The Proposed National State Enterprises Bill: Risky Business?
- 23 October 2023
- 20 min read
Our view on this Bill could be summarised as follows: ineffective, overdue, vague and contradictory – and possibly with risky consequences.
The backdrop
State-Owned Entity (SOE) reform has been a stated aim of successive administrations in South Africa since at least 2009. In the time since then (14 years!), a lot has been said and many plans have been drawn up, with very little implementation of real reform. The result has been failure at every level of most of our SOEs.
We have previously written extensively about this:
1. Importance of Corporate Governance and Insights into SOEs [6 Sept 2017]
2. Futuregrowth’s SOE Governance Review – 18 Months On [14 March 2018]
3. Transnet Board: Our view on the latest changes [7 Sept 2023]
One of the reforms spoken about since 2009 - when it first appeared in a document [1] published by the Presidential Review Committee on State-Owned Entities and submitted to the former president Mr J Zuma - is the idea that there needs to be an overarching law governing all SOEs.
In 2020, President Ramaphosa convened a high-profile Presidential State-Owned Entities Council, which had as one of its aims the “introduction of an overarching act governing [SOEs] and the determination of an appropriate shareholder ownership model[2]."
The National State Enterprises Bill
On 15 September 2023, we finally saw some forward momentum on this crucial issue, with the publication of Government Gazette no. 49312, which introduced the National State Enterprises Bill (“the Bill”).
As part of the usual legislative process, the Government Gazette has invited public comment on the Bill. Many of our SOEs are large capital market issuers (Eskom, Transnet, DBSA, IDC, SANRAL and others). As such, and given our historic interest in this subject, we had plenty to contribute, and we thought we’d share some of the key themes of our comments with you.
Why should we all care?
SOEs play a pivotal role our in our economy and society. Many are funded by the institutional pension fund market (your pension fund and mine), many have needed bailouts (funded by the taxpayers of South Africa), and many are at the nexus of both causing and solving our economic problems. Reforming our SOEs is imperative, so that we can address our current economic challenges and indeed create “a better life for all”.
What will the Bill do?
The preamble to the Bill sets out that it seeks “to establish the State Asset Management SOC Ltd:
to provide for the State as the sole shareholder of a holding company;
to consolidate the State’s shareholdings in state enterprises;
to provide for the powers of the shareholder on behalf of the State;
to provide for the phased succession of state enterprises to the holding company;
to provide for the holding company’s powers as shareholder of subsidiaries;
to provide for the restructuring and management of subsidiaries for developmental purposes;
to provide for appropriate and effective performance monitoring mechanisms over subsidiaries;
to provide for the corporatisation of those state enterprises that are not registered as companies; and
and to provide for matters connected therewith[3] .”
What are the potential consequences of this?
We grouped our general comments under five themes, with examples and/or links to sections where each theme arises.
1. Limitless powers granted to the President
As an overarching observation, the Bill seeks to confer limitless power to the President in multiple sections of the Bill including, inter alia:
the appointment of board members of the State Asset Management Company (“the holding company”);
directing the activities of the holding company and subsidiary companies; and
managing the transfer of entities to the holding company, with no guidelines or permutations on how this power is to be exercised and in whose interests.
Whilst the lengthy efforts of putting the Bill together in its current form are recognised, we believe this concentration of power in the hands of one individual, with no guidelines, oversight or limitations is ineffective and potentially dangerous.
Examples of limitless power granted
One of many such examples of this issue can be found in Section 3(3) of the Bill, which appoints the President as the sole representative of the holding company. We believe that this concentrates an ill-considered amount authority and influence in one individual. 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.
a) Oversight: In the Bill, there is no mention of any oversight to these powers, nor any provision outlining what the limits to that authority may be. There is no requirement or standard imposed on the individual to act in a particular way.
b) Board: Similarly, no criteria are outlined for Board appointments in the Bill. Usually, public company boards are appointed after a vote by a wide body of shareholders. However, the Bill assigns sole power to the President to appoint Board members. It is therefore critical to specify the processes and criteria to be used in making these appointments. We believe consideration needs to be given to the mix of skills required; the qualifications and experience of the various candidates and their other Board appointments; any potential conflicts of interest; as well as background, criminal and other integrity checks. Given the pivotal role of the Board, it is untenable that the Bill be silent on all of these points - and leaves too much uncertainty and opaqueness on the process to appoint directors.
c) Transfer of authority: The Bill allows the President to transfer these powers to another member of Cabinet, and, similarly, there are no requirements for oversight or any specified standards to be met in transferring this authority.
