How to rescue a state that has been pillaged by the corrupt and greedy

SA faces many tough challenges in recovering from the years of state capture, but it can be done - though resistance to the cleanup continues

28 October 2018 - 00:00 By PRAVIN GORDHAN

The Organisation for Economic Co-operation and Development (OECD) has developed the phrase "capture is the name, procurement is the game". The anti-corruption conference convened by Transparency International in Copenhagen earlier this month heard that the global experience from the OECD is that there is a strong association between the political context or system and instances of corruption and state capture.
Lessons from the OECD include:
• Corruption and state capture are not limited to leadership levels, they stem from a deep and widespread culture within institutions;
• A network of people relies on this culture. Professional enablers like lawyers, accountants, financial advisers, transaction advisers and banks advance corruption;
• Corruption has all the trappings of transnational organised crime. Developments in global financial services and products, and rapid technological innovation enable criminals to shift and hide the proceeds of their crimes;
• Beneficial ownership of entities is concealed so that it becomes impossible to identify the actual owners of companies and bank accounts; and
• For the successful recovery of assets and the proceeds of crime, we need effective co-ordination among tax authorities, financial intelligence units, central banks and law-enforcement agents across jurisdictions.
In SA, the average level of trust in the government is at 42%, against the OECD median of 47%. Rampant corruption and criminal behaviour are strong contributory factors to this loss of trust. The work of economists and academics presented at the conference in Denmark illustrated that two state-owned companies (SOCs) were the focal point of the Gupta-family enterprise: Eskom and Transnet. This is no coincidence. They account for about 36% and 34% of total government SOC-spend. SAA ranks third at about 7%.
The total procurement spend available for these SOCs is the equivalent of a quarter of total fiscal expenditure.
"Infrastructure projects," the OECD says, "are notoriously vulnerable to corruption and fraud due to their size, complexity and investment value. Governments are required to navigate various sectors and industries . whilst ensuring that resources are used effectively and projects are implemented to the highest standards of quality."
Academics have found that at least R37bn was allocated by Transnet towards tainted deals for the period 2012 to 2017. Of this, about R7.7bn appears to have been paid illicitly in various forms to a number of firms linked to the Gupta network.
To put this into perspective: the R7.7bn in kickbacks from one SOC equates to 4% of our country's national health budget, 3% of the basic education budget and 2% of the social development budget. The value of kickbacks within Transnet that we know of would have paid for 14% of the total bill for free higher education.
The first step to bring stability to our SOCs has been for new boards to determine, and begin addressing, the depth of corruption and criminal behaviour that seems to have become endemic in these institutions. But the dangerous and unscrupulous fightback against our reform efforts continues. If we allow this fightback to prevail, we risk losing our sovereignty.
This story has been well told by the scholars Daron Acemoglu and James Robinson in their book, Why Nations Fail: The Origins of Power, Prosperity and Poverty. Their thesis of what separates successful states from failed ones is whether governing institutions are inclusive or extractive.
Extractive states are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunities; often greater inclusiveness creates more prosperity, which creates an incentive for even greater inclusivity.
The key purpose of the state is to offer protection and security to citizens against predators - rent-seekers and kleptocrats who view the state as a central means or instrument for the private accumulation of wealth.
Not only has corruption reduced trust between the government and its citizens but it has also depressed the growth rate and extracted resources for private gain. The challenge now is to rebuild trust and use our resources to advance the national interest.
Over the past seven months, we have been piecing together the story of how our SOCs were repurposed to benefit a few, with repercussions for the rest of the country which has suffered financially and lost faith in the integrity of those governing the country. There were many political office-bearers, civil servants and other professionals who were either direct beneficiaries, or simply turned a blind eye.
We have learnt that just changing compromised boards will not be enough to restore SOCs. Interventions must go further to rid institutions of complicit managers.
The challenges facing SOCs are also structural, and cannot simply be solved with a cash injection. Dismantling the destructive business-state patronage networks that have embedded themselves across public enterprises - and indeed across all spheres of government - will require time, difficult choices and bold action by leaders.
We need to consider: what are the objectives of SOCs? How do we fix their governance? How do we create fiscal sustainability? How do we strengthen the role of the state as a shareholder? How do we professionalise the boards and management? How do we ensure transparency and accountability? Are our SOCs fit for the future?
Right now, we have a window of opportunity to change the country's trajectory, but this requires the voice of the citizenry, it requires a sense of urgency and it requires a new narrative centred on a culture of integrity. Denmark was an opportunity to consolidate an analytical framework of how state capture occurred in SA, and gain insight into the prevailing trends of corruption globally.
What does all this mean for SA's anti-corruption campaign and for better performance of SOCs and other key state institutions? We have to develop the ability to disrupt corrupt practices, rebuild our state institutions, recover assets that were acquired though criminal acts, and prosecute those responsible.
• Gordhan is the minister of public enterprises

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