BY Pippa Reyburn , Yana van Leeve AND Alexandra Maree
New state-owned holding company in the pipeline to improve governance at State Owned Enterprises: a step in the right direction?
In the 2023 State of the Nation Address, President Cyril Ramaphosa reiterated a recommendation made well over ten years ago, for overarching legislation to improve governance at state-owned enterprises (“SOEs”). The President said:
“To achieve any progress in addressing the urgent challenges we face, we need a capable and effective state. Our greatest weaknesses are in state-owned enterprises… Many of our SOEs are struggling with significant debt, under-investment in infrastructure, the effects of state capture and a shortage of skills. We will implement the recommendation of the Presidential SOE Council to establish a state-owned holding company as part of a centralised shareholder model that will ensure effective oversight of SOEs”.
On 24 January 2024, the Minister of Public Enterprises introduced the National State Enterprises Bill B1-2024 (the “SOE Bill”) before the National Assembly. In short, the SOE Bill provides for “the development of a strategy for national state enterprises”, establishes the State Asset Management SOC Ltd with the State as the sole shareholder, and provides for various mechanisms to operationalise the President’s vision for a holding company for national commercial state-owned enterprises.
While some view the introduction of the SOE Bill as a positive step towards the achievement of improved coordination and an important milestone towards streamlining oversight and enhancing governance of SOEs, critics of the Bill question whether it resolves the issues currently faced by SOEs, including political interference, corruption and mismanagement.
In this article, we consider the SOE Bill within the context of international best practice on the governance of SOEs, as developed by the Organisation for Economic Co-operation and Development (“OECD”).
The Recommendation on Guidelines on Corporate Governance of State-owned Enterprises (the “Guideline”) was adopted by the OECD Council on 08 July 2015. South Africa participated directly in the working group discussions on the Guideline, which provides an internationally agreed benchmark to help governments assess and improve the way ownership functions are exercised in SOEs, including through best practices on the legal and regulatory framework for SOEs, the professionalisation of the state ownership function, and corporate governance arrangements.
According to the Guideline, governments should endeavour to create simple and standardised regulatory frameworks under which SOEs operate, while allowing SOEs full operational autonomy to achieve their defined objectives. Governments should refrain from intervening in SOE management and avoid redefining SOE objectives in a non-transparent manner. The role of government in SOEs should include:
- being represented at the general shareholders’ meeting and effectively exercising voting rights;
- establishing a well-structured, merit-based and transparent board nomination process;
- setting and monitoring the implementation of board mandates and objectives, including financial targets, capital structure objectives and risk tolerance levels;
- setting and monitoring the implementation of broad mandates and objectives for SOEs;
- regular monitoring, auditing and assessment of SOE performance;
- developing a disclosure policy; and
- establishing a clear remuneration policy for SOE boards.
In the main, the Guideline proposes that although state ownership of enterprises is important for the efficient allocation of some resources to the public as well as for the optimal provision of goods and services, government ownership of SOEs should not extend to control. SOEs should still have operational autonomy to achieve their objectives, while supported by the government.
The SOE Bill establishes the State Asset Management SOC Limited, which will hold the ownership interests in thirteen key national government commercial enterprises capable of being subsidiaries, such as the Airports Company South Africa, the Central Energy Fund, Eskom Holdings, South African Airways, the National Roads Agency, the Post Office and Transnet amongst others. The SOE Bill broadly aligns with and expands on the Companies Act, 2008, to give effect to a number of the international best practices noted in the Guideline.
For example, the manner in which the performance of the State Asset Management SOC Limited and its subsidiaries will be measured, as well as the determination of sectoral and specific objectives, financial and funding targets, alterations to shareholding and any potential for private sector investment, will be guided by a national strategy to be developed by the President. The national strategy is subject to public consultation and the advice of a Presidential Advisory Committee composed of cabinet ministers, a person appointed by business, a person appointed by organised labour and sectoral experts in which the subsidiaries operate. The national strategy, which must be reviewed every five years, has the potential to create coherent, consistent and coordinated norms and standards for national commercial enterprises, which may be elevated to the status of regulation (i.e. subordinate legislation) and as such will go beyond mere policy.
Another significant innovation of the Bill is the manner in which the first board of directors of the State Asset Management SOC Limited is to be appointed. The President, in his capacity as shareholder representative, must specify the number of directors to be elected to the first board of directors. Thereafter, an independent panel, chaired by a retired judge, is fully responsible for developing and implementing an appropriate process for the selection of candidates to be appointed by the President. Regulations, the promulgation of which will be subject to public consultation, will guide the future appointment of board members. The opportunity for public participation, coupled with a limited role for the President in the selection of board members, is an opportunity to create legitimacy through an independent, transparent and participatory process.
In our view, the SOE Bill is a nod in favour of South Africa’s approach of aligning the corporate governance arrangements for SOEs with international best practices. The Bill creates a standardised framework for matters contemplated in the national strategy, opportunities for transparency and consultation, and sharing of rights between subsidiaries (for instance, in relation to land).
Clearly, the Bill intends to create a separate legal regime for national commercial enterprises, because the Public Finance Management Act, 1999 will not apply to the State Asset Management SOC Limited or its subsidiaries. However, the true test of the SOE Bill lies in the details, much of which will be the subject of regulations. We anticipate significant negotiation and planning being required in order to transfer the shareholding in complex national commercial enterprises into the State Asset Management SOC Limited, to develop new financial and risk management systems, as well as establish other critical governance structures. We are no doubt in store for fundamental change in the SOE landscape.
Executive | Public Law
Yana van Leeve
Executive | Public Law
Candidate Legal Practitioner | Public Law