The National State Enterprises Bill: Stuck on repeat?

Now in its fourth iteration, the draft National State Enterprises Bill, which aims to establish a State Asset Management state-owned company (SAMSOC) to own certain state-owned entities (SOEs), appears to be stuck on repeat. Futuregrowth Asset Management has commented on the Bill's three prior versions (see here, here, and here), but it appears as if many of our previous comments have not been addressed in the latest version.

We are therefore unsure of the procedure used to evaluate the stakeholder opinions and comments that were submitted when this Bill was proposed. It is clear that a new approach is necessary for managing our state-owned enterprises. This Bill proposes the creation of a national holding company to oversee some of the SOEs, with the goal of aligning their developmental objectives and ensuring the fulfillment of their mandates while promoting their commercial sustainability.

While the aim of revisiting the management and governance of SOEs is commendable, both we and others have raised concerns about whether the Bill’s intentions and its current draft will result in the type of fundamentally different SOE governance model that we and other stakeholders are hoping for. 

Does the Bill risk repeating past mistakes?  

In our opinion, the Bill requires revision in several key areas, as its current form still carries the risk of repeating past mistakes. One notable concern is the absence of safeguards around public spending: the Bill does not mention the obligation for SOEs under the holding company to comply with the Public Procurement Act and the Public Finance Management Act.

In fact, the Bill lacks any provisions regulating the large future budgets and expenditures of both the holding company and its subsidiaries. We view this as a significant oversight that must be corrected, especially considering the lessons learned from state capture and the Zondo Commission of Inquiry. 

Another potential issue with the Bill is that it muddles the accountability of the boards of directors of the holding company and its subsidiary companies. For example, as it stands, the Bill requires the directors of the holding company to assess and evaluate all capital expenditure programmes for the subsidiary.

This overlaps with the accountability of boards like that of Transnet, whose responsibility is to evaluate capital expenditures. The holding company's intention to take on this role creates significant conflicts of interest, as it undermines the fiduciary duties of the directors at the subsidiary level. 

Shift in ownership won’t resolve chronic problems 

Governments globally use different approaches to manage state-owned enterprises. For example, China has a highly centralised model, while other countries favour less centralisation and more market-oriented structures. Locally, there has been little clarity regarding which model the government intends to adopt.  The key takeaway for South Africa is that we need to address the specific sustainability challenges of each SOE individually. For instance, many of the thirteen SOEs set to be transferred (including Transnet, Eskom, Denel, the SA Post Office and SAA) are currently in a financially or operationally unsustainable position.

The first step in reassessing our SOE model is to evaluate the sustainability of each entity to ensure that, when they operate independently, they fulfil their mandates, remain financially and operationally stable, and do not drain the fiscus. Executing on the decisions needed to ensure the sustainability of these SOEs should be the initial priority, and the good news is that this process is already partly under way. Simply transferring their ownership to the holding company will not fix the ongoing issues at each SOE. 

Another layer of bureaucracy and costs?  

The Bill does not explain how the costs of setting up and running SAMSOC (including paying for another SOE Board, audit costs, due diligence, and other activities) will be covered. Given that most of the SOEs listed in the Bill are not financially able to pay dividends to SAMSOC, it is unclear how SAMSOC, as the holding company for several subsidiaries, will generate the revenue and cash flow needed to cover its operating costs. 

Despite its noble intentions, the Bill risks creating additional bureaucracy and costs in its current form. As it stands, it is not the most effective solution to the fundamental issues facing SOEs. To tackle these problems and align the proposed legislation with the desired outcomes, we believe a substantial revision of both the Bill and the overall legislative framework for SOEs is necessary. 

There are already many laws governing SOEs, and while some may need updating, the need for new legislation is unclear. We don't see how this Bill fits into the current framework or what problem it addresses. Adding another law and statutory body doesn’t resolve the issue without reviewing and aligning other relevant laws. Among others, SOEs each have different rules for appointing directors, with some following SAMSOC’s Bill, others their own founding legislation, and still others the Companies Act. This creates unnecessary complexity. 

Wouldn’t it be better to standardise these rules by fully applying the Companies Act and addressing SOE-specific needs in each SOE's Memorandum of Incorporation (MOI)? This approach would: Allow quicker changes through the MOI without lengthy legislation; Align the laws with current corporate principles; and Provide clarity, making it easier for SOEs to access capital markets. We’d like to know if a review of the legislative framework has been done and what factors were considered in this approach.  

Our fiduciary responsibility to ensure SOE sustainability 

Our perspective on this Bill is shaped by 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. Historically, on behalf of our clients, we have 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 (which is the sole shareholder of the SOEs), there is limited capacity for continued government capital support.  As a result, these (and other) SOEs will be reliant on capital market funding and investment to finance their much-needed infrastructure and development initiatives. Therefore, we are a significant stakeholder, interested in ensuring that the SOEs are sustainable entities that deliver on their mandates while remaining financially, commercially and operationally sustainable.  

Read the full summary of Futuregrowth's comments on the latest version of the draft National State Enterprises Bill here.