Take two: Not quite there yet - Our thoughts on the 2nd draft of the proposed SOE bill
- 13 February 2024
- 14 min read
The updated draft of the National State Enterprises Bill published on 9 January 2024 (“version 2”) followed an intense period of public comment where Futuregrowth and others raised material concerns. These were documented in our formal submission to the Department of Public Enterprises (DPE) sent in October 2023, and also reported on here, here, here and here.
On the face of it, some welcome amendments have been made in version 2. These go some way to address certain matters we flagged as problematic in the original draft Bill. However, in our view, some of these amendments do not go far enough to address problematic clauses in the first draft, and other new amendments have been introduced, which raise additional questions and require clarity.
The paragraphs below highlight some of the key amendments to version 2 together with our views on these. We have not commented on all the changes introduced in version 2, and we re-iterate certain submitted concerns that have not been addressed in the revised version.
Development of a National Strategy on commercial SOEs
The new draft provides for the development of a National Strategy (Chapter 2) for “national commercial state-owned enterprises” by the President, with consultation from a new body, called the Presidential Advisory Committee (PAC). While an overarching strategy on SOEs is welcomed, there is no clarity on the timeline for the development of the strategy, nor the expected timeline for execution of the strategy. 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.
Further complicating matters in our view, is the requirement in Section 2 to promulgate this National Strategy as legislation. The reasons for this requirement are not clear to us. We feel that it risks making the execution and reviewing of the National Strategy (as required under Chapter 2, section 5) cumbersome, time-consuming and subject to complex parliamentary and other legislative processes.
The establishment of the PAC may be a response to the previous concerns raised around the lack of oversight or limits to the President’s powers. In the updated version, the proposed oversight of the President’s powers is welcomed; however, we are not clear on how effective this will be, given that there seems to be no obligation on the President to act on the advice of the PAC. The requirement in version 2 is merely to establish the PAC to advise on the National Strategy and to consult with the holding company and ministers. There is no requirement of the President to act or execute on plans that are in line with the advice provided by the PAC.
Board appointments
Our previous concern around the Board appointment process was related to the seemingly wide powers given to the President to make Board appointments to the State Asset Management Company (SAMCo or the holding company) Board. We viewed this as problematic given the increased risk of political interference in this process, which has been acknowledged as one of the causes of the dysfunction in many of our SOEs.
The new draft now outlines a transitional process for the appointment of the first SAMCo Board in Schedule B. This schedule requires the shareholder (as represented by the President) to compile an 8-person panel to call for nominations, to interview possible candidates and to recommend them for appointment. However, there is no requirement for the President to act on the panel’s recommendations, and, if the President “decides not to elect any person recommended by the panel”, there is a further requirement for the panel to recommend an alternative person.
The panel appears to be widely constituted and includes the requirement for:
a retired judge;
two members of the national executive appointed by the President;
a person appointed by business as represented by NEDLAC[1]; and
three people appointed by the President who “have been or are chief executive officers of public companies”.
Following the transitional arrangements outlined in Schedule B for the first SAMCo Board, appointments after this requires the Board of SAMCo itself to make recommendations to the President for any new Board appointments (as opposed to the President himself making these appointments in the previous version), and some very basic guidelines are included on recommending people for appointment to the Board of SAMCo (these are generic requirements for people of “skill, knowledge, experience and integrity”).
While better than the previous draft, under this new version of the Bill, the 8-person panel (for the first SAMCo Board) and the Board of SAMCo itself thereafter, merely recommend the appointment of persons as directors to the President, and there is no requirement for the President to implement the recommendations, nor to provide a reason for not implementing the recommendations, nor an obligation to act reasonably in making these decisions.
Aside from the generic requirements for “skill, knowledge, experience and integrity”, no clarity is provided on the processes required to fulfil these requirements.
Given these factors, we question whether the amendment will have the desired effect of limiting political interference in the Board appointment process. Our initial concern as expressed in our first note, therefore remains.
Removal of all references to the PFMA[2]
The new draft removes all previous references to the Public Finance Management Act, 1999 (PFMA), leading us to conclude that the PFMA will not apply to SAMCo or its subsidiaries.
While we understand the frustrations with the PFMA requirements experienced by various SOEs, no replacement provisions appear in the new draft to ensure the effective oversight and management of public money by SOEs that fall under the draft legislation, and we need some clarity on this. This is especially important given that other sections in version 2 allow each SOE to undertake its own procurement and spending with seemingly no guard-rails or controls to enforce the appropriate processes for spending public money.
