Is listing SOEs really the best idea?

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JIMMY MOYAHA: The minister in the presidency responsible for planning, monitoring, and evaluation [Maropene Ramokgopa] has previously come out to say that we could potentially be looking at listing state-owned enterprises, the SOEs [on the JSE]. This is part of the National State Enterprises Bill, and this is a conversation that’s been ongoing for quite some time. We’re going to take a look at this.

We’re going to take a look at whether or not this is the smartest idea at this point, and what some of the merits could be for this.

I’m joined on the line by independent analyst Khaya Sithole to take a look at this. Good evening, Khaya, lovely to catch up with you. A great start to the new year for you, I hope. Let’s get right into this particular pronouncement or this particular position from the government’s perspective. Would this be something worth exploring? Is it a good idea to look at listing our SOEs?

KHAYA SITHOLE: Good evening to the listeners. It’s a difficult one, and the reason it’s difficult is that government has actually been working on a separate process through the National State Enterprises Bill, which is aimed at reforming the way in which all of these institutions are governed. That’s been a fixation for the past two or three years. They’ve been developing it and it actually went out for public comment last week.

We’re still trying to figure out how that’s going to work. The idea of them listing these particular entities on an exchange is a remarkably ambitious one, which is very difficult to reconcile with reality because, firstly, even in the National State Enterprises Bill government is still not able to explain which ones are strategic enough for them to invest all of these efforts behind, and which ones are simply less strategic so they can be managed by the ministries where they are.

So until we know what the government’s definition of an ‘important enterprise’ is, we don’t know what we’re working with.

But if they are going to be listed, then it’s a simple question of who in their right mind would want to invest in these particular entities, and what will be so attractive about these entities that will force investors to redirect their capital from other, much less chaotic private enterprises that are already available out there for capital deployment – and then decide that these are the ones where the money needs to report.

So we actually don’t know what the canvas we’re working with is. All we have is her desire to explore the conversation.

JIMMY MOYAHA: Khaya, let’s look at the capital-raising side of it for a moment. Currently SOEs in their current form, the likes of Eskom, go to the exchange and to capital markets and issue bonds when they are looking to raise capital. If we go down the listed space, and we go into that kind of environment, how does that impact the capital-raising efforts of SOEs?

KHAYA SITHOLE: I suspect it wouldn’t at all, because the difference here is that when they go out into the bond market, the risk profile and the repayment profile associated with bonds is very different from the risk profile the bond inherits when investing an equity stake in a particular entity.

The simple difference is that, when you have a particular debt contract through the bond, you can at least say, ‘I am entitled to these particular repayments because the contract says so’.

An equity stake is different in that you’ve got a residual recipient of what may remain after all the bondholders have been paid, and after everything else has been settled. Now that works well when the entities are profitable, which means that after they’ve paid everyone that they owe, there’s an amount available for you to receive as a shareholder.

Unfortunately, the history of state-owned enterprises is that they do not know how to make a profit.

So again, it would be remarkably difficult to imagine how any rational investor would shy or move away from the bond market – if they do desire exposure to state entities – when they can invest in the bond market and then decide that they want to be able to buy equity stakes when those equity stakes have turned out to be really not the most desirable equity stakes over the past 20 years.

I’m not sure what on earth the minister thinks the investor community is thinking about [in terms of] the state of these entities.

Again, unless we know what entity she’s talking about, we actually don’t even know where to start.

JIMMY MOYAHA: Khaya, for a moment let’s assume all entities are on the cards here. Let’s assume everything’s in play. You mentioned attractiveness and a willingness of investors to invest. Given the audit histories of SOEs and the fact that almost all our SOEs have struggled to get unqualified audits in the last couple of years, would listing SOEs – it doesn’t really matter which one – be something that would be a good idea in the context of the scrutiny that comes with listed entities, because now we’re no longer in the realm of just being able to publish public reports. Some SOEs haven’t even published public reports in time in the past. Would the scrutiny that comes with being listed be something that SOEs could handle?

KHAYA SITHOLE: It’ll be a good idea. They just won’t be able to handle it.

We know that because the reason they struggle to publish reports in time is because they tend to be managed by people who are simply not suited to the type of job that they have there.

So what would have to happen is that once you list them out there, you actually have to sacrifice or at least cede some of the control.

That would mean that you actually have to appoint the people who are best placed to run those entities, and be able to ensure that they comply with all the listing requirements.

Now, that’s a bit of a departure from the model that’s been in place, which is the model of saying that ‘We regard these entities as an extension of the mandate that we got at the ballot box, so therefore we should be able to deploy those whom we see fit’.

That’s been the way that these entities have been run. Now you cannot obviously apply that model.

You’d have to say, ‘Who is the person that’s best qualified and best placed in order to generate the type of returns that would make this attractive to stockholders, that would make it attractive to bond holders, that would make its listing viable?’

