What VBS says about SA’s struggling local government sector
Fourteen municipalities lost R1.5bn in deposits in VBS Mutual Bank – deposits made in contravention of municipal regulations. Their failings are symptomatic of SA’s ailing local government sector
It is a year since the stark details emerged of the "great bank heist" at VBS Mutual Bank, which wiped out almost R2bn in savings and precipitated a liquidity crisis at the institution.
The brazen looting was first laid bare in a report by advocate Terry Motau and Werksmans Attorneys. It followed a forensic investigation conducted on behalf of the Prudential Authority after the bank was placed under curatorship in March 2018.
The initial reaction to Motau’s report was shock — it implicated everyone from auditors to bank officials and municipal authorities.
The report alleged that executives of the bank — those meant to be its custodians — had led a criminal enterprise, and identified former chair Tshifhiwa Matodzi as the kingpin. Municipal officials and mayors were accused of asking for kickbacks in return for depositing public funds in the bank — deposits that themselves were in contravention of municipal regulations.
Motau found that "two principal pillars of unlawfulness" had led to the bank’s collapse. One was the methods used for "wide-scale looting and pillaging of the monies placed on deposit at VBS", including the payment of bribes, a campaign to attract large deposits from municipalities, and the creation of fictitious deposits. The second was that goings-on at the bank were fraudulently "hidden from view", allowing looting to take place and even escalate.
Much has been done over the past year to rectify the situation, most significantly as a result of the liquidation process. This includes civil action to claw back money, notably from Brian Shivambu, the younger brother of EFF deputy president Floyd Shivambu, and his company Sgameka. Former president Jacob Zuma’s homestead in Nkandla is also in the liquidator’s sights, given that he is in default on the R7.3m loan he took out to pay back the state funds used to upgrade his personal residence.
Steps have also been taken to rectify a general over-reliance on auditors — a wider issue brought into focus by the conduct of the two former KPMG partners responsible for auditing VBS (lead audit partner Sipho Malaba and Dumi Tshuma both held loans with the bank). The Prudential Authority has, for example, put in place more checks and balances, and stepped up due diligence for board members and audit committee chairs.
But no criminal charges have followed. This is despite a recommendation to that effect in Motau’s report, and the Prudential Authority having handed the report and all its annexures — which have not been made public — to the Hawks.
[It’s a mistake to think] if you punish those who are responsible for the illegal investments into VBS then you have solved the problemMkhuleko Hlengwa
Hawks spokesperson Brig Hangwani Mulaudzi tells the FM the investigation is at an advanced stage, and that the Hawks have considered the report in its entirety. But he will not name those under investigation.
In the immediate aftermath of the bank’s collapse, images of elderly customers queuing to try to withdraw their savings painted a devastating picture of the depositors’ plight. They received something of a reprieve in July 2018 when the Reserve Bank announced that, through a government guarantee, more than 20,000 depositors would be refunded their savings, provided these did not exceed R100,000.
But this covered only retail depositors — individuals, burial societies, stokvels and saving clubs. It did not extend to corporate deposits, or those made by municipalities. Given that the municipalities involved were some of the poorest in the country — and that their deposits accounted for about R1.5bn — the loss was nothing short of devastating.
A bigger-picture view suggests that the level of abuse evident in the VBS debacle is symptomatic of local government in crisis.
Fourteen of the 16 municipalities that invested money in the bank were unable to withdraw their funds before the bank was placed under curatorship.
More than a year later, just one of the 14 — the Elias Motsoaledi municipality in Limpopo — says it has got its money back. Three — West Rand municipality in Gauteng, and Madibeng and Mahikeng municipalities in the North West — have successfully submitted claims for reimbursement.
Of the remaining 10 municipalities, some have submitted claims that have yet to be approved; others have not submitted claims at all. It means only three municipalities are so far in the queue to get their money back.
Liquidator Anoosh Rooplal told FM sister publication Business Day recently that some municipalities might not have submitted claims because they did not have enough time to prepare proof-of-claim affidavits and related documentation.
It’s a view shared by a number of the municipalities the FM approached. But this is despite the gazetting, in March, of a notice for a creditors’ meeting by the master of the high court.
