Shadow state: a chronicle to corporate power in running the South African state

SIYABONGA P. HADEBE outlines the power of corporations in a modern state and how they run a “shadow state” where they are responsible for providing public services on behalf the state. He challenges the outsourcing of public services by private companies, saying this breeds corruption, doesn’t improve delivery of services but weakens the power of the state

I hate the idea that media and other sources deliberately feed the public incorrect stories in order to drive certain political narratives. Perhaps one important topic that falls in this category is corruption.

Corruption as we understand it deals with stealing, simply put. However, the grand topic of economics is secretive and coded to the level that corruption is normalised to an extent that it becomes a way of life.

Forget the corruption that you are familiar with and digress a bit to focus on the massive level of stealing by private companies from the public purse. What we are often told about as corruption is not actually corruption, but economic rents paid to those in public office for corruption to take place. Corruption is therefore misreported to cover up the mess created by private corporates in society.

In order to understand the angle from which I dissect the controversial topic of corruption, in economic sense, I implore you to read a book by the British journalist Alan White titled: “Shadow State: Inside the Secret Companies that run Britain”.

One has to appreciate that the international economic system is driven by large companies, Bretton Woods Institutions (viz. the World Bank and the International Monetary Fund) as well as other peripheral economic organisations like the rating agencies, the International Trade Organisation (WTO), World Economic Forum (WEF), etc. 

Of course, these institutions would not be as successful without the direct support from the United States, Western Europe and other like-minded states. 

In the world economic system, the narrative has moved from “privatisation” to “outsourcing of public services”. Although the two terms appear to be different; they are more or less similar in that they both advocate for private companies to take over the functions of the state.

Privatisation entailed a wholesale of public assets to local and international companies. Privatisation was said to improve efficiency in the provision of services and government raised revenues from the sale, among other things. The apartheid government sold Sasol and Iscor just before the dawn of democracy. 

More and more state assets were lined up for sale in the post-apartheid period but were somehow parked under a certain department, which in all earnest should have been called the Department of Privatisation.

Following the negative reception of IMF’s structural adjustment programmes (SAPs) and privatisation as introduced in the 1980s, outsourcing is now dominant within the public financial management of states.

Outsourcing deals with the handing over of public services, through contractual agreements or tender system, to private companies to be responsible for fulfilling some of the most sensitive and important roles of the state such as welfare, education, health, etc. A private company, for example, provides security services to a police station, hospital and government buildings. This has been normalised.

The dominant economic idea under both privatisation and outsourcing is that state involvement in the economy has to be as minimal as possible in the provision of goods and services.

It must be however mentioned that in social democratic states in Europe governments still play a huge role in the provision of goods and services as well as in creating employment for their citizens using the public sector. That explains why those states have more power than say, South Africa or Honduras.

For example, the Swiss government runs the best healthcare network that includes doctors, pharmacies, clinics, specialists and hospitals. Some of the best hospitals in the world are publicly-owned including the Inselspital (Berne) and Kantonsspital St. Gallen (Saint Gallen). Also, Swiss Federal Railways (SBB), which runs one of the most efficient railway systems in the world, is 100% stated owned.

The German government wholly owns the railway company Deutsche Bahn; but privatised the mail authority Deutsche Bundespost in 1995 to create Deutsche Post DHL Group. In the same vein, the UK in the 1980s and 1990s privatised many previously state-owned industries such as BP, BT, British Airways, electricity companies and gas companies.

To date, the British government also boasts an expenditure exceeding £80 billion in outsourced public services to private companies, which “for the most part they operate with no transparency or accountability.” Nevertheless, these companies have been handed enormous amounts of power of running the state, without a vote or constitutional mandate.

From deportations to NHS cutbacks, in his book White exposes what goes wrong when the “invisible hand” of the market is introduced into public services. “The takeover of government activity by a cartel of unaccountable corporations is a major shift in the way Britain works”, White argues. 

White shines a light into this murky, least understood world of companies that run governments all over the world, but more so in developing countries. He refers to this world of private companies, a “shadow state”, hence the title of the book. 

 In South Africa, the controversial phenomenon of government outsourcing remains contentious but is not well understood. 

Judging by the recent brouhaha concerning the outsourcing of the payment of social grants to a private company and deaths of many people at Life Esdimeni, it is clear that we have a long way from understanding the extent to which private companies long “captured” the state though outsourcing. 

The public is more concerned that services are delivered rather than who provides them. The ominous absence of the government in performing what is generally regarded as traditional functions is rarely questioned. This is the heart of the problem. A company like CPS, for example, draws billions from the state right under our watch.

As much as South African Airways and the SABC struggle in the cut throat industries they operate in, they have a role to play in terms of building the power of the state. They make losses because their industries are not simple. Some people argue that they must be privatised altogether but they have no proof how anyone who buys SAA would fend off competition from Middle East based airlines, as an example.

British Parliamentarian Dame Margaret Hodge is quoted to have said that White’s book “punctures the myth that the private sector is better at delivering public service.” 

But how different is the situation in South Africa compared to that of Great Britain?

Besides CPS, which runs the country’s entire welfare system, which other companies make up the “Shadow State” in South Africa? The parasitic private companies wholly rely on government sourcing to make their money, up to 100% of their profits. Many of them would close shop should they lose government business.

Outsourcing of public services means finances of the state leak uncontrollably as companies become sole providers of functions of the state. Outsourcing also doesn’t bring improved service delivery but fuels corruption at all levels of the state. A public representative of the Democratic Alliance in the Western Cape, for example, had expenses for his birthday party paid for by a company that had won a tender. There are numerous stories of this kind in South Africa, yet companies that bribe are never brought to book. 

Money talks. 

Many people still and stubbornly turn a blind eye to how big corporations benefit from taxpayers/ tenders through different state contracts worth billions of rands. Companies like Exxaro, Anglo-American, South32 (formerly BHP) and Glencore (now Tegeta) have long-term coal contracts with the state-owned electricity utility company Eskom and transportation arrangements with Transnet. 

One day, Eskom must be requested to inform the public how much it spends to maintain the different types of contracts with the coal companies (i.e. cost-plus, medium term and fixed term). Apparently, Eskom’s delivered unit coal costs have grown at a compound annual growth rate (CAGR) of approximately 19% since 2008. No wonder there is so much fighting in this space.

On a related topic, nobody has ever asked what exactly the role of the Office of the Chief Procurement Officer at the National Treasury is. The answer is simple, to administer outsourcing of public services to private companies. The state is left with nothing much to do.

The state makes individuals and companies very rich through this corruption-laden practice called outsourcing to companies. It is therefore no coincidence that unemployment is at 27%. Money is in private companies who are quick to point out that they are not in a business of social welfare, but to make profits. Meaning their purpose is to overcharge the state and employ no one.

The position held by corporations in the shadow state means that they wield too much power over a formal state. This allows them, now called “markets”, to dictate to government on what to do as well as in the appointment of ministers and senior public administrators. For example, at a recent World Economic Forum shindig held in Durban, heads of state had to account to corporations. 

Power of the state is taken away by those who have never been voted into power. When you get to polls you indirectly vote for Exxaro and CPS to be your “shadow state”.

The truth is that it looks like those who scream the loudest about corruption are part of the “shadow state” which runs South Africa.

Hadebe holds qualifications in management and global affairs. His interests are politics, economics and international relations.

Twitter @siyazi

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