State-owned enterprises (SEOs)
In the Global South, SOEs account for 33% or more of the largest companies in China, India, Indonesia, Malaysia, Russia, Saudi Arabia, and the United Arab Emirates and, as of 2017, they accounted for 50% or more of all infrastructure commitments. As of 2018, the assets of SOEs accounted for half of global GDP. Globally, SOEs account for approximately 16% of total emissions and, outside of the U.S. and China, approximately 8%, not to mention domestically where their contributions vary between 5 — 38%.
Within the energy transition, SOEs play a prominent role. According to the Center on Global Energy Policy at Columbia University, “Across Asia, Africa, and Latin America, SOEs dominate key sectors of national economies, particularly energy. SOEs have a critical role to play in reducing emissions, directing funding toward low-carbon alternatives, and bolstering resilience efforts. Depending on the country, SOEs can be well-positioned to drive climate action across power, oil and gas, industry, and urban transit. State-controlled national and multilateral financial institutions are also often key funders of high- and low-carbon projects. SOE actions in shaping and implementing climate policies and programs will have major implications for the efficacy of the global response.”
Given their importance both economically and to the energy transition, as well as their endogenous role within States, SOEs and their potential to both capture and become captured deserve particular attention. In principle, SOEs are led and governed by actors sworn to act in the public interest, including their corporate leadership, governance and accountability mechanisms, and political benefactors in the executive, legislative, and judicial branches of government.However, given that they serve a bureaucratic, political, or even economic elite, the pure notion of acting in the public interest often succumbs to the economic and political exigencies of government.
SOEs can be both subjects and objects of State capture. The examples are numerous. TheLava Jato (Operation Car Wash) scandal in Brazil, which spread throughout Latin America. TheGupta-Zuma State capture affairin South Africa, which was investigated by the Zondo Commission. The corruption of Pemexin Mexico, leading to high-profile criminal investigations and political turmoil.Petrochina and Sinopecin China, which drew the wrath of President Xi Jinping.
Thetop-level corporate capture challengesthat SOEs pose for the State, particularly within the energy transition, include:
- Incentives for corruption:A common thread through the aforementioned examples is the diversion of public resources towards private interests, whether in the form of theft or the more subtle use of public procurement to dole out lucrative contracts to business or political cronies. As a result, reduced resources within SOEs jeopardizes the potential to invest in the capabilities needed for the energy transition and “reduces the capacity within public institutions to implement policies and initiatives that could support the transition.”
- Structural rigidity and resistance to change:As public institutions, SOEs are huge bureaucracies — oftentimes with tens of thousands of employees, if not more — subject to government policy and political interference, and are often slow and resistant to change. This rigidity both protects extant capture and corruption networks within SOEs, and prevents bureaucratic structures from tooling up and adapting to drive the energy transition.
- Transparency and accountability:Currently, over 60 oil, gas, mining, and other extractive SOEs participate in Extractive Industries Transparency Initiative (EITI) reporting, over 25 are represented in EITI multi-stakeholder groups, and over 20 countries fully disclose transactions from and to SOEs. Nevertheless, “EITI reporting and validation have shown that although financial transactions related to state-owned companies have become more transparent, there is still demand for improving transparency standards around SOE governance.” So as to ensure transparency, SOEs must fully disclose their ownership, shareholding structure (if any), reporting protocols, and governance decision-making.Unless citizens are literally owners — with actual economic value shares — of these companies, as in some Scandinavian countries, SOEs will have to do more to avoid being black boxes for accountability.
- Privatization:As objects of corporate capture, SOEs pose juicy targets for companies seeking to obtain privatized assets at a bargain. In the fossil fuel sector, while some emblematic upstream production remains the domain of SOEs, there are countless examples of oil, gas, and mining assets once owned by the State that have passed into the hands of private interest, whether as long-term concessions or leases, or as fully privatized entities. The downstream segments, such as infrastructure, transportation, and financialization, with few exceptions are almost entirely in private hands.
