Counting the cost of state capture
State capture is estimated to have cost SA upwards of R100bn. Some economists say the actual figure is much higher, and the devastation wrought on the economy far worse than previously thought
It’s like walking into your own house after a murder scene. The choice is to go sleep in a hotel and buy a new house — or you start with wiping the floor and end up staying up all night, looking and digging, becoming a forensic investigator…"
This is how economist Thabi Leoka describes arriving at SA Express on May 24 as a member of a new board tasked with cleaning up corruption and mismanagement at the airline.
Later the same day, the Civil Aviation Authority grounded the state-owned airline, citing serious safety concerns. Leoka, who stresses she is speaking as an economist and not on behalf of the board, views this as a direct result of "many years of maladministration — and, in many cases, corruption".
At the time SA Express was on the brink of collapse, with losses amounting to R234m. Irregular expenditure stood at R408m, mostly thanks to contracts being awarded without following procurement rules, and cash was fast running out to pay suppliers and staff salaries.
What Leoka and her newly appointed fellow directors found shocked them. Dozens of contracts worth billions of rand had been signed without proper paperwork, many without going out to tender. There were also suspect payments to companies with ties to the Gupta network. Last year parliament heard that financial advisory firm Trillian, previously majority owned by Gupta lieutenant Salim Essa, was paid R5.7m for capital raising that allegedly never took place.
"You just can’t believe the mess — and you just want to make it right," Leoka says.
Though SA Express has since resumed limited flights, it won’t survive without a government bailout of almost R2bn.
As with so many collapsing or struggling state-owned enterprises (SOEs), including SAA, armsmaker Denel and power utility Eskom, taxpayers are being asked to foot the bill for such malfeasance.
The looting at SA Express is a microcosm of the plunder that took place at SA’s largest SOEs — organisations that are supposed to drive inclusive growth — during Jacob Zuma’s presidency. The consequences for the broader economy are potentially devastating.
For example, documents contained in court filings and released by whistleblowers suggest that half of the relatively small amounts SA Express paid to Trillian and another Gupta-linked firm, Regiments, was funnelled to Essa to ensure he used his political connections to open money taps.
This model was replicated on a much grander scale at Eskom and Transnet, where billions in suspected kickbacks were diverted to letterbox companies controlled by Essa or the Guptas.
"What has happened to SOEs is a travesty," says Leoka. "We’re still discovering the rot and the leakages … State capture and corruption have played a big role in crippling the economy."
The looting of Eskom poses the biggest risk. In July, the power utility reported a staggering R19.6bn in irregular expenditure since 2012, including from "criminal conduct", while recording a R2.3bn loss for the year ending March 31. Its debts have soared to R387bn, R221bn of which was borrowed against government guarantees. This represents almost three-quarters of all government-guaranteed SOE borrowing.
Cross-default clauses written into loan agreements mean that Eskom simply has to default on one loan for the contagion to spread. A default could prompt lenders to recall other government-guaranteed loans, including at other SOEs.
This doomsday scenario almost came to pass in July last year, when Eskom’s qualified audit opinion breached loan covenants.
One of its lenders, the Development Bank of Southern Africa, threatened to recall a R15bn loan unless the utility took action against its then CFO, Anoj Singh, a central figure in corruption scandals at both Transnet and Eskom.
Disaster was averted when Eskom suspended Singh soon afterwards. A new board, appointed in January, embarked on a cleanup campaign. So far it has resulted in 11 criminal cases being opened, five of which involve nine executives, and the departure of five senior executives implicated in corruption. They include Singh and former acting CEO Matshela Koko, both of whom quit earlier this year rather than face fresh disciplinary charges.
However, economists warn that the country is just beginning to count the cost of state capture. The picture emerging is worse than was thought.
State-capture investigation teams chasing complex money trails throughout the world calculate that the Guptas and their associates plundered R40bn-R50bn from the fiscus. In May, public enterprises minister Pravin Gordhan told reporters he "speculated that R100bn or more could have been lost to state capture". He said he would leave it to judge Raymond Zondo’s inquiry into state capture to determine how much was lost.
Isaah Mhlanga, executive chief economist at Alexander Forbes, has taken a stab at quantifying the loss.
One indicator he uses is the difference between forecast and actual economic growth. In 2015 the national treasury forecast GDP growth of 2% for that year, 2.4% for 2016 and 3% for 2017. In fact, real growth slowed to 1.3% in 2015 and shrank to 0.6% in 2016 before returning to just 1.3% in 2017.
In short, GDP in 2015 was R21bn lower than expected, it was R56bn lower in 2016 and R52bn lower in 2017. That’s almost R130bn below forecast for the three years in which state capture was at its height.
The money is secondary. We need to ask ourselves how we allowed a few people to take over the stateXhanti Payi
Mhlanga says this amount should be counted towards the cost of state capture. He explains that SA usually tracks the ups and downs of the global economy very closely. But after 2015, while the rest of the world including Sub-Saharan Africa experienced an economic upswing, SA stayed behind. "The only difference was local issues — state capture and corruption," he says.
Another way Mhlanga calculates the cost of state capture is to track ballooning government guarantees and the increase in actual exposure (the amount SOEs borrowed against their guarantees).
From 2009 to 2010 exposure more than doubled from R63bn to R130bn, almost half of that due to Eskom. Since then SOE borrowing against government guarantees has skyrocketed to R300bn.
