Signs of rigging in Tau tender
The City of Johannesburg stands accused of rigging a large tender in favour of Regiments, an ANC-connected empowerment firm central to a consortium that made the mayor's wife a multimillionaire.
Johannesburg mayor Parks Tau's wife was cut into a Capitec Bank black economic empowerment (BEE) deal in 2006, landing her a stake now worth about R10-million. This was about a year after Regiments, which came to lead the BEE consortium, won a five-year multimillion-rand fund management contract from the city's treasury. Tau, who was elected mayor last year, was the mayoral committee member responsible for the treasury at the time.
The Mail & Guardian exposed the apparent conflict a fortnight ago. Regiments and Tau have denied wrongdoing and the latter asked the public protector to investigate.
Now it emerges that Johannesburg recently chose Regiments to perform the fund management contract for another five years – following a tender process seemingly tailored for it as the incumbent.
Although Regiments's bid was arguably the most expensive, it was the only firm left standing after each of its 11 competitors, including large banks and specialist fund managers, was disqualified on a technicality or for lacking a "track record".
Competitors are crying foul and one has initiated a high court challenge.
City tender #1
The city first issued a tender for the fund management contract in June 2005 and awarded it to Regiments in September.
It appears that at the time a track record was not a requirement at all. Regiments Fund Managers, which won the tender, was established the month in which the tender was issued and its parent company, Regiments Capital, was less than a year old then.
The contract was to manage the city's "sinking fund", in which it puts money aside – now about R2-billion – to provide for liabilities, largely municipal bonds, that have to be redeemed in future. The five-year contract appears to have become effective in late 2005 or early 2006 and may have earned Regiments tens of millions of rands, although neither party would quantify the fees.
Cut into Capitec
In December 2006 Capitec Bank, the microlending upstart now yapping at the heels of the large retail banks, announced its BEE deal with Coral Lagoon, a consortium that the M&G revealed last month was put together by an ANC fundraiser who, in turn, roped in Regiments Capital.
Regiments appears to have strong links with Luthuli House, although it denies being "set up or facilitated" by the ANC. Those cut into the consortium included the Batho Batho Trust, established by ANC leaders, as well as connected individuals such as Philisiwe Twala-Tau, Tau's wife, and Gugu Mtshali, Deputy President Kgalema Motlanthe's life partner.
Coral Lagoon's Capitec stake jumped to R1-billion in value after a controversial debt redemption funded by the Public Investment Corporation in February this year. This gave the two women free shares of R10-million each.
After the M&G highlighted the apparent conflict in Tau's wife benefiting from a consortium involving Regiments while the company benefited from the Johannesburg tender, Tau asked the city's integrity commissioner and the public protector to investigate. He said: "I am confident of my innocence from impropriety. It is important that when such allegations arise, we should subject ourselves to scrutiny."
Tau's spokesperson, Fred Mokoko, said earlier there was no conflict because Tau had not participated in the adjudication of the tender awarded to Regiments. He said nothing about Tau's ongoing duty to oversee the contract – directly as political head of the city's treasury department until last year and then indirectly as mayor.
Regiments denied wrongdoing on the basis that different divisions of the group were involved in the Johannesburg and Capitec deals and the two transactions were "initiated and concluded over different time frames". It also said the Coral Lagoon consortium was "pre-existing" by the time it was invited to participate, implying it was not responsible for Twala-Tau's inclusion.
City tender #2
Towards the end of Regiment's five-year contract as fund manager in 2010, the city issued a new tender for a further five-year contract. But the adjudication was cancelled and Regiments' contract extended, eventually for more than 18 months.
Mokoko said this was to allow the city time to comply with new national treasury requirements for the evaluation of tenders. These included not entering into a large contract shortly before last year's local government elections and to align procurement with development strategy.
The city finally advertised the tender again in April this year, six weeks after the Capitec deal made Twala-Tau rich.
The tender adjudication was divided into three stages: the first to check technical compliance with the tender conditions, the second to check functional competence and the third a scoring of price and BEE.
A report of the bid evaluation committee, obtained by the M&G, shows that aggressive weeding out started in round one and that, of the 12 bidders, only Regiments survived into round three. Because of its high price it would clearly have lost against other bidders – had there been any.
