2016 will go down as the year that state capture scandals rocked South Africa. State capture is a type of systemic corruption in which private interests significantly influence political decision-making. The #Zupta hashtag represents the blurring of business and power between the immigrant Gupta family and the family and associates of President Jacob Zuma. The Gupta brothers, whose business interests overlap with contracts available from state entities, have allegedly been directly involved in discussing political decisions with the most senior government ministers. The country’s power utility Eskom, its arms’ dealing wing Denel and national airline SAA are among the state entities in the Gupta family sphere. Also allegedly captured are law enforcement agencies that can be harnessed for political purposes, for example the National Prosecuting Authority and an investigative squad, the Hawks. There is also the public broadcaster – the SABC – which is used for propaganda. Feeding at the trough of state funds, too, are media companies whose bosses have close ties to President Jacob Zuma, including the Gupta-owned New Age newspaper and ANN7 station, and the inappropriately named Independent Media group. The latter’s chairman, Iqbal Surve – or Itchyballs Scurvy as he is affectionately termed by some of his newspaper colleagues – is a Zuma sycophant who somehow managed to persuade the state asset manager, the Public Investment Corporation, to fund his ailing media business. No-one has been prosecuted in connection with state capture and everyone tainted with the brush of irregularity has denied all wrongdoing. The Public Prosecutor’s state capture report, released in October, contains damning allegations that point to rampant corruption. However, state capture is state capture: with Zuma in charge, and if indeed so many influential individuals have been “captured”, it stands to reason that is going to be a challenge to call anyone to account. For a 60-second tour through the state capture fiasco, watch the BizNews video. For more detail, see the Bloomberg report and analysis by a leading South African academic, below. – Jackie Cameron
By Mike Cohen, Amogelang Mbatha and Antony Sguazzin
South African President Jacob Zuma is under increasing pressure to quit after the nation’s graft ombudsman ordered a judicial inquiry into possible criminal and corrupt dealings between government officials and the prominent Gupta family, Bloomberg wrote in early November.
After thousands protested Wednesday against state corruption in Pretoria, the capital, a 355-page report said Zuma and some ministers may have breached the government’s code of ethics in their relationship with the family, who are Zuma’s friends and in business with his son. It details allegations that the Guptas may have influenced the appointment of cabinet members and received special treatment for a coal business linked to the family and Duduzane Zuma.
The allegations of corruption at the highest levels of government are the latest blow to Zuma’s presidency. The report was released on a dramatic day when Zuma abandoned his request to the High Court to block its publication and protesters demanding an end to state corruption demonstrated in Pretoria. Since taking office in 2009, he’s been implicated in a series of scandals, including a March 31 ruling by the nation’s highest court that he violated the constitution by refusing to repay taxpayer funds spent on his home.
“It further erodes confidence in President Zuma, who is reeling already,” Daniel Silke, director of the Political Futures Consultancy in Cape Town, said by phone. “Having this report in black and white from a source like the Public Protector is the final straw in the curtailment of the Zuma era before his term ends in 2019.”
Among the most striking revelations in the report are an allegation by Deputy Finance Minister Mcebisi Jonas that the Guptas offered to pay him 600,000 rand ($44,373) in cash and deposit 600 million rand into an account of his choice, if he took up the family’s offer to become finance minister and remove key treasury officials who were thwarting the family’s business ambitions. The Guptas have denied making the offer.
The ombudsman said Zuma’s failure to investigate Jonas’s allegation may have violated the executive ethics code. Zuma fired the respected Nhlanhla Nene as his finance minister in December and gave the post to little-known lawmaker David van Rooyen.
“It is worrying that the Gupta family was aware, or may have been aware, that Minister Nene was removed 6 weeks after Deputy Minister Jonas advised him that he had been allegedly offered a job by the Gupta family,” the ombudsman said. It was “equally worrying” that Van Rooyen visited the Johannesburg suburb where the Guptas lived on seven occasions, including on the day before his appointment as minister was announced, she said.
The rand rallied to its strongest in 11 weeks after the High Court ordered the release of a report. It jumped as much as 2.2 percent to the strongest level since Aug. 18 before paring its advance. It was trading 0.5 percent weaker at 13.5103 per dollar by 10:20 a.m. in Johannesburg Thursday.
While Zuma is under no immediate obligation to quit, he and the ANC now face the prospect of a six-month judiciary inquiry, led by a judge named by the nation’s chief justice, that will possibly feature public testimony about the allegations.
“It’s not like in the next day or so Zuma’s going to announce his resignation, but it all adds up,” Dirk Kotze, a politics professor at the University of South Africa, said by phone from Pretoria. “There is accumulating pressure against him.”
The ombudsman says in the report that Brian Molefe, the chief executive officer of Eskom Holdings SOC Ltd., the state power company, and Ajay Gupta, called each other 58 times, while mobile-phone evidence showed that Molefe was in the vicinity of the Guptas household 19 times between Aug. 5 and Nov. 17 last year.
Molefe said by phone he was seeking legal advice. Gert van der Merwe, a lawyer for the Gupta family’s holding company, Oakbay Investments, said in an e-mailed statement the evidence in Madonsela’s report is “riddled with errors and is subject to rebuttal.”
Zuma’s office said that he would study the report to see whether “it should be a subject of a court challenge.”
