SA’s state-owned enterprises: From noble vision to symbol of corruption – Corrigan - Biznews

In the wake of apartheid’s end, South Africa’s ANC believed state power could remedy the nation’s socio-economic woes. However, its vision stumbled as state-owned enterprises (SOEs) transformed from pillars of growth to symbols of mismanagement and corruption. The Zondo Commission uncovered the depth of this decay, revealing how political agendas eroded efficiency, leaving critical sectors like energy and transport in disarray. Now, a daunting challenge looms: reviving SOEs demands not just structural reforms but a cultural shift away from patronage towards competence and transparency.

Terence Corrigan

The ANC took power with the firm conviction that state power was the route to resolving the country’s chronic socio-economic deficits.

Partly, this reflected the statist ideological convictions of a party schooled in the Soviet bloc and influenced by Marxist thought. It also denoted an attraction to the idea, popularised by rapid industrialisation in East Asia, of a ‘developmental state’ – the latter position being a liveable compromise after the failure of the Eastern European socialism it had previously admired. A strong interventionist state would make a purposefully developmental contribution to the country’s new political regime.

Fortunately for this vision, South Africa was endowed with a portfolio of bodies that had played this role in the past and could be adapted to do so in the new era. These were its State-Owned Enterprises (SOEs). For years touted as the proud champions of economic growth and transformation (not only for South Africa, but across the region and continent), they have now become synonymous with South Africa’s national malaise: wasteful, corrupt and incompetently managed.

Indeed, the Commission of Enquiry into Allegations of State Capture, under Justice Raymond Zondo, pointed to the country’s SOEs as prime examples of this pathology.

This is also hitting South Africa’s economic prospects hard. Chris Hattingh, logistics expert and director of the Centre for Risk Analysis, a Johannesburg based research and advisory body, told Africa in Fact: ‘The ongoing issues across the country’s ports and rail networks inhibit these sectors, the economy as a whole, and the country’s future prospects. As the country’s commodities exports continue to decline, South Africa’s reputation as a trade hub on the African continent is damaged, and tax revenues are lost. Neighbouring countries (especially Namibia and Mozambique) are investing in their trade infrastructure, placing them in a stronger position than South Africa over the medium-to-long term.’

Donald MacKay, director of XA Global Trade Advisors, concurs, pointing to run-down and inadequately capacitated ports and unreliable railway lines. ‘All of this,’ he says, ‘is slowing down the economy. It’s putting a lock on the economy like a traffic jam.’

It’s unclear just how many state-owned enterprises exist in South Africa. A 2012 review ordered by the President – at a time when concerns about the state of these entities were growing but enthusiasm for their potential developmental role was riding high – found that ‘at least’ 715 such bodies existed. Most of these would be modest in size, resourcing and mandate. A handful, however, were true colossi of South Africa’s economy.

Eskom and Transnet
The stand-out examples of this are Eskom and Transnet. Eskom dates from 1923, and had provided South Africa’s suburbs and industry with a reliable and relatively cheap supply of electricity.  Transnet was the heir to the various bodies that had managed South Africa’s transport infrastructure, such as the South African Railways and Harbours administration and the South African Transport Services. Each had been responsible for providing some of the hard foundations that made a sophisticated industrial economy possible.

At the time of the transition, the ANC acknowledged the value of these bodies, and the potential to drive a developmental agenda. Eskom in particular was instructed to embark on an accelerated programme of electrification. This was a quality-of-life success story that the new government could deliver to its constituents. South Africa at that point had a power surplus, since economic growth in the 1980s had not lived up to expectations. Indeed, South African electricity costs were among the most competitive on earth.

Transnet, while a less visible feature in people’s lives, was nevertheless a critical enabler. Having been fundamental to the operation of South Africa’s crucial mining sector – not least through providing channels to export its mineral bounty – it was a foundation on which its economy rested. It was also seen as a vehicle for development across Africa by helping to rehabilitate and operate rail networks in peer countries, as South Africa re-entered the continental community, and in the early post-transition years.

