the balancing of social, political & economic

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Categorisation and prioritisation of SOEs
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The South African Government is reviewing State Owned Enterprises with a view to improve the
performance of its entities. One of the areas being examined relates to how the state seeks to
balance social, political and economic objectives in delivering goods and services to the citizens.
State Owned Enterprises were historically created by governments to support strategies for
economic development and promote public interests. Overtime the definition and reference of
these institutions has evolved and as such some inherent tension between the interest of the public
and the enterprises has developed. The tension is more conspicuous particularly when the sociopolitical objectives of government are not clearly articulated and short term commercial objectives
driven by capital market returns are not balanced with developmental Objectives.
The question of balancing social, political and economic objectives arises when government seeks to
have commercial businesses deliver certain 'non-commercial' products and services to the
community using their commercial enterprises.
Government provides a range of products and services to the community through its established
entities such as electricity corporations, port authorities and others. Most of these products and
services are provided on a largely commercial basis with the direct intention of making a commercial
return to the shareholder as well as to ensure that the entities remain viable and sustainable.
However, some products and services are provided by these entities to meet other, noncommercial
objectives of Government. For example, in the case of transport, the government has traditionally
funded passenger rail to provide discounted prices on rail travel to lower income groups of the
community. It is for this reason that an entity such as Prasa receives an estimated 80% of its funding
from the state to deliver passenger rail services.
The expectation for SOEs to play a role in delivering social and political objectives beyond their
ordinarily defined remits is a noted phenomenon. At issue is whether there exists a structure and
approach to guide how such expectation should be implemented.
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SOEs should perceive their role to balance social, political and objectives as bifocal. The bifocality
implies a combination of socio-political and economic imperatives.
This suggests emphasises of a dual approach to delivery of services and goods to the citizens
ensuring that the following objectives are balanced;
 Maximizing Returns to drive viability of the entities
 Delivering and supporting development imperatives of the shareholder
Maximization of shareholder value should balance these distinct components:
Figure 1: Shareholder value maximization bi-focal balance
Shareholder value maximization through bi-focal balance
Shareholder articulate
social political and
economical imperative
SOE embraces bifocal objectives in
strategy formulation and performance
Maximisation of
shareholder value
This paper focuses on a term of reference that examines the role of SOEs in delivering social, political
and economic objectives of the state. A general perception exists that the balance of the social,
economic and political objectives is by nature, paradoxical hence the argument for a
The term of reference is articulated as follows: “The balance of social, political and economic
imperatives in delivering objectives for State Owned Entities (SOEs)”
The research objectives for the paper are to explore and respond to the following questions,
potential sub- issues to be explored are highlighted under each question;
a) Are socio-political objectives of government clearly articulated and commonly understood
by SOEs?
Why do SOEs exist?
What are the drivers of successful SOEs (e.g. Portfolio Management)
How do successful SOEs maintain and manage socio-political objectives and
commercial/entity related objectives?
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b) Do the socio-political objectives encumber achievement of commercial objectives; if so in
which way is this so?
i. How do the tradeoffs between commercial objectives and socio-political objectives
ii. How do RSA SOEs fair when assessed from a commercial and socio-political perspective?
iii. What are the current measurement approaches and are these appropriate to manage any
potential conflict between socio-political and the entities commercial objectives?
c) What inhibits SOEs from achieving a healthy balance between socio-political and economic
objectives of government?
How do general external commercial considerations (e.g. funding) contribute to
achievement (or otherwise) of socio-political and economic objectives?
How do internal operational efficiencies within SOEs contribute to achievement (or
otherwise) of socio-political and economic objectives?
What governance models currently exist globally and how do these prevent or support
SOEs healthy balance between socio-political and economic objectives
How do relevant performance measures contribute to the objective assessment and
intervention management for SOE performance
d) What should be done to maintain a healthy balance between socio-political and economic
Should the shareholder develop a policy framework for management of socio-political
and economic objectives of SOEs?
Can the socio-political and economic objectives be measured, monitored and evaluated,
if so, how?
Are there local and international benchmarks where learning’s can be drawn?
What should be done regarding funding and viability related to implementation of
shareholder socio-political and economic objectives.
2.1 Introduction
State Owned Enterprises are created by government to support strategies for economic
development and promote public interests, however, SOEs are often challenged with trying to strike
a balance between the interests of the public and the enterprise itself. There is a natural conflict
between the commercial interests of SOEs and the state developmental interests. Many
governments are now asking themselves, how the correct balance can be struck between economic
imperatives and socio political objectives. At any given time, there are multiple stakeholders all
requiring inputs and attention from the SOEs.
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Several governments have successfully implemented successful performance management models
to support the drive towards a balance of both these key objectives. In these instances, there
appears to be a greater focus on defining what an SOE is and what mandate it is established for. The
enhanced clarity around definitions and the criticality of an SOE means the right levels of
performance objectives as well management can be employed. With such clarity, the shareholder
shall be able to support funding needs of the entity to deliver on determined objectives. Real and
tangible results can thus realise.
On the whole, SA SOEs would seem to have mixed results when assessed against the competing but
equally prioritised objectives of economic and socio political objectives
South Africa desires to be a developmental state. A developmental state plays an active role in
guiding economic development and using the resources of the country to meet the needs of the
people. A developmental state tries to balance economic growth and social development. It uses
state resources and state influence to attack poverty and expand economic opportunities.
In many countries, the state plays some role in shaping the structure and output of the economy. A
developmental state must be able to direct and support economic development through building a
strong public service, creating an investor friendly environment, supporting small business
development, using state owned enterprises effectively and driving strategic investment initiatives.
The State has to play a role in keeping the economy competitive and close to the leading edge in the
global development of knowledge and technology. The State has to be able to control its vast
resources and directly apply them to meet its goals.
According to Maserumula’s PRC concept paper (2011:2)1 SOEs in a Developmental state, are critical
to the achievement of the objectives of a developmental agenda. Government’s intervention in the
economy is partly driven through the establishment of SOEs. SOEs are viewed as engines for growth
geared towards satisfying needs of the citizens. Political, social and economic considerations are
closely linked to the establishment of SOEs. State owned enterprises (SOEs) are viewed as vehicles
for socio-economic development. The key is whether SOEs in their current state are contributing
towards the political and socio-economic imperatives in the delivery of their objectives. SOEs are
created to serve a specific agenda in any economy.
Maserumula’s PRC concept paper (2011:2)
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In a recent speech, the Minister of Public Enterprises, Minister Gigaba2, stated that:
“The developmental state in South Africa has the objective of actively intervening in the economy to
drive investment in targeted areas to achieve a long term vision of a higher value added, labour
absorptive and racially integrated economy. In order for it to do this, it needs the ability to plan for
long-term growth, drive investment in areas of the greatest impact and form strategic economic
partnerships to develop capabilities in targeted areas of the economy. In addition, in the context of a
developmental state, SOEs should play part in skills development, transformation, and other such
Governments of large and emerging economies have depended on the performance of the private
sector and State Owned Enterprises (SOEs) to drive the national agenda and general competitiveness
of countries. With regards to the private sector, the government’s role has been to reduce red tape,
encourage investment (including Foreign Direct Investment), and provide a stable tax, legal and
statutory environments to drive growth and to generally support the private sector in a facilitative
manner. SOEs on the other hand require that government as shareholder should deliberately and
boldly give guidance on the country’s national agenda.
