tag:theconversation.com,2011:/ca/topics/brian-molefe-36094/articlesBrian Molefe – The Conversation2023-05-24T13:42:03Ztag:theconversation.com,2011:article/2061012023-05-24T13:42:03Z2023-05-24T13:42:03ZCorruption in South Africa: former CEO’s explosive book exposes how state power utility was destroyed<figure><img src="https://images.theconversation.com/files/527785/original/file-20230523-19-yugb19.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Former Eskom CEO Andre de Ruyter.</span> <span class="attribution"><span class="source">PenguinRandomHouse</span></span></figcaption></figure><p>One repeated theme of the <a href="https://www.penguinrandomhouse.co.za/book/truth-power-my-three-years-inside-eskom/9781776390625#:%7E:text=De%20Ruyter%20candidly%20reflects%20on,to%20speak%20truth%20to%20power">memoir</a> Truth to Power: My Three Years Inside Eskom, by Andre de Ruyter, former CEO of South Africa’s <a href="https://theconversation.com/south-africas-electricity-supply-whats-tripping-the-switch-151331">troubled power utility</a>, Eskom, is that “negligence and carelessness had become cemented into the organisation”. </p>
<p>Dirt piled up at even the newest power stations until it damaged equipment, which stopped working – and some equipment disappeared beneath a layer of ash.</p>
<p>Integrity had been displaced by greed and crime: </p>
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<p>Corruption had metastasised to permeate much of the organisation. </p>
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<p>As a political scientist who has, among other topics, followed corruption and kleptocracy, this book ranks among the more informative.</p>
<p>De Ruyter (or his ghost writer) delivers a pacey, racy adventure <a href="https://www.penguinrandomhouse.co.za/book/truth-power-my-three-years-inside-eskom/9781776390625">thriller</a>. Chapter after chapter reads like a horror story about Eskom, whose failure to generate enough electricity consistently for <a href="https://theconversation.com/power-cuts-and-food-safety-how-to-avoid-illness-during-loadshedding-200586">the past 15</a> years has <a href="https://www.investec.com/en_za/focus/economy/sa-s-load-shedding-how-the-sectors-are-being-affected.html">hobbled the economy</a>. </p>
<p>The book is also a sobering indication that parts of South Africa now fester with organised crime.</p>
<p>This book merits its place alongside <a href="https://www.loot.co.za/product/crispian-olver-how-to-steal-a-city/jywy-5080-g730?PPC=Y&gclid=EAIaIQobChMIgZaS7pbE3QIVS7DtCh0EGQXfEAAYASAAEgLszPD_BwE&gclsrc=aw.ds">How to Steal a City</a> and <a href="https://jacana.co.za/product/how-to-steal-a-country-state-capture-and-hopes-for-the-future-in-south-africa/">How to Steal a Country</a>. These two books chronicle how corruption undermined respectively a city and a country to the level where they became dysfunctional.</p>
<h2>Brazen looting</h2>
<p>Another take-away is the devastating indictment of De Ruyter’s immediate predecessors as CEO, <a href="https://www.eskom.co.za/heritage/matshela-koko/">Matshela Koko</a> and <a href="https://www.eskom.co.za/heritage/brian-molefe/">Brian Molefe</a>. They appear as incompetent managers who ran into the ground what the Financial Times of London had praised as the world’s best state-owned enterprise as recently as 2001. Both <a href="https://www.news24.com/news24/southafrica/news/live-former-eskom-boss-matshela-koko-arrested-on-corruption-charges-20221027">Koko</a> and <a href="https://www.sabcnews.com/sabcnews/molefe-singh-back-in-palm-ridge-specialised-commercial-crimes-court/">Molefe</a> have been charged with corruption – at Eskom and the transport parastatal Transet, respectively.</p>
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<a href="https://theconversation.com/explosive-revelations-about-south-africas-power-utility-why-new-electricity-minister-should-heed-the-words-of-former-eskom-ceo-201508">Explosive revelations about South Africa's power utility: why new electricity minister should heed the words of former Eskom CEO</a>
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<p>The standard joke about corruption is “Mr Ten Percent” – meaning a middleman who adds 10% onto the price of everything passing through his hands. Under Koko and Molefe, this had allegedly ballooned into “Mr Ten Thousand Percent”. </p>
<p>For example, De Ruyter writes that Eskom was just stopped in the nick of time from paying a middleman R238,000 for a cleaning mop. </p>
<p>Corruption focused on the procurement chain. One middleman bought knee-pads for R150 (US$7,80) and sold them to Eskom for R80,000 (US$4,200). Another bought a knee-pad for R4,025 (US$209) and sold it to Eskom for R934,950 (US$48,544). The same applied to toilet rolls and rubbish bags. One inevitable consequence of corruption on such a scale was that Eskom’s debt, which was R40 billion (US$2.076 billion) in 2007 (the year that former president Jacob Zuma came to power), ballooned to R483 billion (US$25 billion) by 2020 – which incurred R31 billion (US$160 million) in annual finance charges.</p>
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<img alt="Book cover showing a Caucasian man." src="https://images.theconversation.com/files/527730/original/file-20230523-27-r4nxs8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/527730/original/file-20230523-27-r4nxs8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=920&fit=crop&dpr=1 600w, https://images.theconversation.com/files/527730/original/file-20230523-27-r4nxs8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=920&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/527730/original/file-20230523-27-r4nxs8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=920&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/527730/original/file-20230523-27-r4nxs8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1156&fit=crop&dpr=1 754w, https://images.theconversation.com/files/527730/original/file-20230523-27-r4nxs8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1156&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/527730/original/file-20230523-27-r4nxs8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1156&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>De Ruyter reveals that the “presidential” cartel (meaning one of the local mafias) pillaged Matla power station, the “Mesh-Kings” cartel Duvha power station, the “Legendaries” cartel Tutuka power station, and the “Chief” cartel Majuba power station. He writes that the going rate for bribes at Kusile power station is R200,000 (US$10,377) to falsify the delivery of one truckload of good quality coal. <a href="https://www.gov.za/speeches/special-investigating-unit-secure-another-preservation-order-matter-related-corruption">Kusile</a> is one of the two giant new coal-fired power stations which Eskom is relying on to end power cuts.</p>
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<a href="https://theconversation.com/south-africas-bailout-of-eskom-wont-end-power-cuts-splitting-up-the-utility-can-as-other-countries-have-shown-200490">South Africa's bailout of Eskom won't end power cuts: splitting up the utility can, as other countries have shown</a>
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<p>The book says a senior officer at the <a href="https://www.saps.gov.za/dpci/index.php">Hawks</a>, the police’s priority crimes investigation units, tipped off De Ruyter how he was blocked in all his attempts to combat corruption at Eskom. Senior police officers, at least one prosecutor, and a senior magistrate, have also been bribed by the gangs. </p>
<h2>Noncomformist</h2>
<p>Eskom had 13 CEOs and acting CEOs in 13 years. Twenty-eight candidates, most of them black, rejected head-hunters’ offers to become CEO of Eskom. De Ruyter who was previously CEO of Nampak, took a pay cut (to R7 million) to accept the job, in the hope of accelerating Eskom’s transition from coal to renewables.</p>
<p>At the time of his appointment some commentators alleged that he was an African National Congress (ANC) cadre deployed to Eskom. The ANC’s <a href="https://www.researchgate.net/publication/321223498_The_African_National_Congress_ANC_and_the_Cadre_Deployment_Policy_in_the_Postapartheid_South_Africa_A_Product_of_Democratic_Centralisation_or_a_Recipe_for_a_Constitutional_Crisis">cadre deployment</a> policy is aimed at ensuring that all the levers of power are in loyal party hands – often regardless of ability and probity. But De Ruyter came <a href="https://www.news24.com/news24/politics/anc-claims-de-ruyter-is-trying-to-tarnish-its-image-ahead-of-elections-in-2024-20230426">into conflict</a> with the ruling party.</p>
<p>What caught De Ruyter out was the viciousness of the political attacks on him: smears of racism and financial impropriety. He had to devote many hours of office time to refuting them: </p>
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<p>occupying that seat at Megawatt Park comes with political baggage. </p>
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<p><a href="https://za.geoview.info/eskom_megawatt_park,32555009w">Megawatt Park</a> is Eskom’s head office in Johannesburg. </p>
<p>The book’s early chapters summarise how he was one of those Afrikaners with Dutch parents, who did not conform entirely to apartheid norms. The Afrikaner <em>volk</em> imposed the <a href="https://www.britannica.com/topic/apartheid">apartheid</a> regime onto South Africa for 42 years. In his high school years he became a card-carrying member of the <a href="https://www.britannica.com/topic/Progressive-Federal-Party">Progressive Federal Party</a>, a liberal anti-apartheid opposition party, antecedent of the Democratic Alliance, which is now the official opposition to the governing party. </p>
<h2>Poisoning</h2>
<p>De Ruyter’s book mentions organising a routine Eskom stakeholders’ meeting at a guesthouse in Mpumalanga province. </p>
<p>To save time, he ordered that food be served on plates to table places, instead of buffet arrangements. The guesthouse management refused, due to fear of facilitating poisoning one or more guests – only buffet arrangements could thwart that. </p>
<p>He says that in Tshwane (Pretoria), the seat of government, the National Prosecution Authority no longer orders takeaway lunches for delivery to their premises. Instead, standard procedure is that a staff member buys lunches for all at random take-away shops. </p>
<p>This sinister development culminated in De Ruyter himself being poisoned with cyanide in his coffee in his office, demonstrating how mafia-type gangs had recruited at least one Eskom headquarters staff member.</p>
<h2>Unintended consequences</h2>
<p>In several places De Ruyter also touches on other issues. The unintended consequence of some government policies, such as localisation and <a href="https://www.treasury.gov.za/comm_media/press/2022/2022110801%20Media%20Statement%20-%20PPP%20Regulations%202022.pdf">preferential procurement</a>, is that it costs Eskom two and a half times more to pay for each kilometre of transmission cable than it costs <a href="https://www.nampower.com.na/">Nampower</a> Namibia’s power utility, just across the border. </p>
