This column was first published in Daily Maverick.
By Stuart Theobald and Colin Anthony
The formal business sector in South Africa has been subjected to a propaganda onslaught that has damaged it. It has painted business as universally corrupt, led by unrepentant beneficiaries of Apartheid, in conflict with the aspirations of most South Africans.
In the process we have lost a clear view of what business really does in a society like ours and the important role it must play in delivering on the objectives every South African desires, especially growth and employment.
The propaganda campaign has been waged through social media and a group of spokespeople with unclear funding and motives. Some of the clearest origins of the campaign lie with former Gupta communications company Bell Pottinger, but it has certainly involved other organisations including social media experts in India and elsewhere. The public face has been presented by several spokespeople, including Mzwanele Manyi, the new owner of the Guptas’ former media interests, and Black First Land First founder Andile Mngxitama.
What is the purpose of the campaign? We detect three ambitions.
The first is to eliminate threats to the Guptas and their collaborators posed by businesses dishing the dirt on corruption. The closure of accounts by banks and public disclosures of disciplinary action against employees involved in corruption is highly damaging to the family. German software company SAP has reported itself to the US Department of Justice after it paid R107-million to companies linked to the Guptas. That, no doubt, will turn US investigators towards examining the Guptas themselves. The propaganda campaign calls into the question the bona fides of companies, with the ambition of undermining those companies’ standing in the eyes of law enforcement agencies. KPMG, McKinsey, SAP and others have information that could lead to criminal sanction of the Guptas. For similar reasons journalists have been targeted in the hope of undermining their credibility and thereby the impact of their revelations on public opinion.
The second is to browbeat businesses into acquiescence with the state capturers’ plans. The clearest example to come to light so far is the Gupta’s acquisition of the Optimum coal mine. Eskom imposed onerous terms on Glencore’s supply contracts before Minerals and Energy Minister Mosebenze Zwane helped to strong-arm it into selling its Optimum coal mine to the Gupta-owned Tegeta Exploration & Resources. After the sale, a R2.1bn penalty Eskom had charged to Optimum was substantially reduced. A PWC report found that Eskom’s contract with Tegeta for the supply of coal contained discrepancies, was poorly drafted and was in contravention of supply chain management procedures. Eskom even made the now notorious “pre-payment” of R659m to help the Guptas pay for Optimum.
The same intimidation strategy has been deployed elsewhere including protests directed at Absa and the Reserve Bank purportedly over the lifeboat saga, coincidentally at the same time as the Guptas were trying to buy a bank and prevent the closure of their bank accounts. Another egregious form of intimidation is the use of Section 54 notices to shut down the operations of mining companies that appear to threaten state capture interests. For instance, Royal Bafokeng Platinum was issued with a Section 54 notice in October this year requiring it shut down a shaft, purportedly for safety reasons, after the company terminated its supplier agreement with the Gupta’s Aforika Borwa Mining Solutions.
The third reason is simply to score cheap political points from a credulous electorate that has been sold the line that business is the cause of their economic woes. This serves to shore up political support for crucial political allies of the state capture project, starting with the president. It diverts public energy from confronting corruption by confusing the public about who is really responsible.
Clearly none of these three reasons are in the interests of South Africans.
The damage from this campaign could be long term. The formal business sector is a vital part of the solution to the economic problems facing us. South Africa is unique on the African continent in that it has deep and wide-ranging supply chains. For instance, we can plant seeds, harvest resulting crops using machines made here, process agricultural output, deliver it to factories to manufacture food, and distribute it throughout the country to final consumers. Our construction firms can build the factories and our banks and capital markets can finance it. Many other countries can only manage components of this, producing the raw materials and relying on imports and foreign service providers for everything else. In hard number terms, business generated a gross surplus of R3.65-trillion in 2015. This is the difference between the revenue businesses collect and the costs of inputs acquired from suppliers. This represents the value added by business in the economy.
These activities should be contrasted with rent-seeking. That is when individuals and companies unnecessarily intermediate themselves between two parties of an exchange. The exchange itself adds value to the two parties and the intermediary attempts to capture some of this for themselves. Intermediation is legitimate when it brings parties together in a way that adds value to both, but illegitimate when it intermediates itself by using political power to do so. That is why the state capture project has been about gaining control over the state’s vast procurement spending, particularly through state-owned enterprises, and using the state’s licensing power to muscle in on other business. It has distinctly not been about adding value, the task of legitimate business and entrepreneurs. Legitimate business tries to make peoples’ lives better by working out how to provide better products and services that people want.
Another casualty of the campaign has been the view that business is corrupt. Certainly there has been corruption involving business, including instances like the construction firms that conspired to fix prices in the run up to the World Cup. Some banks were involved in manipulation of the rand exchange rate. KPMG, McKinsey, SAP and others have been caught up directly in the instances involving the Guptas. Many commentators have used such examples to try and draw an equivalence between these actions and those businesses involved in state capture, such as those which have laundered money and received kick-backs from tenders. However, this purported equivalence is not equivalent at all. Companies are instruments of their owners. Some companies are set up by corrupt people in order to further their corrupt ends. In the case of the construction firms and others, the corrupt activities have been significantly to the detriment of their owners. Share prices have been damaged. One of South Africa’s strengths is a sophisticated investment oversight industry complete with corporate governance rules that companies are required to follow. Most of our formal companies are owned by large institutional investors, particularly pension funds. Companies are studied by the financial media and an industry of research analysts who issue opinions on their quality. Corruption must be fought in those companies, but where it occurs it is usually because individuals are acting corruptly in order to derive private benefits, in the form of bonuses based on illegitimately reached targets, or outright backhanders from third parties. This is the key difference: legitimate companies are instruments for shareholders to generate returns on investment commensurate with the risk. Illigitimate companies are instruments for corrupt individuals to achieve their corrupt ends. Legitimate businesses, when corruption does emerge from within their ranks, should act decisively. They should investigate and report wrong doers to authorities. In South Africa, the several businesses have reported themselves to the Competition Commission and have filed cases with the police. They are held accountable by regulators, their shareholders and clients.
The propaganda campaign has generated various other myths about business. These include that business is white, that it externalises its profits, that it doesn’t invest, that it does not create jobs, that it is selfish. Our firm, Intellidex, has worked with Business Leadership South Africa to compose a document that challenges all of these myths head on, that can be downloaded at www.intellidex.co.za/socialvalue. This presents the facts.
The most urgent function of business is to invest in growing the economy. That creates employment and generates returns that support taxes and savings that can in turn be invested again. We need clear and stable political leadership and a conducive policy environment to trigger the business confidence to take risks and invest. Business is an asset to the country – its diversity and size means that it is able to respond to good incentives. The state capture propaganda campaign has damaged public understanding of the crucial role of business. It is important we undo that in order to ensure we get the best possible outcome from business in an effort to develop the economy.