So there would have to be a big shift in orientation and how the ANC and government, who run the state entities [operate] – and I don’t think the ANC has reached an evolution of the mindset that would enable this to happen.

JIMMY MOYAHA: Khaya, something else that comes with listing an entity on an exchange is the fact that you are now opening up yourself to private shareholders. We’ve had the conversations around privatisation – and of course there’s quite a stretch from listing to completely privatising a state-owned entity.

But what the government would essentially be opening itself up to here are things like takeover bids and private shareholders acquiring a significant stake in the business, or in the SOEs.

I imagine this now creates a bit of a tug-of-war because if you’re the PIC [Public Investment Corporation], or whoever is investing on behalf of the government and other individuals, [you are ] now up against capital in the private markets. You now have to face this as a reality that someone could have more shares than you in the company.

KHAYA SITHOLE: The minister seems to be thinking – she published an opinion piece yesterday – that the government is going to seek to retain some golden shares.

In other words, they will hold on to a majority stake, and not only will they hold on to a majority stake but they will ink into the memorandum of incorporation that should there be any decision relating to significant transactions or significant business orientations, [government] will have the ultimate veto right.

All very good for her to say, but that essentially forces the investors to say: ‘Stay away from this thing, because obviously if a decision has to be made and that decision is not palatable politically but makes sense in terms of the business and the business strategy, then how do you resolve the tension?’

The minister’s answer is that, well, government must prevail in terms of exercising its goal and shares to veto those decisions.

This simply means that no one in their right mind is going to invest in these entities, if that is the thinking that is going to prevail out there.

So [as for] the spectrum of what ownership might be, you could very well say that the government is going to own a majority of this, whether it’s 60% or 80%; but that essentially diminishes the pool of potential investors who would take an interest, because everybody will do their own assessment and then say well, hold on, there are many other options here.

‘There are many other entities where we can invest. We could invest in [companies] where the processes and the practices are in line with what we understand capital markets and normal businesses to operate within, so therefore our risk profile is different if we invest in any other entity.

‘If we decide to invest in an SOE, will we have to deal with these new permutations and these problematic permutations? Well, then actually we demand a much higher return.’

And guess what? State-owned enterprises are not known, firstly, for making a profit. They’re not known for meeting their own internal rates of return, and they’re definitely not known for beating the market.

So on that basis, does anyone put money there?

JIMMY MOYAHA: Khaya, before I let you go, I want to take a look at the initial kind of objective of state-owned enterprises, [which] was to ensure that the government had various vehicles to do things like catalyse economic growth, like create jobs and actually build the South African economy by way of things they could control and influence.

If we go the listed route, is this something that could potentially still contribute towards catalysing economic growth – or does [listing] create a bit of a hindrance in that respect?

KHAYA SITHOLE: Well, remember a lot of these state-owned entities were created by a government that had been closed out from international markets.

It was a government that had to learn to do things on its own, and to essentially keep the wheels of the economy running in spite of the hostility that the rest of the world legitimately had toward that particular government. So some of them were created with a very different orientation in mind.

Nevertheless, some have indeed evolved and obviously what we now work with is that they have this mixed mandate in that they need to be financially viable. Most of them are not.

But they also need to be responsive to the social mandate of the day. So that’s the reason Eskom, for example, would give some free electricity allocation to the poorest of the poor.

Now, when you then put this to the market out there, you firstly are saying out there they should kind of want to work. We want to operate in a competitive space where somebody who does the same thing should be able to say, wait, hold on, we run an airline. We understand the rules to be X, Y, Z.

So therefore, if the state is to run an airline, the state must also be able to comply with the same rules that it set. It cannot afford to essentially bypass its own rules, so it creates new complexities and you want them to be able to explain to us whether they’re happy, or whether they’re ready to be able to understand what the market dynamics are – and the fact that if you undermine those market dynamics, you are actually engaging in anti-competitive conduct.

SAA is a good case study of that. They kept getting fined billions on the basis that they thought that because they are a state-owned airline they were entitled to particular market advantages – which is clearly not the case.

So again, the ANC doesn’t know what it’s trying to do. The ANC hasn’t known what its model is.

If you go back as far as 1999 on what it said about the fate of state-owned enterprises and what it has practised since then, and what it then uttered in multiple policy conferences and/or elective conferences, it is a confused party that probably shouldn’t be given the freedom to make these calls without explaining exactly what the big idea is.

So I’d hesitate to give them the latitude to even entertain this conversation until they tell us what exactly their understanding of the economy and the state-owned entities [is], and what the open market equity should look like.

JIMMY MOYAHA: More questions than answers, and one of the big questions is to list or not to list.

We’ll leave the conversation there, Khaya. Thank you, as always, for the time and for the insights. Independent analyst Khaya Sithole joined us to take a look at whether or not it’s a good idea to list SOEs – and if it’s practical.

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