The ombudsman’s report was completed just days before Thuli Madonsela’s seven-year term as graft ombudsman came to an end and she was replaced by Busisiwe Mkhwebane, who didn’t oppose the court bid to halt the report’s release. Zuma and the Guptas have denied wrongdoing.
Madonsela said she should have taken a harder stance against Zuma in her report, and accused the president of breaking his word by failing to answer her questions and failing to show up for planned meetings. Zuma is legally bound to abide by her directives, she said.
“I regret listening to lawyers who represented the broader legal community that I should tread softly with this report mainly to avoid a successful court review of the report,” she said by phone from Johannesburg.
In her report, Madonsela said she had decided to direct that a judicial commission be set up to probe Zuma’s relationship with the Guptas because her office hadn’t been given sufficient funds to complete the job.
Mmusi Maimane, the leader of the main opposition Democratic Alliance, which originally asked the Public Protector to investigate his relationship with the Guptas, called on Zuma to resign.
“Given the scale of the state capture that is detailed in the report, which he has allowed and indeed fostered, he cannot continue in office,” he said in an e-mailed statement.
Why patronage and state capture spell trouble for South Africa
By Co-Pierre Georg*
South Africa has caught the world’s attention with an epic battle between two powerful factions within the governing African National Congress (ANC) which has spilt into government. Deputy President Cyril Ramaphosa has aptly described this as a government that wages “war with itself”, said Co-Pierre Georg at The Conversation website in September.
On the one side there is the largely rural based faction of patronage politicians around President Jacob Zuma. The other side is less well defined, but it can be safely assumed that the beleaguered finance minister Pravin Gordhan is among them. What makes this battle different from the usual political quarrels is the viciousness with which the patronage politicians are fighting to get the upper hand.
The World Bank’s Joel Hellman has defined state capture as
the efforts of firms to shape the laws, policies, and regulations of the state to their own advantage by providing illicit private gains to public officials.
In South Africa, obtaining government tenders should be added to the channels through which unscrupulous firms and individuals can benefit from state capture.
It is necessary to understand the system of patronage politics and the state capture that fuels it to understand why replacing Gordhan is so important to Zuma. So important, that Zuma is willing to risk the unity of his party and losing South Africa’s investment grade sovereign debt rating, which would have devastating effects on the economy and the budget.
The South African captors are reported to be the wealthy Gupta family. Their capture of the government is so deep that they even dared to offer finance minister Nhlanhla Nene’s job to his deputy, Mcebisi Jonas.
South Africa has reached a critical point. If the patronage politicians win the battle within the ANC and complete the capture of the state the country will slip from stagnation into the abyss.
Institutions that have been compromised
As part of their fight for dominance, patronage politicians have attacked the freedom of press as well as the rule of law.
Hlaudi Motsoeneng, chief operating officer of the SABC, turned the public broadcaster into a propaganda machine by telling its journalists “do not focus on negative stories”. The resulting mess at the SABC even triggered scathing criticism from some within the ANC’s top leadership.
Institutions that guarantee the rule of law have suffered severely. The reputation of the National Prosecuting Authority, for example, has been shredded by its decision to appeal a high court ruling to reinstate the 783 corruption charges against President Zuma.
The charges were dropped in suspicious circumstances in 2009. This paved the way for Zuma to become president.
Similarly, the Directorate for Priority Crime, (known as the Hawks), has been used to create a narrative that would allow Zuma to replace Gordhan with someone from the patronage camp. University of Cape Town legal expert Cathleen Powell argues that the Hawks’ continuing attacks on Gordhan are “not only nonsensical, but are obviously nonsensical.” The Hawks, she says, are behaving in a way that “is blatantly outside their powers under law.”
This week, a new front has been opened against an institution most would have believed was beyond the reach of the patronage politicians. First, ANC Deputy Secretary-General Jessie Duarte questioned the independence of the Reserve Bank saying that its private ownership posed a “difficulty”. Then, Mineral Resources Minister Mosebenzi Zwane suggested to cabinet that the right to grant banking licenses be moved from the Reserve Bank to the National Treasury. The National Treasury has been a key target for capture because it controls the government purse.
From an economic perspective, the comments by Duarte and Zwane are obvious nonsense. The Reserve Bank’s independence is enshrined in the constitution. And the bank has been lauded for its independence, for maintaining price stability and for ensuring the health of the banking sector.
The economic consequences of state capture are devastating for the economy. South Africa’s dysfunctional state owned enterprises, from South African Airways to the national power utility Eskom, are weighing heavily on the economy. In a recent evaluation the IMF emphasised the need for South Africa “to improve SOE performance and strengthen their governance.”
The parlous state of the state owned enterprises was amplified this week when Futuregrowth, Africa’s biggest private fixed-income manager, announced that it would no longer be lending money to any of them, including Eskom.
Losing the confidence of Futuregrowth and other institutional investors will significantly exacerbate the country’s economic woes. South Africa will not only lose access to much needed funding for infrastructure projects. It will also increase its chances of being alienating international investors as well as rating agencies.
This is something it can ill afford given its large and persistent current account deficit. Without investment, and without its current sovereign rating, the country’s currency will plummet even further, exacerbating inflationary pressures.
There is, unfortunately, no quick fix to the current crisis. The only way of getting rid of patronage politicians is through a political process. A government needs checks and balances from a strong civil society. The ANC, it seems, has not understood the warning voters sent during the last municipal election. Let’s hope it will understand the warning international investors are sending before the damage to the economy becomes irreversible.