Kleptocracy in South Africa

RW Johnson says the ANC feeding frenzy has consumed the state, and the SOEs, and it is not yet over

It was in 1968 that Stanislav Andreski, in his book The African Predicament, first used the phrase “kleptocracy” to describe independent African states. It turns out, according to the Oxford English Dictionary, that the word had been coined as early as 1819 but it was Andreski's usage that rapidly passed into parlance of Africa.

The idea is not just that the ruling elite steals but that the whole purpose of its rule is self-enrichment. This differs from the German term Raubwirtschaft (“plunder economy”) which tends to be associated with states that are in a perpetual state of war - for example, the Latin American states founded by the conquistadores, where the looting of human and natural resources through conquest and enslavement was a continuous process.

It was always predictable that a liberated South Africa would join the ranks of the kleptocracies. However, South Africa was so much more developed than the rest of Africa there was far more to steal or just to appropriate in one way or another. The risk, obviously, was of a huge feeding frenzy. The notion that a constitution, laws and judges might be able to prevent or hinder such a development might occur to lawyers but it could never gain currency among sociologists or political scientists.

And so it has been. This is the key to understanding both where we have been and where we are now. One should at the outset note that kleptocracy takes various forms. Straightforward theft is common throughout the public service and the SOEs but there are many other ways of skinning a cat.

When Pravin Gordhan took over responsibility for Eskom, for example, it was quickly discovered that Eskom's staff controlled a thousand family firms to which contracts of every kind were diverted. Within a few weeks that figure was revised to 4,000 after which no more was heard so one may assume that the real figure may be higher.

Moreover what is true of Eskom is true of all the other SOEs and of public bodies of every kind – municipalities, water boards, health departments, the governing bodies of most sports and so on. These family firms sometimes deliver real goods or services but always with an extra mark-up at the public's expense. Often they deliver little or nothing.

Another variant is the unnecessary middleman who takes his slice, usually just for buying from another provider and selling on at a substantial mark-up. A flagrant example was Dudu Myeni's suggestion that SAA's purchase of new Boeings or Airbuses should be done through an unknown black middleman to alleviate foreign exchange risk. Given that the risk involved in building up debts in dollars or euros would never disappear the middleman was bound to take a large extra slice to cover that risk – though if currency movements went the wrong way he would doubtless disappear, leaving SAA holding the baby. Such middleman deals generally involve kick-backs.

Similar dodges occur with rentals.

BEE itself, of course, is a form of legalized price-gouging and non-market preferences with the costs invariably passed on to the public in one way or another. The promotion to high office of unqualified people so that they receive money and status far beyond their merits is a not dissimilar abuse. Moreover, appointments come at a price – sometimes literally: SADTU officials have more than once been found out selling teaching jobs. But almost any appointment comes with the expectation that the beneficiary is now part of a larger patronage network and is thus in no position to resist demands that he appoint Y or give contracts to X.

This by no means exhausts the list of wealth-extracting devices. Anyone who watched the extraordinary trade union deals done during the construction of Medupi and Kusile will know how deeply responsible the unions are for the current Eskom crisis. There is, too, is the systematic inflation of salaries, fees, perks and other overhead costs in virtually all public offices. Ordinary municipal councillors, let alone mayors, city managers and other officials draw salaries and allowances which are several multiples higher in real terms than before 1990.

The same is true of ministers, MPs, civil servants, municipal workers and so on. Similarly, straight after 1994 many positions which had historically been performed on a pro gratia basis suddenly became well paid, with their occupants given business class travel and so on. As any hotelier will tell you, after 1994 there was a sharp increase in luxurious shindigs, celebrations, bosberaads, conferences etc by public bodies of every kind. The travel industry had similar reasons to be grateful.

The feeding frenzy affected not just the elite but every other group that could get into the act. This is a classic process of primary accumulation and by definition it takes place at the expense of the wider public. The result has been a vast process of redistribution away from both poor blacks and middle class whites towards a much smaller group of lucky beneficiaries. This group included many non-blacks such as the Guptas, Watsons and not a few women who happily clambered aboard under the “gender” rubric.

All the various processes which collectively constitute this redistribution are known under the generic term “transformation”. In general, the ANC's ideology shifts in opportunistic fashion. Mandela emphasised first nationalisation and then privatization; we then had the African Renaissance, Nepad and Gear; then later, Radical Economic Transformation. All these slogans and even the hallowed NDR have disappeared under Ramaphosa. The only permanent ideological imperative is transformation.