Eight bidders are disqualified. This includes financial majors Nedbank, Old Mutual, Investec, Standard Bank, Sanlam and Rand Merchant Bank, each allegedly for not submitting municipal bills for the company or its directors.
A spokesperson for Old Mutual, which was disqualified for not submitting a company municipal bill, said this week: "To date we have not received any communication from [the city] as to whether we were unsuccessful in the tender. We would like to clarify that we did submit directors' rates bills."
A Sanlam spokesperson said: "We did provide municipal accounts for all the directors except for [one] as she was out of the country at the time. We indicated this in the tender and said that we would provide this if required at a later date."
Four bidders remain standing. They are niche fund managers Regiments, Colourfield Liability Solutions and Pan African Asset Management, and financial major Stanlib. Here, the contestants have to demonstrate competence to manage the R2-billion fund.
To go through to the next round, the bidders have to score 75 out of 100. But without a "track record", they might as well throw in the towel, because 30 points depend on it. This requirement stands in stark contrast to when Regiments, then with no track record, won the first tender in 2005.
The evaluation committee decides that only Regiments, the incumbent, has a track record. The company gets a near-perfect 28.8 out of 30, whereas the remaining three contestants are disqualified when the committee scores them no more than two out of 30.
Colourfield filed a South Gauteng High Court review application in late August, challenging Regiments' selection as preferred bidder. Its founding affidavit states that it "has more than four years' experience in sinking funds and manages third party assets in excess of R20-billion". Its bid document, annexed to the affidavit, lists sinking fund clients, including multibillion-rand blue chip, parastatal and municipal pension funds.
Had there been any bidders left but Regiments, this would have been the decisive round because the sole criteria were BEE compliance, accounting for 10 points, and price, accounting for 90. Colourfield said in its affidavit that as a level one BEE contributor it would have scored full marks for the former and its price beat Regiments' by a significant margin.
The adjudication report obtained by the M&G shows Regiments as expensive – it quoted a basic fee of 0.25% of the total funds under management against the 0.23% average of bidders. And arguably making Regiments the most expensive is that, almost uniquely among the bidders, it also charged an "outperformance" fee of 25% of performance above benchmark.
Regiments this week said price was not all that mattered: "A good fund manager can appear expensive in terms of fees, but when measured in the context of performance is often the cheapest."
Clearly sensing the problem with it selecting perhaps the most expensive bidder in a tender to be decided mostly on price, the city's executive adjudication committee approved the award to Regiments subject to a slight downwards negotiation of its price. The final contract remains to be signed.
In response to the new allegations, Mokoko said on behalf of Tau this week that, because the latter had referred the matter to the public protector and integrity commissioner, "we do not want to pre-empt or prejudice these investigations or be seen trying to influence them through a media campaign. The executive mayor has undertaken to co-operate with the investigations and shall also make himself available for questioning by these institutions."
He said the city was defending Colourfield's court application, but that no new contract had been concluded with Regiments pending the litigation.
Regiments this week denied a discrepancy between a track record not being a requirement in 2005 and it being key now. "The active sinking fund strategy was novel, with no single asset manager having any experience. In 2012, the concept is tried and tested with several clients in the market and a number of experienced sinking fund managers with varying track records. The performance track record of Regiments Fund Managers is unparalleled. The facts speak for themselves."
It also claimed the Colourfield court application contained "serious errors in fact and thus misrepresents the tender process. Regiments Fund Managers will vigorously oppose the application. We are in the process of compiling our answering affidavit, which will lay bare all these errors by Colourfield."
- Public protector Thuli Madonsela is to perform a preliminary investigation on the R1-billion Capitec empowerment deal, she has confirmed. The probe follows a complaint by the Democratic Alliance after the M&G revealed how entities and individuals connected to the ruling party benefited handsomely from Coral Lagoon, the consortium that acquired shares in Capitec Bank in 2006 with the help of a R285-million loan from the Industrial Development Corporation and a Public Investment Corporation debt redemption deal this year.
Disclosure: Capitec Bank Holdings' chairperson is the founder of the Millennium Trust, one of the funders of the M&G Centre for Investigative Journalism. A request for repeat funding is pending.
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The M&G Centre for Investigative Journalism (amaBhungane) produced this story. All views are ours. See www.amabhungane.co.za for our stories, activities and funding sources.