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State Capture wipes out third of SA’s R4.9-trillion GDP – never mind lost trust, confidence, opportunity
The cost of State Capture hovers at around R1.5-trillion over the second term of the Jacob Zuma administration. That’s just short of the R1.8-trillion Budget for 2019. Put differently: State Capture has wiped out a third of South Africa’s R4.9-trillion gross domestic product, or effectively annihilated four months of all labour and productivity of all South Africans, from hawkers selling sweets outside schools to boardroom jockeys.
Quantifying the cost of State Capture is a Gordian knot. There are some costs that hit hard and immediately, although their final impact can be mitigated, at least to some extent, over time. Other costs creep on to the balance sheets of, for example, state-owned entities (SOEs) such as Eskom or government departments, where they look as if they belong as “finder’s fees”, “consultancies” and “commissions”, but they don’t, as these are effectively kickbacks.
The price tag of a culture of imperviousness for politically connected players, and a flailing governance system, can be obscured. And the impact of reputational damage, broken trust and loss of opportunities is hard, if not impossible, to fully quantify, regardless of the cleverest modelling system.
But there are some readily available numbers in the public domain.
And as US Senator Everett Dirkson, cautioning about out-of-control federal spending in his days, reportedly said:
“A billion here, a billion there, pretty soon you’re talking real money.”
South Africa’s Budget lost R252.5-billion between 2007, when official data showed a R9.5-billion surplus in the national coffers (and expectations to have money in the kitty for the next three years), to today, when the 2019 Budget reflected a R246-billion hole that has to be plugged through borrowing and leaving less money for service delivery and governance.
Borrowing requirements shot up by some R67.1-billion in just four years from the R178.9-billion needed in 2015. For this reason, debt service costs are the biggest increasing Budget item: R202.2-billion in debt repayments in 2019, up from R147.7-billion debt service costs in 2016 — and escalating from an initial approximately R15-billion more from 2016 to 2017 to R20-billion more from 2018, according to the various Budget Reviews.
Economic growth plunged from 4.9% in 2006 to 2.3% in 2010, when Budget documents forecast an increase to 3.6% amid upbeat sentiment in the 2010 Budget Review that “the global storm has subsided and the South African economy is well on the path to recover[y]”.
But by 2014, economic growth had plunged to 1.5%, down from 2.2% just a year earlier, and fell further to 1.3% in 2015 on a consistent downward slide — ending at 0.7% in 2018. If the current modest 1.9% growth for 2019 does not materialise, serious questions must be asked as to whether the state of South Africa’s economy, and government’s ability to deliver on a better life, are just the delusions of a political elite in search for votes.
R506-billion was wiped off the value of South African bonds and listed companies, where pension funds are heavily invested, after the midnight end-of-March 2017 Cabinet reshuffle that saw Pravin Gordhan and Mcebisi Jonas booted from the finance ministry.
That Cabinet reshuffle was widely seen as a firm attempt by Zuma to secure ministers favourably disposed to the Guptas and their businesses.
Then finance minister Malusi Gigaba never really shook off that Gupta tag, and two of the three international ratings agencies reacted bluntly: South Africa was downgraded to junk status by Fitch and Standard & Poor’s in April 2017, both citing institutional and political uncertainty in the wake of the Cabinet reshuffle, policy uncertainty, and possible changes of direction with regard to nuclear power and SOEs.
Gordhan, now public enterprises minister, in November 2018 testified before the Zondo State Capture Commission about the cost of this reshuffle:
“The devastating impact of this unexpected announcement on the South African economy is estimated to be approximately R500-billion… Over two days the market value of the country’s 17 biggest financial and property shares fell by R290-billion. The figure excludes the remainder of the equities market that also was hit by the decision. South African bonds lost 12% of their capital value (R216-billion).”
R378-billion had been wiped out on the Johannesburg Stock Exchange (JSE) and some 148,000 jobs — in what is known as South Africa’s 9/12, the evening Nhlanhla Nene was dismissed as finance minister in December 2015, in particular over his opposition to the R1-trillion nuclear deal that the Zuma administration was pushing.
Finance Director-General Dondo Mogajane, in a note to his testimony before the Zondo commission, clearly states debt service costs in the 2016 Budget were R5-billion higher than initially planned because of the impact of Nenegate, that pushed up South Africa’s borrowing costs by one percentage point.
The costs of State Capture also arise in the drop of foreign direct investment (FDI). In 2017 FDI stood at $1.3-billion (about R18-billion), down from $4.5-billion (about R63-billion) in 2012, according to the United Nations Conference on Trade and Development (Unctad) 2018 World Investment Report. And the report directly links politics and economics:
“FDI to South Africa declined by 41% to $1.3-billion, as the country was beset by an underperforming commodity sector and political uncertainty.”