This redistribution is the essential reason for South Africa's sharp increase in inequality. Mass unemployment is, of course, the most effective way to transfer resources from the have-nots to the haves – and under the ANC unemployment has tripled. Moreover the beneficiaries of such transfers are largely parasitic so there is not much increase in productive resources. The only possible outcome is soaring inequality. It is ridiculous to imagine that this is a merely an accidental result – it is caused by deliberate policy.

The rhetoric about this inequality stemming from the apartheid inheritance is quite intentionally misleading: inequality has increased sharply since the end of apartheid. The attempt to explain black poverty as resulting from white privilege largely ceased to be valid after 1994. Indeed, the emigration of privileged whites causes job losses to blacks and produces no gain in equality. Conversely, if more qualified professionals (of whatever colour) were allowed into the country there would be more jobs for black people and inequality would decline. But these obvious benefits are rejected by those who fear such competition. Transformation trumps equality every time.

Real transformation could only occur through a large investment in education and training, with high and rising standards producing a well-qualified and solid black middle class. But the ANC did exactly the opposite, getting rid of many qualified teachers, lowering standards, cutting funding for higher education and making non-merit appointments which condemned the next generation to still lower standards.

So, much of the country's new black middle class exists only because of BEE, affirmative action and because of the generous salaries paid by the SOEs and the public service. So this is often a hollow middle class without real skills or expertise, which means that if they lose their positions they may simply become unemployed. This makes job cuts or pay freezes in the public service an explosive matter. Thus the approaching economic crunch will exert tremendous strains within the ANC, producing increased factionalism. The result of continually putting off essential reforms is that ultimately all one's troubles come at once.

The redistribution towards this new middle class need not have been a bad thing if it had led to an increase in savings and investment. But overwhelmingly this primary accumulation has been consumed. Typically the new haves want to display their wealth right away by having vastly expensive weddings, cars, other consumer goods, foreign travel and so forth. In addition every organ of the state and the ANC is expected to provide large numbers of celebrations of all kinds – so banquets, parties, celebrity evenings, endless award ceremonies (“all shall have prizes”), parliamentary openings and so forth where we are invited to goggle at party dolls of both sexes decked out in expensive finery. In effect the new elite has been having a vast party ever since 1994. An unexpected result of this behaviour has been to promote a positive revaluation of its predecessors' Calvinism.

Mainly the way in which this redistribution has occurred is through the fiscus. The Economist (11 January) has pointed out that in general African countries find it difficult to raise taxes. Tax evasion is rampant, many are too poor to pay and typically revenue-collection systems leave a lot to be desired. In 2015 Nigeria collected less than 6% of GDP in tax. Tanzania, Ethiopia and Uganda all collected 13% or less of GDP and Kenya 17.5%. South Africa at that point was collecting a shade under 25% of (a far larger) GDP in tax. Interestingly, The Economist thought that the maximum potential figure for South Africa was 27% but in fact today's figure is between 28% and 30%. As the demands of the new elite and its cronies grew the answer was always to keep pushing up taxes, rates, electricity prices, port charges, airport charges, road tolls and so on.

Thus the South African elite has been able to cream off far more than its peers elsewhere in Africa and the feeding frenzy has been able to go on far longer here. Elsewhere in Africa radical nationalists ran out of money fairly quickly. Even in relatively prosperous Ghana Kwame Nkrumah had virtually bankrupted the country by the time he was deposed in 1966 after just nine years in power. But here the feeding frenzy has already lasted three times as long as that so that it is seen by many as having the permanence of a law of nature.

Zuma gets much of the blame for things going wrong but in fact the key moments came much earlier, under Mandela. It was then that the decision was taken to introduce affirmative action and “transform” the public service, which meant putting the appetite for jobs and perks above the national interest. Education was put under a completely inert minister, Sibusiso Bhengu, and many of the most experienced teachers were retired early. It was then, too, that the arms deal introduced the era of large-scale public corruption. This is not said in criticism of Mandela, whose instincts were much better than those of his successors. The point is just that such moves were intrinsic to African nationalism and thus came right away.  