Yet the two entities also had what would turn out to be a common vulnerability. Ultimately, their lines of accountability made politically-determined demands all but inevitable. In multiple respects, this would be their undoing.

‘Transformation’
The ANC had little trust in or regard for the officials it inherited from the previous dispensation. It viewed its mandate as being to drive an all-encompassing programme of national ‘transformation’. The state and its companies, being the vanguard of the new society that the ANC was birthing, were obvious early targets. Perhaps less publicly acknowledged but equally important at this time was that they provided a ready source of high-status and well- remunerated positions for those in the party’s orbit. Impolitic as it was at the time to remark on this, many former activists now found themselves in positions for which they lacked expertise and experience.

As the 1990s progressed and the ANC’s confidence in government grew, it added an explicitly political dimension by adopting a policy of ‘cadre deployment’ (which this author has previously written about in Africa in Fact). This was explicitly aimed at bringing all ‘levers of power’ under party control in the interests of securing its ‘hegemony’.

Hard realities bite
South Africa’s public has been frustrated by corruption since the transition, though this has often been expressed in moral terms. This obscured the considerable economic costs that corruption was imposing, a phenomenon helped along by the buoyant mood in the 1990s and the economic boom that accompanied demand for commodities in the early to mid-2000s.

Out of public view, a crisis was developing. In the early years, a concerted push was made to expand quality-of-life infrastructure to the previously underserved black (and especially the rural) population. Electrification in particular took off rapidly, World Bank data indicates that some 58% of the population had access to electricity in 1996; access had grown to a little over 72% in 2000.

This raised the question of the adequacy of that infrastructure. The Department of Minerals and Energy warned in its 1998 White Paper that energy consumption was rapidly rising and that by 2007, the then-existing surplus would be exhausted. New investments in generation would need to be undertaken by 1999 to head this off. Transport faced similar challenges. Harbour congestion and railway accidents (‘Hier kom kak’ – here comes s**t – was a phrase popularised by a quick-thinking engine driver who averted a catastrophic collision) indicated that not all was well.

Yet in both cases, the response was in both cases parsimonious, tardy and riven with political and ideological considerations, notably whether the private sector would play a role, and if so, what role it would play. 

Into this stepped an ever more confident government and ruling party with a growing inventory of racially transformative legislation and political demands to match. It was also a time in which the ANC’s dominance was riding particularly high. It faced no credible electoral challenge, business leaders acquiesced in its demands and most commentators had been won over to its worldview. Hegemony reached its high-water mark, and transformation came rapidly in its wake.

The most obvious tool of this was the use of substantial procurement budgets to drive the Black Economic Empowerment (later rebranded as Broad-Based Black Economic Empowerment) agenda. In Eskom, this centred around the purchase of coal. Hitherto, long-term contracts had been used to ensure a supply of coal of suitable quality for the stations, sometimes from collieries located adjacent to power stations, with supplies delivered via conveyor belts. In the early 2000s, these arrangements were modified, and a new regime introduced a ‘hierarchy of procurement’. Preferences would be given to a range of designated vendors, ‘Black Women-owned Suppliers’, ‘Small Black Suppliers’ and so on. Long-term contracts were to be retired in favour of ‘an active coal spot market.’

Simultaneously, demands for ‘representivity’ saw the introduction of programmes to appoint and promote staff based on demographics (sometimes paired with the exit of skilled and experienced predecessors, incentivised by generous severance packages.). Particularly at senior level, this was linked with favouritism for those with party ties, both as a means of patronage and as a guarantee of party control.

All this was a particularly severe handicap where complex technical matters were at stake. Michael Evans, a public law attorney and one-time member of the ANC’s underground, described what unfolded at Eskom in the 1990s in a column on the Daily Maverick website: ‘A large number of people were brought into the organisation to play a managerial role with no engineering or other relevant qualifications or experience. Many of the highly skilled engineers and others, being “managed” by those who knew nothing about the work being done, left Eskom and took up positions abroad, often in the Far East. While those appointments were driven by a laudable commitment to transformation, this was arguably the beginning of Eskom’s descent.’