Add into the mix R200-billion overspent on Medupi and Kusile, according to a Public Enterprises briefing to MPs in February. Shoddy workmanship first discovered there in March 2013 — 9,000 welding faults in boilers, according to Business Day at the time — continues to this day in the deal forged in political connectivity that profited the ANC investment company Chancellor House to the tune of at least R50-million. It recently emerged that the Special Investigating Unit (SIU) is investigating theft and corruption of R139-billion at those two power stations, as Fin24 reports, part of its probe into misappropriations at Eskom amounting to R170-billion.
And then there is the R419-billion Eskom debt that makes the power utility the most significant risk to the South African economy. The debt has been incurred against government guarantees of R350-billion, and if Eskom defaults it sets in motion a complex cross-default call-in of debt that would cut across SOEs and also affect SAA, which has government guarantees of R19.1-billion.
Eskom’s debt ballooned from R40.5-billion in 2007 to R254.8-billion in 2014, and R419-billion today amid consistently above-inflation tariff hikes, effectively 170% over the past decade, in events that the 2018 parliamentary Eskom State Capture inquiry linked to various procurement deals and appointments of executives and board members.
State Capture costs must include the roughly R90-billion drop in collected tax revenue between 2015 and 2018 — a R48.2-billion shortfall in 2018, R30.4-billion in 2017 and R11.6-billion in Budget 2016. It’s directly linked to the South African Revenue Service (SARS) unravelling in politically motivated State Capture machinations under ex-head Tom Moyane, a close Zuma ally from exile days in Mozambique. Officials do not deny taxpayer morality declined and more sought (legal) ways not to pay their dues, as is borne out in tax collection rates.
In May 2018 MPs in Parliament’s finance committee were bluntly told by the Tobacco Institute of South Africa (Tisa) that due to State Capture at SARS, South Africa lost R5-billion in custom and excise taxes during 2017 alone, or R27-billion since 2014.
Like the capture of SARS has had a direct impact on monies, but also institutional capacity, State Capture through the appointment of politically pliant officials has affected the prosecution service, the SAPS and the Hawks. Aside from internecine internal battles, the costs of State Capture mean actions that should have happened, didn’t.
Or as South African Reserve Bank (SARB) Deputy Governor Kuben Pillay told MPs on the parliamentary finance committee as far back as August 2017, it was unclear what had happened to the 41 suspicious cases the SARB had referred for criminal investigation by the law enforcement agencies in the previous five years.
This is part of what could be called soft State Capture, where the impact is not so much measurable in rands and cents, but rather the impunity put on a show by politicians and the politically connected.
And so, former SAA board chairperson and executive director of the JG Zuma Foundation, Dudu Myeni, went head-to-head with at least two finance ministers in late 2015 over SAA aircraft deals that would have seen the cost of new aircraft balloon due to R603-million pre-payments to a middleman. Earlier in 2015 Myeni had called then Eskom board chairperson Zola Tsotsi to a meeting at then president Jacob Zuma’s official Durban residence to discuss the power utility. Or, as Tsotsi told MPs in the parliamentary State Capture inquiry:
“Ms Myeni then proceeded to outline the purpose of the meeting, namely, that the situation of Eskom’s financial stress and poor technical performance warrants that an inquiry into the company be instituted. She further elaborated that, in the course of the said inquiry, three executives, namely acting chief executive Tshediso Matona, group executive for group capital Dan Marokane and group executive for commercial Matshela Koko, are to be suspended…”
Although MPs wanted to hear from Myeni, she claimed illness when invited in February 2018, and subsequently flouted a subpoena from Parliament to appear before the Eskom State Capture inquiry. The final report was adopted by the National Assembly in early December 2018, and is now, with supporting documents, witness statements and other documentation, with the Zondo Commission.
But a culture of untouchability runs through government. In the reports Auditor-General Kimi Makwetu released in 2018, only 33 of South Africa’s 257 councils had a clean bill of health, while at the national and provincial level, only 28% of departments had “no findings on compliance with legislation”. For many consecutive years, Makwetu and his predecessor Terence Nombembe had the same refrain: Lack of compliance with prescripts and the law, lack of political will and lack of consequences for wrongdoing.
And so 14 councils invested R1.5-billion of monies they received for service delivery and other projects in VBS Mutual Bank in contravention of the law, the Municipal Finance Management Act (MFMA), and against a caution by National Treasury not to invest. And while, for example, Vhembe district ANC mayor Florence Radzilani resigned, insisting she had done nothing wrong, earlier news reports said she had complained about getting only R300,000 for Christmas from VBS.
All these 14 councils are on the list of 87 dysfunctional councils identified in May 2018 by Co-operative Governance Minister Zweli Mkhize.