The problem now is that this great feeding frenzy has not only plunged the state deep into debt but has also largely devoured the SOEs. To see how fantastic this is, remember how hard it is to run a monopoly industry at a loss. And realise that both Alexkor and PetroSA run at a loss – who had ever heard before of a diamond mine and an oil company losing money?

But the feeding frenzy is by no means over. Not only are those who have done so well out of this situation still far from satisfied – think of the public service with its perennial inflation-plus salary increases, still demanding more - but there is still a huge appetite for fresh schemes which will allow even more peculation, tender fraud, high salaries and large annual increases. The fact that South Africa has already gone beyond its taxation potential has not deterred ANC politicians from coming up with plans for a gigantically expensive NHI bureaucracy plus proposals for a state bank and a state shipping line.

All these proposals, as also a relaunched SAA, imply swingeing tax increases and/or even higher debt. In addition, of course, Eskom is still pushing for large increases in the electricity price even though that will inevitably spell closure for various other industries. Similarly, SAMWU will continue to push for large increases for municipal workers even though many municipalities have already run out of money to pay their current salaries.

In effect the assumption has been that tax-payers, ratepayers and those who do actually pay their electricity bills all have a limitless ability to pay. But of course this is not true and tax collections are already falling far short of budget estimates. The clearest sign that the limit has been reached is that the government has at last resorted to the VAT increase that it had resisted for so long.

Even so, the budget is currently running a deficit of 6.2% of GDP and another VAT increase is possible. But The Economist is right: if you tax beyond your revenue-raising potential you merely depress the economy so that tax increases cause tax revenues to fall, not rise. We have reached that point.

The combination of reaching that limit with ever larger appetites demanding more and more produces a situation rather like that of the Titanic, with too many people scrambling for places in the lifeboats. If they all clamber aboard, the lifeboats will sink. We have already had a perfect exemplar of this with the militant Numsa strike at SAA which won salary increases which cannot be paid. Both Eskom and the public service have also seen wage increases in excess of the means to pay.

Only part of the political elite understands this problem. But even those who have some understanding are frightened of standing up against the torrent of demands for more and announcing that the party is over. Thus far it has always been easier to keep feeding the crocodile.

Of course, the president and a few of his ministers also promise to fight corruption but this too is something they quail from in practice. For corruption has become so systemic that the corrupt are the ANC, are the state. Everyone knows that an examination of the careers of Ace Magashule and D.D. Mabuza would reveal some striking material but these are the boss of the ANC and the possible next president, so no one is keen to do that.

Perhaps most pathetic of all is the way the president and ministers are frightened to disavow ANC policies which they know perfectly well are impossible. NHI, for example, would cost another large chunk of GDP. The Treasury must have made it plain to Ramaphosa that this is quite impossible and anyone can read the polls showing that NHI would cause most doctors and professionals to emigrate.

Yet Ramaphosa continues to advocate NHI and has even set up a “war room” to carry it through. One is reminded of the nineteenth century French politician who was asked why he was advocating things he knew to be impossible. He gestured at the crowd in the street: “I am their leader and therefore I must follow them.”

Similarly, Mantashe continues to push for a Mining Charter which effectively means that new mining companies will have to give away 30% of their capital although it is obvious that that prevents new mines from being opened. Both Ramaphosa and Mantashe come from the NUM and ought to know that better than anyone. To continue with our Titanic metaphor, we thus have a captain who is steering straight for the iceberg even though he knows that the iceberg is there.

The fact that the Treasury has failed to come up with the R2 billion it had promised to keep SAA afloat is a clear sign that we have reached a limit. In government spending terms this is not big money. The next stage of the struggle will be largely hidden from view as the government desperately tries to arm-twist the banks into bailing out SOEs that the government can no longer afford to bail out.

From the banks' point of view this is a mug's game: the government will promise to repay the banks, of course, but who would believe that if the government is already defaulting on its promises? In any case, there is a great long queue of SOE debts demanding repayment and the banks certainly can't shoulder all that. In addition the government will cast covetous eyes at the Public Investment Corporation and other pension funds but the same caveats apply. Naturally these pressures will be felt only by local institutions: foreign banks and funds would simply laugh off any such approaches.

