Presidential Power Flagged as a threat to SOE Reform

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Image via Twitter/ Presidency | South Africa



Investment experts have criticized the draft National State Enterprises Bill, which proposes to create a new company to manage state-owned enterprises (SOEs) and has raised concerns about political interference in SOEs. The bill is aimed at strengthening the governance of SOEs and stopping their decline by reforming their ownership model. The key proposal is to shift some SOEs under a single state asset management holding company (holdco) instead of retaining them under the Department of Public Enterprises (DPE), which is likely to be closed after next year's elections.


The Bill does not mention which SOEs are earmarked to be moved. It is expected that the Industrial Development Corporation, Sentech, Safcol, and the Development Bank of Southern Africa will be first in line to be transferred. Basket-case SOEs such as Eskom, Transnet, Denel, and the SABC are only expected to be added later, but will move to their line ministries as an interim measure. Public Enterprises Minister Pravin Gordhan has defended the Bill, saying it follows international best practice of separating the state’s ownership of SOEs from their operational and regulatory functions.


Futuregrowth Asset Management, one of South Africa’s biggest institutional investors in the debt of SOEs, has warned that the President’s powers in the bill are “potentially dangerous.” They believe that this concentrates an ill-considered amount of authority and influence in one individual, and they 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.


Rona Bekker, a senior policy adviser at the National Employers’ Association of SA, which represents more than 8,000 businesses (some of whose fortunes depend on SOEs), agreed with Constantatos, saying the Bill requires more guidelines on the President’s role in the holdco. For the holdco to work, it also needs a board of accomplished, experienced professionals with extensive corporate expertise and “not political cronies”. For the holdco to work, it also needs authority over boards it appoints to manage SOEs to monitor performance and ensure delivery.


There are concerns that the Bill does not mention how SOEs will be improved, ensuring that they are well run and governed, or how they will stand on their own without frequent taxpayer-funded bailouts. A source close to business investments and government processes described the transfer of SOEs to a holdco as “a deckchair-moving exercise”. The draft Bill actually has nothing in it about ensuring SOEs are well run and sustainable.


Another point of confusion is the legislation that will govern the holdco. The Public Finance Management Act and the Companies Act will apply to its operations. Constantatos said some provisions in the Bill were in conflict with the Companies Act, mainly the shareholder of the holding company (the President) being able to appoint an administrator to take control of the holdco in instances where there is “material and persistent failure to meet objectives and targets”.

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