South Africa has a rich and long history of the existence of SOEs. In pre-1994 South Africa, the
government’s approach to SOE’s was instrumental in helping the apartheid state survive sanctions,
blockades and continue to grow the economy even though it was for the benefit of a minority and
detriment of the majority. It is equally important to point out at the onset that the benefit and use
of SOEs articulated was premised on a nuanced and adaptation of the role of SOEs to suit the agenda
of the government of the day.
The relevance of the historical outline presented in this paper seeks to highlight how governments
across the globe strategise and structure their intervention in the economy through the deliberate
use of SOES. Political circumstances and motivation may differ, what is common is the fact that
shareholder governments adapt the use of SOEs to fit the strategic direction of the country.
Reference to the South African historical context is necessary to understand the ideological context
that undergirds the evolution of the SOEs in South Africa.
The period between 1948 –1994 represents a significant era in the history of South Africa. In 1948
the National Party (NP) introduced apartheid, which became the official government policy for four
decades. The policy or ideology was in part a rejection of the British hegemony in economics and
politics. The state used its power to propel economic growth and empowerment of the selected
few. SOEs were used to contribute to the process of industrialisation and economic growth. This
was an era where the country experienced the poor white problem. Part of government’s
Malusi Gigaba, 2011
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intervention in the economy “entailed the operation of monopolistic public corporations – known as
parastatals. Economic growth, industrialisation, creation of jobs, economic empowerment, skills
development were all among other important reasons for the states intervention. The scourge of
poverty had to be defeated. This is one of the early indications in the country of state deliberate and
focused intervention using a balance of socio-political and economic imperatives. .
In 1948 government nationalised the electricity industry. Power stations that belonged to the mines
were taken by the state to catapult Eskom to monopolistic heights in the industry and consolidate its
dominance in the national electricity grid. Subsequent to this era, many other entities were
established. The expansion of the SOE sector exemplifies the extent of government’s role in the
economy. The public sector’s share in South Africa’s gross fixed investment rose from 6.2% to 11.5%
between 1946 and 1973, while its share of capital stock increased from 3 % in 1946 to 13% in 1979,
O’Meara and Nattrass (Southall 2007: 203)3. The South African government owned and managed
almost 40 percent of all wealth-producing assets.
The proliferation of the SOE’s was part of the objective to promote economic development which
was aimed at promotion of the industrialisation strategy premised on the export-economy and
import-substitution (Norval 1962; Bosman, n.d; Van Der Walt and Van Pletsen 1987)4. Subsumed in
this strategy was the notion of economic self-sufficiency. The SOE sector was used by government to
empower Afrikaner enterprises in mining, agriculture, finance, manufacturing and commerce.
(Lipton and Simkins 19935). In 1970 27% of the economically whites, mostly Afrikaners were
employed by the state and its SOEs. Giliomee (1979:165) 6indicated that in 1976 the figure escalated
to 60%. Those who could not make it in the private sector were employed in the state sector.
Further empowerment included apprenticeship and artisan training programmes enabling those
employed to acquire skills that made them marketable (Norval 1962:50-52)7 . A vision emerges of a
state that had identified and prioritised social, economic and political objectives.
The state sector became the biggest employer, especially since the mid – 1970s when the
investment climate deteriorated as a result of sanctions imposed against the apartheid regime. The
1976 Soweto uprising and internal political instability hit the investor confidence. This resulted in
disinvestments and the industrial sector shedding a lot of jobs. Giliomee (1995:89)8 explains that in
the late 1980s the industrial sector could only generate 28 000 jobs as compared to 448 000 in the
1960s. The GDP declined to 1.5 percent in the 1980s. In the 1960s, the GDP was at 5.7 percent and
declined to 3.4 percent in the 1970s. In spite of this economic reality, government defied the logic of
fiscal prudence as spending on state sector increased. Government incurred a huge public debt, the
bloated state sector was too expensive to maintain.
Gigaba9 in a media report captures the above outlined dichotomy well when he annunciates the
importance of balancing the socio-economic imperatives of SOEs, he mentions that “SOEs are not
ordinary commercial enterprises — they have a mandate to achieve longer-term strategic economic
The argument s presented underscores the importance of understanding the reason why SOEs are
O’Meara and Nattrass (Southall 2007: 203).
Norval 1962; Bosman, n.d; Van Der Walt and Van Pletsen 1987)
Lipton and Simkins 1993
6 Giliomee (1979:165)
7 Norval 1962:50-52
8 Giliomee (1995:89)
Malusi Gigaba Business Day 2012/02/07 07
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established. There are primary reasons that drive the formation of SOEs; such reasons are often
articulated in the founding documents of the entity. It is necessary that SOEs optimally deliver on the
primary mandates. A further aspect to be considered relates to what can be referred to as secondary
reasons that inform the role of an SOE. In the context of the ToR under review, in the instance where
one is dealing with a commercial entity, it is not abnormal for the entity to give significant attention
to viability aspects as it is a primary expectation that it shall operate sustainably. There may however
be a requirement that the entity assumes other secondary responsibilities by the shareholder. The
unique nature requires that the entity be able to deliver in a balanced fashion the secondary
imperatives. It may well be necessary for the shareholder to assist the entity through funding the
excess expectation.
In 1988, the government announced the intention to reconfigure the SOEs sector, the strategy
focussed on privatisation. A policy framework to guide the reconfiguration of the SOEs sector was
formulated, – the White Paper on Privatisation and Deregulation in the Republic of South Africa
(WPG 87). The strategy entailed reorganising the South African Railways and Harbour (SArh),
telecommunication services and Eskom into profit-generating entities whereas some major road
networks and SOEs such as Iscor, Foskor and the Mossel Bay gas were lined up for privatisation
(South African Institute of Race Relations 198810).
Southall (2007:205)11 explains that the sale of Iscor was the first major privatisation transaction; it
was concluded in 1989, with the state retaining minority shares bought by the IDC. The rationale for
privatising SOEs was that proceeds would assist in generating funds needed for the running of the
country. Government veered off from their long-standing vision of using the SOEs for economic
emancipation, growth and development.
Globally other developments were taking place, in the 1980s Margaret Thatcher rolled out a project
of privatising SOEs in Britain. The initiative was perceived by many as a success. Large sums of
money were reportedly raised to offset public borrowing”, (McLean 1996:406)12. In spite of the
criticism that privatisation sacrificed public interest, the perception of its success resulted in
emulation of this policy trajectory in many other countries. Its influence was widespread.
