23 January 2017

South Africa: State Capture & Energy Policy

Photo: allafrica.com
Top: Title image of the 'State of Capture' report. Bottom-left: EFF supporters protest in Church Square, Pretoria. Bottom-right: File photo of Atul Gupta and President Jacob Zuma. (file photo).

"Eskom, accused of overly cozy ties with the Guptas featured heavily in the report, with 916 mentions. ... it's Eskom's chief executive, Brian Molefe, who comes out looking the worst. According to cell phone records, Molefe had 58 phone calls with the eldest of the Gupta brothers, Ajay Gupta, between August 2015 and March 2016, just before the Guptas purchased South Africa's Optimum coal mine for 2.15 billion rand ($160 million). Eskom, which prepaid the Gupta's Tegeta Exploration and Resources 600 million rand for coal, had been accused of helping to finance the Guptas' coal mine deal through preferential treatment." - Quartz Africa

In South Africa, as elsewhere in countries both large and small, the debates about government energy policy are often framed in terms of what is best for the "national interest." But few doubt that behind these choices between renewable energy options and others (fossil fuels or nuclear energy), there are also private interests, whose roles in the management of the state are not new but are becoming more and more blatant (see below on links on the common stakes of the incoming Trump administration and Russia's Putin in promoting fossil-fuel interests).

Concentrating on this aspect of what is termed "state capture" in South Africa, this AfricaFocus Bulletin includes (1) brief excerpts from the 355-page report on "State of Capture" from Public Protector Thuli Madonsela; (2) an article with a summary of the report from Quartz Africa, and (3) an article from The Conversation on the state capture issue and its effects on plans for nuclear energy.

Two recent articles with background on the energy debate include:

le Cordeur, Matthew, "5 reasons why Eskom is wrong about renewables costs - CSIR," Jan 12, 2017 http://www.fin24.com - direct URL: http://tinyurl.com/jmpts84

"Eskom delaying R50 billion renewable energy plan to push nuclear goals," Jan 10, 2017, http://businesstech.co.za - direct URL: http://tinyurl.com/zcqku94 - Editor's Note

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Just Announced re State Capture in Mozambique

Watch live on youtube January 25 Zitamar News and Africa Research Institute present: A Webinar on Mozambique's Debt Crisis Wednesday 25 January - 15:00 Maputo / 13:00 London / 08:00 New York https://www.youtube.com/watch?v=h62LLithnV4

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The Trump Election: Intersecting Explanations http://www.noeasyvictories.org/usa/trump-win-reasons.php

Observations (second installment), Jan 23, 2017

In the period between the election and the inauguration, the highest profile debate about reasons for the Trump electoral win was about Putin's intervention. But that debate produced more heat than light, while key issues such as the common interests of Putin and the Trump administration in promoting the fossil-fuel industry received only marginal attention.

See http://noeasyvictories.org/usa/putin-intervention.php for short observations and database entries for 31 sources to date.

Articles on the fossil-fuel connection in particular include:

Joe Romm, "Did Putin help elect Trump to restore $500 billion Exxon oil deal killed by sanctions?," ThinkProgress, Jan 8, 2017 http://tinyurl.com/z6d45ub

Rachel Maddow, 5-minute video on ExxonMobil & Russia deal, Dec. 20, 2016 at https://www.youtube.com/watch?v=n60SzMzjXog

Alex Steffen, "Trump, Putin and the Pipelines to Nowhere You can't understand what Trump's doing to America without understanding the 'Carbon Bubble'," Dec 15, 2016, http://medium.com - Direct URL: http://tinyurl.com/hb2xnc6

"State of Capture": A Report of the Public Protector

14 October 2016

Full 355-page report in pdf available at http://tinyurl.com/jffpskt

5. Evidence and Information Obtained

Introduction

5.1. The Gupta family, originating from India, arrived in South Africa in 1993. They established businesses in South Africa with their notable business being a computer assembly and distribution company called Sahara Computers. The family is led by three brothers Ajay Gupta who is the eldest, Atul Gupta and Rajesh Gupta who is the youngest. Rajesh is commonly known as "Tony". According to a letter submitted to my office, total revenues from their business activities for the 2016 financial year amounted to R2,6 billion, with government contracts contributing a total of R235 million of the revenues.

