Few things have cast such a shadow over modern-day South African politics than the State Capture and the resultant Zondo Commission tasked with investigating it. And no name has been more present than that of the Gupta family – a state connection that continues to haunt the country – with the financial costs of illicit financial trade flows during this period crippling economic growth in the country.

While much of the corruption occurred under former president Jacob Zuma, who is himself under investigation (corruption and illicit financial trade flow in 2017 cost the South African economy an estimated R180 billion) the legacy of the myriad of illicit dealings continues to unfold today.

How much has State cost South Africa?

In 2017, Ebrahim Patel, South Africa’s minister of economic development, claimed that corruption costs the country R27bn and 76000 jobs every year. And, according to South Africa’s Minister of Public Enterprises, Pravin Gordhan, the cost of corruption during the second term of Zuma’s presidency amounted to as much as R500-billion per year. This figure pails in comparison to journalist Marianne Merton’s claim that State Capture under Zuma – over the last three years – cost the country R1.5-trillion!

Broken down, the amount can be attributed to:

  • 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. (Still has budget overruns)
  • The State Capture costs include R1-billion McKinsey consultancy fee, R659-million Eskom prepayment for coal to the Gupta-owned Tegeta and the R5,3-billion finder’s fee to a Gupta-linked company in the Transnet locomotive deal.

Economic growth in South Africa declined from 4.9% in 2006 to 0.7% in 2019, while the number of foreign investors coming to South Africa also declined. Products or services that could be produced in the country were replaced by imports from elsewhere in the world.

The news is not getting any better, with the economy in 2020 having contracted by 7.6% – the largest contraction in 90 years – and it’s expected to get worse, with the effects of the Covid-19 lockdown yet to be factored in. The deterioration in the government’s finances has also led to a lack of confidence in local investors, who have shelved future plans and reduced current investments, has only further exacerbated the situation.

While the shadow of State Capture has loomed large for years, the impact of a weakened and captured South African government was put on full display this year. A weakened state coffer had scarce economic resources available to support SA citisens during the Covid-19-imposed lockdown. If anything, the hard lockdown instituted by government further highlighted its inability to stamp out fraud and corruption, with a spate of high-profile allegations levelled against government officials, themselves tasked with managing the fight against the Covid-19 pandemic.

Cyril Ramaphosa promises to act against corruption

On a positive note, South African President Cyril Ramaphosa has been seen to be leading the fight against corruption in his government.  But it needs to be remembered that this has all taken place at the same time the Zondo Commission continues to unearth more allegations against the previous government under Zuma. That is a worrying sign.

In the second half of 2019, Business Confidence in South Africa hit a 20-year low shortly after Finance Director-General DondoMogajane told the Zondo commission that debt service costs in the 2016 Budget were R5-billion higher than initially planned. This was a result of the Cabinet shuffle that saw Zuma controversially appoint Des van Rooyen as the Minister of Finance for a weekend and was notoriously referred to by political parties as “a weekend special”…

Fronting and tenderpreneurism

The Zondo Commission still needs to run its course, and there will be a lot more to digest in coming months,  but two specific trends have begun to take root in the country: tenderpreneurism and BEE-fronting, with recent scandals involving South African politicians and the Gupta family having brought both of these into the public spotlight.

A tenderpreneur is described as an individual who enriches themselves through corrupting the awarding of government tender contracts, This is mostly based on personal connections and corrupt relationships – although outright bribery might also take place – and sometimes involving an elected or politically appointed official (or his/her family members) holding simultaneous business interests. This is often accompanied by overcharging and shoddy workmanship.

BEE-fronting, meanwhile, is an abuse of the rules governing Black Economic Empowerment (BEE), where qualifying persons are given a seat on the Board of a company while having no decision-making power in the company. All this is done to qualify the company for government contracts in terms of BEE. Numerous complaints have been filed against various South African companies regarding BEE-fronting, while a survey conducted by PriceWaterhouseCoopers in 2019, found that companies reported material financial and reputational impacts because of corruption and unethical behaviour by suppliers, employees, and customers. When quantifying the financial losses of BEE-fronting, it was found that 36% of companies reported a loss due to corruption of up to R1,8 million, 27% reported losing up to R18 million, and 13% claimed to have lost up to as much as R90 million as a result of corruption. In the same study, 50% of the companies surveyed reported that they had been accused of being involved in corruption themselves.

The outcomes of these statistics are telling. Companies who have suffered loss because of corruption reported to have seen material financial damage as well as a decline to their reputation and value of their brand. This in some cases, extended to damaging the reputation of individual executives and non-executive directors on the boards of companies.

Corruption places a heavy burden on the economy

Corruption continues to place a heavy burden on the economy – both in the financial and reputational aspects – yet the businesses that were surveyed reported much lower values of corruption than those reported by Patel in 2017. This again shows deficiencies in how corrupt practices are combatted.

Unfortunately, there is no doubt that there will be more revelations to come from the State Capture enquiries and we will be covering the outcomes in future articles.

For more information

For more information on State Capture in South Africa, and the role the Guptas and others are alleged to have played, download a copy of our E-book, which along with local case studies, looks at global cases and the legacies they have left. It also presents you with all the information at hand to better detect and fight corruption within your business.

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The Corporate Insights system will allow you to protect your business from succumbing to the typical pitfalls that lead to corruption. It also comes with a host of additional benefits to ensure your company continues to operate optimally, free of the threat of corruption.

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