Post 1994, the new South African government insisted that privatisation should be put on hold until
the political negotiations could be concluded. The Reconstruction and Development Programme
(RDP) was introduced, which underscored the centrality of the role of the state in the economy. The
objective of RDP is socio- economic transformation and development. It underscored the
importance of the state’s substantial investment in the economy. This entailed retaining sufficient
hold on state enterprises with the strategic aim of leveraging them as instruments for social
transformation and, at the same time, as lead vehicles for economic growth, Lamola (2011:44 - 45)13
The RDP introduced in essence the need for management of complex social, economic and political
South African Institute of Race Relations 1988
Southall (2007:205)
McLean 1996:406
Lamola (2011:44 - 45)
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Gigaba14 in a media report captures the above outlined dichotomy well when he annunciates the
importance of balancing the socio-economic imperatives of SOEs, he mentions that “SOEs are not
ordinary commercial enterprises — they have a mandate to achieve longer-term strategic economic
objectives (even if there are predictable short-term losses while capabilities are being built). This
creates a delicate balance — if the strategic purpose subverts commercial discipline, the enterprise
will collapse, but if commercial considerations over ride strategic purposes, government objectives
will be compromised. Consequently, shareholder management of these multiple objectives is very
The GEAR policy was introduced in 1996, privatisation was one of the objectives it endorsed aimed
at turning around a weak economy that resulted from the apartheid era (Adwalader and Taft, n.d:
on-line in Maserumule 2011)15. In response, the Department of Public Enterprise developed a
discussion paper on the restructuring of state assets. The concept privatisation was replaced by
restructuring. Southall (2007:207) 16explains that such change of terminologies was an attempt to
“avoid antagonising unions and other elements of its constituency”. Cosatu contended that, even
though new terminology was adopted, the concept of restructuring, the essence of the strategy still
remained privatisation. Government shortly made an announcement seeking strategic equity
partners for the Airport Company of South Africa (ACSA) South African Airways (SAA) and Telkom.
Autonet, Sun Air and Transkei Airways were considered not strategic entities and such it was
announced that they would be sold off. As with other enterprises it was announced that they would
be restructured to engender efficiency and effectiveness in the pursuit of their mandate.
Cosatu argued for a structured process of conceptualising the role of the state in a growing
economy. Both government and labour agreed that SOEs were not performing as expected and
therefore something needed to be done to improve their situation. The fundamental point that the
labour emphasised was that “restructuring should be geared to meeting the basic needs of all South
African with the focus on the poor and disadvantaged. The joint discussion between government
and labour resulted in a consensus on the definition of restructuring in terms of its objectives the
principles that should underpin it, “the structures and processes of implementing any changes in the
control of any of the parastatals” (Lamola 2011:4417). This was formalised and codified into an
accord named the National Framework Agreement (NFA), which was signed on the 07th February
Gigaba Business Day 2012/02/07 07
Adwalader and Taft, n.d: on-line in Maserumule 2011)
Southall (2007:207)
Lamola 2011:44
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The brief historic outline indicate that the evolution of SOEs in South Africa, demonstrate that socio
economic imperatives were central to the role of SOEs. Whereas there was a primary purpose for
which entities were established e.g. electricity generation for Eskom, there were other objectives
that were undertaken by SOEs. Some of the indicators that needed to be delivered included;
creation of jobs, contribution to skills development, providing quality and affordable services. What
is observed is that socio-economic imperatives ultimately subverted economic discipline; this
resulted in the debt burden that led to the state opting to consider privatisation for intervention
resulting in a compromise of government’s socio economic objectives.
The exposition however also reveal other unintended consequences that may result in a situation no
clear policy guidelines exist for the treatment of the balance of social, political and economic
imperatives. In the South African context, it is clear that political objectives subverted the other
areas in a peculiar manner. The extended requirements were for the entities to protect the country
from the global isolation pressures. The social objectives were delivered in a segregation fashion
benefiting a minority of the citizens.
Figure 2: Pre and Post 1994 rationales for SOEs (illustrative)
It is crucial to interrogate what the role and contribution of SOEs should be in the new democratic
dispensation. Key questions relate to how SOEs should be managed, what objectives they should
achieve to contribute towards developmental goals and how SOEs should remain viable and
sustainable. In South Africa’s history, it is unavoidable to ensure that the balance of social, political
and economic imperatives is undergirded by principles of social justice, equity, fairness and an
unambiguous focus on transformation. Similar questions face governments across the world. How
can state-owned enterprises be harnessed to promote socio-economic development without
compromising their viable and sustainable existence?
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What are social, political and economic imperatives?
Many enterprises including transport, energy, telecommunication etc have long been required by
governments to undertake activities that they would not engage in if guided strictly by commercial
considerations. These non-commercial activities are usually directed by governments industrial or
development objectives. A case in point is the telecommunications sector where operators in many
countries are required to deliver universal service obligations. Telecommunication entities are
required to provide a basic telephone service to all who request it at a uniformed price even though
they may be significant differences in the cost of supply, OECD 1995.18 In most instances, such
services would be extended perhaps those who cannot afford are even in rural areas where the
profit benefit does not exist for the supplier. Aspects relating to access, affordability and some of
social justice are taken into account. The enterprises are required to accommodate in their business
delivery mix the ability to balance delivery on their primary mandate objectives and the extended
secondary non-commercial universal service objectives required by governments.
These non-commercial activities are variously referred to as “community service obligations”, “social
Obligations”, “Universal service obligations” or “public service obligations”. In the PRC’s terms of
reference we refer to a multifarious notion of “social, political and economic imperative” The
National Planning Commission(NPC) indicate that a developmental state plays an active role in
guiding economic development and using the resources of the country to meet the needs of the
people. A developmental state tries to balance economic growth and social development. It uses
state resources and state influence to attack poverty and expand economic opportunities.
In all countries the state plays some role in shaping the structure and output of the economy. States
in different countries use a variety of instruments and policies like the regulation of industry and
trade, the redistribution of incomes and assets, the use of fiscal and monetary policies and direct
state ownership of key industries. The degree of state intervention depends on whether a
government chooses to leave economic development and redistribution to the whims of the free
market, or to be a more interventionist or developmental state.
Whatever the terminology used, it appears these non-commercial objectives can be classified into
three broad categories; first there are cases where governments consider it desirable that that
certain services should be supplied to citizens in an affordable manner irrespective of cost of
provision. Secondly public enterprises implement welfare and distribution services by granting price
concessions to consumers who may not afford some of their products or services. Such services in
telecommunication include areas such as telephone directories, public phone booths, apparatus for
the disabled etc. Thirdly governments may wish to deal with areas where there are observed market
failure with a view to developing and building interest in such areas.
Universal Service Obligations in a competitive telecommunications environment; OECD 1995
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Community Service Obligations (CSOs) can be loosely defined as “the provision of goods or services
by a government trading enterprise (GTE), at the direction of government, which could not be
justified solely on commercial grounds".
Several characteristics are commonly associated with CSOs:
A government directive to a public enterprises relating to the conditions of supply of a specific
(ii) The service would not otherwise be supplied under the same conditions as a commercial
decision of the enterprise; and/or
(iii) The service provides an identifiable community or social benefit, (Forum Economic Ministers
Meeting July 2006)19
In requiring the SOEs to, for instance, lower their charges for products and services to certain groups
of consumers, they would no longer be operating with a truly commercial focus. This undermines
the incentives for the business to improve its efficiency and operate to the best of its ability in
providing a wide range of products and services for the community.