5.2. They later diversified their business interests into mining through the acquisition of JIC Mining Services, Shiva Uranium and Tegeta Exploration and Resources, Optimum Coal Mine and Koornfontein Coal Mine. They also started a media company called TNA Media, which publishes a newspaper called The New Age and owns a television channel called ANN7.

5.3. The Gupta family are known friends of the President Zuma. President Zuma has openly acknowledged his friendship with them, most notably during a discussion in the National Assembly on 19 June 2013 where he admitted that members of the Gupta family were his friends. Mr Ajay Gupta ("Mr A. Gupta), also admitted to being friends with President Zuma when I interviewed him on 4 October 2016.

5.4. President Zuma's son, Mr Duduzane Zuma ("Mr D. Zuma") is a business partner of the Gupta family through an entity called Mabengela Investments ("Mabengela"). Mabengela has a 28.5% interest in Tegeta Exploration and Resources ("Tegeta"). Mr D. Zuma is a Director of Mabengela.

5.5. Members of the Gupta family and the President Zuma' son, Mr D. Zuma, have secured major contracts with Eskom, a major State owned company, through Tegeta. Tegeta has secured a 10 year coal supply agreement ("CSA") with Eskom SOC Limited ("Eskom") to supply coal to the Majuba Power station. The entity has also secured contracts with Eskom to supply coal to the Hendrina and Arnot power stations.

5.6. Eskom CEO, Mr Brian Molefe ("Mr Molefe") is friends with members of the Gupta family. Mr A. Gupta admitted during my interview with him on 4 October 2016 that Mr Molefe is his "very good friend" and often visits his home in Saxonwold.

5.7. The New Age newspaper has also secured contracts with some provincial government departments and state owned entities, most notably Eskom and South African Airways ("SAA").

5.8. The Gupta family recently purchased shares in an entity called VR Laser Services ("VR Laser"). VR Laser has major contracts with Denel SOC Limited ("Denel"), a State owned armaments manufacturing company. VR Laser has also partnered with Denel to apparently seek business opportunities abroad.

5.9. During March this year, Mr Jonas issued a media statement alleging that he was offered the position of Minister of Finance by members of the Gupta family in exchange for executive decisions favourable to the business interests of the Gupta family, an offer which he declined. The Gupta family has denied the allegations made by Mr Jonas.

5.10. At the time Mr Jonas is alleged to have been offered a Cabinet post as Minister of Finance, Mr Nene was occupying the post. Mr Nene was removed from his post on 9 December 2015 by President Zuma and replaced with Minister Van Rooyen. Minister Van Rooyen was replaced by Minister Gordhan on 14 December 2015 as Minister of Finance, 4 days after his appointment.

5.11. Following Mr Jonas' statement, Ms Mentor also issued a statement to the press alleging that she was also offered a Cabinet post by members of the Gupta family in exchange for executive decisions favourable to their business interests, an allegation denied by the Gupta family.

5.12. The former CEO of Government Communication and Information System ("GCIS"), Mr Themba Maseko also issued a statement alleging that members of the Gupta family pressured him into placing government advertisements in the New Age newspaper. Mr Maseko further alleged that President Zuma asked him to "help" the Gupta family.

What the "State Capture" report tells us about Zuma, the Guptas, and corruption in South Africa

Lynsey Chutel and Lily Kuo

Quartz Africa, November 2, 2016

https://qz.com/825789

It's the report that confirms South Africa's worst fears about corruption: that the state has been captured. In 355 pages, former public protector Thuli Madonsela and her team of investigators outline in detail just how much control the Gupta family, a wealthy Indian immigrant family, has over South Africa's resources. The Guptas' close friend, president Jacob Zuma, as well as two ministers implicated in the report, went to court to stop its release. But it was finally released on Nov. 2, after protests and a court battle.

The report is potentially damning for Zuma, offering proof that he sanctioned the use of state companies for personal enrichment. But now the real reckoning begins, as a web of corruption around Zuma, the Guptas, and at least three ministers begins to unravel.

Hiring and firing ministers in the Guptas' house

The report contains a detailed interview with deputy finance minister Mcebisi Jonas, who alleges that the Guptas offered him the finance minister's post weeks before Zuma was to shuffle three finance ministers in one week. Jonas was driven to the Guptas' home by the president's son Duduzane Zuma, where he was met by Ajay Gupta.