<p>What stands out from this memoir is that the success of a company demands that a CEO, managers, artisans, guards, and cleaners all take the attitude that the buck stops with them – seven days a week – and act accordingly.</p><img src="https://counter.theconversation.com/content/206101/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Keith Gottschalk is a member of the African National Congress, but writes this review in his professional capacity as a political scientist.</span></em></p>The book shows how parts of South Africa now fester with organised crime.Keith Gottschalk, Political Scientist, University of the Western CapeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/797992017-06-26T15:11:24Z2017-06-26T15:11:24ZNuclear and coal lobbies threaten to scupper renewables in South Africa<figure><img src="https://images.theconversation.com/files/175390/original/file-20170623-22683-kdo1yw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Public Enterprises Minister Lynne Brown citing cost as a reason to stop the last phase of renewables.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/governmentza/16632449722/in/photolist-65aryc-62nZF7-HaBPk-rkKDQw-5V1DEV-k5GzzH-5Ujvi4-CMu41D-FYJ7Da-G5zJVz-7VPga6-p8a3BZ-6hKtqT-7RyM4t-6dQZTu-6dLR9n-4x8MnZ-oRUwAy-6hKtJi-imfo2-raMAk-c5hKK9-4GNj9e-dSZ2ui-dq6VYg-FajqSr-FYJ7wX-FajqM6-FajqL4-y47tSZ-uFzfby-xKQwgs-y47tpp-F7AThg-QjimnS-B1iJ9i-SymxPm-rsXewu-vGtTz6-usxmaB-7Gb4aj">Flickr/GovernmentZA</a></span></figcaption></figure><p>South African power utility Eskom recently <a href="http://www.fin24.com/Economy/dilly-dallying-endangering-sas-renewable-programme-20170620">repeated</a> that it will not conclude supply contracts with the developers of new renewable energy power stations. These developers were selected under <a href="http://www.energyintelligence.co.za/reippp-all-you-need-to-know/">a programme</a> to facilitate private sector involvement in the building of medium-sized renewable energy power stations. </p>
<p>The programme has won <a href="https://theconversation.com/explainer-south-africas-developing-solar-energy-landscape-50537">plaudits</a> for its success in facilitating the establishment of multiple solar and wind farms in record time. But Eskom is once again stalling. </p>
<p>The power utility’s stand threatens the viability of the entire renewable energy sector in the country. It’s hostility also defies logic given that the whole world is <a href="https://www.carbonbrief.org/renewables-growth-breaks-records-again-despite-fall-investment">embracing renewable energy</a> as key to a clean energy future and combating climate change.</p>
<h2>So what lies behind the opposition?</h2>
<p>The answer lies in the fact that two powerful lobbies are at work in South Africa. One is pro-coal, the other pro-nuclear. This has made the success of the renewable energy projects a target for attacks from interested parties in both. Disrupting the renewable energy sector would ensure that the coal sector remains dominant. And that, over time, it is gradually displaced by nuclear. </p>
<p>The lobby groups attached to coal and nuclear appear to have had powerful allies on the state utility’s board. There is mounting evidence that they have been <a href="https://www.dailymaverick.co.za/article/2017-06-01-brian-molefe-the-fall-and-fall-of-the-guptas-state-capture-kamikaze-pilot/#.WUub4uuGOUk">furthering the interests</a> of a group linked to the Gupta family. It in turn has been accused of <a href="https://theconversation.com/how-the-state-capture-controversy-has-influenced-south-africas-nuclear-build-58879">capturing state entities</a> to further its own ends, as well as those of President Jacob Zuma, his family and allies.</p>
<p>It has also been widely <a href="https://theconversation.com/zumas-cabinet-reshuffle-opens-the-door-for-nuclear-deal-in-south-africa-75553">argued</a> that the massively expensive proposed nuclear build is being driven by the same interest groups.</p>
<p>The battle over renewables is therefore closely linked to a wider political confrontation over control of key aspects of the South African economy. </p>
<h2>Eskom’s flawed argument</h2>
<p>The renewables dispute centres on the state utility’s refusal to endorse <a href="http://www.energy.org.za/news/175-reippp-window-4-preferred-bidders">1121 MW of new renewable energy</a>. This translates to about 1% of Eskom’s current generated electricity, given that renewable energy supply is intermittent. This additional renewable energy would <a href="http://www.doe-irp.co.za/">make up 5%</a> of the total renewable energy generating capacity projected by 2030.</p>
<p>Eskom accepts the need to expand its generating potential in the long term. The additional contribution from renewables is well within its broader expansion targets. And <a href="http://www.engineeringnews.co.za/article/renewables-tariffs-dropped-over-25-in-round-4-but-how-low-can-they-go-2015-04-23/rep_id:4136">tariffs</a> on the energy from renewable sources would be almost half of the <a href="https://www.dailymaverick.co.za/article/2016-10-18-comparative-analysis-the-cost-of-new-power-generation-in-south-africa#.WUzkF-uGOUk">estimated cost</a> of new coal and new nuclear power.</p>
<p>The Public Enterprises Minister Lynne Brown has been disingenuous in citing cost as a reason to stop the last phase of renewables. The <a href="https://www.enca.com/south-africa/brown-accused-of-exaggerating-renewable-energy-prices">higher costs</a> she recently quoted were presumably those associated with the <a href="https://www.moneyweb.co.za/in-depth/moneyweb-business-insights/renewable-projects-may-be-coming-to-the-jse/">first round of renewable energy</a> projects. These contracts were concluded in 2012 and prices for renewables have come down considerably since. </p>
<p>For its part Eskom has pointed to the oversupply of electricity as the reason for its objection. But elsewhere it has trumpeted the need for <a href="https://www.businesslive.co.za/rdm/business/2017-05-16-we-must-continue-with-our-nuclear-programmes-molefe-tells-eskom-staff/">more nuclear power</a>. It can’t have it both ways.</p>
<h2>Powerful forces at play</h2>
<p>Until two years ago Eskom was seen as a neutral player committed to effectively provide electric power in the best interests of the country. It threw its weight behind previous power procurement plans. </p>
<p>But that all changed in 2015 after <a href="http://www.fin24.com/Economy/Eskom/Brian-Molefe-appointed-as-Eskom-CEO-20150925">Brian Molefe was appointed</a> CEO.</p>
<p>Molefe and his successor Matshela Koko are both linked to the controversial Gupta family. Their names featured in the Public Protector’s <a href="https://www.dailymaverick.co.za/article/2016-11-02-state-of-capture-eskoms-ceo-brian-molefe-implicated/#.WUlN9ZOkU_s">State of Capture</a> report as well as in a bulk leak of emails which implicated the <a href="http://amabhungane.co.za/article/2016-09-23-two-to-tango-the-story-of-zuma-and-the-guptas">Guptas</a> and other leading figures in the state capture network.</p>
<p>Molefe and Koko played a <a href="http://amabhungane.co.za/article/2017-06-09-guptaleaks-how-eskom-was-captured">pivotal role</a> in helping the Guptas purchase a coal mine – the <a href="http://amabhungane.co.za/article/2017-05-16-exclusive-how-brian-molefe-helped-gupta-optimum-heist">Optimum mine</a> – and to secure a lucrative coal supply contract with Eskom. Both are also strongly <a href="https://www.dailymaverick.co.za/opinionista/2016-09-26-the-nuclear-build-risk-is-not-yours-to-take-mr-molefe/#.WUndJpOkU_s">pro-nuclear</a>. They have also gone on record to argue that renewable energy is <a href="https://www.moneyweb.co.za/moneyweb-opinion/columnists/eskoms-nuclear-vs-renewables-propaganda/">too expensive</a>.</p>
<p>Eskom has furthermore listed renewables as the reason for planning to <a href="https://www.moneyweb.co.za/news/south-africa/eskom-to-close-four-power-stations/">shut down four coal power plants</a>. In reality, these old plants had already been destined for closure in anticipation of the imminent additional power supply expected from two new coal plants - <a href="https://www.dailymaverick.co.za/article/2016-07-07-medupi-kusile-and-the-massive-costtime-overrun/#.WUunQ-uGOUk">Medupi and Kusile</a>.</p>
<p>It’s suspicious that one of the power stations facing closure, Hendrina, is supplied by coal from the <a href="http://amabhungane.co.za/article/2017-05-16-exclusive-how-brian-molefe-helped-gupta-optimum-heist">Optimum mine</a>. The effect of stalling renewable power expansion could force the extension of Hendrina’s life span. </p>
<p>Brown is in the process of <a href="http://www.fin24.com/Economy/Eskom/breaking-brown-unveils-new-interim-eskom-board-20170623">restructuring</a> the Eskom board after Molefe departed, Koko was suspended and the chairperson of the board resigned. Although there are signs that the minister is aware that she has been <a href="https://www.enca.com/south-africa/brian-molefe-lied-about-taking-early-retirement-minister-brown">misled</a> by the Eskom board on other matters, she doesn’t seem to believe this is true when it comes to renewables, repeating recently the view that it’s <a href="http://www.enca.com/south-africa/brown-accused-of-exaggerating-renewable-energy-prices">too expensive</a>. </p>
<p>Brown’s counterpart in the energy portfolio, Nkhensani Kubayi, has displayed little sympathy for the renewable energy sector, also making far-fetched and easily disprovable claims that the initial solar and wind power stations have resulted in <a href="https://twitter.com/mmkubayi/status/872298300799676416">zero jobs</a>. Renewable energy is in fact estimated to eventually generate <a href="http://sarec.org.za/eskom-delays-threaten-new-renewable-jobs/">over 100 000 jobs</a> in South Africa.</p>
<p>Kubayi has also shown that she’s highly receptive to the nuclear lobby. Visiting a nuclear industry fair in Russia <a href="http://ewn.co.za/2017/06/20/kubayi-prolonged-fighting-over-nuclear-power-might-damage-russia-relations">in the middle of June</a> she expressed concern that the <a href="https://theconversation.com/no-nuclear-energy-option-for-south-africa-for-now-at-least-76751?sa=pg2&sq=Winkler&sr=3">judicial disqualification</a> of the existing nuclear cooperation agreement damaged relations with that country.</p>
<p>It has been convincingly argued that South Africa can’t <a href="https://theconversation.com/why-south-africa-should-not-build-eight-new-nuclear-power-stations-49967">afford</a> the nuclear option in the current economic environment.</p>
<h2>The immediate future</h2>
<p>The <a href="http://www.nrel.gov/analysis/re_futures/">global ascendancy of renewables</a> and their particular pertinence in South African climatic conditions may even make coal and nuclear energy technologies obsolete in the distant future. Ultimately South Africa won’t be able to buck international trends. That means that, in the longer term, the future of renewables in South Africa remains bright.</p><img src="https://counter.theconversation.com/content/79799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hartmut Winkler receives funding from the NRF. He is a member of Save South Africa and OUTA, but writes this article in his personal capacity.</span></em></p>Eskom’s stand threatens the viability of the entire renewable energy sector in South Africa, something which plays into the hands of those pro coal and nuclear.Hartmut Winkler, Professor of Physics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/791352017-06-19T20:12:08Z2017-06-19T20:12:08ZCorrupt state owned enterprises lie at the heart of South Africa’s economic woes<figure><img src="https://images.theconversation.com/files/174008/original/file-20170615-23574-zce0hl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Demonstrators march against corruption in South Africa.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>The prevailing economic crisis sweeping through South Africa is a direct result of economic mismanagement largely shaped by the looting of state owned enterprises. </p>
<p>Many are in deep <a href="https://www.dailymaverick.co.za/article/2015-08-06-state-owned-enterprises-chaos-inside-a-mess-wrapped-in-politics/#.WT_1gOuGPIU">trouble</a>. Sheer incompetence and corruption has pushed entities like South African Airways and the South African Broadcasting Corporation closer to <a href="https://www.businesslive.co.za/rdm/business/2017-03-24-sinking-fast-the-perilous-state-of-sas-six-big-state-owned-companies/">financial collapse</a>. Serious questions are being asked about the legality of multi-billion <a href="http://www.timeslive.co.za/politics/2017/06/09/Malema-lays-charges-in-alleged-R17-billion-Transnet-locomotive-tender-corruption">rand procurements at Transnet</a> and the state power utility <a href="http://amabhungane.co.za/article/2017-04-22-r10bn-in-15-days-another-massive-eskom-boost-for-the-guptas">Eskom</a>. </p>