It is in the situation where SOEs are providing services to meet the government’s social objectives
that balancing social, economic and political imperatives p l ay an important role. The provision of
certain social or other non-commercial products and services to the community continues to be an
important responsibility of Government. Whilst it is by and large a common understanding that the
responsibility for ensuring that such services are p provided is one for the Government itself, it is
equally essential to understand that government uses the length and breadth of its organization and
structures to ensure that the desired services are delivered. SOEs as government owned businesses
may from time to time be required to serve a platform to implement some of these objectives. It is
necessary for government as the shareholder to create an enabling environment for SOEs to play a
role in this regard. Fundamental in this regard is reconising the primary mandate for which the
entities were established for. They are required to deliver on the primary mandate in the most
effective and efficient manner. It is a basic necessity for the shareholder to acknowledge that the
extended social and political imperatives required of the entity, are:
an additional t ask
put pressure on the otherwise expected viability and sustainability of the business
are not funded
deliverable given the capacity, reach and skills of the entity
Issues are raised around affordability and sustainability related to balancing of social, political and
economic imperatives. It is argued that the enterprise should prioritise its primary business so as to
achieve viability. To deliver on some of the extended social and political service obligations, it is
argued that there is a need to obtain additional funding from shareholders in most instances.
It is important that CSOs should be:
• directly related to the Government’s Developmental Outcomes;
Managing Community Service Obligations (CSOS) -Forum Economic Ministers Meeting –Pacific Islands Secretariat July 2006
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• specified in explicit contractual or performance arrangements with enterprises; and
• administered with a high degree of transparency and accountability, Queensland Tr e a s u r y
March 199920
The need for government involvement in socio political objectives of development in addition to
driving pure economic imperatives is an unavoidable reality. The use of state owned entities be they
commercial or non-commercial is an established practice for most governments. It is also recognised
that entities are established with a particular mandate and that at a primary level, they should
effectively implement their mandates. In this instance, the government as shareholder should have
particular regard for the categorisation of entities. There appears to be stronger sensitivities in
matters involving commercial enterprises. The entities are encouraged to remain viable whilst
delivering on socio-political imperatives of the shareholder. It is in this vein that there emerges a
need to support the enterprises with additional resourcing for some of the pricey extended
objectives. Creative approaches should negotiated between the shareholder and the entity. The lack
of transparency in articulating socio-economic objectives may result in the full economic cost of such
objectives and their impact on public enterprises being hidden and thus difficult to measure
accurately. Inadequate identification and measurement of these objectives makes it difficult to
evaluate public enterprise performance. Comparative evaluations of public enterprise performance
are difficult without the application of an objective and common framework for delivery in general.
Inadequate information on the effectiveness and efficiency of delivery of social and political
objectives make it difficult for shareholders to assess the extent to which such objectives were being
met, and at what cost. The absence of explicit policy as well as blurred lines of responsibility for the
performance adds to the complexity.
It is important that the government’s policy towards socio-economic objectives is clear so that the
interests of enterprises and other parties that compete in the same space are protected. Such Clarity
shall further aid efficient delivery of both the primary business of the entity as well as the secondary
socio-economic imperatives. The benefit of clearly stating the principles for determination and
delivery of social, political and economic objectives include the following:
protecting viability and sustainability of the primary core business of the entity
opportunity to determine social, political and economic imperatives linked to
priorities of government;
Community Service Obligations: A Policy Framework-Queensland Tr e a s u r y March 1999
Page 14 of 32
ensuring that the objectives must be transparent, costed and where required
Ensuring the objectives are formally agreed upon and are included in shareholder
compacts with agreed upon targets
the shareholder should monitor and evaluate delivery
flexibility to deal with each case on its merits is required on the part of the
Ensure public communication of the SOEs performance on extended objectives
underscoring the benefits derived by the citizens
The review consisted of multiple investigative approaches including; an extensive review of
literature on the subject matter. A further review and analysis of documentation provided by various
participating parties; these include previous reports and reviews. A series of interviews with
stakeholders in the SOE sector were conducted. In addition, other entities and individuals came
forward voluntarily to share their perspectives with the PRC. The review of the ToR also included
conducting secondary research. The PRC also invited public submissions. Desktop research on
various issues related to the TOR was undertaken. The work stream also commissioned papers from
selected experts. Lastly benchmarking exercises as well as policy dialogues were conducted.
The work stream met frequently to discuss the key observations arising from the review.
The paper gives a contextual background against which the summary of key findings and
recommendations arising from the review of the ToR are made. The executive summary gives a
high-level synopsis. This is followed by a background exposition that introduces definitional and
conceptual aspects of the subject matter. An outline of the current situation follows. Based on the
evidence presented, conclusions are made. Recommendations sighting some policy options are
presented. The paper also highlights lessons from benchmarking as well as views of experts.
State Owned Enterprises are created by government to support strategies for economic
development and at a concomitant level to promote socio-political interests of the shareholders.
Page 15 of 32
SOEs are challenged to strike a balance between the interests of the public and the enterprise itself.
A natural conflict between the commercial interests of SOEs and the state’s developmental interests
is observed. Many governments are grappling with how the correct balance can be struck between
these objectives. Successful identification and implementation of effective performance
management models are evident in some areas. Such interventions include among other things such
as; clearer definition of SOEs, clarity on priorities of a developmental agenda; classification and
prioritisation of SOEs. Such a focused approach encourages beneficial performance management
approaches. Real and tangible results can be driven through articulation of clear viability indicators
as well as socio economic objectives.
South Africa is not immune to the challenge of using their SOEs to extend their service and product
offerings for socio-economic purposes. Telkom in a submission made to the regulator ICASA,
acknowledge that governments across the globe advocate universal service and universal access
policies and programmes so as to attain several strategic goals, in particular to “bridge the digital
divide” by:
• Driving physical proximity/ownership to electronic communications services in areas where
it may be uneconomic for licensees to provide services,
Facilitating affordable electronic communications services where residents cannot afford
access to the services available at their locations.
In South Africa, the inequalities in telecommunications resources have been seen to exist not only
along national lines (urban and rural), but also along race and class lines. To this extent policy
directives and pieces of legislation, from the 1996 White Paper, the Telecommunications Act of
1996, through to the Electronic Communications Act of 2005, have over the years been geared to
articulate a vision that balances the provision of basic universal service to disadvantaged rural and
urban communities with the delivery of high level services capable of meeting the needs of a
developing South African economy.