In the renewable energy sector, a combination of State and multilateral funding and private companies have shared the risk to develop these assets, sometimes as public-private partnerships but largely as fully private endeavors. Where this is changing, however, is when fossil fuel SOEs, for example in the Middle East and North Africa, are given new mandates to branch out into renewables. Also, some SOEs, such as Codelco in Chile and “Litio para México,” have nationalized the lithium and other transition minerals to ensure a strategic role for these States in the energy transition.
- Personnel turnover and the revolving door:The cases of Brazil and South Africa illustrate how fragile governments cause personnel turnover within SOEs, which is taken advantage of by political or private interests using the revolving door phenomenon.
According to Conectas,“In Brazil, the political system — characterized by ‘coalition presidentialism’ — is subordinated to the instability of coalitions and temporary public demands, which generates high turnover in the management positions of State-owned companies and frequent changes in the objectives and execution of their business activities. This may make it easier for managers, through the use of their power or influence, to direct the actions of [SOEs] toward personal or private ends. It also allows its public agents to use privileged information or access obtained during their work at the [SOE] as an advantage for their insertion or professional performance in the private sector. In other words, the [SOE], which should [advocate for] the public interest, ends up being appropriated for political and personal interests, harming the population in the short term — by spending public money on managers who only pursue private interests — and in the long term — as the company loses its ability to resist and compete in the market with private companies that appropriate its confidential information.”
According to Devi Pillayfrom Public Affairs Research Institute (PARI), a South African civil society organization, “There are a lot of [SOEs] in South Africa. There is a historical pattern: during Apartheid, these enterprises were used for development but also for finding jobs for cronies. State capture has been focused on SOEs because of the amounts of money they handle. The State spends a lot on procurement. There are a lot of regulations and legislations that ensure the money is going to local Black-owned firms or associated with such businesses.” A pattern that PARI observed with the Zondo Commission was multinational corporations partnering with Black-owned firms, which were often shell companies, in order to secure public contracts, mostly in ESKOM, Transnet, and PRASA. In particular, ESKOM and Transnet were designed to promote and lead the developmental State. Part of the problem was that strategic decisions for the State were taken from the outside, by consultancy firms such as McKinsey & Company.
“There is a lot of political contestation about who makes public appointments, how they work, and who should be removed. If the former president Zuma wanted someone specific at the top of a company, he made the appointment. These people who had been appointed had relationships with third parties, like the Gupta family. These appointments were made through specific networks to award contracts and then inflate them. One problem for the Zondo Commission was to identify or probe who benefited from public contracts and appointments. Those executives, for example, didn’t directly receive bribes, there was no evidence. It was entrenched within political parties. These networks are able to maintain political power. It was difficult to trace the money once it left the country. The Commission only knew about it because of the Gupta Leaks.”
- Environmental and social impacts:Again, the South African example is indicative of a larger challenge. Currently, the country is suffering from massive, rolling energy blackouts, called “load shedding,” whereby a SOE, called Eskom, cuts power access for hours at a time due to its inability to match the need for electric generation. Several sources indicate that this is a direct impact of the corporate capture of the State, insofar as the Gupta family sold Eskom poor quality coal that, combined with other corruption-related problems, resulted in reduced capacity at Eskom. The Zondo Commission investigated this case, leading political parties to discuss either full privatization or nationalization. However, there have been no legal changes to the structure of SOEs.
In the book State Capture in South Africa. How and why it happened, author Luke Spiropoulos writes that, “Instead, Sikwebu argues that the origins of the state capture project lie in the corporatist restructuring of state-owned enterprises (SOEs) under Mbeki’s presidency. Sikwebu expressly refers to the Eskom Conversion Act of 2001, which turned the public power utility into a commercial company under the Companies Act. This made the minister of public enterprises the sole shareholder, with control over appointments, and opened space for abuse. Thus, Sikwebu sees the period from 1999 onwards as a pivotal point from which a distinct form of state capture emerged that had not been possible before.”