SOE Bill 4.0 requires substantive overhaul

Following three previous public comment requests on this topic (see here, here and here), the Portfolio Committee on Planning, Monitoring and Evaluation has invited public comment on the most recent draft National State Enterprises Bill [B1-2024] (“Bill B1-2024” or “the Bill”), which aims to establish a State Asset Management state-owned company (SAMSOC) to own certain named state-owned entities (SOEs).  

The timeline below summarises the evolution of this Bill and the public comment process to date:  

15 September 2023: National State Enterprises Bill first published for public comment within 30 days of publication. 

9 October 2023: Futuregrowth, ASISA and others submitted written comments on the Bill to the DPE. 

23 October 2023: Futuregrowth commentary on the Bill.

24 January 2024: amended (“version 2”) of the National State Enterprises Bill (the Bill v2) introduced to the National Assembly. 

9 February 2024: version 2 of the Bill published for public comment. 

13 February 2024: Futuregrowth comment on version 2 published.

21 May 2024: Version 2 of the Bill lapsed in terms of National Assembly rule 333(2). 

29 May 2024: SA national elections. 

25 July 2024 – National State Enterprises Bill revived, identical to May 2024 version. 

14 August 2024 – National Assembly Committee on Planning, Monitoring and Evaluation held an “Orientation Workshop on the New Shareholding Model and State-Owned Companies[2]”. 

26 August 2024 – President Ramaphosa transferred executive shareholder powers[3] for Transnet, SAA and SA Express to the Minister of Transport; Eskom to the Electricity and Energy Minister; and Denel to the Defence and Military Veterans Minister. 

17 December 2024 – a request for public comment on the National State Enterprises Bill [B1-2024], with a deadline of 14 February 2025.   

We note that the Bill currently proposed is the same as the version published on 25 July 2024, and on which public comments were previously provided by us and other stakeholders. It appears as if none of our previous comments have been addressed in the latest version. It is unclear to us what process has been followed in assessing previously submitted stakeholder views and comments when proposing this Bill. 

Our perspective on this topic is from our role as fiduciary asset managers, investing our clients hard-earned pension savings in a variety of instruments that yield them an appropriate risk-adjusted return. On behalf of our clients, we have historically been significant debt funders to South Africa’s SOEs, many of which are mentioned in this Bill. Given the fiscal constraints of the SA government (the sole shareholder of the SOEs), which limits the capacity of the shareholder to provide ongoing capital to them, it is anticipated that these (and other) SOEs will be reliant on capital markets funding and investment to fund their much-needed infrastructure and development initiatives.

For these reasons, we are a significant stakeholder interested in ensuring that the SOEs are sustainable entities that deliver on their mandate and are financially, commercially and operationally sustainable.  

This perspective informs our comments, highlights of which are provided in this update note and include:  

i) comments on the legislation landscape from a broader perspective, and 

ii) general thematic comments on the Bill B1-2024.  

Legislation landscape creates complexity  

We are curious about the evolution and development of the architecture of the legislative framework for SOEs in general and would like to understand the thinking behind it. From our perspective, there is already a plethora of laws and regulations governing SOEs – from each SOE’s governing legislation (the Eskom Act, the Airports Company Act, the Land Bank Act, the DBSA Act, etc), to the Companies Act, the PFMA1, the proposed Public Procurement Bill as well as a variety of regulations and notices issued by the Minister of Finance and others.   

That many SOEs are financially and operationally challenged is undisputed.   

That some of the laws in our legislative framework need review and possible overhaul to be fit for purpose is also undisputed.   

What we are struggling to understand is how this new piece of legislation outlined in this Bill fits within the existing legislative framework, and what problem it is intended to solve. In and of itself, we fail to understand how inserting an additional law, and another statutory legal entity, to govern SOEs will achieve the outcomes articulated in the Bill without also simultaneously reviewing all other legislation applicable to SOEs to test (and possibly amend) for ongoing relevance, alignment with the shareholder’s objectives and consistency as between each other.   

For example: each SOE has its own director appointment rules and processes – the rules of which are documented in differing legislation. For SAMSOC, this Bill provides the rules. For many of the SOEs contemplated in Schedule A, they have their own founding legislation which provides for this and still other SOEs are bound by the Companies Act rules for director appointments. In our opinion, this creates unnecessary complexity and possible confusion.   

Would it not be better to standardise these and other requirements across all the SOEs by requiring SOEs to be governed by the Companies Act in full, which has a well-understood, transparent and known system for regulating corporations? If circumstances or nuances particular to SOEs need to be catered for, we ask why these cannot be done in each SOE’s Memorandum of Incorporation (MoI).   

In addition to ensuring standardisation across SOEs, this approach has the possible added benefits of: 

i) allowing for more nimble changes, which can be done by the Board to the MoI and consequently don’t have to follow a cumbersome and time-consuming legislative process;  

ii) ensures that the legislation is aligned with current corporate law realities and is not disjointed and potentially misaligned with other laws in our legislative framework; and  

iii) is clear, consistent and better aligned with commercial principles that are well understood by funders and other key stakeholders, which should make accessing capital markets for funding for these SOEs easier.  

We would like to understand whether this overall legislative framework review has been carried out and what factors and conclusions were considered in following the path chosen.

We submit that an overhaul of all the existing regulations and legislation applicable to SOEs is needed and will go a long way to ensuring their governance and legislative frameworks are fit-for-purpose and aligned with existing corporate law frameworks and commercial realities.  