It is noted that despite all of the above legislative amendments, changes in the licensing regime, as
well as other significant market forces, the regulatory framework on Universal Service and Universal
Access has never been reviewed since the initial set of Universal Service and Universal Access
Obligations (USAOs) that were imposed on the licensed operators from as far back as 1997 when
Telkom was first issued with its PSTS license. Furthermore, it is noted that the implementation and
maintenance of existing USAOs has left the country with valuable experiences that cannot be
overlooked going forward. Amongst others lessons that can be cited include:
• The disconnect between roll out targets and issues of affordability, culminated in mass
disconnections and wasteful investment;
Public payphones exemplifies a techno-centric obligation that has failed;
The uncoordinated and selective rollout of CST’s, mainly in commercially viable areas, has
left most of the contemplated needy areas not serviced;
The lack of proper mechanisms to facilitate and monitor the implementation of obligations
imposed was an unfortunate set back;
Regulatory coordination for the implementation is lacking, Telkom SA Limited’s ICASA submission
August 2010. 21 It is also clear that such obligations require mandatory periodic reviews
Telkom SA Limited’s submission on ICASA’s review of universal service and access obligations as published in the government Gazette
no. 33467 of 17 August 2010.
Page 16 of 32
Over 576 SOEs exist in the Republic of South Africa, these include, subsidiaries and. The entities
contribute an estimated 8% of annual GDP” .Management of the SOEs is through a mix of ministerial
guidance as well as internal and external stakeholders (e.g. shareholders and debt providers).
Entities are managed through diverse methods ranging from direct shareholder relations with
specific ministries (e.g. Ministry of Public Enterprise) to dotted line relationships with policy
ministries (e.g. Eskom’s relationship with the Ministry of Energy). The oversight model results in nonstanderdised requirements and approaches in many areas. Approaches to the interpretation and
treatment of social, political and economic objectives reflect a similar lack of uniformity across
various shareholder ministries. Equally performance assessment of such indicators where applicable
is not standerdised. Other existing governance processes outside of the organisation such as
regulators and parliament oversight committees are also a consideration in the mixed oversight
The existing oversight matrix seems to be convoluted and overbearing. It is not transparent in
articulating output indicators for the entities particularly those of a socio-political nature. There are
multiple stakeholders demanding attention. Performance measurement by the various demanding
stakeholders on socio-economic objectives is inadequate and disjointed. Collaboration between
ministries and between SOE’s is ad-hoc.
In the mixed oversight model currently existing in SA, it is unclear whether this is proactiveinterventionist (management by exception, focussing on key risks and issues and intervening in a
timely manner) or whether this is reactive-bureaucratic (management by audits, non-exception
focussed, structured periodic reviews). There are also several ministries which fall under dual
ministerial executive authority (Minister of Public Enterprises and a home ministry, see figure 13,
Figure 3: Excerpt of alignment of SOEs to ministries
Some of the challenges with the existing South African ministerial and shareholder accountability
matrixes include the following:
Several SOEs are owned by the Minister of Public Enterprises (as sole shareholder) and
service a different Ministry as supplier (e.g. the Ministry of Defence is Denel’s main
customer (see examples circled in red in figure 3, above
This could result in dual management and dual objectives being fed into the SOE (duplication
of effort, multiple objectives)
There is also no criticality applied to SOEs and their management – all seem to be treated as
Page 17 of 32
Multiple stakeholders input into SOEs and require outputs from SOEs. This could drive a
culture of “he/she who shouts loudest is served
Although most SOEs understand the socio-political objectives of the government, there appears to
be an element of self-policing in the way these objectives are managed, executed against and
reported on. On the surface it appears as if SOEs are meeting commercial objectives as they are
growing profit and turnover. However these measures are narrow and do not take into account the
monopolistic position of most SOEs. 79% of the sampled entities interviewed by the HSRC through a
commissioned survey indicate that they are achieving a balance in delivery of their determined
socio-economic objectives (HSRC SOE survey October 2011)22. Whilst the findings represent a high
percentage of those who indicated that they not only understand the objectives but achieved the
balance, it can be concluded that in the absence of an adopted policy and a transparent
performance management framework, such a finding can best be described perhaps as leaning more
towards subjectivity. The self defined performance management by entities may impede SOEs from
meeting socio-political objectives. Entities that reported not to have achieved the balance attributed
their failures to financial resource constraints.
The research listed some of the areas identified by respondents as possible social objectives that
the shareholder may require them to service:
Figure 4 : SOEs’ understanding of government’s political, economic and social priorities
What follows are some of the priorities that have been articulated by government in relation to the
national development goals they are pursuing figure 4 highlights the Medium Term Strategic
Framework (MTSF, 2009-2014) as well as the 12 priorities identified by cabinet in 2011 . There exist
other indicators to which the HSRC survey observations could be compared like the National Growth
Path, IPAP2 and the National Planning Commission listed indicators.
HSRC Survey, 2011
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Figure 5: Medium Strategic Framework 2009-2014 Government’s 12 Priorities
Page 19 of 32
Medium Term Strategic Framework (MTSF, 2009-2014)23
Government’s 12 Point Plan24
Improved quality of basic education.
A long and healthy life for all South Africans.
All people in South Africa are and feel safe.
Decent employment through inclusive
economic growth.
5. A skilled and capable workforce to support an
inclusive growth path.
6. An efficient, competitive and responsive
economic infrastructure network.
7. Vibrant, equitable and sustainable rural
communities with food security for all.
8. Sustainable human settlements and improved
quality of household life.
9. A responsive, accountable, effective and
efficient local government system.
10. Environmental assets and natural resources
that are well protected and continually
11. Create a better South Africa and contribute to a
better and safer Africa and World.
12. An efficient, effective and development
oriented public service and an empowered, fair
and inclusive citizenship.
The identified social, political and economic priorities reflects alignment to national priorities using
two amongst a few other documented indicators, the MSTF, 2009-2014, the 12 Point Plan of
Government, this supports the fact that 79% of those interviewed are aware of governments socioeconomic objectives. It can thus be deduced that what respondents articulated as social political and
economic objectives are directly related to the Government’s Developmental Outcomes. What
remains a gap in the finding is the lack of traceable evidence regarding the shareholders role in
ensuring that such objectives are specified in explicit contractual or performance arrangements with
enterprises in a consistent manner. The administrations and of the social and political objectives to a
lesser extent the economic objectives display a lack of transparency and accountability. The impact
of a mixed and uncoordinated approach by various ministries can be seen as a further contributory
factor to lack of consistency in balancing the socio-economic imperatives
The above finding is further corroborated by the observations of the PWC study, they report that
SOEs revealed that they were committed to the principles of a developmental state but had
indicated varying degrees of alignment of these objectives to their mandates and strategies. Their
level of commitment seem to be based on the amount of funding they have allocated to promoting
the Developmental State Agenda, they further indicate that it appears as if total buy-in and
commitment still need to be achieved given the apparent lack of resource alignment to the
objectives. The report also states that few examples or concrete evidence could be obtained to
Medium Term Strategic Framework 2009-2014
Guide to outcomes approach May 2010
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support the level of activity by SOEs towards promoting or aligning to the objectives of a
developmental state PWC SOE Subjective Review July 201125
Both Studies the HSRC as well as the PWC surveys have consensus on the fact that the biggest
challenge in addressing a balanced delivery in the social and political objectives is inclusion of the
objectives in the mandate of entities, the allocation of funds and the ability to deliver.
