Trend Assessment: South Africa has gone from bad to worse

A corruption scandal in South Africa is shaking an already unstable government, which risks dragging down several multinational investors with it. South Africa is now entering a period of major civil unrest and political uncertainty as the ruling party is increasingly weakened and divided.

Campaign posters with President Jacob Zuma’s face barred, and with text saying ‘It is enough’ in Zulu.

INDICATORS

  • 16 May 2017: Several South African journalism organisations begin publishing leaked emails, incriminating the president and several large multinational corporations of corruption and influence-peddling in public tenders
  • 31 March: President Zuma suddenly replaces his trusted finance minister, prompting two sovereign credit downgrades in a few days
  • 8 August: Zuma will face his ninth vote of no-confidence since he took office in 2009

INTRODUCTION

On 8 August, President Jacob Zuma will be subjected to a no-confidence vote in the National Assembly, the lower house of the legislature. That is the ninth time Zuma has faced similar actions, but this time the outcome could be politically fatal as the Constitutional Court allows it to be conducted through secret ballot. However, the parliament speaker, Baleka Mbete – an ally of Zuma – has not given any indication on whether that will be the case. Underneath it all lies appalling governance, and allegations of a series of major corruption scandals are shaking the foundations of the presidency, the ruling party, and the core of the South African economy.

Enter the Guptas

About six months after the former anti-graft ombudsmen and public prosecutor, Thuli Madonsela, presented the findings of a preliminary investigation into alleged corruption and influence-peddling by the Guptas – a wealthy business family of Indian origin, with an intimate relationship with Jacob Zuma and extensive investments in the country’s state-owned enterprises, who have been repeatedly accused of corrupt practices – South African investigative journalists from several South African news sites, including national broadcaster News24 and the Daily Maverick, have published a raft of leaked emails and documents they claim confirm those accusations. Since June, amaBhungane Centre for Investigative Journalism has released new articles almost daily, accusing the Guptas of controlling SOEs and public tenders, and laundering money through letterbox companies in Dubai. At the centre of their investigations lies a body of over 100,000 leaked emails and other documents they claim support their allegations against the family and the president. According to the Daily Maverick, the leak came shortly after the political and economic uncertainty that was caused by Zuma’s sudden appointment of a new finance minister on 31 March. Meanwhile, public inquiries as well as internal investigations at some of the named organisations are ongoing, but they will take several months, if not years, to finalise.

the leak came shortly after the political and economic uncertainty that was caused by Zuma’s sudden appointment of a new finance minister

The reporting by amaBhungane has implicated several multinational firms, such as two well-known German software companies, global management and accountancy firms, and British public-relations firm Bell Pottinger Private. Most of the allegations relate to public tenders that the firms have been linked to, particularly for the electricity public utility, Eskom, and the public infrastructure and transport provider, Transnet SOC Ltd. Millions of public funds are alleged to have been transferred to Gupta bank accounts abroad.

Framing the debate – South Africa’s PR problem

Beyond the allegations of large-scale corruption in South Africa’s SOEs, the Guptas have also been accused of influencing the appointment of former finance minister Nhlanhla Nene – allegations which the family has denied. Former finance minister Mcebisi Jonas has said in an interview with the BBC that the Guptas offered him ZAR600,000 (USD46,000) and the finance minister role, on the condition that he work with them. In addition, amaBhungane has also accused the Guptas of attempting to divert attention from the corruption allegations by framing the public debate. They did this by offering a hefty GBP100,000 retainer to U.K.-headquartered public-relations firm Bell Pottinger, which designed a PR-strategy that was tailored around the narrative of ‘white monopoly rule’ and to highlight the country’s enduring inequalities, 23 years after the end of the apartheid regime. As part of its campaign, Bell Pottinger commissioned opinion papers to challenge claims of journalists or opinion makers who they considered critical towards the Guptas and set up 106 fake Twitter accounts to spread the word. Although it is true that South Africa’s wealth remains unfairly distributed – average earnings for black households are one sixth of their white counterparts according to national data – the media campaign fuelled racial antagonism, which has been brewing in South Africa in recent years. Bell Pottinger has since the news broke fired the partner in charge of the account and has issued an unequivocal apology. White journalists have, for instance, been harassed and assaulted by members of a recently emerged movement called Black First Land First (BLF) – an extremist organisation that calls for the return of all of South Africa’s wealth to the black population. Whether or not the campaign has influenced policy or is responsible for growing inter-communal animosity is unclear.

