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Jeremy Maggs: A new bill would transfer state-owned enterprises (SOEs), most of which are in serious trouble, to a single state-owned asset management holding company, rather than keeping them under the troubled Public Enterprises Authority. There is growing concern about
Read: SA releases draft holding company bill for state-owned enterprises
Insights from Olga Constantatos, Head of Credit at Futuregrowth. First of all, Olga, what specific criteria or strategies do you think can be established to decide which state-owned enterprises should be transferred to this holding company?
Olga Constantatos: I think the shareholders themselves need to decide what standards will be applied to state-owned enterprises that fall under the category of holdco subsidiaries. This list, published in the second draft of the bill, appears to include a variety of state-owned enterprises across a number of sectors. Some companies have financial, operational, and governance challenges, while others have fewer challenges. Some have potentially developmental mandates, while others have a mix of developmental and commercial mandates.
I don't think it's necessarily up to us to say what the strategy should be about which entities should be transferred. Rather, I think shareholders should tell us the criteria by which they make these transfers and the outcomes they aim for. achieve.
After all, what is the outcome we all want? We want a national organization that functions efficiently. We want them to be operationally and financially sustainable and to fulfill their mission of not putting a strain on our finances and economy.
I guess we're just wondering whether transferring these designated entities to new holdcos will actually achieve the stated objectives. We believe that further amendments to this law are necessary to achieve that goal.
Jeremy Maggs: Let's talk about fixes in a moment, but conceptually, do you think it's a bad idea?
Olga Constantatos: You see, this is the way it is done in several other countries around the world as well. I don't think it's a bad idea to centralize some of the operational oversight within her one organization. I think some of the challenges we have with state-owned enterprises is that oversight is spread out across aligned ministries, and in some cases, other departments are added to Treasury oversight.
Read: SOE planning: What does it take for a successful implementation?
As a result, it is not always clear who is making decisions and who is providing the appropriate level of oversight. There have also been conflicting requirements issued by various ministries that have historically been responsible for some SOEs.
So insofar as this provides a consistent view and clarity about who is actually in control, that's a good thing.
A worrying aspect of this equation is that concentration of power can sometimes become problematic unless appropriate guardrails and guidelines are in place to limit what could be abuses of concentration of power. I think.
Jeremy Maggs: Let me address that. This is exactly the point I would like to raise with you. Given concerns about political interference with such concepts, wouldn't it be important to put additional safeguards in place to minimize the overreach of political influence and authority?
Olga Constantatos: 100 percent, Jeremy. And that's exactly where we think this bill falls a little short. So this version 2 is a slight improvement over version 1 in this respect. This version is 2, so it is positive in that there is a nomination process for recommending new directors. The previous version had no such feature, giving the President (Cyril Ramaphosa) the sole right to make appointments without any guidelines or input. Therefore, this version has slight improvements.
Read: Government asset management company eliminates political interference – Gordhan
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There is a nomination process that recommends appointments outside the presidential office. But we think it falls short because the president has no obligation to follow these recommendations, no obligation to explain why he does not follow them, and no obligation to act reasonably in making decisions. There is no such thing.
So while there is outside input into the decision, the presidency is not actually obligated to act on those recommendations. Therefore, we still feel that there is scope for inappropriate political interference.
Jeremy Maggs: And that would be an important fix to consider. These are all complex entities. You will agree with me too. Isn't it difficult for a single company to exercise what ostensibly requires expert insight and oversight?
Olga Constantatos: Of course, I think that applies to your first question about the different industries mentioned as possibilities for inclusion and the types of companies with different missions. It spans a variety of industries, including Transnet, the Post Office, Eskom and SAA (South African Airways). If you think of this in a corporate sense, it's like having a holding company for a conglomerate that has side interests in basically every aspect of the economy. The question, then, is to centralize that power in the Holdco board, but how much specialized skill is required there?
Read: State-owned enterprises must never again become platforms for occupation
What typically happens in the corporate world, the non-SOE world, is that that power is delegated to the subsidiary board of directors. So while a conglomerate holding company may exist, it will likely delegate a significant amount of power to the subsidiary boards that actually know the industry best. So, for example, in the case of an airline or a logistics company, the board of directors of that particular subsidiary are experts in their field and are best placed to make decisions for that subsidiary. That will happen in the corporate world as well.
What we think this bill might do, or risks happening, is that it would move more decision-making power over certain subsidiaries, whether it's logistics or whatever, to the holding company.
So we ask, what do they know better? What do Holdco firm-level directors know more than what the actual directors of the subsidiaries know? We argue that directors of a subsidiary are probably in the best position to make decisions for that subsidiary. So as we see it, it's potentially problematic.
Jeremy Maggs: Finally, while oversight is important, new organizations must ensure reform and commercial success.
Olga Constantatos: Indeed, I think that's one of the problems. That is, the challenges facing our country's state-owned enterprises are not limited to ownership and supervisory structures. These are very important operational and financial challenges that exist in so many companies, and some of those challenges include financial guardrails, financial management, how to use money, the value of money, capital Some are as basic as allocation decisions. We can legislate for some of it, but not all of it.
Listen: Will SA get a new SOE?
The key to this is actually reforming the operations of the business entity itself, deploying the right people to make the right decisions, setting the right KPIs (key performance indicators), and measuring goals appropriately. is. Legislating at two levels up doesn't necessarily mean you're going all the way. So, while it could potentially be part of the solution if done properly, it does not eliminate the need to operationally reform these entities at the actual operational level.
Jeremy Maggs: It is felt that a lengthy discussion is needed on this point. Special thanks to Olga Constantatos, Head of Credit at Futuregrowth.