The natural focus for most SOEs has been to manage narrow, short term commercial objectives in
line with capital markets return-requirements while ignoring more pressing, wider longer term
viability and sustainability related challenges and objectives
The HSRC survey shares suggestions from SOE respondents on how balance of the three dimensional
objectives (social, economic and political) can be accomplished, suggestions include:
 Setting targets in each area where outputs are targeted;
 through the skills development programmes ensuring that those who deliver on the complex
balance of requirements are adequately equipped to handle the demands;
 through a comprehensive strategic and operational planning system, including
developmental scanning and analysis, to ensure alignment between SOE initiatives and
government priorities;
 by adopting and implementing strategies and plans that allow for efficient and effective
social ,political and economic development priorities are achieved;
 ensuring that there are strategic indicators in place, based on government’s strategic
 by improving the availability and lowering cost of long distance connectivity to the
telecommunications sector
 trying to maintain a balance between developmental and business activities HSRC Survey
At the heart of the balance of the social, political and economic objectives is the question of what
value is created by the entities. The PWC survey identified six elements that drive value creation,
these are listed below:
1. Strategic importance of the entity: issues such as mandates, competitiveness, social
cohesion are taken into account
2. Value creation: this element talks to increasing access and value of services and goods
3. Viability: the element deals with the ability of the entity to be sustainable in the long-term
and to ensure where relevant the generation of returns that shall assist the entity to survive
and sustain itself.
4. Funding: in this regard the role of the shareholder is highlighted, the shareholder should
take responsibility to ensure that the entity is adequately funded or capitalised for the
mandate they are assigned to undertake.
5. Restructuring: in this regard it is acknowledged that entities may at one stage or the other
undergo some form of restructuring to ensure that they continue to deliver the desired
balanced outputs and value. To this effect, the argument is that the shareholder should at all
PWC SOE Subjective Review July 2011
HSRC Survey of SOEs In South Africa 2011
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times be vigilant to ensure that such restructuring deliver on expectations, improving cost,
quality and access of goods and services.
6. Organisational Capacity: capacity to deliver and manage processes and delivery is critical.
Aspects such as knowledge, output rate, leadership, management, skills, technology, training
and clarity of mandates are important to enhance the capacity of the organisation to deliver
Both studies reflect awareness of the development priorities. The surveys also make valuable inputs
on some aspects to be taken into account when crafting a structured approach towards achieving
the multifarious objectives.
The collaboration and coordination challenges remain, the various government stakeholders should
harmonise their demand inputs to SOEs to ensure that they are better enabled to respond to the
balance of socio-economic objectives. This requires some form of treatment of the complicated
mixed model of oversight. Coordination shall further clarify governance processes and performance
indicators for SOEs. Creation value in SOEs involves a long-term approach to efficiency, profitability,
development capacity and sustainable taking of environmental and social responsibility.
SOEs primary task is not just to generate financial ROI for the government as shareholder in the
short term. Strategic value creation through the right investments creating long term sustainable
and competitive advantage for the nation is also important. SOEs often perform roles that that are
firstly aimed at delivering their mandated primary roles which in terms of enterprises are largely
commercial. Entities are however required by governments in their shareholding role to perform
other secondary socio-political roles outside their core mandate. The performance and otherwise
value creation of entities cannot be one dimensional focusing on financial ROI only, there strong
advocacy for a bifocal balance of socio-political and economic imperatives. The performance and
value creation of an entity should be evaluated in a holistic manner including balance of social
political and economic objectives for example; human, social, environmental, intellectual,
infrastructural, and financial and other dimension.
Global Comparisons
The below figure 6 gives a comparison of two countries evaluated by the OECD. The working Party
on ownership and privatisation practices with a specific focus on “Balancing competitive and noncompetitive priorities of state owned enterprises. The main issue being propagated is the need for
guidelines to direct the effort of balancing contrasting complex priorities. Such guidelines it is argued
lends credibility to the process involved in balancing the objectives. Guidelines offer better
transparency and accountability. The OECD argues that any obligations and responsibilities that an
SOE is required to undertake in terms of public services beyond the generally accepted norm should
be clearly mandated by laws or regulations. Such obligation and responsibilities should be disclosed
to the general public and related costs should be covered in a transparent manner.
The below outline highlight some of the following areas as crucial for the balance of socio-political
and economic imperatives:
 The purpose of ownership of the SOE
 The classification of the SOE
 The identified specific objectives for the entity
 The normal corporate social responsibility objectives
Page 22 of 32
Funding for additional non-commercial objectives
Performance evaluation
Figure 6: Balance of social, political and economic objectives - Norway and Israel
Area of comparison
Purpose of state
Diversified ownership is strength for Norwegian business and industry in
terms of access to capital and expertise. Diversified ownership is
necessary, both private and public ownership and national and
international ownership. Norwegian ownership is
An important means of ensuring that companies have their head offices
and research activities in Norway. Foreign ownership, on the other
hand, helps to ensure development and build competence.
The state is a major owner of Norwegian business and industry. State
ownership ensures control of our national resources and ensures
revenues that can be used for the good of society as a whole. State
ownership can be decisive in ensuring Norwegian
Ownership and a base in Norway for key enterprises in the years ahead.
A Government company shall act in accordance
with the business considerations by which a
non-Government company is generally guided,
unless the Government, with approval by the
[Knesset Finance] Committee, prescribed other
considerations for action. This provision shall
not apply to a Government company, the basic
documents of which prohibit the distribution of
Corporate Social
Publish wide ranging state expectations
Covers areas including health, environment, gender equality,
minority protection, ethics anti corruption
Stakeholder considerations given attention in case of restructuring
Boards ensures balance of objectives in consideration of
shareholder interests
Strong accountability and transparency
Expectations approved by cabinet and parliament
Extensive categorisation of SOEs
Categorisation follows government policy
Political considerations play a role in categorisation
Fully commercial entities
Commercial and host Head Quarters
Commercial and other objectives
Some are imposed through sectoral obligations e.g. telecoms
Universal Service Obligations
Specific SOE’s can be charged with special objectives pursuant to
parliamentary decisions
Commercial entities are encouraged to maximize earnings subject
to non-commercial obligations imposed
Classification of
SOE specific
Funding for nonCommercial
For non-commercial entities a combination of fiscal grant
allocations and earnings from the market
Support from the state for non- commercial priorities using
diverse instruments
This is an area that still need further development
Greater focus on non-commercial entities due to fiscal funding
and the related budget scrutiny required
Boards take responsibility for performance monitoring
Objectives for SOEs same for the
corporate sector
Exceptions made for selected areas e.g.
affirmative action for women and
protection of ethnic minorities
No strict formal classification, reference is
though made to commercial and noncommercial entities
Allows for incorporation of public benefit
companies, the companies are legally
barred from declaring dividends
For non-commercial entities a
combination of fiscal grant allocations
and earnings from the market
For public sector monopolies, regulated
tariffs are also used
This is an area that still need further
OECD Working Party on State Ownership and Privatization 2011
Page 23 of 32
The analysis so far confirms that there is a need for pursuance for a balance in delivering the
complex socio-political and economic imperatives of government entities. It is also clear that SOEs
are not ordinary commercial enterprises — they have a mandate to achieve longer-term strategic
economic objectives whilst also giving attention to the short term financial returns. A complex and
delicate balance is needed. It is also recognised that in the process of dealing with the dichotomy of
the balance, should the strategic purpose subvert commercial discipline, the enterprise will collapse
and loose its survival and sustainability. However, if narrow commercial considerations over ride and
ignores the strategic socio-political and developmental imperatives, government objectives will be
compromised. Consequently, shareholder management of these multiple objectives is very complex;
a balance of the bifocal financial and social logic is called for.
