It is popularly believed that once poor governance  at state-owned enterprises (SOEs) is fixed, they will magically return to good health. Yet, while poor governance may be a critical problem at failing SOEs, more importantly, the business model of many SOEs is broken, and in many cases unfixable.

SOEs are highly bureaucratic in their inner workings, mimicking that of the struggling public service, which makes these companies highly ineffective, unproductive and inflexible.

SOEs are compliance-driven. Compliance is rewarded. Decisions take long to make. Decisions, problem-solving and communications within the organisation are often politicised, bureaucratised or in silos.

They have rigid chains of command, with multiple layers between the management, employees and customers. The internal organisational structures are often bloated. Duplication of functions is the norm.

Executives often barricade themselves from staff and customers, interacting through layers of intermediaries. Employees also do not have autonomy or decision-making power within their sphere of operation. Permission has to be sought from layers above to make decisions on the most mundane issues.

Task teams and ad hoc committees abound and are often permanent — with companies often forgetting the initial purpose of these structures. In many SOEs, communication, even if it involves neighbouring offices, is done through secretaries, including old-school typed paper letters and e-mails, instead of face-to-face discussions.

Incentives, rewards and performance management are lopsided. Performance management is based on whether a job has been done according to minimum job descriptions — just for arriving at the job, meetings attended and for keeping costs down — rather than on excellence, including increasing productivity, efficiency and innovation.

The best people are often not recruited or promoted. Senior management and boards are often appointed for patronage, political and corrupt reasons rather than for competence. Such leaders obviously cannot give the transformational, value-based and purposeful leadership that is required to make SOEs work efficiently.

Incompetent boards and management often appoint family, friends and allies to middle and lower management — cascading the zone of incompetence downwards in the organisation. This creates a cycle of poor productivity, inefficiency and waste across the organisations.

Many managers do not spend time at the coalface of service delivery, and may spend the life of their careers without ever having been at the point where services are delivered, products manufactured or clients engaged. This means managers often do not come to know the reality of the business.

These organisations are not adaptive, agile or flexible. When competition finally arrives, often in the form of new kinds of products that replace the traditional services provided by them, they cannot respond.

For example, new competitors to the SABC, including private broadcasters and streaming services such as Netflix, and the rise in usage of content projected on mobile phones and the internet, have eaten the SABC’s proverbial lunch.

The Post Office is another case in point. E-commerce, e-mail and social media have disrupted the Post Office’s traditional offering of snail mail. Yet the workforce of the Post Office, its systems and structures may be too bureaucratised to respond effectively to new kinds of competition.

Jobs are created for political, patronage and corrupt reasons. SOEs are highly unionised. With the ANC in an electoral alliance with union federation Cosatu, trade union jobs, wage increases and benefits are often guaranteed, even if an individual unionised employee is ineffective, unproductive and unskilled.

In many cases when an SOE unit or division is not functioning optimally but employees cannot be fired for political, patronage or corrupt reasons, a new unit is created to perform exactly the same functions.

Affirmative action and black economic empowerment have increasingly been captured at SOEs. Affirmative action is used to appoint political allies, family and friends. Similarly, procurement is diverted to family, friends and allies or through front companies.

When these companies are forced into rightsizing they often retrench those least connected to the governing party leadership or company management, which means they retrench the most capable people and leave those who are connected but incompetent.

Invariably neither the affirmative appointees nor empowered businesses deliver quality services on behalf of SOEs, as seen in the dramatic case of Eskom, where critical services have been supplied by people with no business experience, leading to the power outages that caused mines and factories to close, prospective new investors to seek other destinations and mass unemployment.

When these companies are forced into rightsizing they often retrench those least connected to the governing party leadership or company management, which means they retrench the most capable people and leave those who are connected but incompetent.

SOEs are often secretive. They rarely share information with staff, customers or the public. Everything is “top secret”, “classified” or only accessible to “top management”. The lack of company-wide information sharing means employees do not know where the problems are, whether targets are being met or how their performance compares to that of their peers.

Many SOEs are not service orientated either. Because SOEs are usually monopolies and have no competition for the services they deliver, they are aloof, uncaring and complacent about customers.

The argument by many SOEs managers and employees is because their customers cannot get the service anywhere else they are captive, cannot leave or seek alternatives, and therefore do not need to be nurtured in the way private companies would service the needs of their customers or risk losing them to competitors.

Monopolies do not have to care too much about the quality of services, goods and products they produce. Because there is no sense of responsibility on the part of senior management or the board, there is often also little sense of personal responsibility for the quality of services and products by ordinary employees.

The cost structures of SOEs are unsustainable. Poor-quality services and products are produced at higher costs than equivalent private sector peers. The profit model of most SOEs is to increase the price to make up for increased costs and revenue losses, rather than market-related pricing. Eskom is a case in point — prices are increased even if demand drops and the quality of supply has declined.

The remuneration structures of most SOEs are out of kilter with their productivity, quality of services and goods produced and their employees’ skills. Even when failing spectacularly as businesses, SOE managers and employees receive huge incentive payments, bonuses and wage increases.

Many of the SOEs are in a death spiral, their services and products produced cheaply elsewhere or new alternatives taking market share. These companies do not have the skills set, organisational flexibility or finances to reposition themselves to compete or find new niches.

To reform these institutions will mean that whole management and board teams, as well as employees, will need to be fired. However, in many cases, this would be impossible, because managers and staff are politically connected or members of trade unions aligned to the ANC.

Furthermore, wholesale retrenchments are often opposed by ANC supporters because it is felt that it will increase job losses in a weak economy. Breaking up SOEs is also opposed because of the fear that it will cause job losses and that new private owners will not give black small businesses opportunities.

Advances in technology have outstripped those in SOEs. Investing in new technology would in many cases be too expensive, the skills are lacking, and the organisational cultures, systems and processes too archaic.

The markets in which many SOEs are operating have been so disrupted and advanced that they face formidable new competitors. It is difficult to overhaul the embedded organisational culture — high levels of corruption, low productivity and high operational costs — in most SOEs because their employees are in many cases not fit for purpose.

Successful SOE reform will depend on overhauling the business model rather than only cleaning up governance, as important as the latter may be. However, it will need extraordinary political will to reform the business model of SOEs given the formidable entrenched interests.

• Gumede is an associate professor at the Wits University School of Governance and author of SA in Brics (Tafelberg). He was an advisor to the presidential review committee on SOEs (2009-13).