Question NW308 to the Minister of Public Enterprises

Reply:

1. Firstly, it is necessary to clarify that the Presidential State-Owned Enterprises Council (PSEC), of which the Department of Public Enterprises (DPE) is the secretariat, has suggested that South Africa adopt a centralised shareholder model for the management and oversight of SOEs. In furtherance of this model PSEC has recommended that South Africa should create a Holding Company (HoldCo), into which selected strategic SOEs would be amalgamated.

The DPE supports this proposal. The Holding Company will house selected strategic SOEs, in furtherance of a centralised shareholder model. The PSEC believes that housing SOEs in a centralised structure will promote professionalism, decrease politicisation and enhance good governance practices at SOEs, amongst other benefits.

Also, it is important to note that PSEC is not the first State initiated advisory body to call for the SOEs to be managed in terms of a centralised shareholding model. The Presidential Review Committee (PRC), chaired by Ms Riah Phiyega, was established in 2010, with a mandate to make recommendations pertaining to the reform and strengthening of the SOEs. Amongst the recommendations of the PRC were that:

• The Government should develop an overarching long-term strategy for SOEs;
• The Government should enact a single overarching law (State-owned Entities Act) governing all SOEs;
• The Government should develop a framework for the appointment of SOE Boards;
• The Government should develop a common performance management system;
• The Government should rationalise its holdings by focusing on those SOEs that provide public goods and those deemed to be strategic, namely serving national interests, national security and priority sectors;
• Government should address the issue of non-financially viable commercial SOEs; and
• The Government should develop an integrated reporting, monitoring and evaluation capacity for SOEs across all spheres of Government.

Additionally, The PRC highlighted the need to clarify the roles of the state in its capacity as (i) shareholder in, (ii) the regulator of, and (iii) the operational and regulatory policy-maker for SOEs. The PRC Report, in other words, highlighted the need to separate the shareholding, regulatory and policy-making functions of the State as they pertain to SOE management and oversight. Additionally, the Report also drew attention to the fact that there is a lack of clarity in SOE mandates; coupled with the fact that SOEs’ accountability channels and mechanisms can be opaque, with there often being multiple accountability frameworks (from differing oversight Departments or legislative frameworks) that SOEs need to comply with. This situation creates inefficiency and duplication of efforts by oversight bodies, facilitating unnecessary political interference in SOEs.

In a similar vein, the Commission of Inquiry into Allegations of State Capture, chaired by Judge Raymond Zondo, also highlighted (inter alia) the need for:

• SOE governance frameworks to be consolidated, and possibly augmented into one – by enacting a single SOE Act; and
• There to be a clear division between the State’s shareholding, regulatory and policy-making functions.

Consequently, the President’s announcement on the establishment of a National Holding Company (HoldCo) constitutes the enactment of recommendations put forth by the PRC, the Commission of Enquiry into Allegations of State Capture and PSEC. Furthermore, the establishment of a National Holding Company, in furtherance of a centralised shareholder model, is in alignment with growing international trend(promulgated by an OECD Report on the ‘Corporate Governance of State-owned enterprises’) that a centralised shareholder model is the optimum model for SOE management and oversight; with Chile, China, Finland, France, Hungary, Malaysia, Paraguay, Peru, Poland, Singapore and Spain being amongst the countries that have adopted this model for the management of the SOEs.

The main benefits from the experience of the above countries of a centralised shareholder model for SOE management and oversight, are:

• Separation of the state’s ownership functions from its policy-making and regulatory or supervisory functions, to help avoid or minimise potential conflicts of interest;
• Minimising of the scope for political interference and bringing greater professionalism to the State’s ownership role, by pooling specialised capabilities and scarce resources;
• Promotion of greater coherence and consistency in applying corporate governance standards and in exercising the State’s ownership role across all SOEs;
• To manage state assets in a way that protects shareholder value;
• To achieve greater transparency and accountability in SOE operations through better oversight and performance monitoring.

In acknowledgment of 1) the importance of SOEs to South Africa’s future economic growth on the one hand, and to the government’s ability to deliver on its developmental mandates on the other hand; as well as 2) the fact that South Africa’s SOEs are currently in need of reform revitalisation, PSEC has recommended that South Africa establish a National Holding Company, as the mechanism to implement a centralised shareholder model for SOE management and oversight. Only selected strategic SOEs, that are currently financially viable, will be incorporated into HoldCo at the outset. The inclusion of additional SOEs into HoldCo can be possibly be considered, once SOEs have demonstrated to be sufficiently financially stable

Briefly, PSEC has been working on classifying the SOEs along 2 lines: 1) whether they are strategic or not; and 2) whether they are in crisis or not. PSEC has used frameworks and matrixes to determine each SOE’s status for this categorisation. Furthermore, PSEC has commissioned financial analysts to undertake deep dives into the SOEs. Information arising from the deep dives has also been utilised in categorising the SOEs. In short, four conditions need to be met for an entity to be deemed strategic. The conditions are that:

• 1. The function provided by the SOE is not adequately or appropriately provided by the private sector;
  2. There needs to be a natural monopoly in the industry or sector the SOE operates in;
  3. Disruption of the SOEs activities would have a high economic impact; and
  4. The SOEs function is critical for developmental purposes and state security.

On the other hand, in determining whether or not an SOE is in crisis, both financial and non-financial considerations are assessed. Financial indicators that point to an entity being in crisis include: (i) the entity carrying an unsustainable debt burden; (ii) the entity being unable to make payments on their debt/s when they are due; and/or (iii) then entity having a negative cashflow and/or negative equity over a sustained period. Non-financial indicators that point to an entity being in crisis include: (i) the entity having experienced serious governance breaches; (ii) the presence of procurement corruption within the entity; or the entity continually being ineffectively managed and thus continually exhibiting operational non-delivery.

Financial indicators	Non-financial indicators
Unsustainable debt burden Negative cashflow over a sustained period and/or negative equity Inability to settle liabilities when due	Serious governance breaches Procurement corruption Continued operational non-delivery and ineffective management

As noted above, only SOEs that are both strategic and not in crisis will be eligible for inclusion into HoldCo.

2. The prospect of SOEs being financially independent, and not reliant on on-going bailouts from the fiscus, is one that the DPE is committed to. Furthermore, the DPE is of the firm believe that, under the guidance of PSEC, SOEs can be restructured and repurposed so that they both (i) advance the country’s developmental objectives and (ii) cease being reliant on the fiscus.

 

Remarks: Reply: Approved / Not approved

Jacky Molisane PJ Gordhan, MP

Acting Director-General Minister

Date: Date: