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Abu Dhabi, UAEMonday 19 November 2018

Extent of South African corruption begins to come to light

After rapacious financial misconduct under president Jacob Zuma, new momentum is building to illuminate the murky goings during his rule

Former South African Jacob Zuma. Under his watch graft became rampant. AP
Former South African Jacob Zuma. Under his watch graft became rampant. AP

South Africans have grown used to lurid corruption scandals in the headlines, but only now is the exorbitant cost of the looting of public coffers by politicians and their cronies becoming clear.

The "lost decade" under the presidency of Jacob Zuma cost $70 billion in economic growth and resulted in millions of potential jobs not being created, according to a new study.

“The 2010s look set to be the worst growth decade in [South Africa's post-Second World War] history, so we’re really in the doldrums,” says Harri Kemp, an economist at the Bureau for Economic Study at Stellenbosch University near Cape Town, who produced the report.

From 2009 when Mr Zuma took office until his ousting in February, South African economic growth had fallen behind other emerging market economies, including many in Africa.

“Domestic factors, rather than external factors, explain the lion’s share of the underperformance,” Mr Kemp says.

Mr Zuma was forced out by Cyril Ramaphosa, who has since set up several commissions to pick through the evidence of the looting. One such commission currently underway is tasked with looking into "state capture", the local euphemism for corruption involving state-owned enterprises (SOE). These include the national electricity utility Eskom and freight rail company Transnet among others.

State capture is seen as especially linked to one family of businessmen – the Gupta brothers – who benefited hugely from their friendship with Mr Zuma, who ensured companies they controlled secured lucrative state contracts.

For instance, Mr Zuma came close to signing off a 1 trillion rand (Dh254.38bn) contract for a nuclear fleet of power stations with Russia, which most economists agreed South Africa could not afford. In 2017, a South African court ruled that the deal was unlawful. The Guptas were central to the plan, owning uranium assets as well as controlling the Eskom board. Control of the utility earned them millions in coal contracts supplying power stations, and a nuclear deal would have further added to their coffers.

With Mr Zuma gone the nuclear option is dead in the water but his legacy is that Eskom is drowning in debt of 400bn rand – more than the country’s budget for health care and education combined. Ultimately the government may have no choice but to sell off Eskom or some of its power plants to private investors.

“Eskom debt is a ticking time-bomb for the South Africa economy,” says Daniel Silke, an energy analyst in Cape Town. “It’s time that the state accepted its severe limitations in thinking it can solely run these critical sectors of the economy.”

The losses from the state capture years are not just financial. The National Prosecuting Authority (NPA), the organisation tasked with serious crime including corruption, was neutered by Mr Zuma to effectively shut down investigations into his and the Gupta’s activities. The Gupta brothers at the centre of the scandals fled the country last year and have so far refused to return to face questions.

The NPA’s newly appointed acting head Silas Ramaite told parliament in October that budgetary constraints and resignations have left 1,064 posts vacant, including 244 seen as critical to its functioning.

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“This should be the biggest concern of most South Africans,” says the South African Federation of Trade Unions general secretary Zwelinzima Vavi, one of Mr Zuma’s fiercest critics over the years. Almost 700 cases have been sent to the NPA, he notes, and now with at least three commissions of enquiry into state-related corruption, the list will grow quickly.

Given the sheer number of offences the NPA, even under new and determined leadership, will struggle to get through the caseload. “Lots of crooks will never be prosecuted,” Mr Vavi adds.

The list of corruption scandals does not look like it is slowing down much either. The latest was the collapse of an obscure finance operation most South Africans had never heard of, VBS Bank. In October a forensic report into VBS showed nearly 2bn rand was embezzled by dozens of bank officials with connections to the ruling African National Congress.

Also implicated were senior members of the Economic Freedom Fighters, the far left opposition movement calling for the nationalisation of the country’s banks. VBS officials had bribed local municipal officials to bank South African’s money with them. The money did not stay in VBS for long; it was quickly spent on luxury cars, overseas holidays including, for one official implicated, a skiing trip to Alaska.

Some at least are hoping new leadership in the presidency will at least slow, if not halt, the rot. The auditor general Kimi Makwetu, whose job it is to oversee state spending, has doggedly warned year after year that most departments and SOEs were guilty of murky spending. Year after year, his findings were ignored.

Now, his office might finally get the attention it needs. "Irregular expenditure is at an all-time high,” he told parliament during a briefing last week. “We are not in a good place."

Around 75 per cent of all municipalities and government departments could not produce reliable financial statements, he noted. Usually, guilty entities simply ignored a qualified audit because they knew it would "disappear" in time.

Now, with Mr Ramaphosa’s administration backing his office, this could change Mr Makwetu said.

“In the new dispensation, these issues may no longer just disappear.”

KPMG under fire over VBS banking scandal

South Africa should seek damages from global auditor KPMG for the role it played in a corruption scandal that saw at least 1.9 billion rand (Dh477.4 million) stolen from local bank VBS, a central bank investigation published this month said.

Lawyers and forensic investigators were commissioned on behalf of the South African Reserve Bank (Sarb) to investigate VBS after it was placed under curatorship in March. KPMG, which audited the bank's financial results, said it had noted the investigation's publication.

"We will only be in a position to comment once we have studied the full contents of the report," the auditor said.

KPMG South Africa has already cut jobs and lost business over work done for a company owned by the Gupta family, friends of scandal-plagued former president Jacob Zuma, who were accused of unduly influencing the award of billions of rand in government contracts. Mr Zuma and the Guptas deny wrongdoing.

Advocate Terry Motau, who led the VBS probe, recommended that criminal charges be brought against the more than 50 individuals and entities who orchestrated and benefited from the VBS theft.

"I recommend further that an auditor's liability claim be instituted by the Prudential Authority, the curator and National Treasury against KPMG for recovery of their respective damages," Mr Motau wrote in the report.

He did not specify how much money the state should seek in damages from KPMG.

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Mr Motau said the scale of the looting from VBS would not have been possible had KPMG not signed off on the bank's financial results.

Two KPMG partners who had dealings with VBS, Sipho Malaba and Dumi Tshuma, resigned after failing to disclose financial interests in VBS.

"Malaba was aware that there was a cash hole when, on 17 July 2017, he gave his audit opinion in respect of the annual financial statements for the year ended 31 March 2017," he wrote in the report. "I accordingly find that Malaba committed fraud."

Mr Malaba did not respond to a request for comment. During the investigation, Mr Malaba blamed failures in the VBS audit on another auditor and said he could not be held responsible for reckless lending by VBS, according to Mr Motau's report.

Mr Motau's probe found that VBS actively sought to attract deposits from municipalities and other state entities and that bribes were paid to solicit the money. Bribes were also paid to people who became aware that money was being stolen for them to keep silent, it also found.

VBS was also in the spotlight when it gave Mr Zuma a 7.8m rand loan to reimburse the state for upgrades to his personal home.