Substantial amendments required  

The intended outcome according to the preamble of the Bill is to “optimise that shareholding to achieve long-term strategic interventions for developmental purposes and secure these enterprises for future generations”.   

We agree that we need efficient, functional SOEs that fulfill their mandates and are operationally and financially sustainable and not a drain on the fiscus and, by extension, taxpayers. To achieve this, we believe this Bill needs substantial amendments and updates.  

We have previously commented on the core areas needing amendment. Many of these points are worth repeating, and some additional comments are made in this note.  

1. In our view, the current draft doesn’t go far enough to limit political interference in the Board appointments at the proposed State Asset Management SOC. While there is now a nominations process to appoint the first Board of SAMSOC, the President is not obliged to follow these recommendations, nor is there a requirement for him to provide reasons for not following the recommendations, or for him to act reasonably in making the appointments. 

2. There is no requirement in this draft for SAMSOC and its subsidiaries to comply with the Public Finance Management Act (PFMA). It does not mention the new Public Procurement Bill and imposes no guard rails or limitations on the Board of SAMSOC or its subsidiaries regarding the spending of public money. Given what we have seen with misspending, malfeasance and corruption irregularities - particularly around procurement matters in many SOEs - we believe this is a missed opportunity. Further, one of the government’s purported aims in establishing SAMSOC is to “improve accountability, transparency, governance and oversight, while reducing inefficiency and the potential for corruption2”. We struggle to understand how these outcomes will be achieved without some form of limitation or controls of spending decisions in the Bill. 

3. The Bill continues to blur the lines of accountability and decision making between the Board of SAMSOC and the underlying subsidiary Boards (for example Eskom or Transnet, which are intended to be transferred as wholly owned subsidiaries to SAMSOC at some stage). The Bill, in its current form, requires the Board of SAMSOC to make decisions (like capex and provisioning) that we believe should be the domain of the subsidiary company board. The proposals in the Bill as currently drafted, in our opinion, are misaligned with corporate governance best practice, including King IV and need to be redrafted to consider these key principles and standards. 

4. The Bill allows for the transfer of land and land rights between SOEs by agreement. This provision is widely drafted, and we believe may be open to legal challenge, and abuse. It appears that the transfers between SOEs can happen for no value, and all that is needed is agreement between them. This may ignore any rights or security that existing creditors or funders may have over those assets. 

5. There is a requirement for SAMSOC and its subsidiaries to report annual financial statements (AFS) within six months of the end of each financial year end. While this is a laudable target and in line with accepted norms in corporate reporting, it ignores the lived reality where many SOEs (such as Denel, SA Post Office, SAA and Eskom) have not had a good track record in timeous AFS reporting. Imposing outcomes by legislation, without simultaneously implementing mechanisms and processes to achieve these outcomes, is an exercise in futility and unrealistic expectations. 

6. Conflicting objectives between the stated aims of the Bill may arise. For example, the directors of SAMSOC are required to consider developmental objectives, business sustainability and the public interest in their conduct. These aims may conflict with each other and the Bill provides no clarity on the overriding objective or how conflicts between objectives can be managed.

   As an example, it may be in the public interest and in line with the country’s developmental objectives for Eskom to provide electricity at low (unprofitable) tariffs. This objective, however, comes at the cost of another of Eskom’s objectives – that of its financial sustainability. The Bill needs to include guidance on how directors need to manage this conflict. 

7. While the Bill now lists the 13 SOEs “capable of transfer” to SAMSOC in Schedule A, it seems from the explanatory notes that the only criterion for inclusion in Schedule A is to be incorporated as a company. No timelines or steps are provided to fulfil the transfer or in what order of priority the 13 named SOEs should be transferred. The 13 named SOES are some of our more financially and operationally challenged entities and there is no guidance or explanation provided on what steps (if any) will be taken to return these SOEs to a more sustainable path before they may be considered for transferring to SAMSOC.

   We believe this is a missed opportunity. Further, the explanatory notes to the Bill outline an expectation for founding legislation to be amended for those entities that still need to be corporatised, as well as an expectation that other “commercial state enterprises” (which are not defined) will “require legislative enablement so that they may be unbundled or restructured”. These are stated as general expectations, and it will be helpful to understand the process and timelines for fulfilling these expectations. 

8. Schedule B to the Bill outlines transitional arrangements to be followed in appointing the directors to the first Board of SAMSOC and imposes obligations on the Minister of Public Enterprises – a position that no longer exists in our cabinet. The Bill needs to be updated to be relevant to our current reality. 

9. There is no guidance provided on how the costs of establishing and running SAMSOC (including paying for the remuneration of another SOE Board, paying for the costs of due diligences and other activities of SAMSOC) will be funded. In the current reality where almost all the SOEs listed in Schedule A are not in a financial position to pay dividends to SAMSOC, it is not clear to us how SAMSOC itself, as a holding company of a number of subsidiaries, will generate revenue and cashflow to meet its overhead costs. In the current constrained fiscal environment, we would like to understand how SAMSOC is to be funded so that it too, does not become another SOE that is a “massive drain on the fiscus”3.  

Conclusion  

We believe that a substantive overhaul of this Bill, and the overall legislative framework governing SOEs, is needed to address these concerns, and to align the proposed legislation with the intended outcomes.   

1 Public Finance Management Act: https://www.treasury.gov.za/legislation/pfma/act.pdf 

2 Presentation (p4), presented at a Planning, Monitoring and Evaluation Committee meeting on 14 August 2024 https://pmg.org.za/committee-meeting/39258/ 

3 Bill B1-2024, p22, Section:” Memorandum on the Objects of the National State Enterprises Bill”