As the 2000s wore on, these factors brought South Africa’s SOEs to the brink. As management was denuded of skills, critical maintenance was ignored. Race-based preferences and political preferments were opening the door to inflated prices and the purchase of inferior quality goods. The latter was especially notable in respect of coal, which was sometimes trucked in from distant parts of the country and was not of the quality required for the stations. Indeed, when power failures began to hit in and after 2007, a regular explanation given was that the available coal stocks were wet – though historically, a condition of the coal quality had been that it should be viable when wet. 

It’s worth noting that what had happened to this point followed a deliberate set of policy choices. This was corruption in a literal, structural sense, in that it weakened the integrity of the institutions on to which these policies and practices had been imposed. It had undermined the quality of the systems and compromised the reliability of the services they provided. And all  this had happened as tough choices confronted the leadership, and where solid management and operational capacity was critical.

As the power crisis was biting, and the necessity of creating new generation capacity was recognised, the cumulative effect of these pathologies began to be exposed. The ANC, it turned out, had established a company, Chancellor House, to raise funds for itself. Its involvement in government contracts, with the obvious conflicts of interest, were of particular concern. Among these was the construction of power stations at Medupi and Kusile. Chancellor House partnered with Hitachi in a successful bid for the boiler contracts – valued at some R38 billion – and also received a payment from Hitachi, with the reference ‘Tender Support Fee – Bravo’. Political proximity meant that a good crisis was too lucrative to waste.

The deluge
If by this point, the challenges before Eskom and Transnet could be explained as institutional corruption, the ascendency of Jacob Zuma unleashed (or at least coincided with) something more sinister.

South Africa’s transitional society offered bountiful opportunities for enrichment for those willing to work outside the rules. A large arms deal negotiated in the late 1990s had demonstrated how political connections could turn into large earnings for the companies implicated, for some of the fixers and according to some sources, for the ANC itself. (This issue has never been properly resolved.) It was also apparent that criminal elements were penetrating and influencing the state. Former police commissioner Jackie Selebi was ultimately convicted for corruption arising from his relationships with crime bosses and crooked businesspeople.

Zuma himself had been fingered in corruption allegations, and it was widely believed that his presidential bid was partially a gambit to avoid prosecution. Certainly, a heavily compromised incumbent in the presidential office signalled in some quarters a laissez-faire approach to public resources, not to mention a pliable partner to assist in accessing them.

Zuma’s presidency has come to be associated with ‘State Capture’. This is a uniquely South African concept denoting the wholesale suborning of the state to serve corrupt interests.  State Capture revolved around the Gupta family, a trio of brothers from India who had worked their way through modest business ventures in post-apartheid South Africa to become the key players in a web of corrupt extraction that included Zuma and a range of other prominent South Africans. This has been documented in a number of books, such as Pieter-Louis Myburgh’s The Republic of Gupta, and Rajesh Sunderam’s Indentured – Behind The Scenes At Gupta TV. While this is true (though the state capture web was much larger than the Guptas), it cannot be gainsaid that this was a development – an inevitable development – of the ANC’s own hegemonic pretensions. Having sought to commandeer the state for the party, and having commensurately weakened its institutions, the ANC was especially vulnerable to the predations that followed.

The basic pattern was that political influence was brought to bear in making executive appointments; this might be done after the suggestion of a political-connected businessman, or what in South Africa has come to be called a tenderpreneur. Once in place, these people could swing contracts to their patrons, generating healthy kickbacks in the process. This helped to make some people very wealthy, and also meant that the core business of these bodies was a secondary consideration.

As Chris Hattingh remarks: ‘Through cadre deployment and preferential procurement, state owned companies such as Transnet find it all the more difficult to do their work. Contracts, materials, and work generally cannot be completed, or even undertaken, without some element of ‘beneficial’ or political relationship having been first established. Materials and components sourced from “chosen” sources always tend to cost more than they would in a competitive market, meaning Transnet’s already dwindling resources become further constrained.’

