South Africa's widening corruption scandal
Podcast: Several multinationals have become embroiled in a scandal over allegations that South Africa's president Jacob Zuma has allowed a prominent business family to use its friendship with him to control state appointments and the award of big government contracts. Andrew England discusses the scandal with David Pilling and Joseph Cotterill. www.ft.com/ftnews
Presented by Andrew England. Produced by Fiona Symon
From the Financial Times in London, I'm Andrew England and this is FT News.
Tensions in South Africa are running high over allegations that President Jacob Zuma has allowed the Guptas, a prominent business family, to use their friendship with him to control state opponents and award government contracts. The scandal has embroiled multinational companies as well as local politicians and business people. Here with me to discuss this is our Africa editor, David Pilling, and our South Africa correspondent, Joseph Cotterill.
Hi, David. Could you tell us how this scandal first came to light and how it's evolved over the past year?
Well, stories have been trickling out in South Africa for many years now that an Indian family, the Guptas, have been gaining influence over the President Jacob Zuma, including over cabinet appointments and influence over some of the SOEs, the big state-owned enterprises and the contracts that they signed with some of the private companies, some of them owned by the Guptas. These were really all allegations and innuendo and stories in the press until the public protector, Thuli Madonsela, came out with her "State of Capture" report, as she called it, last October, and which really began to detail some of these allegations. And that is all they are at the moment, but allegations that the Guptas have inculcated themselves into the South African state.
Joseph, what are the latest developments? And it seems that there's new information coming up all the time even though this scandal has been running for more than two years now.
The latest developments are a succession of international companies, quite big global brands such as McKinsey, KPMG, and others who've just been implicated in various parts of this long-running scandal. The latest is Germany's SAP, which is Europe's largest software company, which has referred allegations that it agreed kickbacks to a company controlled by the Guptas to US authorities, and has also apologised and said it will discipline employees in South Africa.
This is the other key development in this scandal, which is that it's going international in terms of regulatory tension in other jurisdictions, in particular the US. Last week, sources told the FT that the FBI has opened a probe into US links to the Gupta family, be that company's bank accounts or individuals. So even if South African authorities aren't investigating the family and the various allegations against them, it looks increasingly clear that the US is preparing to.
Can you explain a little bit why there's been no investigation in South Africa. Obviously, we had the public protector's report on state capture, which had a lot of information in it. And there have been numerous allegations in the local and international media. If there are any of these probes going on overseas, why nothing in South Africa?
I think the bottom line is that South Africa is a young democracy. Many core institutions, such as the police, the anti-corruption police in particular, the national prosecuting authority are already very contested in terms of who gets to appoint them and so on. I mean, key appointments are controlled by the president under the South African constitution. And there are constant claims by opposition parties and civil society that Mr. Zuma has put his thumb on the chief prosecutor, on police chiefs to ensure that he and his friends aren't investigated. And so you have other institutions, such as the public protector you mentioned, a kind of government ombudsmen, carrying on investigations where they can. But that is not in a civil or criminal context-- or not so far.
Joseph, we're talking about Africa's most industrialised nation. By far, it's the biggest capital markets, a country that attracts enormous amount of foreign investment into its equities and bond markets. How is this all playing out on the economy?
Well, understandably, business confidence has collapsed. There's an atmosphere of just waiting to see what happens in the ANC. What will happen after December when the ANC will vote on a successor to Mr. Zuma as party leader? Will that mean investigations over state capture proceed after that point if a new party leader then becomes president and can appoint or reappoint prosecutors, police chiefs, what have you?
So everyone on tenterhooks waiting for that, and also just for policy making in general to start again. Because of the factionalism and infighting within the party, key economic policies are just not being made or people are waiting for whichever faction wins out. So private investment is in a bad shape.
And then the state-owned companies themselves that are at the heart of the scandal-- Eskom power monopoly, in particular-- what will happen to them? What will happen to their management? What will happen to their investment plans if there are now what could be years of investigation an kind of picking out of what happened during the era of the Guptas?
You mentioned the ANC's elective conference due for December. What are the likely outcomes? And what do people expect to come after the conference?
First of all, I think we have to ask, is the conference going to happen in December? Because the infighting has got so bad that it's no longer impossible that when the vote takes place, there will be disruption, particularly if Mr. Zuma believes that his chosen successor, his ex-wife, Nkosazana Dlamini-Zuma, who's also a veteran of the party and a former government minister, if she doesn't look like she's going to walk the conference, there is plenty of speculation that Mr. Zuma and his allies will try to collapse the vote in some way. That's how high stakes are at the moment.
But if it does run smoothly, Ms. Dlamini-Zuma will be pitted again Cyril Ramaphosa, the current deputy president of the ANC and the of the state. Mr. Ramaphosa is running on an anti-corruption ticket. His speeches are kind of peppered with references to a certain family, to certain individuals bringing down the reputation of South Africa internationally. It's a clear reference to the Guptas.
What Mr. Ramaphosa would actually do if he wins in December is an open question. Does he actually have the support within the ANC to carry out that root and branch reshaping of police, prosecutors, the boards of state-owned companies to turn a leaf on the Gupta era? Or will he inherit a party which is inherently divided, and we'll just continue to see this kind of conflicts play out into next year and quite close to the next national elections, which take place in 2019?
So people are very worried about one or other of these quite factionalised candidates winning. And that's why you're seeing increasing shifts within the ANC, particularly at grassroots level, to find a so-called unity candidate. One name in the frame is Zweli Mkhise, the ANC's current treasurer. He's seen as not tied to the Guptas or to allegations of corruption. But at the same time, he's not seen as as divisive as Mr. Ramaphosa may be. So it could be a three-way contest in December.
David, how much damage has this all caused South Africa's reputation as a place to do business?
This has done a lot of damage, both to South Africa and to some of the companies that have operated in South Africa. To take them separately, South African politics has had a big influence on, for example, who is the finance minister, whether some institutions are seen as independent or not. And partly because, or largely because of this political uncertainty, the ratings agencies have downgraded South Africa to junk status which affects the rate at which it can borrow, which affects its reputation more generally. The rand has also gone on a kind of a roller coaster ride and has tended to follow these political machinations very closely.
In terms of the companies that are doing business in South Africa, there are foreign companies like KPMG, like McKinsey, like SAP, the German software company, and like Bell Pottinger which have really been sucked into this controversy for appearing to have worked with the Guptas or worked on behalf of some of these nefarious elements that are seen to be affecting the state.
Now this may all sound like a sort of gossip and conspiracy theory. Bell Pottinger, for example, has virtually folded. It's gone bankrupt in Britain. The Asian arm of Bell Pottinger has been salvaged. But Bell Pottinger, a venerable British PR firm, has gone bust because of the actions that people allege that it took part in in South Africa.
And do you think there's more to uncover here?
I think there is more to come. The tentacles of this scandal go quite far. The US and UK regulatory, even criminal, authorities-- the FBI, for example-- are now involved in investigating some of these links, possible remittances of funds from South Africa to bank accounts in America or to Britain. As I say, Bell Pottinger has gone as a company. And even companies like KPMG and McKinsey, they've had their own investigations into this. But one suspects that it's not entirely over for them, or that they will have to work extraordinarily hard to put this story behind them.
What are the lessons for some of the multinationals like McKinsey, like KPMG that have found themselves linked to this scandal?
I think when they're in South Africa, there's probably three rules-- due diligence, due diligence, and due diligence. South Africa is a fairly toxic environment at the moment. And who you do business with and how you do business, and what kind of business you do, is being very closely scrutinised. So companies need to be aware of that, and they need to act accordingly.
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