Ajay Gupta allegedly told Jonas they'd been keeping tabs on him and wanted him to be their man in the treasury. Ajay Gupta revealed that they'd already made 6 billion rand ($443 million) from dealings with the government, and wanted to make at least 2 billion rand more (about $147 million). When Jonas refused, they tried to sweeten the deal with 600 million rand (about $44 million) and an extra 600,000 rand ($44,318) in cash, right there. Jonas declined the money, and months later became the whistle-blower that launched this investigation when he revealed his story in March.

Vytjie Mentor, who came out after Jonas with an account of how the Guptas tried to offer her the job of minister of public enterprises, in charge of state-owned companies, also details her exchange with the family. According to the report (p.89), Mentor was told during a meeting in October last year at the Guptas' home that she would go from an ordinary parliamentarian to cabinet minister in a week. All she had to do was make sure South African Airways dropped their route between Johannesburg and Mumbai, making way for the Guptalinked carrier Jet Airways. Mentor declined. She was surprised to see the president himself emerge from an adjacent room, who said "it's okay girl…take care of yourself," as he personally escorted her out.

According to the report, the Guptas also have the power to fire ministers seen as stumbling blocks to their plans. Former finance minister Nhlanhla Nene's insistence on sticking to the rules cost him his job. As did Barbara Hogan, former minister of public enterprises, who refused to allow outside influence in appointments of board members of state-owned South African Airways, Transnet, the national rail, and Eskom, the state power utility (p. 89, 90). On an official visit to India, Hogan said she was shocked to find the Guptas running proceedings. She was relieved of her duties a few months later.

Des van Rooyen, the unknown parliamentarian who became finance minister for a few days after Nene, went to court in a bid to delay the report, fearing it would implicate him. And it has. His phone records show that van Rooyen visited the Guptas' home seven days in a row before he was appointed as finance minister. He was later moved to a less prominent ministry. Van Rooyen has denied any wrongdoing.

Negotiating on behalf of the Guptas

Mining minister Mosebenzi Zwane also tried to have the report delayed, saying it was hastily prepared and that he had not been given time to respond. According to the report (p. 124, 125), Zwane travelled to Switzerland on behalf of the Guptas to smooth over their acquisition of a troubled coal mine from multinational commodity trader Glencore, helping the Guptas become one of the main coal suppliers for state utility Eskom. Zwane allegedly helped facilitate the deal by accompanying delegates from a Gupta resources company, Tegeta, to Zurich, according to a flight itinerary obtained by the public protector. Zwane could not be interviewed in time for the report, but should be allowed to give his version in subsequent investigations, the report says.

Eskom: Keeping the lights on for the Guptas

Eskom, accused of overly cozy ties with the Guptas featured heavily in the report, with 916 mentions. Lynn Brown, who became the minister in charge of South Africa's state owned enterprises, is implicated in the report for allowing the appointment of a lame-duck board that turned a blind eye to murky deals made at the energy monopoly.

But it's Eskom's chief executive, Brian Molefe, who comes out looking the worst. According to cell phone records, Molefe had 58 phone calls with the eldest of the Gupta brothers, Ajay Gupta, between August 2015 and March 2016, just before the Guptas purchased South Africa's Optimum coal mine for 2.15 billion rand ($160 million). Eskom, which prepaid the Gupta's Tegeta Exploration and Resources 600 million rand for coal, had been accused of helping to finance the Guptas' coal mine deal through preferential treatment.

The report concludes (p, 20), "it appears that the sole purpose of awarding contracts to Tegeta to supply Arnot Power Station, was made solely for the purposes of funding Tegeta and enabling Tegeta to purchase all shares in OCH [Optimum Coal Holdings]. The only entity which appears to have benefited from Eskom's decisions with regards to [the Optimum coal mine deal] was Tegeta." Cellphone records also put Molefe in the Saxonwold area, where the Guptas live, 19 times between August and November 2015 and phone calls between Molefe and Ronica Ragavan, head of the Gupta's holding company, Oakbay Investments. Justifying these calls and visits, Ajay Gupta told Madonsela in an interview last month that Molefe is his "very good friend" who often visits the Gupta compound. But Madonsela says these records show "a distinct line of communication between Molefe of Eskom, the Gupta family and directors of their companies… These links cannot be ignored as Mr Molefe did not declare his relationship with the Guptas." Eskom hasrefuted any allegations of wrongdoing. "We do believe everything that we've done so far was above board," spokesman for the utility, Khulu Phasiwe, told a local radio station.