Water and Sanitation, which received a qualified audit in 2017 and clocked up R6-billion in irregular expenditure, paid invoices for engineering and project management hours that would have meant the consultant was working 24:7 at a rate well above what is stipulated by Public Services and Administration, Parliament’s watchdog on public spending.
That emerged in a series of meetings in 2018 by the Standing Committee on Public Accounts (Scopa), which also heard there is still no access to safe drinking water for all villagers under the Giyani water project, despite costs ballooning to R2.2-billion in 2017, from R1.3-billion just a year earlier.
On Wednesday Parliament’s environmental affairs committee in a statement welcomed that the project’s trenches had now finally been closed — after the death of six-year-old Nsuku Baloyi, who fell into one such uncovered trench of this Giyani water project in January 2019.
Meanwhile, in the Eastern Cape, investigations are underway into why a contractor was paid R4.8-million to replace nine pit toilets, when that was meant for 12 toilets and the renovation of several classrooms, according to City Press.
There are straightforward State Capture costs that have been in the public domain for at least three years, confirmed in the #GuptaLeaks. This includes the R1-billion Eskom paid to international consultants McKinsey, the R659-million coal prepayment for Gupta-owned Tegeta in April 2016 that effectively facilitated its acquisition of the Optimum coal mine, and the R5.3-billion finder’s fee to a Gupta-linked company as part of the 1,064 new locomotive deal by Transnet.
McKinsey repaid the R1-billion some eight months after London-based McKinsey senior partner David Fine told the parliamentary Eskom State Capture inquiry in mid-November 2017 that the consultancy “did not want any tainted money. Our understanding is we went into a relationship with Eskom in good faith… They gave us verbal commitment they had National Treasury approval”.
Civil proceedings have been underway since January 2019 to recover at least R1.3-billion from former executives, according to Transnet board chairperson Popo Molefe, as Fin24 quotes him saying: “One would not be exaggerating to say what we found there (at Transnet) was a horror show.”
Molefe is part of the crop of new board members and executives appointed to troubled SOEs since early 2018. At Eskom, this meant that scrutiny of the books uncovered further irregular spending; it rose to R19.6-billion in 2018 from R3-billion just a year earlier. And while irregular expenditure does not necessarily mean corruption, or losses, it does mean procurement and other processes were not properly followed and requires each instance be investigated, according to the Public Finance Management Act.
To date, it’s unclear whether, or what, steps are being taken to recoup the R659-million spent on the Tegeta deal that was described in the parliamentary Eskom State Capture inquiry report as part of a series of “questionable” decisions taken by a new board appointed under then public enterprises minister Lynne Browne.
“The Board oversaw some questionable procurement decisions, including the resolution taken on 9 December 2015 regarding an unprecedented prepayment to Tegeta ahead of its acquisition of (Optimum)…”
The Stellenbosch-based Bureau of Economic Research (BER) in October 2018 calculated that South Africa’s GDP could have been anything between 10% and 30% higher, and between 500,000 to 2.5-million more jobs could have been created by 2017, according to the Financial Mail. And between R500-billion to R1-trillion more tax revenue could have been collected over 2010 to 2017. Or as BER economist Harri Kemp is quoted:
“If domestic post-crisis growth had matched that of SA’s peers, citizens and the government would have been in a much better position than is now the case.”
State Capture has extracted an enormous price directly and indirectly on South Africans, most harshly on the poorest and most vulnerable, who cannot opt for private housing, private health insurance, private education and private security.
Here’s how the cost of State Capture adds up to R1,5-trillion over the past four years or so:
- R252,5-billion in lost Budget,
- R67-billion more in debt service costs,
- R90-billion lost in tax revenue collection.
- R506 billion were lost from the value of South African bonds and listed companies in the March 2017 midnight Cabinet reshuffle,
- Nenegate wiped out R378-billion from the JSE.
- R200-billion overspent on Medupi and Kusile coal power stations that are not only over budget but also overdue in completion.
- The directly State Capture identified costs include R1-billion McKinsey consultancy fee, R659-million Eskom prepayment for coal to the Gupta-owned Tegeta and the R5,3-billion finders fee to a Gupta-linked company in the Transnet locomotive deal.
There are other costs arising from a plummeting economic growth rate, down to 0,7% in 2018 from 2,3% in 2010 and 2,2% in 2013 negatively impacting job creation and tax collection. And costs arise also from a culture of impunity within the government that allows service delivery project costs to balloon without completion while 4 councils invest R1,5-billion against the law in VBS Mutual Bank, instead of service delivery projects.
These calculations on the State Capture price tag don’t even touch on the untold costs of loss of trust, reputation and opportunity. DM