Skimming off the fat: How to rip off the govt
Landing lucrative government leases is the hottest new tenderpreneur scam.
When Nelson Mandela Bay ANC chairperson Nceba Faku reportedly told his supporters last week to burn down the offices of the Herald newspaper, he clumsily turned a spotlight on the latest craze sweeping tenderpreneurial circles—how to relieve taxpayers of their hard-earned cash by winning government leases.
All the tender fiend needs is a building, BEE credentials, a friend who can help secure a fat state lease and a greedy bank ready to support the scam with an overblown bond, secure in the knowledge that it will be repaid with public money.
The lease is fattened according to what the tenderpreneur wants, not what the state needs. In turn, the bond is sized according to the lease and not what the building costs, allowing the tenderpreneur to gorge himself on instant cash and, if necessary, share the fat with the friend who helped secure the lease.
It could be argued that President Jacob Zuma’s alleged buddy, Roux Shabangu, perfected this formula, but the influential Moseneke family spelled out elements of it in a brazen 2008 document obtained by the Mail & Guardian.
As for former Port Elizabeth mayor Faku, he has been accused in a number of exposés by the Herald and noseweek (see “Answers not arson” below).
According to the press reports, Faku was close to Port Elizabeth businessman Yossuf Jeeva. Until 2004, the year after Faku became mayor, they were business partners.
Apparently Jeeva bought the eight-storey Kwantu Towers in the CBD from Investec for R2.5-million in 2003, the same year Faku became mayor.
Soon after the sale, Investec handed Jeeva a R49.4-million bond on Kwantu and two other cheap CBD buildings. The following year the municipality started signing leases and occupied five storeys of Kwantu Towers.
Clearly the building was worth almost nothing in Investec’s hands, but something about Jeeva unlocked new value—to the extent that the bank was willing to put up nearly three times what he had spent on the CBD buildings.
What was Jeeva’s magic touch? Could it be that, through Faku, he was able to secure inflated state leases and on that basis could secure huge bonds, guaranteed to be serviced by the state?
The beauty of big bonds, of course, is that instant cash can be drawn by the tenderpreneur instead of having to drip-feed on monthly rental profits.
Neither the Herald nor noseweek proved Faku’s culpability, but a provincial government-commissioned forensic investigation of several municipal deals under Faku ordered the municipality to explain these leases and recommended that the ANC bigwig be criminally charged.
Another politically connected property family has provided a more candid road map to such riches. Encha Properties is controlled by the Moseneke family, with the largest stakes accruing to connected businessman Tiego Moseneke and a family trust controlled by his brother, Deputy Chief Justice Dikgang Moseneke. It is run by his son, Sedise.
In 2008 Encha outlined a disarmingly lucid plan—aimed at potential investors—to use political and government links to get rich through state leases.
Encha planned to use its BEE status to make good money. But the proposition strayed into the political terrain when its authors wrote that there was a need “to take advantage of opportunities created by political uncertainty with the change in ANC leadership”.
Encha aimed to invest in “state-tenanted commercial property only” and on several occasions emphasised that this was lucrative because of the company’s links to the government.
Encha assured potential fellow investors that it had “access to decision-makers in government” and that the company “may have sight of transactions that may not be open to others — The fund would only invest in properties in which [Encha], through its relationships, has established a long-term desire from both the department of public works and the client state entity to remain in [the] property.”
Encha also made the banks’ complicity clear when it boasted that Investec had financed its properties in Pretoria “subject to the company being able to obtain long leases. Encha delivered the long leases.”
To summarise Encha’s pitch:
- It was hooked up with the right people in government.
- These friends would give Encha a heads-up when the public works department was interested in a long-term lease for a state entity.
- Banks would happily hand over juicy bonds—based on the size of these probably inflated leases—which would then be serviced with state money.
- Encha would make money fast or, as it put it, “realise a short-term capital gain”.
As it happens, Encha owns Wachthuis, the Pretoria building leased by the public works department as the police’s headquarters.
Its lease was renewed for another 10 years at the end of 2009, raising the question of whether the police will be saddled with two headquarters now that the department has also confirmed the lease—for the same purpose—of property mogul Roux Shabangu’s nearby Sanlam Middestad building.
Shabangu appears to have read the Encha document very carefully.
The M&G revealed in March that, on the strength of the apparently manipulated SAPS lease, he was able to land himself a R100-million bonus from Nedbank while taxpayers effectively bought him a Pretoria building that the police could have bought or built themselves for less.
- At the top of the food chain was the bank, which put up R320-million when Shabangu bought the building for R220-million in January.
- But first Shabangu had to secure a R600-million lease from the public works department, which he did—and the bank was clearly pleased.
- Even before Shabangu could secure the lease, officials at the SAPS and the department sent the standard procurement process through the blender, apparently to suit Shabangu.