<p>The scale of the problem has been brought into sharp relief in recent weeks by two developments that show corruption in state owned enterprises has been unfolding for years. The first was the release of a report written by academics: <a href="https://www.dailymaverick.co.za/article/2017-05-26-betrayal-of-the-promise-the-anatomy-of-state-capture/">Betrayal of the Promise</a>. The second was the leaking of 200 000 emails which point to dubious links between the <a href="http://www.huffingtonpost.co.za/2017/06/01/the-new-gupta-emails-are-a-lot-heres-what-they-say-in-5-quick_a_22120706/">Gupta family</a>, senior politicians and officials.</p>
<p>The country stands to slip deeper into crisis unless the lust for loot is stopped. The economy is already in deep trouble. It’s <a href="http://www.enca.com/south-africa/south-africa-slips-into-recession-as-economy-shrinks">in recession</a>, and worse is to come. The second quarter GDP figures will reflect that a third rating agency has downgraded the <a href="http://www.stanlib.com/EconomicFocus/Pages/MoodysdowngradeSAscreditrating.aspx">country’s credit rating.</a></p>
<p>There are some indications that the <a href="https://theconversation.com/the-battle-for-control-of-south-africas-state-isnt-just-about-personalities-79131">tide may be turning</a> but the job of reforming the state owned enterprises will have to go beyond just replacing board members. It must also focus on ensuring greater accountability financial responsibility, and performance management.</p>
<p>Unfortunately the severely <a href="http://www.heraldlive.co.za/news/2017/03/24/anc-fractured-core-says-chief-whip/">fractured</a> African National Congress (ANC) is incapable of reversing the slide. Instead, it’s more concerned with outsmarting the growing opposition to President Jacob Zuma’s rule suppressing internal rebellion, and maintaining the crumbling patronage network.</p>
<h2>Unaffordable</h2>
<p>The increasing inefficiency in state owned enterprises continues to put pressure on the <a href="http://www.treasury.gov.za/documents/national%20budget/2017/review/Chapter%208.pdf">country’s fiscus</a>. This is not something it can afford. <a href="http://www.sowetanlive.co.za/business/2017/04/06/public-enterprises-played-a-big-part-in-south-africas-credit-ratings-downgrade">Ratings agencies</a> have made it clear that they’re monitoring continuous bailouts and government guarantees. This is because they pose a serious threat to government’s fiscal balances and policy priorities.</p>
<p>Government guarantees to state owned enterprises stood at <a href="http://af.reuters.com/article/investingNews/idAFKCN0VX1DN">R467 billion</a> at the end of 2015/16. Standard & Poor’s forecasts they will swell to over R500 billion by 2020 – 10% of <a href="https://www.thesouthafrican.com/south-africa-beyond-the-2017-budget/">South Africa’s current GDP</a>. This is more than twice the government <a href="https://www.moneyweb.co.za/news/economy/sp-government-guaranteed-debt-contingent-liabilities-a-risk-to-sa-rating/">contingents in year 2015/2016</a>. </p>
<p>These bailouts have weighed on the fiscus, pushing government debt into dangerous territory. Even before the downgrades South Africa’s debt burden was higher than other <a href="http://www.fin24.com/Economy/sas-debt-to-gdp-highest-among-emerging-market-peers-report-20160926">emerging markets</a>. Moody’s forecasts that total government debt will reach 55% of GDP by 2018 and will <a href="https://www.cnbcafrica.com/trending/sa-downgrade/2017/06/09/moodys-rates-sa/Link">continue to rise</a> after that.</p>
<p>The reason government continues to bail out state owned enterprises is purely due to the fact that they are being managed badly.</p>
<p>The recent board and management scandals at the <a href="http://www.biznews.com/leadership/2017/03/13/prasa-popo-molefe-dipuo-peters/">Passenger Rail Agency of South Africa</a>, <a href="http://www.iol.co.za/dailynews/news/sabc-board-under-fire-amid-scandal-2072625">South African Broadcast Corporation</a>, <a href="http://weeklyxpose.co.za/2017/05/22/r13m-tender-scandal-at-saa-tip-of-the-iceberg-report/">South African Airways</a> and <a href="http://ewn.co.za/2017/05/12/eskom-says-thorough-board-discussion-went-on-over-molefe-s-comeback-move">Eskom</a> indicate that there has been little commitment to improve governance and address operational deficiencies. Instead some senior ANC officials claim that a call for reforms is <a href="http://www.anc.org.za/sites/default/files/National%20Policy%20Conference%202017%20Economic%20Transformation_1.pdf">anti-transformation</a>. </p>
<p>The financial markets are increasingly unwilling to tolerate such excuses. This can be seen by the recent <a href="https://www.moneyweb.co.za/news/markets/transnet-bond-auction-fails-to-entice/">subscription failure</a> of Transnet’s bond auction. And some private asset managers have become extremely <a href="http://www.enca.com/south-africa/sas-asset-manager-stops-lending-state-companies-money">cautious</a> about lending money to public entities.</p>
<h2>The way forward</h2>
<p>The new Finance Minister Malusi Gigaba has so far failed to inspire confidence. Allegations that he is deeply mired in the <a href="https://www.dailymaverick.co.za/article/2017-06-13-analysis-being-malusi-gigaba/">web of scandals</a> are not helping the situation. </p>
<p>Gigaba recently declared that state owned enterprises are <a href="http://www.fin24.com/Economy/gigaba-praises-south-africas-soes-20170605">functioning well and doing “great work”</a>. This is surprising given the rot being revealed on a daily basis. </p>
<p>Nevertheless, the <a href="https://theconversation.com/south-africas-power-utility-so-many-red-flags-its-hard-to-know-where-to-start-79155">patronage network</a> that stands accused of milking state owned enterprises has <a href="https://www.businesslive.co.za/rdm/politics/2017-06-13-the-gupta-dominoes-are-tumbling-fast/">started to crumble</a>. This includes the axing of <a href="http://ewn.co.za/2017/06/14/no-golden-handshake-for-sacked-hlaudi-motsoeneng-when-he-leaves-sabc">Hlaudi Motsoeneng</a> from the South African Broadcasting Corporation and <a href="http://www.iol.co.za/news/politics/eskom-officially-fires-brianmolefe-9506271">Molefe</a> from Eskom. <a href="https://mg.co.za/article/2017-06-13-lights-out-eskom-board-chair-ben-ngubane-resigns-with-immediate-effect">Ben Ngubane</a> has resigned as chairperson of the Eskom board. </p>
<p>There are also signs that <a href="http://www.fin24.com/Economy/Eskom/outa-lays-criminal-charges-against-ngubane-20170613">public and private pressure</a> is forcing some government ministers to take responsibility for their departments. Examples include Minister of Public Enterprises <a href="http://ewn.co.za/2017/05/31/brown-inter-ministerial-committee-has-reached-agreement-on-molefe">Lynne Brown</a>, Communications Minister <a href="http://ewn.co.za/2017/04/01/communications-minister-dlodlo-aware-of-turmoil-at-the-sabc">Ayanda Dlodlo</a> and the Minister of Police <a href="http://www.sowetanlive.co.za/news/2017/04/16/mbalula-orders-former-hawks-boss-ntlemeza-to-vacate-his-office-immediately">Fikile Mbalula</a>.</p>
<p>Nevertheless, the key implication of the Gupta emails is that reversing the deep damage inflicted on the country must start with reforming state owned enterprises. Reversing the rot will take decades. It should begin by ensuring that <a href="http://www.fin24.com/Economy/cabinet-approves-measures-to-improve-soes-20161103">measures agreed last year</a> are implemented.</p>
<p>These include:</p>
<ul>
<li><p>holding the corrupt public servants to account,</p></li>
<li><p>closing loopholes in public procurement to ensure that history isn’t repeated, and</p></li>
<li><p>appointing suitably qualified and experienced technocrats rather than unqualified politically connected individuals.</p></li>
</ul>
<p>Finally, some state owned enterprises will need to be privatised. This is because they operate as monopolies in key sectors which is perpetuating gross inefficiencies. Only privatisation will end these distortions. </p>
<p>For many years, government has claimed that South Africa’s many challenges could be overcome by adopting policies of a “developmental state”. This would entail active state involvement in economic activity and using its resources to tackle poverty and expand economic opportunities. </p>
<p>But the ongoing revelations show that even before South Africa can consider becoming a developmental state, it will first have to root out the ingrained predatory state. Only then can investor confidence begin to be restored, recovery restarted and rating downgrades reversed.</p><img src="https://counter.theconversation.com/content/79135/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town. </span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Reforming South Africa’s state owned enterprises should start with greater accountability and financial responsibility.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape TownSean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/791552017-06-13T16:02:07Z2017-06-13T16:02:07ZSouth Africa’s power utility: so many red flags it’s hard to know where to start<figure><img src="https://images.theconversation.com/files/173598/original/file-20170613-25879-o5e7c7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In happier days. Former Eskom CEO (right) shakes hands with President Jacob Zuma.</span> <span class="attribution"><span class="source">Flickr/GCIS</span></span></figcaption></figure><p><em>South Africa’s state owned enterprises have been hit by one scandal after another signalling serious political and corporate governance failures. The largest of these, the power utility Eskom, has seen its CEO <a href="https://theconversation.com/eskom-ceo-saga-highlights-massive-systems-failure-in-south-africa-78432">Brian Molefe</a> resign, then return, and then be <a href="http://www.iol.co.za/news/politics/brianmolefe-fired-again-9448206">fired</a> – all in the space of seven months. This was followed by the unexpected <a href="http://www.news24.com/SouthAfrica/News/eskom-board-chair-resigns-20170612">resignation</a> of Eskom Chairperson Ben Ngubane. The Conversation Africa’s Sibonelo Radebe asked Owen Skae to make sense of it all.</em></p>
<p><strong>What do you make of what’s happening at Eskom?</strong></p>
<p>It’s an unholy mess. The entire basis of the departure, reappointment and subsequent firing of the Eskom CEO raises so many red flags it’s hard to know where to start. And, to cap it all, the chairman has resigned with immediate effect. That means Eskom is without a CEO and now has a <a href="http://www.news24.com/SouthAfrica/News/eskom-board-chair-resigns-20170612">stand-in chairperson</a>.</p>
<p>One thing is clear. The board, the chairperson Ben Ngubane, the minister of public enterprises Lynne Brown, and Molefe failed in their duties to serve Eskom. They failed South Africa’s taxpayers who are the indirect shareholders of Eskom. And they failed the country. </p>
<p>To understand their duties, one has to consider the basic principles of governing state owned enterprises. Eskom is a <a href="http://www.eskom.co.za/OurCompany/CompanyInformation/Pages/Legislation.aspx">public company</a> and its sole shareholder is the government. The shareholder representative is the ministry of public enterprises. A <a href="http://www.eskom.co.za/OurCompany/CompanyInformation/Pages/Legislation.aspx">shareholder compact</a> guides the relationship between the board, the executives and the minister. </p>