Advertising with the Guptas

Themba Maseko, former chief executive of government's communications agency, in charge of a media buying budget of 600 million rand a year, said he was pressured by the Gupta family to place government ads in their newspaper the New Age. Maseko was also one of the whistleblowers who took his story to the media in March.

In an interview with Madonsela in August, Maseko said he was on his way to a meeting with the Guptas in late 2010 when the president called him on the phone to say, "The Gupta brothers need your help, please help them." During the meeting with Ajay Gupta, Gupta told Maseko that he wanted government advertising channeled to his new newspaper, the New Age. According to Maseko's account, the government official told Gupta that he could not decide where government departments advertise. Gupta responded that this was not a problem. He would instruct the departments to advertise in the newspaper

According to Maseko's account, Gupta instructed Maseko to tell him "where the funds are and inform the departments to provide the funds to you and if they refuse, we will deal with them. If you have a problem with any department, we will summon ministers here." Later when Maseko refused to take a meeting with a New Age staff, Gupta told Maseko, "I will talk to your seniors in government and you will be sorted out." Maseko was fired a few months later.

A bright spot: Integrity in the Treasury

The report shows how the Guptas' plans were repeatedly thwarted by officials in the treasury (p. 131, 132, and 94). The National Treasury, in charge of approving deals linked to state-owned enterprises, stuck to the rules of procurement and public finance. Treasury officials questioned the Eskom coal deal with Tegeta. Unable to stop the initial deal, they succeeded in blocking an extension of the Tegeta contract. These obstructions appear to have frustrated the Guptas and cost Nene his job. Many speculate that current finance minister Pravin Gordhan'songoing legal battles are related to the treasury's resistance to the Guptas influence.

What next?

Zuma, the ministers, and the Guptas have yet to respond to the damning allegations in the report. Madonsela has since left office, with state capture report serving as her parting shot in a sevenyear battle against corruption. Still, she's left instructions on how to use with her findings. Her successor, who has already started, should bring potentially criminal accusations in the report to the National Prosecuting Authority and the police's Directorate for Priority Crime Investigation, better known as the Hawks.

Madonsela has also recommended that the report be taken further by a commission of inquiry, headed by a judge appointed by the chief justice of South Africa's constitutional court, Mogoeng Mogoeng. There are concerns that the prosecuting authority and the Hawks have been compromised. (They have spearheaded the fraud case against finance minister Gordhan.) But the public's hopes lie in the chief justice, who has spoken out harshly against the abuse of power before.

"Public office bearers ignore their constitutional obligations at their peril. This is so because constitutionalism‚ accountability and the rule of law constitute the sharp and mighty sword that stands ready to chop the ugly head of impunity off its stiffened neck," Mogeng said in March when he ruled against the president over his use public funds used to renovate his personal compound in Nkandla.

How the state capture controversy has influenced South Africa's nuclear build

Harmut Winkler

The Conversation, May 26, 2016

http://tinyurl.com/jgrjcz8

South Africa is facing a critical decision that could see it investing about R1 trillion - or US$60 billion to $70 billion - in a fleet of new nuclear power stations. Proponents argue that it will greatly increase electrical base-load capacity and generate industrial growth. But opponents believe the high cost would cripple the country economically.

What should be an economic decision has now been clouded by controversy, with political pressure to push through the nuclear build and the increasingly apparent rewards it would bring to politically linked individuals.

The nuclear expansion programme needs to be considered exceptionally carefully given that the required financial commitment is roughly equal to the total South African annual tax revenue. Loan repayments could place a devastating long-term burden on the public and on the economy as a whole.

South Africa's energy needs

South Africa is in the process of massively expanding and modernising its electricity generation capacity. The governmentdriven Integrated Resource Plan aims to increase total capacity from 42,000MW (peak demand of 39,000MW) to 85,000MW (peak demand of 68,000MW) in 2030. A key component of this plan is the construction of facilities to produce 9,600MW of nuclear power. However, this aspect of the plan has been challenged.

The biggest concern is that nuclear power is too expensive for the country. The debate gained momentum when the 2013 update to the 2010-2030 electricity plan found that electricity demand is growing slower than originally anticipated. Peak demand in 2030 is now expected to range between 52,000 MW and 61,000 MW. There is consequently widespread belief that new nuclear power stations can be delayed considerably.

