Bailouts allow state capture to continue

Good things finally seem to be happening now the commission into state capture is under way. But state-owned enterprises (SOEs) are also asking for bailouts and there’s a connection.

Let’s summarise the compact that let the commission happen. 

For President Cyril Ramaphosa’s government, the aim of the commission is to gather evidence publicly. The commission was approved by the faction led by former president Jacob Zuma. 

But some in the Zuma faction are allegedly state capturers themselves.

This is where the government and the state capturers’ needs overlap —a commission buys time to get law enforcement agencies back into shape and delays criminal prosecution.

It also gives capturers a chance to fight back, by achieving a “partial recapture” of key legal institutions, or even the commission itself. And they can funnel back stolen funds to pay for their legal defence.

If those options fail, the capturers’ next strategy is the “Stalingrad defence”, which is to say delay, delay and delay. In fact, there’s a financial incentive for capturers to do so.

Let’s consider the SOE appeals for bailouts in the light of Mcebisi Jonas’s assertion that Atul Gupta said they “control everything”. Why wouldn’t the Guptas have had a multi-pronged strategy?

The South African Revenue Service was systematically crippled to render it unable to pursue tax offenders, leaving a R100-billion shortfall in annual revenue. This implies that funding for state capture was never planned to come from taxed income. Consequently, it is feasible that state capture was intended to be funded from national debt.

The worst interpretation, that the Guptas and Zuma actively decided to cripple the government’s tax-collecting ability while planning for SOEs to appeal for bailouts ad infinitum, may not even be accurate. It may just have been an ad hoc decision, along the lines of: “Where will this money come from? Oh, we can appeal for bailouts.”

But the end result is the same. On the basis of this interpretation, the SOEs are not badly run, they were intended to be financially broken to justify appeals for bailouts and so to keep access to a reservoir of funds well beyond their budget.

That South Africa’s debt doubled from 28% to 60%+ of gross domestic product in eight years then presents itself not as awful mismanagement but as one part of a totally or partly planned strategy. After all, it is called “organised crime”, so one shouldn’t be surprised when the criminals are organised.

The further implication is that the capture machine is still running, albeit on autopilot. Simply put, all the techniques to siphon off funds using distorted procurement procedures are still in force and legally binding until their contracts have been overturned in court. South Africa is still paying R13-billion extra for the Passenger Rail Authority of South Africa train carriages, for coal supplied by front companies that tack on markup, and so on.

But more critical is the likelihood that not all the inflated supply chains and dodgy tenders have been noticed. They’re embedded in the everyday running costs of the SOEs, covered by a veneer of legal invoicing. And because they haven’t been discovered, the perpetrators, not all of whom need to have been in the Gupta network, are letting them run.

Here, for example, is a comment from an SAA executive: “The problem here is not even the market, but within, with people stealing and committing fraud.”

That quote is not from the height of the alleged Zuma capture era, but from last week. Nor is there a plan to remedy the matter soon. SAA is projected to need R21.7-billion of bailout between now and 2021.

Unfortunately, because SOEs paid for those losses using debt, the country doesn’t only pay for the losses but also for interest on the financing to cover the losses.

South Africa is being squeezed in a “capture multiplier”, as each round of bailout funding, dissipated over inflated supply chains, leads to a greater need for borrowing.

Now, one might imagine that capturers would have aimed for delay until the SOEs or government default on payment: at that point, the government would be too absorbed in managing the fallout to worry about prosecuting the capturers.

But Ramaphosa is on top of that problem: he’s doing a great job of addressing the immediate tactical needs, to bring money into South Africa to stimulate our economy, while using that growth to keep the ANC’s national executive committee on his side, maintain party unity and entrench his position.

Even so, if the recently promised loans from China and Saudi Arabia are frittered away through the distorted supply chain of SOEs, in a few years we’ll be back in the same position —but with even greater debt. Worse, if we default on those payments we’ll be subject to whatever penalties are in the loan agreements.

Best to break down the state capture networks as quickly as possible. Ramaphosa is thus facing a dilemma: if he moves too slowly to dismantle the networks, he risks default and forfeit of the sovereign control of our nation to external financial powers; if he moves too quickly, he risks disruption and revolt by the capturers.

That happened recently. After a series of horrible revelations at the Zondo commission, the Sunday Times broke the story that Zuma had been meeting his allies Ace Magashule and Supra Mahumapelo, allegedly to discuss strategies to recall Ramaphosa or dispute the results of the 2017 election.

Kudos to the Sunday Times for running the story. But did they fall into a Zuma trap? The two meetings were held in the Beverly Hills Hotel (though without Zuma) and the Maharani.

The photos the Sunday Times ran were taken in the foyer of the Maharani. Who holds “secret” meetings in the most noticeable landmarks in KwaZulu-Natal, and then hangs around in full public view in the foyer, unless they want to be noticed?

The point to note is that Zuma usually means something else when he says or does something obvious. If so, the fuss probably served as sabre-rattling on several fronts: as a justification of the relevance Zuma still has in politics, a threat that he might come back, a warning to those in the network to keep mum and a threat to the Ramaphosa faction to back off.

But Ramaphosa can’t back off entirely, so either he allows South Africa to get neck-deep into debt and external obligations to the point of default or, at a certain point, the Zuma faction will be forced to make what plays they can.

That being so, it’s urgent that we begin dismantling the capture network. One option that hasn’t been mentioned is offering amnesty for junior members of the network. In practice, this could happen in three stages.

First, Ramaphosa could offer an amnesty to junior state capturers, provided that they make a full disclosure of their actions and every remaining rand or asset is returned. That will reduce the fear of owning up among the capture network, and restore funds that would otherwise be years of court action from being recouped, if ever. Second, Ramaphosa could underscore to the electorate and to all elected officials that corruption steals from the poor and set a “reset date” after which a zero-tolerance policy for corruption will be installed.

Third, he could then launch a dedicated corruption unit from scratch, which only prosecutes corruption that occurred after the reset date. The unit’s personnel can be free of capturers from the start, unlike the Hawks, and so can be effective from the get-go.

There will also be less backlash from those in government and SOEs who don’t have squeaky-clean pasts and might be tempted to obstruct the process. Doing so is also timely.

The hard truth is that, while half of South Africa is looking for ­justice and half to protect themselves from justice, the parties will maintain their stand-off. We need to be forward-looking to begin the bigger tasks of rebuilding our nation. And we need to act soon. We’re burning money and we don’t have time for fiddling.

Dino Galetti, most recently a post-doctoral researcher at Yale, was creative director at an Irish ad agency, and senior writer and a strategist for the Democratic Party in 1994.

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Dino Galetti
Dino Galetti
Dino Galetti, most recently a post-doctoral researcher at Yale, was creative director at an Irish ad agency, and senior writer and a strategist for the Democratic Party in 1994

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