Testimony before the Zondo Commission heard for example, that executives at Transnet – apparently close to the Guptas – were appointed by Cabinet. The Commission’s report stated that this ensured that ‘a small group of senior executives and directors were positioned to collude in the award of contracts.’ One of these involved a decision in 2012 to buy a fleet of locomotives to replace existing stock from two Chinese companies, China North Rail and China South Rail. Funds were diverted into Gupta-linked companies (and kickbacks) that added little if any value to the project, and the projected costs escalated from an initial R39 billion estimate to around R55 billion. The Chinese suppliers, meanwhile, were found delinquent in their local tax obligations – and then refused to supply spare parts. As a result, despite being no more than a decade old, many of the locomotives have been unusable for years.

The Commission damningly remarked that ‘Transnet became the primary site of state capture in financial terms,’ these amounting to over R41 billion.

At Eskom, Zondo found that the Guptas had engineered the installation of new leadership in 2015. (This included appointing as CEO Brian Molefe, who had been Transnet CEO.) The Guptas swiftly moved to acquire a coal mine, Optimum Coal Mine in Mpumalanga, an endeavour in which it received the personal support of the then minister of Mineral Resources, Mosebenzi Zwane, who flew to Switzerland, apparently to push for the sale. The mine would go on to supply coal to Eskom through the Gupta’s Tegeta company, at a cost exceeding what it had previously paid.

All told, the Zondo Commission found that some R14.7 billion worth of contracts were ‘afflicted by State Capture’.

As Donald MacKay comments: ‘When you deploy incompetent people, or corrupt people, or both, things break.’

Post-State Capture?
President Ramaphosa and his supporters branded their accession to office a decisive break with State Capture and an uncompromising confrontation with corruption. New leadership was brought into both Transnet and Eskom – but this has exposed how deep the decay has become.

In late 2019, André de Ruyter took over as Eskom’s CEO. His time in office was not a happy one. Loadshedding intensified, though his supporters would claim that this was a dual consequence of the derelict state of the entity and of maintenance needs finally being taken seriously. De Ruyter was regularly attacked in racial terms, effectively for undermining ‘transformation’. (A news report indicated that the government had sought a black CEO, but given the toxicity of the position, it had been rebuffed by two dozen possible candidates.)

De Ruyter drew attention to the scale of penetration of Eskom by criminal syndicates, some linked to political and law enforcement figures. Sabotage of equipment was widespread, as were scams involving coal deliveries.

Shortly before his resignation in February 2023, De Ruyter told a television journalist that an attempt had been made on his life, that a senior manager had routinely worn a bullet-proof vest, and that he had reported a corrupt politician to a cabinet minister (both unnamed). His report had  met with resigned indifference.

Perhaps most damningly, he described Eskom as the ANC’s ‘feeding trough.’ ‘So yes,’ he said, ‘I think it is entrenched.’

Meanwhile, the impact on the country is catastrophic. Estimates released by the Minerals Council South Africa for 2023 showed that its overall production and exports were down significantly compared to 2022; production from R1.2 trillion to R1.1 trillion, and exports from R883 billion to R782 billion. Much of this was laid at the door of failing power and transport systems. Busi Mavuso, the outspoken CEO of Business Leadership South Africa, remarks that the failure of the country’s network industries is probably the single biggest problem facing South Africa’s economy. She laments the lost opportunities on top of the literally billions that firms (those able to afford it) are spending on things like generators and diesel. ‘We all knew this was coming,’ she says, ‘the government knew, but they never did anything to prevent it. Now we are sitting with these multiple crises.’

Post-post-State Capture
What can be done to turn this around?

Answering this depends on the frame of reference. Restoring South Africa’s network infrastructure is a goal universally shared. BLSA’s Mavuso points to existing work in which the business community has been involved to deal with these problems – through the National Logistics Crisis Committee – but her frustration is evident: ‘We are great at planning, terrible at implementing.’

For Donald MacKay, addressing the logistics crisis will take significant investment properly to utilise the infrastructure that exists, and expanding it to meet the needs of South Africa’s economy. But this must be paired with a fundamental change in thinking, since ‘money without competence is just money poorly spent.’

