AVRIL HALSTEAD: SOE bill a recipe for another round of state capture

The National State Enterprises Bill in no way addresses the challenges that resulted in state capture of many of the country’s largest state-owned enterprises (SOEs), or the financial and operational challenges facing the SOEs.

Essentially, the bill proposes the establishment of a holding company into which SOEs would be transferred over time. The president would serve as the shareholder for the holding company, but may delegate this responsibility to another member of cabinet.

The proposal to establish a holding company is not without merit. Internationally, the Organisation for Economic Co-operation & Development (OECD) Guidelines on Corporate Governance of SOEs (2015) are the recognised good practice benchmark.

The OECD advocates a model where oversight of the SOEs is centralised under a single entity, because it creates a Chinese wall between the policymaking and shareholder responsibilities of government, with the intention of avoiding policy being designed so that it benefits the SOE rather than the country as a whole.

A holding company may provide some insulation from political interference since there tends to be a greater focus on delivering financial returns. It may also make it easier to attract and retain capable staff, as salaries are not constrained by public sector regulations. Having a centralised entity can promote a uniform approach to SOE oversight and enable aggregate reporting.

However, in the SA context centralising oversight of the SOEs without introducing robust checks and balances sets the stage for state capture 2. To some extent, SA was protected by its existing, largely decentralised approach to overseeing the SOEs. Had all the SOEs been overseen by the department of public enterprises, many more would have been comprised in the way Eskom and Transnet have been.

With a portfolio that in time could encompass all the major SOEs, the proposed holding company would indirectly control an even larger procurement budget, making it even more attractive to nefarious interests.

As a minimum, the weaknesses highlighted by state capture need to be addressed. The bill does not do this at all. Other than the introduction of the holding company, the existing system of SOE oversight would continue to apply to the SOEs as well as the holding company.

One area that warrants particular attention is the process for appointing board members. The appointment of compromised SOE directors enabled the diversion of lucrative procurement contracts to Gupta-linked entities. Ideally, the board appointment process should be a transparent, competitive, merit-based process whereas — as former public enterprises minister Barbara Hogan’s testimony to the Zondo state capture commission highlighted — it is an opaque, politicised process controlled by a single individual — the shareholding minister. In the case of the holding company, the situation is made even worse by the fact that this power is concentrated in the hands of the president.   

Instead of shielding the SOEs from political interference there are numerous provisions in the bill that explicitly enable it. Most notably, if the holding company fails to achieve its objectives the shareholder may issue instructions to the board or replace the board with an administrator. This would be the case even where the holding company is thwarted from achieving its objectives by the government, like when Eskom was prevented by the government from constructing new power stations, leading to electricity shortfalls. 

The holding company structure will make public oversight of the SOEs more difficult. Layering an additional governance structure on top of the SOEs will make it more difficult to access information about the SOEs and worsen the existing lack of transparency regarding their activities.

A key motivation for creating the holding company is the idea that it could raise debt financing to recapitalise the SOEs. This is unrealistic. Even if there were SOEs that were in a position to pay dividends (remember, SA’s SOEs have paid a total of just R1m in dividends over the past five years) the decision to pay dividends would be at the discretion of the boards of the SOEs.

As such dividends would be the only source of revenue for the holding company, there is a high risk of the holding company not receiving the revenues required to service any debt it raised. This very situation has occurred in other countries, for instance with the Georgian Partnership Fund.

Parliament’s role in determining the allocation of public resources would be circumvented. If the holding company were to raise financing or receive dividends, decisions on how these funds are invested have fundamental economic consequences. The bill does not provide any framework to guide and restrain the activities of the holding company. An analogous example is how it was found that the way Transnet set port tariffs favoured the export of unbeneficiated basic commodities vis-à-vis manufactured products, undermining the objective of reindustrialising the economy. 

Similarly, as no controls are introduced over the assignment of developmental mandates to SOEs, they will continue to be used as a slush fund for political patronage while undermining SOE performance. While some of these activities may be both commercial and developmental, the majority impose costs on the SOEs.

Good practice is for the costs to be financed directly from the budget. This ensures that the developmental mandates are prioritised against other government programmes, and that there is transparency over how public resources are being used. The efficiency and effectiveness with which the SOE delivers on the mandate can be closely monitored.

Alternative ways of achieving the developmental objectives can also be considered. Most importantly, it means SOEs can be held accountable for delivering returns that are commercially competitive, as they are no longer able to use their developmental mandates as an excuse for poor performance. 

These are just some of the most glaring failings in a poorly drafted bill. Whereas such important legislation should have followed a proper process involving the development and public comment on a green paper and white paper, rather than jumping straight to legislation, it is being hastily rushed.

The establishment of a holding company to house the SOEs without a proper overhaul of the institutional architecture for governing them will just create a platform for the future capture of SA’s SOEs, and a further deterioration in their performance. 

• Halstead is a former deputy director-general of the department of public enterprises, and former chief director at the Treasury.