FABRICE GATWABUYEGE AND and THANDO NGOZO: Governance and independence to play a role in state-owned holding company plan

Establishing a state-owned holding company (SOHC) for state-owned entities (SOEs) in SA is a significant step in restructuring and managing the country’s public sector. While this move has advantages and potential benefits, several challenges and drawbacks must be considered.

The department of public enterprises has published the draft National State Enterprises Bill 2023 for public comment. It outlines the goal of establishing a state-owned holding company, the State Asset Management SOC Ltd, as a holding company owned by the government, after the regulations of the Public Finance Management Act.

The holding company will take over the shareholding of state enterprises and oversee their operations in compliance with the Public Finance Management Act, Companies Act and relevant provisions. It is aimed to ensure consistent governance across the holding company and its subsidiaries. The restructuring and management of subsidiaries will be carried out for developmental purposes. Effective performance monitoring mechanisms will be implemented for subsidiaries, and state enterprises not registered as companies will be transformed into corporations. The overall objective is to promote the long-term commercial sustainability of the holding company and its subsidiaries. 

The government has flagged its intention to close down the department of public enterprises when a new administration takes office after the 2024 general election. The State Asset Management SOC Ltd is intended to oversee the management of the country’s SOEs. The bill mentions the president as the sole representative of the SOHC, but they may transfer the administration of this act or any power or function referred to therein to another member of cabinet in accordance with the constitution. 

This bill comes at a crucial time for the economy, which is experiencing lacklustre growth as a result of structural constraints, the key of which is the poor state of the country’s SOEs (particularly Eskom and Transnet). The Reserve Bank’s models estimate the impact of load-shedding as having reduced the country’s economic growth rate as much as 3.2 percentage points in 2022, and it will continue to weigh on growth going into 2024. In addition, research by logistics experts estimate Transnet’s operational challenges to have cost the economy as much as R400bn in 2022, with an economic loss of about R350bn predicted for 2023. 

The proposed State Asset Management SOC Ltd comes with significant benefits. First, by establishing it, various SOEs can be consolidated under a single entity. This can improve operational efficiency, reduce duplication of efforts, and streamline decision-making processes. It allows for better co-ordination and allocation of resources, potentially resulting in cost savings and improved performance. 

Second, the proposed State Asset Management SOC Ltd can provide better oversight and governance mechanisms for the SOEs. It can establish standardised reporting and monitoring systems across the entities, ensuring transparency and accountability. This can help mitigate corruption, improve financial management, and enhance public trust in SOEs.

Third, the proposed State Asset Management SOC Ltd can facilitate strategic planning and co-ordination among SOEs. It can align their objectives with national development goals, promote collaboration and knowledge-sharing, and support the implementation of long-term policies. This can contribute to economic growth, job creation, and social development. 

Fourth, a well-structured and professionally managed State Asset Management SOC Ltd has the potential to attract domestic and foreign investment. By consolidating and strengthening SOEs, it can enhance their credibility and financial stability, making them more attractive to potential investors. Increased investment can inject capital, technology, and expertise into the SOEs, fostering their growth and competitiveness. 

The creation of an SOHC is positive in that it would allow for the separation of the state’s ownership functions from its policy and regulatory function. Theoretically, this should help minimise the chances of political interference and conflicts of interest. SOHCs are not a new phenomenon as Organisation for Economic Co-operation and Development countries such as Spain and Austria both have one centralised state-owned holding company. There is also empirical evidence that shows that a centralised holding company can have a positive impact on the financial and operational performance of SOEs. 

Challenges

The proposed State Asset Management SOC Ltd also presents some challenges. First, it may increase the risk of political interference in SOE operations. Political appointments, favouritism, and decision-making based on political considerations can compromise the efficiency and effectiveness of this entity. It is crucial to ensure its independence and autonomy from political influence to mitigate this risk.

Second, centralisation through the State Asset Management SOC Ltd may lead to bureaucratic processes and a lack of flexibility in decision-making. This can hinder innovation and responsiveness to market dynamics. It is important to strike a balance between centralised control and allowing individual SOEs the autonomy to adapt to changing circumstances and explore new opportunities. 

Third, the financial health of struggling SOEs can pose risks to the overall stability of the holding company. If poorly performing SOEs are consolidated, it can burden the SOHC with their financial liabilities and require government bailouts. Adequate financial assessments and restructuring measures must be in place to ensure that the SOHC does not become a drain on public finances. 

That being said, the real value add for SA in having an SOHC will all depend on how well it can be governed and remain truly independent and free from political interference, which has been a key issue in the governance and decision-making at many SOEs, as revealed by the Zondo commission. The level of autonomy that the holding company will have will be essential for making objective decisions in the best interests of the SOEs under its management and the country's economy. 

The new SOE holding company should be empowered to make the necessary decisions (at a financial and operating level) required to turn around the performance of flailing SOEs without fear, favour, or prejudice. In this regard, the holding company’s board and executive management composition will be key. It is welcomed that the bill states that the board should be made up of individuals based “on the grounds of their skill, knowledge and experience”, which will be a crucial determinant of the success of the holding company.   

The failure of SOEs in SA can be attributed mainly to corruption and maladministration, and as such, the SOHC’s ability to address these issues will be where its impact will lie. An important area for consideration should be to clearly define how this SOHC will interact with the private sector (for example, whether it would be able to sell equity or assets to the private sector). The private sector has not shied away in its desire to help turn around the fortunes of the economy, and it would be a step backward for the SOHC to create barriers to channels for private investment to follow into SOEs. 

In conclusion, while establishing the proposed State Asset Management SOC Ltd offers potential benefits such as consolidation, improved governance, and co-ordination, it is important to carefully consider and address the potential drawbacks and challenges.

Robust regulatory frameworks, transparency, accountability, and mechanisms to ensure fair competition are necessary to mitigate the risks associated with centralisation. Additionally, sector-specific expertise, stakeholder engagement, and effective change management strategies are essential for the successful implementation and long-term sustainability of the SOHC. 

• Gatwabuyege is a researcher, and Ngozo a research specialist, at the Financial & Fiscal Commission SA. They write in their personal capacities.