Mhlanga points out SOEs are supposed to be self-funding. So the increase of R237bn in government exposure to SOE debt since 2009 is "a fair indicator of how badly these institutions were run" during the Zuma era, and could therefore arguably be added to the total state-capture bill.
Sean Gossel, a senior lecturer at the University of Cape Town’s Graduate School of Business, agrees that the actual cost to the economy far outweighs the amount of cash that has been spirited out of the country.
"The damage done to SA’s democracy and financial economy is now solidifying us into the low-growth trap while other countries recovered and are roaring ahead, even in Africa," he says.
"Where we are after state capture, in terms of our development, is at a much lower trajectory. And that’s far more expensive than R100bn. That’s the number that frightens me more."
This stagnation could result in another ratings downgrade, which would "solidify that state capture failure" and could turn SA into a fragile state. "We tend to exaggerate the depth of our democracy. As we’ve seen in the US, it doesn’t take much to reverse democracy."
Gossel sees an urgent need for the government to offload unneeded SOEs and partially privatise the rest, including Eskom, which poses a "significant risk" to the economy. But this would come with job losses and lead to social unrest, which would increase instability and scare off international lenders and investors.
What it means
SA has uncovered only the tip of the iceberg in terms of the economic toll of state capture
"We knew how bad it was during the Zuma years, but now it’s really coming home to roost," he says. "Which is why ‘Ramaphoria’ wore off so quickly. We really are in a very, very precarious position. The move now to populism … is not helping."
He believes it is ill-conceived to use inefficient and corruption-riddled SOEs to drive development in a country riven by factionalism and lacking "a professional public service that is developmentally orientated".
"Much of our public service is by its nature predatory," he says.
"Now we have failing institutions, we have massive debt problems, pricing problems, service delivery problems" and SOEs that "crowd out any opportunities for the private sector and lock in the market failures arising from government failure".
The state’s inability to police and enforce rules is a strong deterrent for investors. "We can’t even enforce the laws we have; instead we’re having inquiries," says Gossel. "We should be having court cases. The law is quite clear what happens if you break the regulations."
For economist Xhanti Payi, the greatest cost of state capture has been the hollowing out of democratic institutions. The Hawks and the National Prosecuting Authority have become dysfunctional — rendered powerless to enforce the checks and balances of a constitutional democracy.
"The money is secondary. We need to ask ourselves how we allowed a few people to take over the state," Payi says. "We wouldn’t have lost any money if the controls worked."
SA boasts of "an open, democratic society [but] the pillars of this system were dismantled. The economic system is based on this democratic system. That’s why the economy is not growing — because people don’t trust the system," he concludes. "We have to rebuild that trust."
BOOK EXTRACT: Genesis of a looting spree
Award-winning FM journalist Stephan Hofstatter this week releases a hard-hitting book, Licence to Loot, which examines how the plunder of Eskom and other parastatals almost sank the economy. This is an extract:
The destruction of Eskom’s top tier had a profound effect on the power utility, resulting in an exodus of employees with essential skills at the height of the country’s load-shedding crisis and opening the sluice gates for billions to flow into the pockets of the Guptas and their fellow looters.
By January 2015, emboldened by their hand-picked board at Eskom and with billions in suspected kickbacks from a Transnet deal starting to flow to their front companies in Dubai, the Guptas ramped up their efforts to get in on the R50bn-a-year coal-buying action at Eskom.
First, they had to remove executives who were proving an impediment to their ambitions.
Topping their list was chief executive Tshediso Matona, who’d started talking about launching an investigation into all contracts over R10m concluded in the past three years, and finance director Tsholofelo Molefe, who’d refused to sign off on their R43m media sponsorship deal and prevented Eskom from appointing Regiments Capital as a financial adviser.
Having the Regiments deal fall through in 2014 must have been particularly galling for the Guptas. The financial advisory services the company was offering, which included work on coal contracts and selling off unused buildings worth R10bn, could have earned it billions in fees. Given the apparent kickback arrangement Regiments already had in place at Transnet, it’s fair to assume that up to half this money was likely to flow directly to Gupta dealmaker Salim Essa and from him to Gupta front companies and bank accounts in Dubai and Hong Kong.
These numbers are not as far-fetched as they appear. A year later, Trillian, the offshoot of Regiments majority owned by Essa, was having discussions with McKinsey on how to carve up R9.4bn in fees that the firms were expecting to earn for consulting work at Eskom.
The Regiments advisory work would hold the considerable added advantage of giving the Gupta network an inside track on deals and opportunities at Eskom worth hundreds of billions. These would range from coal, gas and diesel contracts to sourcing finance and suppliers to refurbish or maintain power stations. As they had proved at Transnet, the Gupta-linked companies could then either secure the deals for themselves or act as gatekeepers for multinationals bidding for Eskom contracts, using their political muscle to ensure those who paid them hefty kickbacks won the contracts.
Another thorn in the Guptas’ side was Eskom’s head of group capital, Dan Marokane. The urbane, articulate and highly competent petrochemical engineer was seen as the natural successor to Brian Dames, the chief executive who’d repeatedly rebuffed the Saxonwold family’s overtures until he threw in the towel in March 2014.
But the Guptas also knew that decimating Eskom’s top decisionmaking tier and replacing executives who blocked their ambitions with pliant puppets wasn’t going to be easy. They’d need to enlist the president’s help.
• Licence to Loot, published by Penguin Random House, will be available in bookstores from September 10