President Cyril Ramaphosa’s move to set up a state-owned holding company to house the state-owned enterprises (SOEs) will create an entity holding assets worth more than R1.88-trillion.
This figure undercounts the actual value as it includes only the assets of Eskom, Transnet, the South African National Roads Agency Ltd and Airports Company South Africa.
According to the National State Enterprises Bill, the new entity will also include Air Traffic & Navigation Services Co, Broadband Infraco, Sentech, the South African Forestry Co, Denel, SAA, the South African Nuclear Energy Corp and the South African Post Office.
Though the government says it has no plan to bring in outside shareholders, the State Asset Management SOC Ltd could easily raise as much as R200bn if allowed to list just 5% of its value, and if the listed holding was based on the value of its underlying assets.
Such a move paid off for Saudi Arabia when it listed 1.5% of its state oil company, Aramco, in 2019. The IPO raised $25.6bn on the Saudi Exchange, making it the world’s largest IPO.
However, when it comes to listing state-owned holding companies, Aramco is the exception rather than the rule. Governments prefer to retain full control rather than open themselves up to involvement by outside investors or regulators.
The South African government has reiterated that bringing in outside shareholders is not on the cards, but having a sizeable balance sheet will help the State Asset Management SOC in other ways when it comes to raising funds to support the SOEs.
It could follow the example of Singapore’s state-owned holding company, Temasek, which has S$409bn in assets under management and issues bonds to support its business.
The size of Temasek’s balance sheet, along with the quality of its cash flow, enables it to offer a 1% coupon rate on a $750m 10-year bond that matures in October 2030.
The group was founded in 1974 to manage SOEs for the country’s long-term benefit. Its portfolio consists of, among other things, a 53% holding in Singapore Airlines, a 17% holding in Standard Chartered and a 100% holding in Singapore Power.
The size of Temasek’s balance sheet, along with the quality of its cash flow, enables it to offer a 1% coupon rate on a $750m 10-year bond that matures in October 2030. By comparison, Eskom pays a coupon rate of 7.125% on its $892.9m 10-year bond that matures in February 2025.
The cost of borrowing weighs on Eskom. It has said its net finance costs increased to R37bn from R33.1bn in 2023, largely due to higher interest rates on inflation-linked borrowings and the increase in debt securities and borrowings.
But if the State Asset Management SOC could instead finance Eskom at substantially lower interest rates, the power utility’s debt service costs could be decreased by hundreds of millions, perhaps billions, of rand.
Enabling SOEs to access cheaper debt will be a boost not just for debt-burdened Eskom but also for the country as a whole. The problems at the SOEs have resulted in many state bailouts. Eskom, for example, received R241bn in fiscal support from 2008/2009 to 2022/2023. The Post Office, Denel and SAA also had the government commit billions of rand to keep them going.
When these entities are housed in the State Asset Management SOC, there might be no need to ask for bailouts; they might turn to the market for support. An example of how this can work is when Temasek issued S$6.2bn in bonds in 2021 as a way to support Singapore Airlines, which like all airlines had been hard hit by the pandemic.
The findings of the commission of inquiry into state capture echo through the bill. Former chief justice Raymond Zondo’s final report noted that government ministers had had a big hand in appointing the boards of SOEs. The danger of this was that they would appoint board members who were not competent or diligent, or who had criminal intent.
The report said the setting up of a state holding company would “insulate the SOEs from unwarranted political interference”, as ministers would not have a direct hand in appointing board members. It reasoned that having a state holding company appoint the boards of SOEs instead would ensure that competent people with the necessary skills would sit on them.
However, there are doubts that the new structure will improve oversight.
Under the National State Enterprises Bill the department of public enterprises will fall away, and the State Asset Management SOC will report directly to the president. Though the State Asset Management SOC will have to submit an annual report to parliament, the requirement that the specific SOEs make presentations to the National Assembly will no longer apply.
At briefings on the bill in October, MPs were unhappy that parliament would have limited oversight. The DA’s Darren Bergman asked if only a “super board” would oversee the State Asset Management SOC. He noted that the only oversight this board would have was the office of the presidency, which, in turn, does not have a specific parliamentary committee that has oversight over it. “It almost seems as if parliament is redundant in the bill. This is highly concerning.”
egislator can hold the State Asset Management SOC and its subsidiaries accountable because their annual reports and financial statements will be tabled in parliament.
— Melanchton Makobe,
MPs also raised concerns that the State Asset Management SOC’s board could be vulnerable to political pressure, as the president will appoint the panel selecting board members.
In response, Melanchton Makobe, deputy director-general for state-owned companies, governance assurance & performance in the department of public enterprises, argued that the proposed legislation addresses these concerns. The selection panel’s majority, for example, will be members not appointed by the presidency.
Makobe said the legislator can hold the State Asset Management SOC and its subsidiaries accountable because their annual reports and financial statements will be tabled in parliament. “Parliament can call … the holding company to account at any time because they account to this particular parliament. There are accountability mechanisms in the legislation.”
Aside from these issues, the bill also excludes the State Asset Management SOC and its subsidiaries from the Public Finance Management Act (PFMA), which is intended to promote good governance in state entities.
Regarding the PFMA, Makobe said that unlike other companies, SOEs have to play a “developmental role”, which includes a focus on commercial activities. The PFMA puts them at a disadvantage to other companies, which only have to abide by the Companies Act.
Though the PFMA is meant to ensure accountability and transparency, executives in SOEs have often said they find it restrictive. They said its complex procurement processes, strict financial oversight and focus on compliance often hinder SOEs from responding quickly to market demands. As governance guru Mervyn King has put it, the PFMA encourages “conformance over performance”.
Makobe agrees that the PFMA restrains the ability of SOEs to act quickly because it affects issues related to borrowing, accountability and reporting. “They are not able to make decisions on time, especially those that are in the commercial environment.”
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