The National State Enterprises Bill – third time (un)lucky?

Next month will mark a year since we first published commentary on the proposed new legislation titled The National State Enterprises Bill (or “the Bill”) that aims to incorporate many of our State-Owned Enterprises (SOEs) under a single holding company, the State Asset Management SOC (or SAMSOC for short).

The previous process to approve the Bill in the National Assembly lapsed with the election in May 2024 and formation of the new government. In late July 2024, the Bill was revived in the National Assembly and proceedings to take the Bill through parliamentary processes and into legislation were resumed.

Timeline Summary

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

• 9 October 2023: Futuregrowth, ASISA, BUSA and other market participants submitted written (and detailed) comments on the Bill to the DPE.

• 23 October 2023: Futuregrowth commentary on the Bill, found here.

• 24 January 2024: amended (“version 2”) of the National State Enterprises Bill (the Bill) 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, found here.

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

• 29 May 2024: SA National elections

• 25 July 2024 – National State Enterprises Bill revived[1], exactly the same as version 2.

• 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 transfers 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.

The Bill continues to miss the mark

The Bill introduced in July 2024 is exactly the same as  version 2 proposed earlier this year and on which we commented[4] at the time.

Overall, we continue to believe that the proposed legislation, in its current form, falls short in terms of a workable solution and also presents a missed opportunity.

The intended outcome of the Bill is to create 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[5]. Many of these points are worth repeating, and some additional updates are needed, given the passage of time and events since the Bill was first presented:

1. In our view, the current draft doesn’t go far enough to limit political interference in the Board appointments at SAMSOC. 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 at all, 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 of our 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 corruption[6]”. 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. Who knows better what capex is needed – the Board of Transnet, or the Board of SAMSOC that is one step removed from Transnet?

4. The Bill allows for the transfer of land and land rights between SOEs by agreement. This provision is very widely drafted, and we believe may be open to legal challenge, and also 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 of our 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 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 very low (unprofitable) tariffs. This objective, however, comes at the cost of another of Eskom’s objectives – that of its financial sustainability. How is this to be managed?

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 explanatory notes to the Bill also 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 it 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.

Reform at our SOEs has been needed for decades and has been spoken about for as long. One of the key elements of this reform, since as far back as 2009, has been to implement an overarching law that governs all our SOEs. Unfortunately, this Bill in its current form, doesn’t get us to where we need to be.

Why is it important that we get this Bill right?

If we look at the graph in Figure 1 below, around R400 billion has been spent bailing out SOEs since 2008/09. This money comes from taxpayers one way or another and means that money is diverted away from other government priorities.

Figure 1: Recapitalisation of state-owned companies

Source: National Treasury 2024 Budget Review, p 85

Per the commentary on page 83 of the 2024 Budget Review[7] produced by National Treasury: “Eskom has dominated these bailouts. From 2008/09 to 2022/23, Eskom received R2241.6 billion in fiscal support. In some cases, rapid injections through the budget had little to no impact on the service offering. For example, South African Airways (SAA) received a total of R48.2 billion over six years and still went into business rescue.”

Think of how many hospitals, roads or schools this money could have built instead?

And while there are significant reform steps under way at many of our more challenged SOEs, the entities to which this Bill will apply (as listed in Schedule A of the Bill) are not all yet adequately self-sustaining and able to “improve accountability, transparency, governance and oversight, while reducing inefficiency and the potential for corruption[8]”.

Further complicating matters is the recent dissolution of the Department of Public Enterprises (DPE), and the transfer in August 2024 of executive shareholder powers in those SOEs that fell within DPE’s remit, to their respective line Ministries (e.g. Transnet to the Department of Transport, Denel to The Ministry of Defence and Military Veterans etc). Doing this before the much-needed (and difficult) business of ensuring that each underlying SOE is financially and operationally sustainable is putting the cart before the horse. How passing this Bill - on its own and in its current form - aims to “provide for appropriate and effective monitoring and reporting mechanisms over subsidiaries” and “secure these enterprises for future generations[9]” is not clear to us.

An opportunity to be “third time lucky” – or not?

We have been through two previous rounds with this Bill and are now faced with a third opportunity to get this right. Unfortunately, as outlined here, we believe the current draft of the Bill misses the mark in some key areas.

We need to do more than pass flawed Bills so that we can tick a box of supposed SOE reform. Financial accountability, oversight, consequence management, internal controls, policy certainty and clarity all need to be bedded down before shifting ownership and ministries.

While this work has been started and is ongoing, we suggest a serious review of the current Bill, with meaningful consideration of the points made by stakeholders (in the public comment process and subsequently) to properly address the problems highlighted. This will go a long way to ensuring that the proposed legislation is fit-for-purpose and achieves the intended outcomes.

Anything else is window-dressing.

[1] https://pmg.org.za/bill/1208/  

[2] https://pmg.org.za/committee-meeting/39258/  

[3] Cyril Ramaphosa moves public enterprises portfolio to line departments

[4] Our thoughts on the 2nd draft of the proposed SOE bill

[5] The Proposed National State Enterprises Bill: Risky Business? and Our thoughts on the 2nd draft of the proposed SOE bill

[6] Presentation (pg4), presented at a Planning Monitoring and Evaluation Committee meeting on 14 August

[7] https://www.treasury.gov.za/documents/National%20Budget/2024/  

[8] Presentation (pg4), presented at a Planning Monitoring and Evaluation Committee meeting on 14 August

[9] Preamble to the National State Enterprises Bill