Our conclusion on this point
The Bill envisages creating a conglomerate of SOEs that will be held as subsidiary companies of the holding company. We believe that oversight of a conglomerate holding company requires distinctive skills and experience, yet there is no provision for this in the Bill. Control is given to the President, regardless of the skills or experience of the incumbent, or what the holding company may need to operate efficiently, effectively and sustainably.
2. Lack of clarity on the interplay between the Bill, the Companies Act, the PFMA and existing SOEs’ founding legislation
There is a lack of clarity on the interplay between the Bill, the Companies Act, the Public Finance Management Act (PFMA) and the existing founding legislation that may be applicable to certain of the state-owned entities. The Bill takes a staggered approach as to which piece of legislation might be applicable at a given stage, but gives no consideration to any conflicts that may arise between these various pieces of legislation, or how these conflicts are to be managed.
Examples of the lack of clarity
The Bill contemplates that both the PFMA and Companies Act apply to the operations of the holding company in section 3(5). There is no allowance for instances where the provisions of the PFMA and the Companies Act may differ or contradict each other, and no guidance given as to which legislation takes precedence.
a) Existing founding legislation applicable to certain SOEs: Another observation is that no consideration is given to the founding legislation that exists for many of the state-owned entities, whether it aligns with or contradicts the various sections in the Bill, or how it may be phased out. In fact, the Bill makes no reference at all to the founding legislation of particular SOEs, such as Eskom, DBSA, Land Bank and SANRAL, which all have different founding Acts. Whether the founding legislation allows for the transfer to the holding company needs to be examined, along with the process to be followed from a legislative perspective, and matters that may be in conflict with the founding legislation.
b) Confusion over the applicability of the Companies Act: The Companies Act, which, according to section 2(b) of the Bill, purportedly governs the Bill. However, there is a lack of clarity on the applicability of the Companies Act within the sections of the Bill. The Bill contains multiple overall requirements to comply with the Companies Act, but has sections which seem to carve out specific requirements that allow for a different or contradictory outcome to that contemplated in the Companies Act.
In one such example of this inconsistency, section 6(2)(f) of the Bill allows the shareholder of the holding company to “appoint an administrator, on such terms as the shareholder may determine, to take control of the management of the holding company”. This would apply in the instances where there is a “material and persistent failure to meet objectives and targets”.
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. The 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.
Our conclusion on this point
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.
3. Lack of understanding of the fiduciary responsibilities of directors
The Bill is silent on the fiduciary responsibility of directors - in fact, the phrase “fiduciary responsibility” does not appear in the Bill.
In business generally, a huge amount of faith is placed on director responsibilities and the principles of good governance, where strict adherence applies to the relevant Companies Act provisions pertaining to director responsibilities, as well as the applicable Codes.
The current draft of the Bill does little to incite such faith, as there appears to be a lack of understanding of the fiduciary responsibility that directors have in terms of the Companies Act. Certain sections of the Bill seem to make provision for direct actions which either ignore or conflict with, or seek to usurp, the fiduciary responsibilities of directors.