<p>The shareholder compact is an annual agreement between Eskom’s leadership and the minister. It documents the power utility’s mandate, as well as key performance measures. It also sets out what’s expected from a good governance perspective. It’s meant to avoid the kind of mess that has visited Eskom over the past few months.</p>
<p><strong>What went wrong?</strong></p>
<p>A number of things.</p>
<p>The main one is that corporate governance rules designed to manage conflicts of interest were totally disregarded. </p>
<p>The country’s <a href="http://www.iodsa.co.za/?Companiesact">Companies Act</a> spells out what a director may or may not do if they have a personal financial interest in a matter. These rules apply as much to state owned enterprises as they do to publicly listed ones. The Eskom situation suggests that directors, and Molefe in particular, disregarded this principle. </p>
<p>This is highlighted in the former public protector Thuli Madonsela’s “<a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">State of Capture</a>” report which suggested that Molefe had had an improper relationship with the Guptas, a family of businessmen with close ties to President Jacob Zuma. Among other things, the report questioned the way in which the Eskom leaders collaborated with the Guptas to buy, some say <a href="https://www.businesslive.co.za/bd/companies/energy/2017-05-16-brian-molefe-helped-the-guptas-hijack-a-mine-says-ngoako-ramatlhodi/">hijack</a>, a mine supplying power utility with coal.</p>
<p>The Eskom board and the minister also failed to apply their minds properly around Molefe’s controversial <a href="https://mg.co.za/article/2017-05-22-now-eskoms-molefe-was-on-unpaid-leave">departure and return</a>. This includes a deal to give him a pension payout of <a href="https://mg.co.za/article/2017-05-12-lynne-brown-paying-brian-molefe-r30-million-is-the-only-solution">R30 million</a> just 18 months in the job and 13 years before he is due to reach <a href="https://www.moneyweb.co.za/news/south-africa/brian-molefe-50-too-young-for-early-retirement/">retirement age</a>.</p>
<p>A good understanding of the act, as well as the <a href="http://www.iodsa.co.za/?kingIII">codes</a> of good corporate governance that have been developed in the country, make it clear that the board should have:</p>
<ul>
<li><p>called a special meeting to consider Molefe’s departure</p></li>
<li><p>applied its mind to the circumstances of his departure</p></li>
<li><p>ensured that the necessary legal, risk and reputation issues were addressed.</p></li>
</ul>
<p>Another big area of failure was the role of the board’s chairperson. Even though he has resigned, he should still be held accountable for not providing the necessary oversight at such a momentous time.</p>
<p>As the only shareholder, the government is also complicit. As the shareholder representative the minister of public enterprises had the responsibility of asking the board questions as part of a consultative process that’s set out in the shareholder compact.</p>
<p>Either the minister wasn’t <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">properly informed</a> or didn’t ask the questions she was entitled to ask, or a mixture of both. This raises red flags about her level of commitment to the shareholder compact.</p>
<p><strong>What does it tell us about the broader political environment?</strong></p>
<p>There’s just too much interference – for nefarious reasons – from outsiders in the running of state owned enterprises. Excessive power and authority is vested in too few people. I often use the analogy of being a sports coach. Imagine a situation where the coach is called to account for his actions every day, where he has no say in who is picked and is told to change the game plan. The situation becomes unmanageable. </p>
<p>Interference undermines the way things should be, erodes confidence and allows conflicts of interest to flourish. This is particularly true when the interference is from people who aren’t acting in the best interests of the team. </p>
<p>But being untouchable is also a recipe for disaster. So we have to find a middle ground. The rules of the game must be established and the parties must carry them out with integrity, competence, responsibility, accountability, fairness and transparency.</p>
<p>These rules of the game are clearly set out in the South African context. Nobody can claim they don’t know what they are. In the case of Eskom they’ve simply been flouted.</p>
<p><strong>What do the events at Eskom tell us about state owned enterprises in South Africa?</strong></p>
<p>Sadly, state owned enterprises are seen as instruments to serve an elite few rather than fulfilling their broader mandate. </p>
<p>On top of this they aren’t financially viable which means they’ll continue to be a drain on the fiscus. The government must consider partnerships with the private sector. This can be done by selling minority stakes as <a href="https://www.moneyweb.co.za/news-fast-news/finance-minister-says-like-saa-minority-equity-partner/">suggested</a> by former finance minister Pravin Gordhan.</p>
<p>The success of the partly privatised telecommunications entity Telkom supports this view. The company has just posted <a href="https://techfinancials.co.za/2017/06/05/sas-telkom-earnings-lifted-by-mobile-business/">handsome profits</a>, suggesting it’s a model that could be used to turn around other state owned enterprises, including Eskom.</p><img src="https://counter.theconversation.com/content/79155/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The scandals surrounding South Africa’s power utility, Eskom, were caused by the neglect of corporate governance rules by the board, the executive authority, and the public enterprises minister.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/791312017-06-09T11:50:12Z2017-06-09T11:50:12ZThe battle for control of South Africa’s state isn’t just about personalities<figure><img src="https://images.theconversation.com/files/172977/original/file-20170608-32294-12onp7d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A protester calling for President Jacob Zuma's removal. </span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>It is probably no consolation to Brian Molefe, the CEO of South Africa’s power utility Eskom, that his woes are evidence that President Jacob Zuma’s March cabinet reshuffle has so far had precisely the opposite effect to that which was expected. </p>
<p>Nor, no doubt, would it cheer Molefe to know that his plight has become a symbol of an important reality: that who occupies which political post is turning out to be far less important to the government’s economic decision-making than it seemed.</p>
<p>Molefe’s woes are evidence that the country’s infamous <a href="https://theconversation.com/firing-of-south-africas-finance-minister-puts-the-public-purse-in-zumas-hands-75525">cabinet reshuffle</a> has so far had precisely the opposite effect to that which was generally expected. </p>
<p>Before the reshuffle, many expected that, if Zuma did fire the finance minister and deputy minister, the balance of power in government would sharply change. Walls which held the <a href="https://theconversation.com/firing-of-south-africas-finance-minister-puts-the-public-purse-in-zumas-hands-75525">state’s capture</a> at bay would come tumbling down. </p>
<p>But this has not happened. The ANC patronage faction may have strengthened its presence in the Cabinet. But its attempt to take control of key institutions is in retreat in the face of opposition within the governing party and from unions, business and civil society groups. </p>
<p>Thus far the patronage group’s opponents have also turned the tide by winning changes which reverse its gains. This does not mean that the patronage faction’s opponents have won: the battle will continue to be fought decision by decision, day to day, possibly until the 2019 election. But the patronage group’s expected triumph has not materialised despite changes in the faces in government. </p>
<h2>Molefe’s Pyrrhic victory</h2>
<p>It is widely known that the Treasury is a key prize for the <a href="https://theconversation.com/economic-exclusion-feeds-the-politics-of-patronage-in-south-africa-69996">ANC’s patronage faction</a>. It was also expected across the spectrum that if Pravin Gordhan and Mcebisi Jonas were out of the way, it would be able to get on with handing over public resources to private interests without hindrance. Molefe’s <a href="http://www.iol.co.za/news/politics/brianmolefe-fired-again-9448206">recent experiences</a> shows that this has not happened.</p>
<p>After <a href="http://www.fin24.com/Economy/Eskom/full-statement-eskom-ceo-brian-molefe-quits-20161111">leaving</a> Eskom in response to the Public Protector’s <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">State of Capture report</a> which linked him to the Gupta family, Molefe landed in Parliament chosen by <a href="https://www.businesslive.co.za/bd/politics/2017-02-17-brian-molefe-will-soon-be-an-mp-anc-officials-say/">North West province</a>, a patronage faction stronghold. </p>
<p>When Zuma told ANC leaders he planned to replace Gordhan, it became clear that Molefe had not been given his seat as a consolation prize – <a href="https://www.businesslive.co.za/bd/politics/2017-02-17-brian-molefe-will-soon-be-an-mp-anc-officials-say/">the president wanted to appoint him finance minister</a>. He backed off because half the ANC’s top six leaders insisted that Molefe was <a href="http://www.iol.co.za/news/politics/furore-over-molefes-new-job-implodes-7937847">unacceptable</a> because he had become firmly linked to the patronage faction. </p>
<p>This seems to have made Molefe so politically radioactive that he was not given any post in the reshuffle. Since he presumably had not come to parliament to sit on committees, he was <a href="http://www.heraldlive.co.za/news/top-news/2017/05/12/breaking-brian-molefe-returns-chief-executive-eskom/">given his Eskom job back</a>. </p>
<p>This prompted a <a href="http://ewn.co.za/2017/05/17/anc-wants-brian-molefe-s-return-to-eskom-rescinded">backlash</a> – from within the ANC as well as outside it. The governing party issued a statement <a href="http://ewn.co.za/2017/05/17/anc-wants-brian-molefe-s-return-to-eskom-rescinded">rejecting</a> the appointment and the ANC national executive committee, its decision-making body between conferences, agreed that Molefe should go. </p>
<p>He now <a href="http://www.fin24.com/Economy/breaking-brian-molefe-challenges-his-removal-as-ceo-20170604">relies on courts</a> to give him back his job – the same courts which have barred him temporarily from Eskom property, suggesting that they may see less merit in his case than he hopes.</p>
<p>What is the political import of these events? Not only have the president and the patronage faction been unable to secure Molefe any job in the Cabinet which would enable him to take the economic decisions they want. They have also failed to persuade an ANC national executive committee that Molefe should keep his Eskom job. That hardly suggests an all-conquering patronage faction ready to do with the state whatever it pleases.</p>
<h2>Other patronage faction losses</h2>
<p>Molefe’s fate is not an isolated incident. Since the reshuffle, every key government decision has gone against the patronage faction. The president has finally, after months of stonewalling, <a href="https://www.ujuh.co.za/president-zuma-signs-the-fica-bill-into-law-leaving-protesters-in-a-lurch/">signed</a> the Amendments to the Financial Intelligence Centre Act. The amendments aim to tighten control on illicit financial activity and were opposed by the patronage faction. </p>
<p>The <a href="http://www.news24.com/SouthAfrica/News/parliament-adopts-sabc-interim-board-names-in-unenviable-task-20170315">interim board</a> of the South African Broadcasting Corporation has begun an attempt to retrieve it from the faction. A deal between the armaments parastatal Denel and a company with links to the Gupta family, VR Laser Asia, has been <a href="https://mybroadband.co.za/news/government/209596-gigaba-cancels-massive-deal-between-denel-and-gupta-linked-company-report.html">halted</a>. </p>