MacKay’s insight reflects the thinking of seasoned observers, like Harvard University’s Ricardo Hausmann. Hausmann’s Growth Lab argued in a report last year that key to South Africa’s crisis is a lack of state capacity. Central to this, he said elsewhere, is South Africa’s politics. For decades, the electorate was unwilling to punish the ANC, and so incentives to resolve problems were limited, and any action to deal with them was subject to vigorous contestation within the party. This has meant that policy is grid-locked and action circumscribed by ideology.

Ultimately, the government and the ANC have chosen a course that has introduced purposeful, structural corruption in South Africa’s SOEs, which has fed seamlessly into the decentralised, pathological corruption with which they have been infected. And as long as they pursue the current course, the dysfunction will continue.

Rehabilitating South Africa’s SOEs demands, fundamentally, a two-step process: one is to deal firmly with criminality and incompetence. As in any functional organisation, this is a task for properly capacitated management, robust corporate governance and the support of honest law enforcement agencies. But none of this is possible unless a fundamental change in mindset on the part of South Africa’s political authorities takes place. South Africa’s own National Planning Commission has pointed to the state’s ‘rejection of meritocracy’. Positive outcomes will not come about until meritocracy, not political or racial preferment, is embraced.

Referring to Transnet, Chris Hattingh sums this up well: ‘There is ample scope for pressure on Transnet (and government more widely) to be removed. This can be done by bringing in private sector investment; not where companies can only invest, but Transnet retains ownership (and ultimately decision-making powers), but where said companies have proper, transparent ownership agreements and rules. In terms of macro policy, various government departments need to step back and allow the Transnet board to run the entity like a business, free from political interference. In the same vein, preferential procurement legislation and requirements must be paused, or scrapped. These open avenues for corruption, increase costs, and render Transnet’s work all the more difficult.’

But doing so would be the task of a generation; SOEs exist within a larger context and the broader state is similarly compromised. A distinction needs to be made between dealing with the state of South Africa’s SOEs and the services they provide the economy.

South Africa urgently needs to move towards more extensive private sector involvement in the provision of these services. This has long been resisted on ideological grounds, but South Africa is frankly beyond the point where ideology is a reasonable concern. State bodies in South Africa lack the ability to perform these functions.

Private sector appetite for doing so exists – if only to ensure that the logistics system operates effectively – though as Donald MacKay points out, this will only make sense if it is allowed to intervene in a meaningful manner. Suggestions for railway concessions that might be limited to two years, for example, are simply not attractive, and indicate a state mindset that recognises a need for help, but believes it can retain control and effectively carry on as before, in the manner that caused the crisis in the first place.

If it continues to do so, corruption will remain entrenched.

Postscript
By 2024, Medupi and Kusile have not been brought fully online. They have been plagued by engineering design flaws, along with cost and schedule overruns.

South Africa remains plagued by loadshedding. It is a measure of the severity of the crisis that this continues even as an election approaches.

Restrictions have been lifted on the private generation of electricity, paving the way for the private sector to participate in dealing with power crisis. This was done in 2022, some 15 years after the crisis first emerged.

A number of SOE executives linked to the Gupta family have been charged with offences; the Gupta family decamped for Dubai.

Ports and railways remain plagued by broken equipment and inadequate facilities. Vandalism and theft – opportunistic and syndicated – remain debilitating.

Repeated pronouncements from the government and ruling party assure the country, with little credibility, that resolutions are on the horizon.

Racial preferences in hiring and procurement remain veritable non-negotiables for state enterprises.

Despite the unambiguous condemnation of the practice by the Zondo Commission, the ANC and President Cyril Ramaphosa have indicated that cadre deployment will continue.

A report in the Sunday Times in February 2024 indicated that the party’s deployment committee was dissatisfied with the candidates short-listed for the position of Transnet’s new CEO. The paper reported that the view of several members of the committee was that since most candidates were not ethnically African, the ‘optics will not look good.’

Terence Corrigan is the Project Manager at the Institute, where he specialises in work on property rights, as well as land and mining policy.

https://www.biznews.com/rational-perspective/2024/04/22/state-owned-enterprises-corruption-corrigan

This article was first published on the Daily Friend.