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JEREMY MAGGS: There is growing concern over a new bill that state-owned enterprises (SOEs), most of them in dire trouble, be transferred to a single state asset management holding company instead of retaining them under the embattled Department of Public Enterprises.
Read: SA publishes draft bill to establish holding company for state entities
A view now from Olga Constantatos, who is head of credit at Futuregrowth, Firstly, Olga, what specific criteria or strategy, in your opinion, could be established for determining which SOEs are transferred to this holding company?
OLGA CONSTANTATOS: I think the shareholder itself needs to set out what criteria are going to be used for the state-owned entities that will fall under this Holdco subsidiary. The list, as published in the second draft of this bill, seems to indicate a variety of SOEs across a number of sectors. Some are financially, operationally, and have governance challenges, and others are not as challenged. There are some that have a developmental mandate potentially, and some also that have a mixed developmental and commercial mandate.
I think it’s not necessarily up to us to say what the strategy should be in terms of which entities should be transferred over, but rather for the shareholder to tell us what their criteria is going to be in making these transfers and the outcomes they aim to achieve.
At the end of the day, what is the outcome we all want, we want efficient functional state-owned entities. We want that they fulfil their mandate, that are operationally and financially sustainable and that are not a drain on our fiscus or on our economy.
I guess we are just questioning whether transferring these named entities into a new Holdco, whether that actually achieves the stated aims, and we think this legislation needs some further amendment in order to go towards that goal.
JEREMY MAGGS: Let’s talk about amendments in just a moment, but conceptually, do you think it’s a bad idea?
OLGA CONSTANTATOS: Look, it is the practice of some other countries around the globe that have done this. I think that it’s not a bad idea to concentrate some of the operational oversight within one entity. I think some of the challenges that we’ve had with our SOEs is that oversight is scattered across aligned ministry sometimes with some oversight from National Treasury with some other departments added in.
Read: SOE plan: What’s needed for successful implementation?
So it’s not always clear to us who is making the decisions, who’s providing the right level of oversight. There have also been conflicting requirements issued by the various ministries that have historically been in charge of some of the SOEs.
So to the extent that this may provide for an aligned view and a consistent view and clarity around who is actually in control, then that is a good thing.
I guess the concern side of that equation is to say that the concentration of that power can sometimes be problematic unless there are appropriate guardrails and guidelines in place to limit what could be the abuse of that concentration of power.
JEREMY MAGGS: And let me pick up on that. That’s exactly the point I want to raise with you, given concerns around political interference in a concept like this, it would be important, would it not, to implement additional safeguards to minimise political influence and overexertion of authority?
OLGA CONSTANTATOS: A hundred percent, Jeremy. And that’s exactly where we think this bill maybe falls a little bit short. So this version two is a slight improvement on this front as regards to version one. So this version two, so it’s positive in that there is now a nominations process for recommending new board members. The previous version didn’t have that and gave the president (Cyril Ramaphosa) the sole right to make those appointments with no guidelines or input. So this version is a slight improvement.
Read: Govt’s asset management company will cut out political meddling – Gordhan
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There is this nominations process outside the presidency that recommends appointments. But where we think it falls short is that the president is not obliged to follow these, nor is he required to give a reason for not following the recommendations, and nor is there an obligation on him to act reasonably in making his decision.
So while there is external input into the decision, there’s no obligation really on the presidency to act on those recommendations. So there is still the scope for inappropriate political interference we feel.
JEREMY MAGGS: And that would be a key amendment that you would need to look at. These are all complex entities; you would agree with me. Would it not be difficult for one single company to exercise what is ostensibly specialist insight or oversight that is needed?
OLGA CONSTANTATOS: Absolutely, and I think it goes to the first question around the various industries and the types of companies with their different mandates that are listed as potentials for inclusion. So it’s Transnet, it’s the Post Office, it’s Eskom, it’s SAA (South African Airways), it’s across a variety of industries. If you think of it in a corporate sense, it would be like having a conglomerate corporate holding company that has subsidiary interests in basically every aspect of the economy. So there is a question around concentrating that power in a Holdco board, what level of specialist skills are needed there?
Read: SOEs must never become platforms of capture again
Usually what happens in the corporate world, so non-SOE world, is that that power is devolved down to the subsidiary company board. So there may be a conglomerate holding company, but they would devolve quite a lot of power to the subsidiary board that actually knows that industry best. So let’s say if it’s in airways or logistics or whatever, the board of that particular subsidiary company are the specialists in that field and would be best placed to make decisions for that subsidiary. That’s what would happen in the corporate world.
What we think may be happening or is at risk of happening with this legislation is that the power to make decisions for that particular subsidiary company, be it in logistics or whatever, goes up a level to the holding company.
So we would question: what do they know better, what do those directors at the Holdco company level know more than what the actual directors of the subsidiary company know. We would argue that the subsidiary company directors are probably best placed to be making the decisions for that subsidiary. So that is potentially a problem, as we see it.
JEREMY MAGGS: And just a final one, oversight is one thing, but any new entity has surely got to ensure reform and also commercial success.
OLGA CONSTANTATOS: Absolutely and so I think that’s one of the problems is that the challenges that our SOEs have faced are not just around their ownership structure or their oversight structure. They are very significant operational, financial challenges that exist at very many of them, and some of those challenges are as basic as financial guardrails and financial controls, the way money gets spent, value for money, capital allocation decisions and so on. You can legislate for some of that, but not all of that.
Listen: Will SA be getting a new SOE?
The key to do that is to actually operationally reform the entities themselves, to put the right people in place to make the right decisions, to have the right KPIs (key performance indicators) and to be measuring targets appropriately. Legislating it at two levels above doesn’t necessarily go all the way. So it’s potentially part of the solution if it’s done properly, but it doesn’t take away the need to operationally reform these entities at the actual level of the operation.
JEREMY MAGGS: One senses a long row to hoe in this particular respect. Olga Constantatos thank you very much indeed, head of credit at Futuregrowth.