<p>Berning Ntlemeza, head of the Hawks, the special investigating unit which hounded Gordhan and Jonas and was seen as a loyal instrument of the patronage group, has been <a href="http://ewn.co.za/2017/04/17/police-ministry-warns-of-legal-action-if-ntlemeza-refuses-to-leave-office">removed</a> by new Police Minister Fikile Mbalula. </p>
<p>Investigations have been ordered into Eskom transactions. </p>
<p>There is a clear pattern here and it sends the opposite message to the one expected before the reshuffle. It is consistent with a takeover by the patronage faction’s opponents, not the faction itself. </p>
<p>How do we explain this? Why, after Zuma, a key figure in the patronage faction, removed key impediments to it at the National Treasury and other ministries, and saw off attempts to remove him, is the ANC and government behaving as if the patronage group lost?</p>
<h2>It’s about much more than just personalities</h2>
<p>The short answer is that the framework through which many in business, the media and the academy look at the ANC’s economic battle places far too much stress on personalities. It assumes that, if Zuma stays, the patronage group is rampant - if he goes, they will be put to flight. </p>
<p>It was similarly assumed that Gordhan and Jonas were the thin line which kept the patronage faction at bay: once they were gone, it could trample over the fiscus like an invading army.</p>
<p>But the battle is about far more than personalities. It is about how important sections of the ANC and the society relate to the market economy. Within the ANC there are significant groups who see patronage as a mortal threat to the economy. They enjoy substantial support from anyone who has a stake in the formal economy: unions and their members as well as professionals and business people. </p>
<p>They did not disappear on the night of the reshuffle. On the contrary, they regrouped quickly. They seem to have decided that they could win important battles on what government should and should not do about the economy regardless of who is president and in the Cabinet. And they seem to be winning thus far.</p>
<p>While the mainstream debate concentrates on who occupies which positions, the patronage group’s opponents are showing that it is possible to limit the use of public funds for private purposes regardless of who wins the personality battles.</p>
<p>It is, of course, not yet clear how lasting the patronage group’s retreat is – it may well recover. What is clear is that, even if its opponents win the ANC presidency, this faction will not disappear: it may continue to control several provincial governments which can be used as patronage strongholds. So its success, too, depends less on who gets what position.</p>
<p>Molefe’s recent travails, and the events which surround it, show that the battle for the fiscus will continue. And that the economy will be shaped by who wins the battle on concrete decisions more than who sits in government offices.</p><img src="https://counter.theconversation.com/content/79131/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The misfortunes experienced by Brian Molefe, the CEO of South Africa’s power utility Eskom, shows that the battle for the country’s public purse is not a one way bet.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/784322017-05-29T13:59:53Z2017-05-29T13:59:53ZEskom CEO saga highlights massive systems failure in South Africa<figure><img src="https://images.theconversation.com/files/171320/original/file-20170529-25236-19l94b5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Brian Molefe's return as CEO at South Africa's power utility, Eskom, has caused controversy.</span> <span class="attribution"><span class="source">Alon Skuy/The Times</span></span></figcaption></figure><p>South Africa has, in the past, been credited with taking on innovative corporate governance <a href="https://www.ft.com/content/bb4557d2-5b75-11e4-b68a-00144feab7de">standards</a> and integrated reporting. So it’s particularly depressing to see the spectacle around the country’s largest state-owned enterprise, its power utility Eskom.</p>
<p>The <a href="http://www.timeslive.co.za/politics/2017/05/12/Molefe-didnt-resign%E2%80%9A-says-Eskom.-He-retired">drama</a> has revolved around Eskom’s CEO Brian Molefe, who has returned to the job just months after quitting. The contradictory explanations of his return point to huge flaws in the accountability systems of the country’s state owned enterprises. It’s clear that Eskom flouted many basic <a href="https://www.icaew.com/en/technical/corporate-governance/overview/does-corporate-governance-matter">principles</a> of sound corporate governance.</p>
<p>This poses enormous risks as these systems are imperative for ensuring an ethical public service and society.</p>
<p>When Molefe announced his <a href="https://www.businesslive.co.za/bd/national/2017-05-12-brian-molefe-did-not-resign-that-is-why-we-can-reinstate-him-eskoms-board-says/">departure</a> from Eskom, he specifically connected his leaving to “corporate governance”; he was certainly accurate in that. On top of the issue of his claimed connections to the <a href="http://www.bbc.com/news/world-africa-22513410">Gupta family</a>, the <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">allegations</a> that spurred his exit spoke to breakdowns in information sharing and decision making that were made to benefit only a few.</p>
<p>The National Executive Committee of the ruling party, the ANC, has since ordered that Molefe’s return to Eskom should be reversed, a decision seen to be going against the wishes of its President Jacob Zuma.</p>
<p>There are many flaws that need to be examined in this saga, but let me flag three foundational faults in corporate governance. Firstly, there were serious lapses around Eskom’s senior executive remuneration processes. Secondly, it looks like the basic rules of consultation around critical decision making were flouted. And thirdly, creating a <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">false dilemma</a> between handing Molefe a R30 million payout or allowing him to return to his Eskom job points to a simple disregard of the rules.</p>
<h2>Process failures</h2>
<p><strong>The compensation question:</strong> the question of fair and justified compensation for senior executives looms large in the Eskom saga. There’s still no clarity over why Molefe left Eskom in December last year: whether he “retired” or “resigned” remains a contested point. More recently, South Africans were informed that he was, in fact, on <a href="https://mg.co.za/article/2017-05-22-now-eskoms-molefe-was-on-unpaid-leave">unpaid leave</a> in the months between his departure in December and his return in early May. </p>
<p>Whatever the reason for his departure, Eskom’s board chose to award Molefe <a href="http://www.iol.co.za/news/politics/why-did-brian-molefe-get-a-r30m-golden-handshake-8690587">R30 million</a>. This raises the first potential failure in the accountability system: the responsibility of board members to decide fair and justified compensation for senior executives. </p>
<p>This is true regardless of whether they retire or resign or go on unpaid leave. Each is governed by sets of rules to guide a board’s decision-making. Leaving aside the obvious contradiction that anyone would be paid R30 million for being on unpaid leave, none of the normal remuneration rules seem to have been followed. But without a basic understanding of the terms of his departure, a proper analysis is almost impossible. This failure of transparency in the process makes justifying the award on the grounds that it was in the interests of Eskom’s stakeholders even less likely.</p>
<p><strong>Flouting consultation processes:</strong> The second failure in the governance system is a lack of clarity around the <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">role</a> of the Public Enterprises Minister, Lynne Brown. Her decision to contradict the board and deny the R30 million pay-out triggered an evaluation of what to do about Molefe’s connection to Eskom. In her statement, Brown highlighted the fact that she hadn’t been consulted and referred to decisions that appeared to have been made without the required approvals. </p>
<p>An effective corporate governance system has clearly delineated processes for both consultation and decision making. </p>
<p>In this case, it seems that steps in that process were skipped over, and key people weren’t consulted, leading to an unsupported outcome.</p>
<p><strong>Creating a false dilemma:</strong> Brown claimed that there were only two options open to her – to pay Molefe R30 million or reinstate him. But by doing so she created a false dilemma that stood to benefit the person who stepped down, rather than the company and its stakeholders. In the process, the board and the minister ignored multiple options that would have likely been better. </p>
<p>For example, if neither the board nor Brown could agree on severance compensation, Molefe could be paid his old salary in the interim, while final negotiations took place (there is a paid leave option in his contract). This type of bridging arrangement would create fairness for him while avoiding disruption to Eskom’s operations. </p>
<h2>A question of ethics</h2>
<p>A fundamental principle of good governance, laid out in <a href="http://www.iodsa.co.za/?page=KingIV">King IV</a> (a set of guidelines for strong corporate governance which companies/directors should comply with and explain their choices), that applies here is that: </p>
<blockquote>
<p>governing bod[ies] should govern the ethics of the organisation in a way that supports the establishment of an ethical culture. </p>
</blockquote>
<p>Regardless of political ideology, it is difficult to see that Molefe’s return to Eskom can be said to be in the best interests of creating an ethical culture. </p>
<p>Strong accountability systems create ethical cultures because everyone knows the rules, and believes the rules are being followed. As a result, people trust that when things don’t go their way, there’s a clear explanation. While they may not agree with choices, they are confident that a decision was made after a known process was followed. </p>
<p>Strong accountability systems can certainly privilege some people over others in different circumstances, but they clarify what gets rewarded and what gets punished. This leads to an ethical culture because there’s a common understanding and, crucially, some levels of shared purpose.</p>
<h2>Not just about following the rules</h2>
<p>Good accountability systems are about more than creating and following rules; while compliance is an aspect of these systems, it is really the bare minimum. They create and support a sense of shared destination, bolstered by agreed processes. </p>
<p>Recently, leaders have too often relied on their legal “right” to do something, ignoring their ethical obligation to the greater good: the good of their company, their portfolio, their electorate, their country.</p>