To achieve the advocated balance, the shareholder shall require to provide clear guidance through
unambiguous specification and determination of what it is that the entity should focus on to achieve
the financial and social logic. Loose specification of the bifocal objectives permits room for subjective
individualised interpretation as well as inconsistent self-policing of entities. Lack of transparency and
accountability result. It is therefore important for the shareholder to recognise that to facilitate
achievement of the balance, it shall be necessary for the shareholder to adhere to a clear set of
1. Identification and articulation of the socio- political and economic objectives
2. The SOE carries as a primary responsibility the need to deliver on the core objectives for
which it is established for in a viable and sustainable manner
3. That the identified objectives should be included in the shareholder compacts of entities
4. The bifocal objectives should be aligned to developmental goals of the state
5. Recognition that there may be a cost associated with the delivery of the identified
objectives. This shall require that such costs be estimated and that mechanisms for funding
be explored and agreed upon
6. That there should be a structured monitoring and evaluation of performance of the
identified objectives
7. Application of the principles should take into account the adopted different classification of
state owned entities.
Taking these principles into account and pulling the threads of this ToR analysis, the following
emanates in relation to the key questions that needed to be answered:
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The overarching question for government owners is why these companies need to be owned by the
state. It is argued that the reason for state ownership is that they are expected to act at least in
some respects, differently from private companies. A relatively clear cut case is provided for entities
which are established for the purpose of pursuing mostly non-commercial activities. For commercial
enterprises, their primary remit remains to create economic value. There are often exceptions from
the rule where governments may require entities to perform some specified non-commercial
objectives. The OECD postulates that “any obligations and responsibilities that an SOE is required to
undertake in terms of public services beyond the generally accepted norms should clearly be
mandated and articulated. Such obligations and responsibilities should also be publicly and
transparently disclosed.28
The analysis reveal that there is some knowledge and awareness of the political and social
imperatives but the interpretation thereof as well as the setting of targets and performance
indicators is left to the interpretation of the entities. There is an over concentration on economic
performance. There seem to be no clear articulation approach and guidelines for predetermined
socio-political and economic objectives. The loose specification of the bifocal objectives fuels
subjective and individualised interpretation. A further observed weakness is that there appears to be
little coordination and collaboration across various ministries that may be delivering on similar
objectives, this emanates in part from the complex mixed oversight model that currently exists in
South Africa.
FIGURE 7 : Balancing Act – Public & State Interest vs. Enterprise Interest
OECD working party on State Ownership and Privatisation: Balancing competitive and non-competitive priorities March 2011
Page 25 of 32
High level analyses of the annual reports of SOEs indicate that primary focus is on economic
imperatives. This is amplified by the fact that most SOEs are indebted and therefore need to raise
more capital in capital markets that have become volatile and pricey. The ability to repay capital
requires relevant pricing structures. When SOEs are requested by the shareholders to undertake
socio-political objectives that are not part of their primary commercial mandate, and are also not
funded, it becomes difficult for an SOE to meet its viability objectives as well as the socio-political
objectives. A need arises to fund through existing private sector-sourced debt facilities.
Most SOEs are committed to working towards various socio-political objectives but are hampered
by lack of funding for the extended non-commercial mandates. The state should consider an
approach that seeks to advance resources for the identified and socio political objectives in order to
safeguard viability. The need for funding for the additional socio-political objectives is corroborated
by the surveys of both PWC and HSRC. Global examples also support the principle of additional
funds, see figure 4 and 5
Figure 8; Examples of balanced social, political and economic objectives for Norwegian SOES
Posten (commercial and other objectives)
Posten is a postal and logistics group that views the Nordic countries as its home market, and is engaged in the business
areas postal services, logistics and IT. The group comprises the parent company Posten Norge AS and the wholly and
partly owned subsidiaries gathered under the brand name Bring, as well as the IT Company ErgoGroup.
A key element in Posten’s strategy is to maintain its position as the market leader for postal services and develop leading
positions in the Nordic countries.
Posten shall ensure the nationwide provision of mandatory delivery services and basic banking services in the branch
network. Furthermore, the company shall ensure proper management of the State’s assets and good industrial
development of the company. The sectoral policy objectives are mainly safeguarded through sector-specific regulations,
including licenses.
Avinor AS (sector policy objectives)
Avinor is responsible for owning, operating and developing a nationwide network of airports for civil aviation and a joint
air navigation service for civilian and military aviation. This encompasses 46 airports in Norway, as well as control towers,
control centres and other technical infrastructure for safe flight navigation.
The objective of State ownership of Avinor is to facilitate safe, efficient and environmentally friendly air services
throughout Norway. Avinor shall, to the greatest possible extent, be self-financed through its own revenues from the
primary activities and business activities in connection with the airports. Financially, the entire enterprise is managed as a
single unit, which means that the financially profitable airports finance the financially unprofitable airports.
AS Vinmonopolet (sector policy objectives)
Vinmonopolet is a state-owned company with exclusive rights to sell alcoholic drinks containing over 4.7 per cent alcohol
volume to consumers through retail outlets. Vinmonopolet was founded on 30 November 1922. To ensure legitimacy with
the general public, the company places emphasis on being a specialised trade chain with a wide range of products and
personal customer service. Vinmonopolet is one of the most important instruments in Norway’s alcohol policy and is
intended to help limit alcohol consumption by regulating accessibility. The alcohol-policy responsibilities safeguarded by
Vinmonopolet are expressed through effective social control, measures to create positive attitudes, efficient operations
and no pressure to buy
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Eskom and Transnet are two South African examples where the tension (see figure 6, below)
between public interests and the entities commercial interests is clear and where need for additional
funding is indicated. Figure 8 below gives a high-level appreciation of the tensions
Figure 9 – Meeting key SOE
There are many other examples of SOEs that are battling with this dichotomy and this continues to
be amplified. As long as large SOEs are expected to fund themselves from private sector money
markets and provide returns in line with private sector money market returns, while at the same
time being required to effectively subsidise specific government socio-political objectives (e.g. rural
electrification or cheap logistics), it is clear that such expectations are not rationale, they cannot be
possible without government support (e.g. subsidies or direct funding) or a direct decision by
government to forego profit in return for delivery of socio-political objectives that are clearly
identified and tagged as delivery outputs.