Examples of the lack of understanding of directors’ responsibilities
a) Usurpment: One section where this is evident is section 7(2)(a)-(f), which seems to allow the holding company board to usurp the powers and responsibilities of the subsidiary company boards and management teams. These sections allow the holding company board to, inter alia, prepare and submit corporate and borrowing plans, and evaluate the capex of the subsidiary company. These are all powers and responsibilities that already reside with the subsidiary company boards. What about the fiduciary responsibility that subsidiary board members have to their stakeholders, and why would the holding company board be better qualified to make these decisions than the subsidiary company boards? Even if it was better qualified, what would be the point then of having a subsidiary company board and management team if all decisions are to be made by the holding company?
b) Blurred lines of accountability: There are many sections in the Bill that blur the lines of accountability and responsibility between the subsidiary company board and the holding company board. We believe these sections possibly contravene the fiduciary responsibility of directors and possibly contravene the Companies Act. A clear example of this can be found in section 7 which governs the powers, functions and duties of the holding company board. Section 7(4) says the holding company board “must, in accordance with its corporate plan, and after consultation with each of its subsidiaries, issue annual instructions to each subsidiary”. There is no limitation, rationale or context given to such “instructions”.
Our conclusion on this point
We query the purpose of this section (and others like it) and ask where the line of accountability of the subsidiary company lies? Unless the draft is amended to provide a clear means of delineating responsibilities, we fear that this will result in a reluctance by suitably qualified and experienced individuals to serve on these boards. It is undeniable that the success of the proposed structure hinges heavily on the quality of the board/s, for which no guidance or guard-rails are provided. We believe that this is unacceptable, and breaches the very basis of corporate governance, which requires directors to act in the best interests of all stakeholders.
4. Multiple sections in the Bill are vague and allow for a wide scope of interpretation
The Bill contains multiple sections which are vague, and which allow for a wide scope of interpretation which we believe is inefficient, ineffective, risky and open to manipulation by bad faith actors.
Example of the wide scope of interpretation
Sections that are vague in our opinion include 7(5) and 7(6) which require a “governance and reporting framework” and “financial and operational performance monitoring framework” to be established by the holding company board for the subsidiaries. In addition to this being a further example of a blurred line of accountability between the holding company and subsidiary company boards, no reference is provided to any required standard of performance, or any recognition that there may be a need for nuanced differentiation for different subsidiary companies. There is also no indication of what ‘reporting” is needed, the metrics to be monitored, or the frequency of deadlines attached to such reporting.
5. Lack of clarity on how the intended outcomes are to be achieved
It is not clear to us how the intended outcomes – as stated in the preamble to the Bill and in public utterances by various government representatives – are to be achieved with this version of the Bill.
Examples of the lack of clarity on achievement of the outcomes
a) Political interference: One of the publicly stated aims of the Bill by government officials has been to “minimise the scope for political interference”. It is not clear to us how concentrating such significant power in the hands of the President – himself a political actor – without any checks, balances, limitations or oversight can achieve this aim.
b) Succession to the holding company: Another of the stated outcomes is for the “phased succession of state enterprises to the holding company”. There is no detail given as to the order in which state enterprises will be transferred, against what criteria, or over what timeframe this will happen. Given the lack of detail, we are unclear on how this Bill will achieve this outcome.
Our concluding thoughts
Our comments to the Department of Public Enterprises ran to some 18 pages and we have only provided a few examples here of some of the inconsistencies, problematic sections and clumsy drafting in this Bill.
We all agree that significant reform is needed in order to address the chronic and sustained dysfunction and inefficiency we experience every day in many of our SOEs. We also agree that one of the ways to achieve this is through the rationalisation and standardisation of the management of our SOEs. We cannot fail to utilise the opportunity presented by this Bill to solve the problem sustainably, by focusing clearly on the required outcomes, and being candid about the mechanisms and interventions needed to achieve these. In our view, the current version of the Bill does not get us to where we need to be.
We believe the Bill needs significant clarification and wholesale amendment in order to meet the purported aims and to be truly effective in enacting the long overdue and necessary reform at our SOEs. Otherwise, the performance of our SOEs will continue to be a notable risk to the South African economy.
For further content related to this subject, please see:
There is already a blueprint for funding SOEs, says Futuregrowth
Olga Constantatos, Head of Credit at Futuregrowth, presented at a CGIS webinar
Nuclear bomb triggered: Futuregrowth ends lending to SOEs in wake of Finmin attacks
Links to reference articles used to write this piece