<p>While the legal grounds for better governance are worth debating and enforcing, South Africans must never neglect the profound ethical impact of failed accountability systems. Eskom’s current situation is about more than fulfilling its legal obligations. It’s a warning that South Africa’s ethical culture might slip through our hands. Let’s hold on tight.</p><img src="https://counter.theconversation.com/content/78432/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy London works for the Allan Gray Centre for Values Based Leadership which receives funding from the Allan Gray Orbis Foundation. The Centre is a part of the Graduate School of Business at the University of Cape Town. </span></em></p>The drama caused by the return of Brain Molefe into South Africa’s power utility, Eskom, signals a failure of accountability and corporate governance within the public sector.Timothy London, Senior Lecturer, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/778042017-05-17T09:29:20Z2017-05-17T09:29:20ZThe CEO of South Africa’s power utility is back. Why the move can’t be justified<figure><img src="https://images.theconversation.com/files/169758/original/file-20170517-24341-jsgsbl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Eskom CEO Brian Molefe addressing the media.</span> <span class="attribution"><span class="source">Alon Skuy/The Times</span></span></figcaption></figure><p>The <a href="http://citizen.co.za/news/news-national/1515927/anc-wants-govt-deal-brian-molefes-return-eskom/">return of Brian Molefe</a> as CEO of South Africa’s largest state owned enterprise, the power utility Eskom, has caused <a href="http://www.timeslive.co.za/politics/2017/05/17/ANC-demands-that-Molefe-be-axed-from-Eskom1">outrage</a> due to the circumstances under which he resigned in December last year.</p>
<p>Molefe left the power utility after a Public Protector’s inquiry alleged that he may have been involved in nefarious activities. The <a href="http://www.ujuh.co.za/state-of-capture-public-protectors-report/">State of Capture</a> report by the then Public Protector, Thuli Madonsela, showed extensive and irregular communication between Molefe and the <a href="http://www.bbc.com/news/world-africa-22513410">Guptas</a>, a family with close ties to President Jacob Zuma. </p>
<p>At the time Molefe’s backers – including board chairperson Ben Ngubane – <a href="http://www.fin24.com/Economy/Eskom/eskom-regrets-molefes-exit-says-its-a-great-loss-20161111">glorified</a> him. They attributed a turnaround in Eskom’s fortunes as a function of the CEO’s 18-month tenure. His supporters branded him as a <a href="http://www.fin24.com/Economy/Eskom/eskom-regrets-molefes-exit-says-its-a-great-loss-20161111">messiah</a> whose departure would have negative consequences for the power utility. </p>
<p>Similar sentiments were expressed more recently by <a href="http://ewn.co.za/2017/05/16/ngubane-s-comes-to-molefe-s-defence">Ngubane</a> and Public Enterprises Minister <a href="http://www.news24.com/SouthAfrica/News/molefe-innocent-until-proven-guilty-lynne-brown-20170512">Lynne Brown</a>. She told a press conference that she supported his return as CEO as he was responsible for the fact that load shedding (organised power cuts) had stopped and the power utility was on sound financial footing. </p>
<p>But was Molefe’s performance as great as his supporters say it was? I suggest not. </p>
<p>It’s true that under Molefe’s reign power cuts across the country were brought to an end. In addition, Eskom reported better financial results last year. </p>
<p>But neither of these two developments had much to do with Molefe’s capabilities as a CEO. The power cuts <a href="http://www.fin24.com/Economy/zuma-we-will-never-have-load-shedding-again-20160506">ended</a> primarily due to a decline in electricity demand – partly the consequence of a weakening economy – and new generation capacity that had been in the pipeline for years. And the improvement in a number of Eskom’s financial ratios was due in large part to massive <a href="http://www.ujuh.co.za/nene-2015-medium-term-budget-policy-statement/">financial support</a> provided by the government in 2015.</p>
<h2>Did Molefe end the power cuts?</h2>
<p>Prior to Molefe’s arrival as CEO in March 2015 the power utility’s finances had been worsening and it was struggling to meet electricity demand. These challenges were largely due to a delay in investment by the government as well as slow increases in tariffs.</p>
<p>The delay in investment was due to government’s <a href="https://mybroadband.co.za/news/energy/122710-here-is-how-government-was-warned-in-1998-about-sas-electricity-crisis.html">indecisiveness</a> over a protracted period of time. And the slow increase in tariffs was the result of a desire to shield consumers from sharp increases and a mistrust of Eskom’s claimed needs. </p>
<p>South Africans lived through a period of extensive <a href="http://www.fin24.com/Economy/EXCLUSIVE-6-reasons-why-Eskom-is-load-shedding-20141124">power cuts</a> in 2007. Electricity generation capacity was unable to keep up with demand. The situation was largely saved by slowing economic growth combined with greater energy efficiency. These factors meant that electricity demand was already well below forecasts prior to Molefe’s appointment and continued this trajectory during his tenure as CEO. </p>
<p>Falling demand created a virtuous cycle in operations: lower demand put an end to the need to impose power cuts. It also opened up the opportunity to do maintenance on infrastructure, leading to greater availability of capacity and an even lower probability of power cuts.</p>
<p>To be sure, Molefe still had to ensure that Eskom continued to get the basics right. There’s little evidence that he did more than that. Instead, it seems that his predecessor, Tshediso Matona, was excessively negative in his outlook. This set up Molefe to appear as though he had pulled-off a dramatic success.</p>
<h2>Molefe’s bailouts</h2>
<p>What of the improvements in Eskom’s financial situation?</p>
<p>The view that Molefe was behind Eskom’s short-term financial turnaround was used to award him a R2.5 million performance bonus for the year ended 31 March 2016. (Molefe appears to have secured a <a href="http://www.news24.com/SouthAfrica/News/molefe-innocent-until-proven-guilty-lynne-brown-20170512">R30 million</a> retirement package when he tendered his resignation. Under the terms of his return to the job this will now no longer be paid.)</p>
<p>But a closer look suggests that Eskom’s financial improvement can’t be attributed to Molefe. In many respects it was the result of extraordinary support afforded to the power utility by the government in 2015. </p>
<p>This support, facilitated by two special appropriation bills passed by Parliament, had two main components. The first was an <a href="http://www.engineeringnews.co.za/article/government-sells-vodacom-stake-to-pic-to-fund-eskom-bail-out-2015-07-01">equity injection</a> through which the National Treasury under which Eskom received R23 billion in exchange for shares. Since government is the sole Eskom shareholder, this translated into a straight cash gift.</p>
<p>The second component was even more significant. This involved government writing-off a <a href="http://www.timeslive.co.za/sundaytimes/stnews/2015/06/21/Eskom-bailout-dressed-up-as-a-loan-turned-into-a-gift1">R60 billion</a> loan which had been approved in 2008 and disbursed in multiple tranches between 2008 and 2010. </p>
<p>If we treat Eskom as a genuinely independent entity, the full cost to national government and therefore the taxpayer of writing off the loan had two parts:</p>
<ul>
<li><p>the remaining principal amount (around R30 billion), and </p></li>
<li><p>an additional R86 billion, the estimated cost of the state foregoing interest payments on the loan. According to the loan conditions, Eskom would have been required to pay this interest in the event that its financial situation improved. </p></li>
</ul>
<p>Whether this financial support was desirable depends on your view of Eskom’s recent history. Many analysts agree that additional government support was overdue. But in relation to Molefe it raises a simpler question: if many of the improvements in Eskom’s financial ratios were due to massive transfers of cash and assets from taxpayers, did it make sense to pay its CEO a bonus that effectively also came from taxpayers?</p>
<p>Either way, closer analysis of Molefe’s supposed successes reveal that they are not what they have been made out to be. Combined with the <a href="http://www.ujuh.co.za/state-of-capture-public-protectors-report/">failures</a> of corporate governance with which he has been associated, the case for reappointing him as Eskom CEO appears to be paper thin.</p><img src="https://counter.theconversation.com/content/77804/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller previously worked for the Parliamentary Budget Office where, at the time of his resignation in 2016, he was leading a project analysing Eskom's finances for parliament's appropriations committees.</span></em></p>A closer look at the supposed successes of Brian Molefe at South Africa’s power utility, Eskom, shows that they are not what they have been made out to be. They are paper thin.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/777432017-05-16T16:13:21Z2017-05-16T16:13:21ZThe South African government hasn’t given up the fight for nuclear<figure><img src="https://images.theconversation.com/files/169508/original/file-20170516-11948-10k9i5w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Energy Minister Mmamoloko Nkhensani Kubayi (R) being sworn in.</span> <span class="attribution"><span class="source">EPA</span></span></figcaption></figure><p>Nuclear energy in South Africa is a highly contested issue; so much so that a court recently <a href="https://theconversation.com/no-nuclear-energy-option-for-south-africa-for-now-at-least-76751">ruled against</a> the government’s plans to issue a contract for the construction of <a href="https://theconversation.com/why-south-africa-should-not-build-eight-new-nuclear-power-stations-49967">eight new nuclear power stations</a>. </p>
<p>The ruling appeared to have delivered a significant <a href="https://mg.co.za/article/2017-04-29-court-ruling-on-zumas-nuclear-deal-is-a-marker-of-south-africas-political-health">blow</a> to President Jacob Zuma, and those who support him, who had set their sights on immediate nuclear expansion. The court’s decision was met with <a href="http://www.sowetanlive.co.za/news/2017/04/26/celebrations-as-government-s-nuclear-programme-set-aside-by-court">jubilation</a> by those opposing the nuclear plan.</p>
<p>The expectation was that the government would <a href="http://www.fin24.com/Economy/expert-slams-anti-nuclear-lobby-says-court-ruling-must-be-appealed-20170427">appeal</a> the decision. It didn’t, but this shouldn’t be read as a shift in its thinking. </p>
<p>Minister of Energy Nkhensani Kubayi <a href="http://www.fin24.com/Economy/Eskom/sas-nuclear-procurement-process-to-start-afresh-kubayi-20170513">made it clear</a> after the court ruling that, while there would be no appeal, the government remained fully committed to nuclear expansion, and was planning to initiate a new process without delay.</p>
<p>This signals a realisation by government that an appeal would have little chance of success, and that a lengthy court process would tie up the parties in legal cases for months or even years. This would delay a nuclear build even further.</p>
<p>The minister has made it clear that the government is not giving up on its push for the controversial nuclear plan. But it has realised the process must start from scratch. This is the clearest indication yet that Zuma intends launching the nuclear build before his term of office ends in 2019. </p>
<p>Adding to fears that the government isn’t giving up the fight was the surprise reinstatement of Brian Molefe as CEO of the country’s power utility <a href="http://www.eskom.co.za/Pages/Landing.aspx">Eskom</a>. Molefe left the job under a cloud six months ago. His reappointment led to immediate and widespread <a href="http://www.news24.com/SouthAfrica/News/molefe-reappointment-cope-da-protest-outside-eskom-hq-20170515">public outrage</a>. Many have interpreted his return as <a href="http://www.biznews.com/leadership/2017/05/12/molefe-back-eskom/">beefing up the quest for nuclear</a>.</p>
<p>Molefe’s return, however, isn’t as critical to the nuclear project as imagined, as Eskom has maintained his <a href="http://www.fin24.com/Economy/Eskom/eskoms-koko-firm-about-sas-need-for-nuclear-20170330-2">pro-nuclear stance</a> in his absence. </p>
