Is Listing State-Owned Enterprises the Optimal Strategy?

https://iframe.iono.fm/e/1519933″ width=”100%” height=”126″ frameborder=”0

You can also tune into this podcast on iono.fm here.

JIMMY MOYAHA: The minister in the presidency focused on planning, monitoring, and evaluation, [Maropene Ramokgopa], has previously stated that we might consider listing state-owned enterprises (SOEs) on the JSE. This forms part of the National State Enterprises Bill, which has been an ongoing discussion for quite some time. Let’s delve into this topic.

We will examine whether this is indeed a wise decision at this moment and what benefits it may bring.

I’m joined by independent analyst Khaya Sithole to discuss this matter. Good evening, Khaya, it’s great to reconnect. I hope your new year is off to a wonderful start. Let’s dive straight into this announcement. Would exploring the listing of SOEs be a worthwhile pursuit?

KHAYA SITHOLE: Good evening to the listeners. This is a challenging issue. The challenge arises because the government is currently engaged in a separate undertaking with the National State Enterprises Bill, aimed at reforming the governance of these institutions. This has been the focal point for the past two or three years, and it recently underwent public comment.

We are still determining how this will unfold. The prospect of listing these entities on an exchange is notably ambitious, yet hard to align with reality because, first, even within the National State Enterprises Bill, the government cannot clarify which entities are strategic enough to warrant this attention and which should remain under ministerial management.

Until there is clarity on what the government regards as an ‘essential enterprise,’ we lack a clear direction.

If these entities are to be listed, the pressing question remains: who would logically want to invest in them, and what could possibly attract investors to divert their capital from more stable private enterprises already ripe for investment?

At this stage, we lack a clear understanding of the landscape we are dealing with. What we have is merely the minister’s intent to broach this subject.

JIMMY MOYAHA: Khaya, let’s consider the capital-raising aspect for a moment. Currently, SOEs like Eskom turn to the exchange and capital markets to issue bonds as a means to raise funds. How would entering the listed space affect their capital-raising efforts?

KHAYA SITHOLE: I suspect it wouldn’t have much impact at all. The distinction lies in the fact that when they seek capital from the bond market, the risk and repayment profiles associated with bonds differ greatly from the equity investments in these entities.

Simply put, having a bond contract means you can assert your right to repayments as stipulated, whereas an equity stake comes with the uncertainty of receiving anything only after all other obligations are met.

Sadly, the historical performance of state-owned enterprises shows a consistent inability to turn a profit.

This raises doubts about why any rational investor would shift from the bond market—where potential exposure to state entities exists—to equity, given that historical trends do not favor such investments.

European and American models demonstrate that when the government engages in these processes, significant risk aversion rears its head.

JIMMY MOYAHA: Khaya, let’s operate under the assumption that all entities are on the table. If we take into account their audit trails—which show that many SOEs have struggled to deliver timely unqualified audits—would listing them be beneficial considering the heightened scrutiny that comes with being a publicly listed entity, especially for those that have previously failed to publish reports on schedule?

KHAYA SITHOLE: It could be a beneficial idea, but they wouldn’t be able to sustain it.

We observe this because they typically struggle with timely report publication due to mismanagement by inadequately qualified individuals.

If they were to be listed, there must be a willingness to relinquish some control.

This means appointing the best-qualified personnel to run these companies and ensure compliance with all listing requirements.

This marks a significant shift from the current mindset, where entities are treated as extensions of political mandates, allowing for placements based on political affiliation.

This current approach cannot persist.

They must instead consider who is best suited to deliver returns attractive to both shareholders and bondholders to ensure the viability of the listing.

Such a shift in mindset is crucial for the ANC and government running these state entities, and I question whether the ANC is prepared for such an evolution in thinking.

JIMMY MOYAHA: Khaya, listing these entities also leads to the introduction of private shareholders. We’ve discussed privatization, and although there’s a great deal of difference between listing and complete privatization, the government would inadvertently expose itself to takeover bids and significant share acquisitions by private investors.

This creates a complicated dynamic. For instance, whether the PIC [Public Investment Corporation] or any other entity invests on behalf of the government or individuals, they must now contend with private capital.

KHAYA SITHOLE: The minister appears to propose—she mentioned in an opinion piece yesterday—that the government will aim to retain certain ‘golden shares.’

This means maintaining a majority stake and ensuring that the memorandum of incorporation affords government ultimate veto power over significant transactions or strategic directions.

While this sounds enticing, it essentially leads investors to avoid participation since significant decisions may not align with sound business practices.

The minister suggests that government should maintain the right to veto critical decisions.

This raises concerns about investor interest; if the government’s mentality persists, potential investors will surely reconsider their options.

In this scenario, the government might retain a majority interest, whether 60% or 80%, but this diminishes the pool of interested investors due to their desire for clearer investment prospects.

Investors will conduct their assessments and conclude that diversified and stable enterprises present less risk than SOEs amidst mounting challenges.

This leads to the likelihood that state-owned firms would need to offer higher returns to attract any interest.

Yet SOEs have a reputation for failing to achieve profitability, let alone meeting return expectations.

So the question remains: who would allocate their resources to such ventures?

JIMMY MOYAHA: Before we conclude, I’d like to discuss the core objectives that state-owned enterprises initially aimed to achieve, such as stimulating economic growth and job creation through mechanisms that the government could control.

If we move towards listing, could this still foster economic growth, or would it act as an impediment?

KHAYA SITHOLE: Keep in mind that many of these entities were established to help a government long shut out from international markets.

This government had to adapt and innovate to maintain economic activities despite global opposition, resulting in entities designed with differing objectives.

However, in practice, many have evolved, leading to a mixed mandate requiring fiscal sustainability—most have not achieved this.

Simultaneously, they must respond to social imperatives, evident in cases like Eskom, which provides complimentary power to the most vulnerable communities.

By inviting market participation, the expectation is that they will operate competitively. For example, an airline state-run must adhere to the same regulations applicable to its competitors.

This cannot only be a cover for circumventing regulations, which creates complexities and potential anti-competitive behaviors.

SAA exemplifies this predicament, facing significant fines for misconceptions regarding its state-operated advantages.

Thus, the ANC’s aims concerning these entities appear unclear.

Going back to 1999, where it articulated its vision for SOEs versus its actions in subsequent years, the inconsistencies are striking. The party lacks a coherent strategy worthy of consideration in this conversation regarding the future of state-owned enterprises.

JIMMY MOYAHA: This discussion has posed more questions than answers, fundamentally questioning the approach to listing.

We’ll conclude our discussion here, Khaya. Thank you for your valuable insights. Independent analyst Khaya Sithole has joined us in analyzing the feasibility and implications of listing SOEs.

Stay updated with Moneyweb’s comprehensive finance and business news by following the WhatsApp channel here.