SOEs to a holdco as “a deckchair-moving exercise”.

The holdco is widely viewed as a “Department of Public Enterprises 2.0 [and] the Bill says precious little about what this new thing is actually meant to do, any different from the DPE”, said the source.

“We are deeply sceptical that this is anything more than a deckchair-moving exercise and it will have no better go at things than the DPE. The draft Bill actually has nothing in it about ensuring SOEs are well run and sustainable. Overall, this is a rather weak and odd piece of legislation that addresses none of the underlying problems.”

Another point of confusion is the legislation that will govern the holdco. The Public Finance Management Act and the Companies Act will apply to its operations. Constantatos said some of the provisions in the Bill were in conflict with the Companies Act, mainly the shareholder of the holding company (the President) being able to appoint an administrator to take control of the holdco in instances where there is “material and persistent failure to meet objectives and targets”.

Constantatos said this is problematic as the Companies Act already has extensive business rescue and insolvency-related provisions, which are either activated by the board or by the creditors of a company.

“Provisions of the Bill, on the other hand, in allowing the shareholder to unilaterally appoint an administrator, would appear to conflict with the Companies Act provisions. No guidance is given in the Bill on how to manage this conflict, or which legislation should take precedence,” Constantatos said.

“This lack of clarity is a significant pitfall — one of many — in the Bill. We believe that the inconsistencies need to be practically examined and clarified in the drafting before there is any move to implement the Bill.” DM

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