It’s the economy stupid

Amid all these corruption allegations lies a faltering economy, which entered into recession for the second time in a decade in this year’s second quarter. The finance minister who was appointed in an unexpected cabinet reshuffle at the end of March, Malusi Gigaba, said on 15 June that the country was unlikely to meet its target of 1.3 per cent GDP growth this year, and the government could be forced to cut spending. The outcome is explained by the global slump in commodity prices which has hit South Africa’s key mining sector hard. Many within the sector, including Sibanye Gold – the country’s largest gold producer – are delaying decisions on future investments and are mooting job cuts to ease costs. The situation was made worse in June when the government revised its mining charter for a third time, and published a new land-rights bill for public review. The two policies aim to increase the share of black ownership in the country’s mining industry, which is still dominated by white men, and speed-up the redistribution of land to black landowners.

The amended mining charter was announced on 15 June by the minister of mineral resources, Mosebenzi Zwane. The new charter increases the requirement of black shareholding in mining firms to 30 per cent from the previous 26 per cent of black ownership required. It also imposes other levies on mining activities, including requirements that new mining-prospecting rights are 50 per cent plus 1 owned by black individuals and that 70 per cent of mining equipment is produced in the country. Mining firms have 12 months to implement the new charter, but this is unlikely to materialise given that the legal battles, which have only just begun, are likely to last several years.

The main industry body, the Chamber of Mines, quickly challenged the new mining charter in court, arguing that it would seriously damage South Africa’s investment climate. Under the previous charter, under which 26 per cent of shares of firms needed to be owned by black people, black owners have exited the investments since. It is unclear whether they will need to comply with the new regulations all over again. In response, Zwane threatened last week that he intended to suspend any new granting of applications for prospecting and mining rights until the court case is resolved. Were he to make good on his threat, this will likely paralyse South Africa’s mining sector, which appears unlikely. What is clearer is that mining firms are facing a period of increased political outreach and engagement to mitigate any adverse impacts of the new charter.

By the same token, on 7 July the minister of rural development and land reform submitted a revised communal land rights bill for a 60-day public review. The proposal, which has been on and off the table for years, would allow for the expropriation without compensation of communal land that local authorities deem unused. In the immediate term, the bill is likely to delay future investments in the agricultural sector, one of the few sectors that has grown in recent months.

ASSESSMENT

It is clear that recent allegations of crony capitalism and corruption at the highest levels of the government apparatus have damaged South Africa’s investment prospects in the one-year outlook. The announcement and implementation of erratic policies aimed at courting the political base of President Zuma’s faction of the ANC, commonly referred to as the Premier League, and poor government, have exacerbated those problems. What is less clear is to what extent such alleged mismanagement and influence-peddling has guided the recent policies announcements, if at all.

Bell Pottinger’s ‘inappropriate’ PR campaign has clearly elevated race relations on the political agenda. These will continue to be a key issue ahead of the next general elections in the first half of 2019. The recent Gupta leaks will also exacerbate divisions within the ANC party ahead of Zuma’s resignation as party leader in December this year. While most commentators have highlighted the deputy president, Cyril Ramaphosa, and former head of the African Union and Zuma’s ex-wife, Nkosazana Dlamini-Zuma, the succession is now appearing increasingly unclear. The Premier League, the dominant force within the ANC, is likely to continue to support Dlamini-Zuma but there are also renewed calls for Mbete, the parliamentary speaker, to run for the party leadership. Her decision to run will be impingent on the conditions under which the no-confidence vote on 8 August will be held. The opposite camp, supporting Ramaphosa, include several other high-ranking ANC officials, such as Gordhan and Mcebisi.