- And before that? We don’t know. Public Protector Thuli Madonsela, who investigated the lease agreement, has made it clear that the R600-million question is how Shabangu came to have access to senior police officials when his negotiations began.
It is hard to escape the conclusion that Shabangu is being courted by some big names in South Africa. His lease agreements in Pretoria and Durban were pushed through by Public Works Minister Gwen Mahlangu-Nkabinde, despite two legal opinions suggesting they were invalid.
Madonsela’s report suggested that both police national commissioner Bheki Cele and the minister’s hands could be dirty.
Those on the public works team who put a halt to the lease so that it could be investigated—former minister Geoff Doidge and director general Siviwe Dongwana, for example—were either sacked or suspended.
In Port Elizabeth the Herald reported that Faku’s regional ANC office left a smoking gun also suggesting political interference: a letter to the municipality.
“In the letter the party informs ANC chief whip Chippa Ngcolomba and then-mayor Nondumiso Maphazi that a decision had been taken that all vacant management-level posts ‘must not be filled until further advised by the [regional executive committee]’ — Major projects advertised and still to be advertised must be submitted to [the ANC’s] Standard House, after which a meeting will be arranged with the mayoral caucus to deal with them.”
The letter does not spell out that Faku was hooking good leases for Jeeva, but it does illuminate an environment in which senior politicians meddle in state affairs.
The kind of illogical conclusion such deals lead to is that in Pretoria the SAPS is now paying for two expensive leases on adjacent city blocks.
Alternatively, as the M&G showed in March, if the police had bought or built their own building, the bond repayments would have cost less than the lease signed with Shabangu.
In the case of Jeeva’s building in Port Elizabeth, noseweek claimed last year that two of the five floors leased by the municipality were not even occupied.
Puzzlingly, the lease for these two floors was renewed mere weeks after the article. Jeeva did not respond to the Herald’s request for comment and Faku threatened to sue the paper for defamation.
Sedise Moseneke was adamant that his company’s purchase of Wachthuis was above board: “At no point is the landlord in a position to negotiate and conclude lease terms with the client department. The department of public works signs leases with the landlord after a very thorough and elaborate process, which complies fully with the PFMA [Public Finance Management Act].”
Shabangu has consistently denied exploiting his political connections to secure state leases.
Answers, not arson
Standing outside the Port Elizabeth City Hall last Friday after a nail-biting local government election in which the ANC nearly lost power, the party’s regional chairperson, Nceba Faku, faced his supporters.
“The primary battle of the ANC has been with the media, especially the Herald, in this region,” he reportedly said. “Down with the Herald, down, down. Burn the Herald. Fire to the Herald — Go and burn the Herald. We will face a bullet with a bullet.”
Indeed, both the Herald and noseweek magazine had dealt heavy blows to his and the regional ANC’s credibility, raising questions that demand answers, not arson.
Most recently the Herald reported on a summary of the damning Kabuso forensic report commissioned by the provincial government to examine various municipal projects between 2003 and 2009.
The paper had gone to court in a fight for the full investigation to be released.
The Kabuso report recommended that Faku be criminally charged for his role in various deals while mayor.
The investigation also fingered a pungent leasing arrangement that contained just the right ingredients to cook up a tasty state-tenant stew. It included a building, a politically connected BEE businessman, state leases and an overblown bond from a bank.
The businessman in this case was Yossuf Jeeva, who noseweek reported last July is both Faku’s friend and former business partner.
Jeeva had bought the eight-storey Kwantu Towers from Investec for R2.5-million. At about the same time the property investor bought two more buildings in the same area of Port Elizabeth for R15-million and R1.14-million from Sanlam and Old Mutual.
“Almost immediately after the deal was done, Investec granted Jeeva bonds over the three ‘hopeless’ CBD properties for a total of R49.4-million—more than three times what he had paid for them,” noseweek reported.
Investec would not say why it sold the building for so little before granting Jeeva a massive bond. The bank said only: “It was part of a larger transaction.”
So noseweek speculated: “Whatever the transaction, Investec was clearly of the view that Jeeva’s prospects in Port Elizabeth’s CBD were way better than those of Sanlam, Old Mutual or Investec itself.”
However, no evidence has been presented to show a clandestine leasing arrangement between Jeeva and Faku, who was mayor at the time, or other officials.
But, as it happens, the Nelson Mandela Bay Municipality came to lease five floors of Kwantu Towers, noseweek reported. Just weeks later the Herald reported that the municipality had retrospectively renewed a lease for its communications department to occupy two floors of Kwantu Towers.
It wrote: “Estate agents have revealed that if the communications department just looked out its windows, it would find similar space for up to half the R82/m2 monthly rate Jeeva is charging.”
Kabuso investigators have told the municipality to explain this lease.—Craig McKune
The M&G Centre for Investigative Journalism, supported by M&G Media and the Open Society Foundation for South Africa, produced this story. All views are the centre’s. www.amabhungane.co.za.