<p>What’s more important is that it’s clear that contestation around the future of South Africa’s energy sector will continue unabated. This despite the president having been severely <a href="http://www.huffingtonpost.co.za/2017/05/15/ferial-haffajee-zumas-defences-are-floundering_a_22087340/?utm_hp_ref=za-homepage">weakened</a> in recent months, and with it the power of the pro-nuclear lobby supported by his faction.</p>
<h2>What the court ruled</h2>
<p>The High Court decided that three international intergovernmental nuclear agreements and two ministerial proclamations to kick start the establishment of new nuclear power plants were <a href="https://theconversation.com/no-nuclear-energy-option-for-south-africa-for-now-at-least-76751">unconstitutional and illegal</a>.</p>
<p>The order nullified an agreement in which South Africa had committed to appointing Russian agency <a href="http://rosatom.co.za/">Rosatom</a> to build new nuclear plants. The agreement had allocated the build to Rosatom without costs being established or a competitive tender process. </p>
<p>The court also negated the government’s decision to delegate nuclear power procurement to Eskom and ruled that the country’s <a href="http://www.nersa.org.za/">energy regulator</a> was compelled to engage in meaningful public consultation before any major development can proceed.</p>
<p>By saying that it will restart the process from scratch, the government came to the obvious conclusion that it could only achieve its objective without the double albatross of the Russian agreement and the short circuiting of consultative processes hanging around their head.</p>
<h2>Nuclear isn’t needed, but remains in play</h2>
<p>The drive to develop 9.6 GW of new nuclear energy generating capacity is the result of a governmental <a href="http://www.energy.gov.za/files/irp_frame.html">Integrated Resource Plan</a> for electricity drafted in 2010. But the plan is now completely <a href="https://theconversation.com/south-africas-new-energy-plan-has-sparked-strong-emotions-heres-why-69383">outdated</a>. It overestimated electricity demand growth, and did not anticipate the dramatic drop in the cost of renewable energy technology, particularly solar photovoltaics.</p>
<p>The <a href="http://www.energy.gov.za/files/irp_frame.html">latest draft</a>, published in 2016, does not foresee any need for nuclear for the next 20 years. <a href="https://www.csir.co.za/study-shows-abundance-wind-and-solar-resources-south-africa">Studies</a> have also shown that a larger renewable energy investment is more feasible in South Africa than was previously thought.</p>
<p>Nuclear’s main drawback is the excessively <a href="https://theconversation.com/why-gordhans-silence-on-south-africas-nuclear-option-is-a-good-sign-73287">high costs</a>. It has been widely argued that this technology is <a href="https://businesstech.co.za/news/energy/94677/r1-trillion-nuclear-plans-are-simply-disastrous-for-sa/">unaffordable</a>.</p>
<p>So why the inexplicable urgency to drive this highly expensive programme?</p>
<p>One answer is that it shows there’s massive outside pressure influencing the push. The <a href="https://theconversation.com/how-the-state-capture-controversy-has-influenced-south-africas-nuclear-build-58879">influence</a> over the president enjoyed by politically connected business people, in particular the <a href="http://www.bbc.com/news/world-africa-22513410">Gupta family</a>, suggests that local oligarchs might be manipulating the president.</p>
<p>It is, however, probable that the dominant source of the pressure on the president are <a href="https://www.businesslive.co.za/rdm/politics/2017-01-18-zuma-the-guptas-and-the-russians--the-inside-story/">Russian interests</a>, in particular President Vladimir Putin. There is no proof, only <a href="http://citizen.co.za/opinion/opinion-columns/1316406/zuma-putin-knife-sa/">speculation</a>, about the high degree of influence the Kremlin has over the South African head of state. What is known is that Zuma endorsed the nuclear agreement concluded without due process with Russia in 2014 after a private <a href="https://mg.co.za/article/2014-09-25-jzs-secrete-nuke-stich-up">meeting with Putin</a> in Moscow.</p>
<h2>What is likely to happen next</h2>
<p>In line with the ministerial announcement, expectations are that new intergovernmental nuclear cooperation agreements will be concluded and tabled in parliament before the end of this year. The Russian agreement is likely to be aligned with agreements that have been signed with France, China, South Korea and the US, removing all specifics that afford Rosatom an advantage. Despite this, perceptions will remain that the Russians have been promised the nuclear build.</p>
<p>Even so, and despite the president’s current efforts, new nuclear power plant developments remain improbable in the next decade. This is because the publication of the final energy plan document – expected in the coming months – and any adjustments to the draft in favour of nuclear are likely to be vigorously challenged in the now mandatory consultative process. This will make it almost impossible to initiate a nuclear build before 2019.</p>
<p>The political terrain will become even trickier after that as the country will go to the polls in a general election in 2019. The ruling party won’t be able to afford being associated with a controversial nuclear agenda during an election year.</p><img src="https://counter.theconversation.com/content/77743/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hartmut Winkler receives funding from the NRF. He is a member of OUTA and Save South Africa, but writes this article in his personal capacity.</span></em></p>The South African government is not giving up on its push for a controversial nuclear power plan. But it’s chances of succeeding have been greatly reduced.Hartmut Winkler, Professor of Physics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/732872017-02-23T15:07:03Z2017-02-23T15:07:03ZWhy Gordhan’s silence on South Africa’s nuclear option is a good sign<figure><img src="https://images.theconversation.com/files/158103/original/image-20170223-24072-mza771.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">President Jacob Zuma and Finance Minister Pravin Gordhan. Gordhan is standing firm against any political pressure.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/governmentza/29959512473/in/photolist-dKxmRB-dCwqKB-EgiHHy-MDqkhv-ucSHK3-dSstSj-dSmUW4-dPpfhD-dPuSW1-dPuSVd-dPuSVU-Htiyav-JhDKtD-LjB4HL-MgY8ci-dKCPy7-Du2yM1-D15HES-dKiaGe-dAcyRr-So2NNk-dAcFrF-pzHWrM-pidYS7-piegXY-E28oRC-dRoNyC-dAcFdB-fKXcQJ-R8XnzT-dAiaw1-So2N1Z-So2Mdr-So2Nyx-So2Nr8-dKiaH8-dCNMQM-dTTJtF-So2Nf6-Dg77bk-CqZvE8-Doo1mz-CWghaJ-Dm4Qgd-CqZvLa-dveR1a-dK36N8-dAUbdr-t8DXs3-dAUcfg">Flickr/GovernmentZA</a></span></figcaption></figure><p>South Africa’s Minister of Finance, Pravin Gordhan said very little about the energy sector in his recent <a href="http://www.treasury.gov.za/documents/national%20budget/2017/default.aspx">budget speech</a>. The word “energy” came up only once compared with <a href="http://www.treasury.gov.za/documents/national%20budget/2016/default.aspx">2016</a>, when it was used five times. Even more notable is that he didn’t mention nuclear energy – <a href="https://theconversation.com/questions-mount-over-south-africas-planned-nuclear-power-deal-65682">a source of major contention</a> – at all.</p>
<p>The explicit statements relating to energy were restricted to an increase in the fuel levy and affirmation that the independent power producer programme would continue with the development of further renewable and gas power generation.</p>
<p>This avoidance might at first glance seem odd given the heated controversies around power shortages as well as the government’s plans to invest in <a href="https://theconversation.com/questions-mount-over-south-africas-planned-nuclear-power-deal-65682">unaffordable nuclear power plants</a>.</p>
<p>But there’s a great deal to take heart from. By downplaying the energy sector in his speech, the Minister effectively signalled that there is no need to react to exaggerated energy crisis talk coming from the <a href="http://showme.co.za/lifestyle/nuclear-power-too-expensive-for-sa/">pro-nuclear lobby</a>. Instead, he is showing faith in the existing modest medium term energy budget, and an unwillingness to be diverted onto a reckless financial course.</p>
<h2>The evolution of the budget speech</h2>
<p>South Africa’s budget speech has evolved from an ordinary presentation to something much deeper. It can now be likened to a sermon in the battleground for the soul and purse strings of the nation that has come to characterise President Jacob Zuma’s tenure at the ANC.</p>
<p>As political analyst, Daniel Silke <a href="http://www.fin24.com/Budget/beyond-the-numbers-gordhans-budget-will-be-a-political-statement-20170222-2">put it</a>:</p>
<blockquote>
<p>Gordhan’s budget will be a political statement.</p>
</blockquote>
<p>To unravel the hidden messages in the statesmanlike rhetoric, it is first necessary to establish why heading the Treasury has become so awkward. To start, <a href="https://theconversation.com/how-the-state-capture-controversy-has-influenced-south-africas-nuclear-build-58879">recall</a> that late in 2015 Zuma dropped a <a href="https://www.businesslive.co.za/bd/opinion/editorials/2016-12-08-editorial-the-lessons-of-912/">bombshell</a> by inexplicably dismissing the well-regarded incumbent finance Minister Nhlanhla Nene and replaced him with the then unknown Des van Rooyen. The currency tumbled and society was jolted into protest action. Facing internal pressure from his own party, Zuma reversed the appointment and replaced him with the experienced Pravin Gordhan.</p>
<p>Since then, there have been regular <a href="https://www.dailymaverick.co.za/article/2016-12-05-boxed-in-can-zuma-do-the-shuffle/#.WK6QQmBaHcs">attacks on the Minister</a> by the state law enforcement agency The Hawks, groupings within the ruling party and the influential <a href="http://www.bbc.com/news/world-africa-22513410">Gupta family</a>.</p>
<p>In the last week, seemingly, another front opened up. Rumours surfaced with new ferocity that Zuma would remove Gordhan, or his deputy, and <a href="http://www.fin24.com/Economy/molefe-coming-for-gordhans-job-not-just-yet-analyst-20170217">appoint</a> former Eskom chief Brian Molefe in one of the two jobs. Molefe does possess some gravitas in matters finance, but is viewed a pliable front for the architects of <a href="https://www.dailymaverick.co.za/article/2017-02-20-life-of-brian-mexican-standoff-looms-for-zuma-of-guptas-new-cabinet-deployee/#.WK6zQmBaHcs">state capture</a>.</p>
<p>There is an argument that suggests that the <a href="http://www.news24.com/SouthAfrica/News/guptas-are-attacking-me-gordhan-tells-treasury-staff-20160826">attacks</a> on Gordhan are due to his tight stewardship over the treasury purse strings. His ministry’s fiscal prudence is viewed as the major obstacle for unlocking funds for reckless developments which would benefit politically connected individuals. </p>
<p>The most lucrative piece of state expenditure is the mooted deal to build a fleet of nuclear power stations. It comes at a total cost comparable to the total annual national expenditure of R 1.56 trillion for 2017/18.</p>
<h2>The significance of the Minister’s silence</h2>
<p>Gordhan’s budget signalled that he is intent on standing firm against any political pressure by refusing to significantly deviate from the National Treasury’s long term expenditure plan.</p>
<p>Contrary to what his detractors would have hoped for, he did not make appreciably higher allocations to the nuclear sector. Instead he:</p>
<ul>
<li><p>Committed to the continuation of the independent power producer driven renewable energy programme. This has been <a href="http://mg.co.za/article/2016-12-06-eskom-threatens-fastest-renewable-expansion">opposed</a> by the pro-nuclear Eskom;</p></li>