There is also no reference to the Public Procurement Bill [3] at all in version 2, leading us to question whether any regulations or rules around public procurement and spending will be applicable to SAMCo and its subsidiaries. Our fear is that without a substitute for the PFMA, or an obligation on the SOEs to comply with the proposed Public Procurement Bill, the risk of inappropriate spending by SOEs remains elevated.
Transfer of land rights
A new chapter in version 2, Chapter 5, allows for transfers of land and land rights between subsidiaries (SubCos). This chapter is silent on the criteria that each subsidiary should consider in agreeing these transfers, or who the ultimate decision maker would be - or, if there is a dispute, how this would be resolved. The clause merely states that “a subsidiary may enter into an agreement with another subsidiary to transfer specified property to that subsidiary”. We believe the current drafting is very broad, and may be subject to abuse. It may also be subject to legal challenge from existing funders and creditors of the transferring SubCo.
In addition, no mention is made of existing funding agreements at the various SubCos which may restrict or limit the transfer of assets. This is something that we need clarity on, as, on the face of it, the wording is so vague that it may risk triggering loan agreements that prohibit the transfer of assets at many SubCos. It may also negate the rights that certain parties may have over the assets of certain SubCos.
In addition, the wording is silent on whether this transfer of “specified property” between subsidiaries happens for value. It does not mention – at all – that the receiving subsidiary should pay market value for the land transferred. As such, in our view, it cannot be correct that, for example, Transnet can agree to transfer land to SANRAL for no value. We believe the current draft needs amending to clarify this point.
Further, the wording in version 2 seems to compel the Registrar of Deeds to effect the transfer with seemingly no recognition given to any rights that may exist over the property/land in question, nor whether the proposed transfer would accord with the Registrar of Deeds’ legal and other obligations. We believe this may be subject to legal challenge and be unenforceable.
Schedule A is no longer blank
The list of SOEs to be considered for transfer has been published (which is positive). However, the schedule describes the entities as being “capable of being transferred” but the criteria and basis for inclusion, and the anticipated timeframe for transfer to the SAMCo, are not clear.
Schedule C and amendment of other founding legislation
A new Schedule C in version 2 allows for the amendment of certain laws (including the Companies Act, the Airports Company Act, The South African National Roads Agency Limited and National Roads Act, the South African Post Office SOC Ltd Act and others) and the repeal of the South African Airways Act. The impact of this is unclear and the process (of amending and/or repealing other seemingly unrelated pieces of legislation within this particular Bill) appears unusual to us. We understand that there is usually a public comment process for legislative changes, and it is not clear to us whether this will apply to the extensive legislative changes proposed in the new Schedule C of version 2 and which, together with the other new amendments to version 2 including the “Transfer of Land” chapter, did not appear at all in version 1 and hence did not form part of the initial public comment process on version 1 of the Bill. This needs further clarification.
Director responsibilities and the blurring of accountability lines
There is no clarity on the issue we previously raised regarding the blurring of accountability between the SAMCo Board and the various SubCo Boards. The SAMCo Board is still responsible for taking actions and making decisions for the SubCos (e.g. implementing a procurement and provisioning framework, developing a system for evaluating capex projects for subsidiaries, etc.). We consider these activities to be in the domain of the SubCo Boards, and we raised this issue as possibly infringing on SubCo directors’ fiduciary responsibility to act in the best interests of the stakeholders of the SubCo.
Requirement for “uniform governance”
Version 2 corrects the previously problematic “uniform governance” requirement to “proper governance”, but no guidelines are given for what is considered “proper” - and there is still no reference to the King Codes on Corporate Governance or any other corporate governance requirements or standards.
Transfer of rights from the President to a member of Cabinet
The new draft still allows the President to transfer his/her rights/obligations to a member of Cabinet – and there are still no guidelines or parameters provided for this process.
Our concluding thoughts
While we welcome the opportunity to comment on the draft Bill, and while there has been an attempt to address some of the shortcomings in the first draft of the Bill, our view is that version 2 does not go far enough to address many of the more concerning matters raised by us and others.
The amended version of the Bill has as its stated intention, expressed in the Preamble, “to … achieve long-term strategic interventions for developmental purposes and secure these enterprises for future generations”.
Many of our SOEs are a substantial drain on the fiscus. Their reform is paramount for South Africa’s economic recovery. We doubt that version 2 of the National State Enterprises Bill achieves this and argue that further amendments are needed to ensure that the intended outcomes are achieved.
[1] National Economic Development and Labour Council
[2] Public Finance Management Act, No 1 of 1999