The PRC commissioned report by PwC suggest that most SOEs honestly accept that they have had
mixed results when meeting the bifocal imperatives, the socio-political and economic objectives.
58% of those surveyed confirmed that their most significant contribution, 40% in view of social
objectives and 9% indicated that their significant contribution is towards political objectives.
Some of the issues raised as inhibitors by SOEs in the PWC survey include among the following (see
figure (10)
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Figure 10: Some identified inhibitors for meeting bifocal objectives (PWC)
It is essential that the work of SOEs considering their, classification, defined mandates as well as
funding should ensure that their work cuts across the social, political and economic imperatives to
promote full realisation of democracy in South Africa.
The final question that the review of the ToR sought to answer is “what should be done by all
stakeholders of SOEs to maintain a healthy balance between political, socio-economic imperatives?
Can this be measured? If so how?”
In answering the question, the paper shall introduce a set of recommendations that are undergirded
by the findings of this review. Three key areas are focused upon for the recommendations:
SOE foundational issues - structure, categorisation and enablement aspects, the
impact thereof in driving the balance of social, economic and political objectives
The role of legislation and regulation in enabling the shareholder to drive the
multifarious agenda for balancing diverse objectives
Policy development for balancing social, political and economic objectives
Key issues for owners: (Driving the success in balancing the social, economic and political
imperatives for SOEs).
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At the foundation of giving treatment to the question of balancing social, political and economic
imperatives are issues related to ownership of the entities. Recommendations in this regard are
given full attention in some of the ToR, they are reflected in this paper to highlight the primary
dependencies they have for solutions proposed to achieve balance of objectives.
8.1.1 Rationale for ownership: The shareholder should ensure that there is clarity to all on the
rationale for ownership of the entity. It is against this primary background that the shareholder shall
determine the mandate of the entity within which the shareholder can articulate the social, political
and economic objectives
Set a clear SOE strategy –evaluate the mission and goals of SOEs
The South African and global economy has evolved since the establishment of many of our SOEs.
Furthermore the rationale for SOEs during the apartheid era and the rationale for SOEs post 1994
require examination for sharpening alignment to new priorities of the democratic dispensation.
This, coupled with changing economic times, means there is a need to revisit the missions and goals
of SOEs. In the absence of regular managed reviews of any country’s portfolio of SOEs it is possible
that SOEs could end up being misaligned with their founding goals or could be totally misaligned
with the existing economic and socio-political needs of the country.
This drives the need to review a country’s involvement in specific sectors or markets in the economy
and how the portfolio of SOEs contributes to long-term (> 20 years) plans for the success of a
Categorisation and prioritisation of SOEs
To facilitate identification of the social, economic and political imperatives of an SOE, it is essential
to establish how it is classified. It is necessary to categorise and prioritise SOEs in order to improve
on their governance and targeted performance management.
China, for example, had identified the types of SOEs it required; the next step was to prioritise these
SOEs to ensure an effective form of management and interaction with the SOEs. China separated its
SOEs into strategic and key industries (those where the state maintained absolute control and were
seen as the key drivers of the economy’s growth), basic and pillar industries and other industries
(SOEs with a lower influence to shift the Chinese states developmental curve). New Zealand also
undertook a similar exercise to classify and prioritise SOEs, splitting them into Commercial
Enterprises (SOEs that should be as profitable and competitive as private sector organisations),
Crown Financial Institutions (companies that invest in growth industries and sectors) and Multiple
Objective Companies (companies that maintain financial viability and an adequate return on
The way a country applies the categorisation and prioritisation is irrelevant. What is critical however
is that this rigour exists as it drives the right determination of socio-political and economic
objectives, governance and performance management approaches. The approach is important
particularly in countries that have a plethora of SOEs (normally a reflection of historical
circumstances or poor classification of SOEs). South Africa has (at last count) 576 SOEs (PRC).
Page 29 of 32
Portfolio management
South Africa should drive toward a coordinated portfolio management to meet predetermined
bifocal portfolio outcomes. This should support the achievement of integrated outcomes within the
economy, as SOEs are performance managed to work together towards long-term aims. Emphasis is
on the need for a prioritised set of SOEs to be determined and for there to be a portfolio
management approach to ensure the differing SOE objectives (socio-political and/ or economic) are
met in an integrated fashion due to the many interdependencies.
Figure 11: Critical Success Factors for SOEs
A clear legal, regulatory and governance framework
The balance of social, economic and political imperatives can be further aided by a clear governance
framework for SOEs. Most governments have focused on the development of the relevant legal and
governance frameworks. Following on from the premise that most SOEs struggle to balance
competing aims of economic output and socio-political responsibilities, it inherently makes sense to
ensure that the right legal and governance frameworks exist to support achievement of these
competing objectives.
South Africa has currently not undertaken a root and branch review of the existing governance
structures. This is evident by the number of bodies involved in the “policing” and governance of
SOEs (see figure 12, below)
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Figure 12: RSA SOE governance landscape (not exhaustive)
There are several SOEs which fall under dual ministerial executive authority these burdens the
entities when dealing with multiple demands. Multiple stakeholders input into SOEs often results in
transference of responsibility and could drive a culture of “he/she who shouts loudest is served. A
legal framework dealing specifically with governing SOEs in particular, their shareholder make-up,
one-on-one relationships with ministries or their performance management shall assist the desired
balance of the bifocal objectives. Such a framework shall go a long way in clearly determining and
articulating the social, economic and political objectives of entities. Countries such as China and
Namibia have implemented SOE Acts
Develop an overarching policy for balancing commercial and non commercial priorities
It is important for the shareholder to recognise that to facilitate achievement of the balance, it shall
be necessary for the shareholder to adhere to a clear set of principles:
Identification and articulation of the socio- political and economic objectives
The SOE carries as a primary responsibility the need to deliver on the core objectives for
which it is established for in a viable and sustainable manner
That the identified objectives should be included in the shareholder compacts of entities
The bifocal objectives should be aligned to developmental goals of the state
Recognition that there may be a cost associated with the delivery of the identified
objectives. This shall require that such costs be estimated and that mechanisms for funding
be explored and agreed upon
That there should be a structured monitoring and evaluation of performance of the
identified objectives
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Application of the principles should take into account the adopted different classification of
state owned entities.
The ToR review lends itself to the conclusion that, when it comes to the stated priorities for
SOEs, a top priority is to ensure a sufficient degree of transparency and accountability around these
priorities. It is further necessary to ensure that they have been established through procedures that
are representative of the public interest. Focus should be on delivering intended benefits for the
citizens. It is also necessary to give attention to the impact non-commercial entities have in
supporting delivery of balanced social, political and economic imperatives. An important challenge
for policy makers is to ensure that SOEs receive adequate financial support for the public policy
priorities they are asked to undertake. They should neither be put at a competitive disadvantage
where they are not able to effectively deliver on their primary mandates. Clear performance criteria
should be developed. Feed back on performance on the predetermined objectives should be
mandatory. A balanced delivery on economic as well as social capital should be commonly
understood. Clear policies should be developed to guide this area of delivery in SOEs.
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