Many commentators believe that come D-day for the no-confidence vote, most ANC lawmakers will toe the party line, although some have publicly said they will vote against Zuma. Most are afraid that voting against Zuma could harm the party ahead of this year’s leadership race and the next general elections. On the one hand, its hardline leftist voters are likely to be attracted by the Marxist party, the Economic Freedom Fighters, which is…

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Transnet’s alleged kick-back scheme(s)

AmaBhungane claims that German technology firm SAP paid Gupta-owned entities to push the sale of its products to state-owned enterprises like Transnet. A ‘sales commission agreement’ was signed in August 2015 between SAP and CAD House, a 3D-printing firm controlled by the Guptas, to help SAP to seal a deal with Transnet. The agreement allegedly stipulated that if CAD House ‘effectively’ helped SAP land the Transnet tender worth at least ZAR99.9 million (USD7.65 million), the 3D-printing firm would get ten per cent in commission. CAD House was apparently chosen even though it hardly had any ‘experience marketing or selling SAP products’, which was the core of the brief. Instead, the firm was allegedly used as a front company to distance the transaction away from the Guptas and to launder the proceeds to them. SAP denies that it paid kickbacks or helped launder money, while CAD House and the Guptas failed to respond to amaBhungane’s questions.

SAP did, however, conduct due diligence through an ‘external reputable’ firm on CAD House, in which a link was established to Sahara Systems, an I.T.-firm owned by Oakbay Investments, which is owned by the Guptas. At the time, CAD House was nominally half-owned by Santosh Choubey, the chief executive officer of Sahara Systems. SAP partnered with CAD House regardless of those ‘red flags’. At the time of the signing of the agreement, Mail & Guardian alleged that telecommunications firm Neotel had entered into a similar deal with Homix, a business entity amaBhungane says is a letterbox company controlled by the Guptas. A letterbox company is created with the aim of circumventing legal and conventional obligations, including taxation and wages, but they do not perform any real economic activities.

SAP has, since the allegations were published on 11 July, launched external and internal investigations and fired several senior employees. Whether or not South African prosecutors take legal action against SAP, legal experts have warned that it is possible that it could be charged in the United States, given the broad reach of the Foreign and Corrupt Practices Act. This is because the money was transferred in U.S. dollars, and therefore through U.S. institutions, i.e. the Federal Reserve. The U.S. Department of Justice’s (DoJ) Kleptocracy Asset Recovery Initiative recently seized billions of assets, including bank accounts, real estate, art, jewellery, aircraft, and yachts located around the world. On 14 July, the DoJ announced the forfeiture of ill-gotten assets belonging to Nigerian high-level officials, including the former oil minister and first female president of Opec, Diezani Alison-Madueke. The Transnet saga will continue to play out in the next six months at least.

 

The not-so Optimum Eskom deal

Former South African mining minister Ngoako Ramatlhodi alleges that the former chief executive and ex-chairperson of Eskom pressured him into blackmailing Swiss mining giant Glencore over the sale of one of its coal concessions. The case relates to the sale of Optimum Coal Mine, a Glencore subsidiary which supplied coal to Eskom and which was placed into business rescue, an alternative to bankruptcy, in August 2015.

Ramatlhodi said in an amaBhungane interview in May that Brian Molefe, the re-appointed and recently sacked chief executive of Eskom, and Baldwin Sipho Ngubane, the utility’s former chairperson, had demanded he suspend all Glencore’s mining licences in the country until a ZAR2.17 billion (USD165.38 million) ‘fine’ for supplying substandard coal had been paid.Ramatlhodi refused, and was shortly after moved to the Department of Public Service and Administration by President Jacob Zuma. What is more, Ramatlhodi was replaced by a politician with links to the Guptas. Allegedly, the company was placed in ‘business rescue’ to prevent it from being sold to Pembani, an investment firm previously owned by Deputy President Cyril Ramaphosa. Instead, the final buyer of the firm was Tegeta, a company jointly owned by the Guptas and Duduzane Zuma, the president’s son.

That was despite the fact that Pembani was worth ZAR13 million and had a proven track record in the coal industry, details that would have been crucial in the tendering process, as the sale of Optimum included two conditions: that the buyer could prove it had enough financing and that it had a contract to sell the coal that Optimum produces to the domestic market. This is only one of the several corruption allegations amaBhungane has lodged against Eskom in its recent leak, and it will continue to deter investors.