State capture and the transition to a green economy

2018 brought renewed optimism in South Africa. Tainted politicians and bureaucrats have been rotated and replaced, boards have been reconstituted, and public sector accountability is becoming more visible. Restoring faith in South African institutions that have been under attack for almost a decade, however, will not be quick or easy. State-owned corporations (SOCs), which have proven to be fertile ground for state capture, are still haemorrhaging cash with very little to show for the huge amounts of state support they are receiving. This is problematic, since South Africa relies heavily on SOCs to advance developmental objectives via the provision of economic and social infrastructure. SOCs are fully corporatised, with independent boards, and are governed by both the Public Finance Management Act and the Companies Act. They are supposed to operate in accordance with the general business principles which apply to private sector companies, generate profits and declare dividends. SOCs enjoy the greatest degree of autonomy amongst public entities and can source their own funding.[i] The 20 SOCs in South Africa are responsible for roughly half of government’s infrastructure expenditure – with three (Eskom, Transnet and South African National Roads Agency Limited (SANRAL)) accounting for the bulk of this.[ii]

Because of the size of their investments and the areas they invest in, SOCs will play an important role supporting the transition to a greener economy in South Africa. State capture can negatively impact this role, and the broader transition to a greener economy, in several ways. It creates incentives for rent-seeking and corruption rather than innovation and entrepreneurship, limiting investment in the skills and capabilities required to drive transitions. In a system characterised by unproductive rent -seeking, a significant proportion of the benefits from investment in new technology will go to the politically connected. This creates a disincentive for productive economic agents to invest capital and effort in developing the skills, capacity and experience required to underpin the transition – since a large proportion of the benefits and opportunities arising from these activities will be syphoned off via corrupt means. State capture and corruption could thus delay or even prevent the transition to a green economy in South Africa.[iii]

State capture compounds existing structural rigidities and makes it more difficult for resources to migrate to where they are most useful. Existing structural rigidities have long hampered the growth of the South African economy, and there is a large body of academic and empirical literature that shows that the more barriers there are to resources moving from one use to another within an economy, the more painful and costly structural adjustments are.[iv] State capture adds an additional constraint to the deployment of resources within this already challenging environment. With institutionalised corruption, the greater good (in this case whether deployed resources are efficiently utilised to support the transition to sustainability) will be of secondary consideration when compared to the amount of rents that can be diverted to the beneficiaries of state capture. When incentives are muddled, and non-market factors influence resource allocation (i.e. whether there is a link between the individual adjudicating a bid and the entity or individual bidding, or whether the bidder is willing to pay bribes), the usefulness of market-based instruments to influence decision-making is severely compromised. This is worrying, since these instruments are widely used to support the sustainability transition in South Africa.

Widespread corruption also influences the types of projects that are preferred. Large, centralised infrastructure projects, like a nuclear procurement programme, for example, are much more attractive conduits for state capture largess than efficiently run decentralised programmes like the Renewable Energy Independent Power Producers Procurement Programme (REI4P).[v] Locally, suspicions that centrally procured coal supply contracts are being used to direct rents as part of state capture activities, and that South Africa’s proposed nuclear procurement programme is seen as an opportunity to ratchet up these activities, are common.[vi]

State capture reduces the capacity within public institutions to implement policies and initiatives that could support the transition. State capture is facilitated by weak institutions and limited accountability. Weakened governance structures and capabilities of SOCs, government departments that influence resource allocation and oversee compliance, and even at law enforcement agencies, have been central to allowing state capture and institutionalised corruption in South Africa.[vii] This hampers service delivery and reduces the capacity of public sector institutions to implement policies, projects and initiatives that can support the transition. It also means that even well-designed initiatives and programmes run the risk of being derailed by corrupt activities. It also drains resources that could be used to support the transition. State capture has a financial cost. Rents are diverted from legitimate to corrupt purposes, increasing the costs of targeted developmental interventions. For instance, including the nuclear allocation in the country’s energy generation mix, could increase the cost of new electricity generation in South Africa by up to R50 billion by 2030.[viii] There is also an indirect cost linked to weakened capacity and oversight within SOCs, as illustrated by the large contingent and real liabilities that exist because of the dire financial performance of SOCs at present.[ix] The opportunity to use the financial benefits originating from policies like the carbon tax to support a just low carbon transition by, for example, addressing energy poverty[x] or reducing the negative distributional impacts[xi] of polices, is also jeopardised. If these revenues are instead used to reduce an inflated budget deficit, this could undermine support for the transition.

Finally, state capture reduces the likelihood that the move to a green economy can reduce inequality. South Africa is faced with extreme inequality, and that this is largely due to limited economic opportunities. A green economy offers more inclusive development pathways. Green energy technologies, for example, create the possibility of a less centralised, interdependent, interactive and distributed energy system. A just green transition would thus present the possibility of a fairer distribution of ownership and benefits (both in terms of economic benefit and energy services) from the energy system.[xii] But this will require a paradigm shift away from the current large-scale, rigid and centrally-planned approach to electricity supply.[xiii]A lack of community ownership and meaningful participation has been highlighted as a shortcoming even within the otherwise very successful REI4P programme.[xiv] The energy sector is currently the most visible driver of the move to a green economy. If state capture leads to a continued focus on capital intensive and large-scale projects in areas like coal or nuclear (which are also prone to capture), it is unlikely that the sustainability transition in South Africa will be just or fair.

An obvious solution would be to strengthen institutions and create sufficient accountability to weed out corruption and state capture at SOCs. Some SOCs, however, have extremely large budgets, and face little competition in the markets within which they operate[xv], creating sufficiently large rents to test even the most robust of governance structures. Thus, to effectively stamp out state capture, it may be necessary to also address the market power of these SOCs by exposing them to more competition and/or more effectively regulating the ways in which they engage with the market.[xvi]