<li><p>Effectively endorsed the draft <a href="http://www.energy.gov.za/IRP/irp-2016.html">2016 Integrated Resource Plan for Electricity</a> by making reference to greater opportunities in electricity generation with gas. Updated every few years, the plan is an official projection of South Africa’s electricity requirements, and the power generation strategies it will need to meet them. In its latest publication it does not envisage the need for nuclear power until 2037;</p></li>
<li><p>Referred to the need to have the country’s national credit rating safeguarded. It has been <a href="http://www.fin24.com/Economy/why-nuclear-will-plunge-sa-into-junk-status-20160317">argued</a> that a commitment to the nuclear deal would entail an almost automatic downgrade by international rating agencies. The Minister’s opponents have gone as far as to argue that Gordhan shouldn’t hold up bold developments (like nuclear) because of the threat of a <a href="http://www.news24.com/SouthAfrica/News/we-want-the-rand-to-fall-so-that-when-it-rises-we-will-control-the-economy-maine-20161222">downgrade</a>; and</p></li>
<li><p>Belaboured the point that economic transformation should not empower a new elite (beneficiaries of grand projects) but should rather serve the public good. He equated the concept of a better life for all with financial discipline, and argued that rash spending ultimately impoverishes society.</p></li>
</ul>
<p>Gordhan went on to say:</p>
<blockquote>
<p>By acting now to stabilise debt … future generations will not pay … 20 or 30 years from now.</p>
</blockquote>
<p>This affirms the frequently stated view that the decision to embark on a massive nuclear build could only be financed through astronomical loans that will severely <a href="https://businesstech.co.za/news/general/136799/nuclear-plans-will-push-south-africa-to-r3-trillion-in-debt-outa/">burden</a> the nation for decades.</p>
<p>Gordhan has stood firm. But one question remains: will his stand lead to his dismissal and replacement with a stooge leading inevitably to a crash of the country’s currency, open warfare inside the ruling party and public protest?</p><img src="https://counter.theconversation.com/content/73287/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hartmut Winkler receives funding from the NRF. He is affiliated with OUTA and Save South Africa, but writes in his personal capacity. </span></em></p>South Africa’s Minister of Finance, Pravin Gordhan, downplayed the topic of energy in his budget speech. There is good that can be taken from this.Hartmut Winkler, Professor of Physics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/732862017-02-21T08:40:21Z2017-02-21T08:40:21ZReplacing South Africa’s finance minister, or his deputy, would carry a heavy cost<figure><img src="https://images.theconversation.com/files/157660/original/image-20170221-18664-9zq029.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Finance minister Pravin Gordhan, his deputy Mcebisi Jonas, and Reserve Bank Governor Lesetja Kganyago. </span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>Many see <a href="http://mg.co.za/article/2017-02-17-brian-molefe-to-be-sworn-in-as-a-member-of-parliament">the decision</a> by South Africa’s governing African National Congress (ANC) to send the <a href="https://www.businesslive.co.za/fm/features/2016-11-03-state-of-capture-report-reduces-brian-molefe-to-tears/">disgraced</a> former CEO of the power utility Eskom to parliament as the precursor to another <a href="http://www.huffingtonpost.co.za/2017/02/17/brian-molefe-becomes-an-mp-next-stop-finance-minister/">attack</a> on the National Treasury and to remove finance minister Pravin Gordhan. </p>
<p>The decision to give Brian Molefe a seat in the country’s parliament has led to widespread <a href="https://www.dailymaverick.co.za/article/2017-02-20-life-of-brian-mexican-standoff-looms-for-zuma-of-guptas-new-cabinet-deployee/">speculation</a> that he is being positioned for a cabinet post – either as finance minister or as deputy finance minister. While some commentators believe that President Jacob Zuma has his sights set on appointing Molefe as finance <a href="http://www.timeslive.co.za/politics/2017/02/17/Molefe-as-MP-seen-as-a-bid-to-oust-finance-minister-Gordhan">minister</a>, others <a href="http://www.huffingtonpost.co.za/2017/02/17/whats-the-real-plan-for-brian-molefe/">argue</a> that the real target is Deputy Minister Mcebisi Jonas. The deputy minister <a href="http://www.fin24.com/Economy/mcebisi-jonas-takes-on-ajay-gupta-over-saxonwold-meeting-20170217">blew the whistle</a> on an alleged bribery attempt by a member of the Gupta family which is at the centre of a political storm amid allegations that it has attempted to exert undo influence on Zuma.</p>
<p>Either way, there is no doubt that Molefe’s appointment to either position would cause substantial turmoil in the country’s financial system and cost South Africa billions of rand. </p>
<h2>The cost of the rand taking a knock</h2>
<p>South Africa would take a massive economic blow because its currency would depreciate dramatically. The rand <a href="http://www.xe.com/currencycharts/?from=USD&to=ZAR">fell</a> through the floor the last time Zuma made a misbegotten attempt to <a href="https://theconversation.com/why-zumas-actions-point-to-shambolic-management-of-south-africas-economy-52174">install</a> one of his cronies at the helm of the National Treasury in December 2015.</p>
<p>This should worry South Africans. The country’s current account <a href="https://www.imf.org/external/pubs/ft/scr/2016/cr16218.pdf">deficit</a> in the third quarter of 2016 was 4.1%. This means that the sum of imports and external debt – borrowing from abroad – is larger than the sum of its exports and lending abroad. Mineral products, machinery and chemical products alone <a href="http://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/zaf/all/show/2014/">constitute</a> more than 50% of South Africa’s imports. A weaker rand would make these more expensive since the country would have to pay more rand per dollar value. This means that prices for everything from consumer products to transportation would go up. South African firms, which often depend on intermediate inputs from abroad, would face a rise in the cost for their products and an erosion of their profits. As a consequence, fewer people would invest in the country.</p>
<p>A currency depreciation would affect investors in other ways too. A weaker rand would diminish their returns and they would therefore be more likely to look for investment opportunities elsewhere. Not only will they stop investing, they would also likely unwind their existing positions. This in turn would drain liquidity from the financial system, making banks less likely to provide new loans for businesses. The knock on effect would be lower growth and higher unemployment.</p>
<p>It is difficult to put a number on the impact of a sudden depreciation of the rand. But some simple back-of-the-envelope calculations can help. South Africa spends roughly US$10 billion more on imports than it gets from exports. This corresponds roughly to R130 billion per year. If the rand weakens from 13 to 14 Rand per US$1, the country would need another R10 billion to finance its trade imbalance. </p>
<p>South Africa has watched this movie before. Between November 2015 and January 2016 when Zuma installed the backbencher Des van Rooyen as finance minister the rand weakened from R14.4 to R16.9 per US$. This R2.5 increase per US$ corresponded to additional R25 billion cost to finance our trade deficit. On top of this <a href="http://www.biznews.com/undictated/2015/12/15/cost-to-sa-of-zuma-v-rooyen-gordhan-nene-r171bn/">private investors</a> are estimated to have lost R171 billion after finance minister Nhlanhla Nene <a href="http://ewn.co.za/2015/12/09/New-finance-minister-announced">was fired in 2015</a>.</p>
<h2>Secondary effects</h2>
<p>Removing either the finance minister or his deputy would also result in rating agencies downgrading the country’s investment rating to junk status. </p>
<p>Zuma has shown in the past that he has no clue about the impact of ratings on the country’s finances. Amidst threats of downgrade late last year Zuma was <a href="http://www.fin24.com/Economy/zuma-we-take-the-ratings-agencies-very-seriously-but-20161025">quoted</a> as saying:</p>
<blockquote>
<p>But although they’re important, their ratings don’t necessarily have an impact on the agreements and commissions South Africa have entered into with other countries.</p>
</blockquote>
<p>This simply is not true. A downgrade affects the interest rates on every new bond issuance. Every year some of our outstanding R2,000 billion <a href="https://commodity.com/debt-clock?off">domestic</a> and R141 billion foreign denominated debt has to be <a href="http://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/7195/08Statistical%20tables%20%E2%80%93%20Public%20Finance.pdf">rolled over</a>. Debt services are already at roughly R150 billion per year – the second largest position in the country’s <a href="https://www.fanews.co.za/article/economy/43/budget-2016/1390/budget-2016-all-about-debt-stabilisation-and-a-social-compact/19856">budget</a>. A 5% increase in the country’s refinancing cost would already cost South Africa additional R7.5 billion every year. Money that is missing to finance social grants, healthcare, police or student bursaries.</p>
<p>The banking group Absa did some <a href="https://businesstech.co.za/news/finance/145453/fears-over-south-africa-junk-status-this-is-how-it-will-affect-you/">sample calculations</a> on how a ratings downgrade would affect the average South African. It concluded that every adult person would lose roughly R2,000 because a ratings downgrade would mean that the banks themselves would face higher refinancing costs. These would be passed on to their customers. </p>
<p>These numbers mirror a World Bank <a href="https://businesstech.co.za/news/finance/145453/fears-over-south-africa-junk-status-this-is-how-it-will-affect-you/">estimate</a> that a ratings downgrade in South Africa would result in a reduction of R1,000 per capita by the end of 2017.</p>
<p>The numbers paint a clear picture. Zuma’s last attack on the National Treasury cost South Africa <a href="http://www.biznews.com/undictated/2015/12/15/cost-to-sa-of-zuma-v-rooyen-gordhan-nene-r171bn/">billions</a>. Molefe’s appointment would be seen as another attack on the institution given that he was implicated by the former public protector Thuli Madonsela in her state capture <a href="http://mg.co.za/article/2016-11-02-breaking-read-the-full-state-capture-report/">report</a>. The effect of his appointment would be equally costly for the country. </p>
<p>South Africans should not allow this raid on the National Treasury to happen. The last time Zuma and his allies attempted to capture a well-functioning institution for their own personal gains the private sector gave them a hiding. The good news is that it is likely that markets will show a strong reaction this time, too. The question is whether ordinary South Africans realise the threat that a captured National Treasury would pose to their wallets and stand up before it is too late.</p><img src="https://counter.theconversation.com/content/73286/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Co-Pierre Georg is a Policy Associate at Economic Research Southern Africa. He writes in his private capacity.</span></em></p>The decision to give former Eskom CEO, Brian Molefe, a seat in the country’s parliament comes with the potential to cause great economic pain for South Africa.Co-Pierre Georg, Associate Professor, UCT School of Economics; South African Reserve Bank Research Chair in Financial Stability Studies, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.