South Africa's energy generation options

South Africa has had remarkable success with speedy, cost-effective installation of renewable energy power plants. In addition to this, technologies for harvesting South Africa's plentiful wind and solar energy resources are rapidly becoming cheaper, raising the question of whether the country should not invest more in these options rather than in going nuclear.

The argument that nuclear energy provides a stable base load, independent of weather conditions, is mitigated by improvements in energy storage technologies. But also by the fact that South Africa, with its large coal power production, has a proportionally higher base load than many highly developed industrialised countries. The pro-nuclear option is therefore not unavoidable, as nuclear proponents suggest, but rather a matter for thorough economic consideration.

Zuma and the Russians

The nuclear debate gained a political dimension when President Jacob Zuma and his Russian counterpart, Vladimir Putin, started to develop an unusually close relationship. It culminated in an announcement that the Russian nuclear developer, Rosatom, had been awarded the potentially highly lucrative contract to build the new reactors. The agreement was later denied.

Rosatom was considered the preferred contender, with other bidders only there to lend the process legitimacy, according to some observers. The lack of transparency surrounding the process, coupled with a history of corruption in South African mega-projects like the arms deal, has made the whole scheme seem suspicious to the broader public.

A thickening plot

A crucial thread in this saga involves the Shiva uranium mine, about 30km north-west of Pretoria, the country's executive capital. It originally belonged to a company called Uranium One, a subsidiary of Russia's Rosatom. It was sold in 2010 to Oakbay Resources, a company controlled by members of the politically connected Gupta family and the president's son, in a deal that greatly surprised economists.

The mine was deemed unprofitable and thus unattractive to other mining companies. But it was still considered worth a whole lot more than the R270 million paid by Oakbay. The mine would, however, become highly profitable if it became the uranium supplier to the new nuclear power stations. Oakbay and its associates therefore have a very strong incentive for this nuclear build to happen.

It is here that the nuclear build drama feeds into the recent major controversy surrounding alleged state capture, meaning a corrupt system where state officials owe their allegiance to politically connected oligarchs rather than the public interest. This was highlighted by the shock dismissal of Finance Minister Nhanhla Nene, a reported nuclear build sceptic, but also by subsequent allegations of ministerial positions being offered to people by members of the Gupta family.

Political, legal and civil opposition

The nuclear build's association with the Zuma faction in the ruling African National Congress (ANC) will be a political hot potato for decades to come. The whole scandal also offers potential opportunity to opposition parties. With increasing evidence of individuals benefiting, opposition parties have found another spot to exploit, as they did with Nkandla. A post-Zuma government would find it most convenient to simply dissociate itself from the whole scheme.

The South African courts have been used very effectively by pressure groups in the past. Already a number of environmental groups have initiated legal applications, and these might end up being escalated to the Supreme and Constitutional Courts. This will delay any building initiative by years.

The South African experience with the 2010 World Cup has shown that mega-projects can come to fruition when there is broad overall support for the initiative. At the same time, South Africans can be very disruptive and obstructive when this is not the case. For example, the public opposition to e-tolling, an electronic toll collection on certain roads.

The two leading opposition parties, the Democratic Alliance and the Economic Freedom Fighters, have already expressed their strong criticism of the planned nuclear build. Their supporters and civil society in general have demonstrated their capacity for mobilisation around specific issues. So the potential for an anti-nuclear protest movement cannot be discounted.

A negative nuclear outlook

Building these plants is a risky business proposition, especially for Rosatom, which is implicated in the developing scandal. The recent political mood swing against state capture and a likely credit rating downgrade add to the risk.

Rosatom has suggested a nuclear build financing option that effectively amounts to it providing a loan. It is, however, conceivable that a future government may not honour debt repayments if there is a view that the construction deal was secured irregularly.

The narrow public support base and downright hostility in some quarters to a nuclear build has already effectively stalled local nuclear construction plans. The level of controversy, high costs and potential for further disruption mean that the planned implementation could only proceed under severe social strain.

Such a scenario could very well cost the ruling ANC the 2019 national elections. And the party is becoming increasingly aware of this. As such, it is posited that the nuclear build will not happen any time as soon as planned.

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