"That is why, in my view, so few of [the municipalities] have at this stage lodged claims, but I am sure that will change when the second meeting of creditors is held," Rooplal said.
That meeting is due to take place later this year, giving municipalities and others another opportunity to join the creditors queue. And they’re likely to do so. The sentiment of officials the FM spoke to, succinctly summarised by one municipal CFO, is that you would have to be crazy not to want the money back.
But whether any of the municipalities will succeed in this is another question. Everything now depends on how much of the missing R2bn the liquidators can recoup.
Meanwhile, the financial and operational fallout for the local councils is underscored in a report compiled by the provincial government in Limpopo — the province most heavily affected by the banking scandal — during an oversight visit by a National Council of Provinces (NCOP) delegation last month.
One of the issues the report identifies pertains to management capacity. Though there had been progress in filling vacancies in senior management positions in Limpopo municipalities during financial 2018, the resignations arising from the VBS scandal and subsequent disciplinary proceedings created a number of vacancies at senior level that have not yet been filled.
The loss of funds due to VBS investments is one of the five major causes of poor financial health listed by the provincial government.
But the VBS matter speaks to broader problems in SA’s municipal landscape.
Tshitereke Matibe, lead delegate of the NCOP delegation, says the number of vacancies in senior positions in municipalities across the province is "quite shocking".
"This is where we must start," he says, arguing that oversight cannot be performed properly where management positions haven’t been filled formally. If this is not resolved, he believes mismanagement is likely.
Earlier this year, auditor-general Kimi Makwetu used the VBS municipalities as a prime example of the impact of deteriorating accountability.
Makwetu’s report on the consolidated audit outcomes for financial 2018 notes that municipalities are mostly funded through rates and taxes, as well as grants from the national government. But he found most municipalities are struggling financially and often do not have enough money to pay their creditors, maintain their infrastructure or deliver services.
"As custodians of taxpayers’ money that is sorely needed for municipal delivery, municipalities should take a conservative and cautious approach towards investments," the report says.
But this did not happen in the case of the VBS municipalities: their funds were invested in breach of the municipal investment regulations, which prescribe what investments are permitted and stipulate that all investments must be made with primary regard for the safety of the investment.
In a marked shift away from a political culture in which mayors and officials act with impunity, the ANC in Limpopo has axed seven of its mayors implicated in the scandal, and asked two provincial heavyweights to step aside: the deputy of the party in Limpopo, Florence Radzilani, and provincial treasurer Danny Msiza.
Radzilani was famously mentioned in Motau’s report for demanding "Christmas" after keeping the municipality’s investment in the bank.
She has reportedly called the allegations against her baseless.
What it means
The VBS scandal highlights broader problems across many municipalities in SA
Some in the party have, however, demaded that the pair be reinstated in their political leadership roles, according to a recent report in City Press. It’s a clear indication that the clean-up in the so-called new dawn does not come without pushback.
Parliament’s standing committee on public accounts (Scopa) also recently met with municipalities that failed to obtain clean audits for three consecutive years.
One of them was the Vhembe district municipality — of which Radzilani is a former mayor — which lost about R300m in the VBS scandal.
Scopa chair Mkhuleko Hlengwa said last month that the Vhembe council had taken a decision to pay Radzilani almost R1m, despite the gaping loss left by the VBS investment.
"The committee found this concerning as it depicts a lack of leadership in this municipality, and [the committee] will further investigate the matter with law enforcement agencies," Hlengwa said.
Hlengwa tells the FM it would be a mistake to deal with VBS in isolation, and to think "if you punish those who are responsible for the illegal investments into VBS then you have solved the problem".
Instead, the VBS saga should be seen as a symptom of an ailing local government environment, he says. He believes this is a space that "takes offence" to oversight and accountability.
Hlengwa’s description of the municipal space rings true also for VBS itself: officials, directors and auditors operating behind a veil acted with impunity and scant regard for the poor. The only real light is the hope that the sordid saga will prove to be a catalyst for greater oversight and scrutiny of both the public and the private sectors.
But, for the moment, the dock remains empty, and the municipalities poor.