President Cyril Ramaphosa could generate a multi-billion dollar windfall by eliminating graft © Xinhua/Sipa USA/PA images
President Cyril Ramaphosa could generate a multi-billion dollar windfall by eliminating graft © Xinhua/Sipa USA/PA images

What is the future for South Africa's state-owned firms?

15 March 2018

Politicians make so many promises – and keep so few – that disbelief can seem like a way of saving time. Yet when Cyril Ramaphosa, the new president of South Africa, says that the country’s troubled state-owned enterprises must pay their own way in future, he probably means exactly what he says.

Why should we believe Ramaphosa in this instance? Because, as he knows – particularly from his past experience as minister of public enterprises – South Africa cannot afford to pay its bills for much longer.

The major state-owned enterprises are: ACSA, which runs the country’s airports; Armscor, the defence procurement agency; arms manufacturer Denel; energy utility Eskom; oil and gas company PetroSA; the Passenger Rail Agency; the Post Office; Rand Water; South African Airways; the South African Broadcasting Corporation and infrastructure/logistics group Transnet. The government also has minority stakes in two telecoms companies – Telkom and Vodacom – and fuel and chemicals group Sasol.

The travails of the Passenger Rail Agency (Prasa) encapsulate the troubles that have bedevilled many of South Africa’s nationalised companies. It is not a simple story, but the convolutions illustrate how seriously these businesses have been corrupted – and how difficult it may be to break with an inglorious past.

Created 10 years ago, Prasa is best known for spending around $200m on Spanish Afro 4000 trains which were 1.75cm too tall to run on all of South Africa’s railway lines. The outcry over this mismanagement led to the removal of Prasa CEO Lucky Montana and the chief engineer Daniel Mtimkulu who, the media discovered, had falsely claimed to have a doctorate in electrical engineering.

Luckily for Prasa, a Johannesburg court cancelled the full contract, after judges found that the tender process had been skewed in favour of Swifambo Rail Leasing, a company owned by Makhensa Mabunda, a former colleague of Montana’s.

Having no experience in the industry, Swifambo was not the obvious choice but it won the order – and promptly asked Vossloh Espana to manufacture the trains. Documents published in Swiss newspaper Tages Anzeiger suggest that more than $5m was paid by Vossloh Espana to a company called S-Investments, for acting as a “sales representative” on the deal. S-Investments also happens to be owned by Mabunda.

The money trail doesn’t stop there. Auswell Mashaba, Swifambo’s managing director, is also alleged to have made a series of payments, running into millions of dollars, to Mario Gomez, an Angolan entrepreneur who claims to be a friend of ousted South African president Jacob Zuma.

Montana who, as one newspaper put it, “sang like a canary” when testifying in parliament, has also alleged that Zweli Mkhize, in his capacity as ANC treasurer, demanded a $3.6m pay-off and that the former president’s son, Duduzane Zuma, working with the Gupta family, tried to win the order for a Chinese supplier.

The Gupta brothers – Ajay, Atul and Rajesh (aka Tony) – came to South Africa 25 years ago from India. The siblings, who were all in their forties, had decided to emigrate after an email from their father Shiv Kuma Gupta advised them that South Africa was the “America of the world” – a land of infinite opportunity.

And that is exactly what the country proved to be for the Guptas who, as close friends of president Zuma, exerted such power and influence they were accused of trying to “capture the state”. The most vivid example of their leverage was their use, in 2013, of a military airbase near Pretoria to fly in guests for a family wedding. It was rumoured that the ceremony had been paid for by money intended to help poor farmers, which had been diverted into Atul Gupta’s personal account (the family denies this).

The rapid implosion of the Gupta business empire will help Ramaphosa’s government clean up the public sector in general and its nationalised businesses in particular.

Even so, the task will not be easy. Arms maker Denel is strapped for cash, South African Airways has lost $1.9bn since 2012 and PetroSA is still reeling from a $1bn loss incurred when an offshore drilling project collapsed.

Prasa’s bosses have infuriated MPs by ignoring scheduled meetings with the parliamentary transport committee. To be fair to acting CEO Cromet Mopelo, his in-tray is pretty full – the company recently shut a main line in Cape Town for six weeks after a spate of vandalism and violent attacks in which one security guard was shot dead.

Blade Nzimande, the new transport minister, says he will “leave no stone unturned in terms of trying to tap the ideas, analysis, and the key stakeholders to see if we can’t form a broad alliance to rescue the trains that are being run under Prasa”. In that stone-turning process, the agency’s long-suffering passengers will hope that the agency proves competent enough to buy new rolling stock that actually fits the railway lines.

In its present parlous state, Prasa is hardly ripe for privatisation. Other government-owned companies seem better prospects – once the last vestiges of the Guptas have been eradicated. Sean Gossel and Misheck Mutize, academics at the University of Cape Town, say: “The cost of maintaining state ownership has become too high. Over the past 24 years, these enterprises have been the site of gross inefficiencies and high social costs which have hampered the economy.”

Unpacking such monoliths as energy utility Eskom and infrastructure group Transnet, and collaborating with partners in the private sector, is on the new government’s agenda. Sales would lighten the state’s fiscal burden and help it invest to accelerate economic growth, currently dawdling at around 1.1%.

To achieve this, Gossel and Mutize suggest, the government “must follow up on the promise to hold corrupt public servants to account and to ensure tender processes aren’t abused by closing loopholes in public procurement”.

The incentive, for Ramaphosa, is the “corruption dividend” – a multi-billion dollar windfall from eliminating graft that can help him invest in his main priority: creating jobs.

That’s why South Africa’s new president is likely to turn words into deeds.

 Want to stay up to date with the news? Sign up to our daily bulletin.

London or East Kilbride
London total package - £35,700, East Kilbride total package - £30,700
Cabinet Office
Leeds, London
Department of Health and Social Care
CIPS Knowledge
Find out more with CIPS Knowledge:
  • best practice insights
  • guidance
  • tools and templates