The great drama, of course, is that many groups which have been used to getting their own way over salary increases, job demands and other resources will soon have to face the fact that the party is over. Thus far the only public sector workers and officials who have had to face this are in the various bankrupt municipalities which can no longer pay their salaries. These are located mainly in small towns and rural areas and such groups are very weak compared to their comrades in the metropoles, let alone in the highly unionized civil service and SOEs. Ramaphosa, of course, has already promised all these workers that none of them will lose their jobs but this is going to be one more promise that he fails to keep.

As may be seen from the reaction of the public service unions, even the notion that they might cease to get inflation-plus increases provokes fury. One can imagine what the reaction to job cuts or a pay freeze would be. Similarly, all the BEE firms charging high mark-ups for their goods and services will be utterly horrified at any thought that they should be paid only market rates. But the same applies to all the corrupt interests, patronage networks and, indeed, the whole state capture crowd. Every one of them will demand a privileged place in the lifeboat although it's clear that the boat cannot carry them all.

So we should have to brace ourselves for a rough period as all these well-empowered groups shout and yell and break the furniture as they are forced to face the end of the party. At the end of this not only the government but the unions and various other institutions will emerge weaker. Certain parts of society will continue to function even under these difficulties – the Western Cape and many of its municipalities, for example, and the larger and stronger parts of the private sector. No matter what political tussles are going on people will continue to frequent Pick 'n Pay, Checkers, Standard Bank, Old Mutual and so on. Provided they exercise strict cost controls there is no reason why such companies should not remain profitable.

The metropoles will become more important for they have a sufficient revenue base to survive even as other municipalities go to the wall. In the most favourable version they become veritable city states. However, a line needs to be drawn here between Cape Town and the rest: Durban, Jo'burg, Pretoria and PE have all been so badly governed that their resources are depleted and they probably also lack the capacity to take on any new roles.

The business community and most media commentators have for some time been urging Ramaphosa to “lead”. What is meant by this is that there must be a heroic assertion of the national interest against all sectional groups. This would mean that the government would have to take on the white collar unions that now dominate Cosatu, facing down strike action and perhaps even breaking some of the unions altogether.

Ramaphosa clearly has no stomach for such a challenge. In any case, to have any hope of succeeding he would have needed to rally public opinion from the start, make careful preparations to deal with strikes and make sure that the government didn't end up fighting all the unions at the same time. None of this has been done.

So, what happens? SAA probably offers the best guide. That is, the unions fight with great militancy for more or less impossible goals. The government caves in and agrees but in practice simply doesn't have the money with which to keep those promises. The ANC then announces that a restructured SAA will be relaunched – though this “decision” is made in ignorance of what restructuring means or what a re-launch will cost. No investors or creditors will be found so there will then be a growing mess with unpaid salaries, bouncing cheques and de facto job losses. There is not much that any trade union can do in the face of that. Nonetheless, one should expect a lot of militancy, violent language and illegal behaviour. Throughout this the ANC will pass all sorts of wildly unrealistic motions declaring that this and that “must” happen but this will be King Canute stuff.

Hence the contradiction of ANC rule. It is all important for ANC politicians that they should be in charge, so they are continually extending their powers (and thus patronage) over areas as various as land expropriation or sport. Yet simultaneously their avoidance of necessary decisions is tantamount to a refusal to govern.

Since the ANC has failed to constitute a ruling class able to govern in the national interest, the buck will be passed to domestic and international capital markets. Increasingly bankers, investors and creditors (the IMF?) will have to decide what gets funded and what doesn't.

Ramaphosa himself seems hopelessly out of touch. He keeps insisting that things are actually getting better and says that the chief objective is “building a capable state”. He seems not even to have considered that the ANC inherited a capable state in 1994. Eskom worked fine and had surplus power. There were no water shortages and a whole series of institutions ranging from the post office to the railways were then in working order. There were no bankrupt municipalities and public hospitals were in decent shape. When the ANC regards the incapable state it is gazing at its own handiwork. How anyone can believe that the ANC could rebuild a capable state (or even want to do it) is beyond comprehension.

The most hopeful sign of recent days has been Pravin Gordhan's statement that Eskom (and by inference, the government) needs “all the help it can get”. This is the beginning of wisdom. (Gordhan is very slowly getting the point. He is even beginning to consider the heresy of appointments on merit. At this rate he may, in his retirement years, join the DA.) The next stage is the recognition that help comes with conditions – a tough step for politicians but an essential one.

Churchill had to face this at the Teheran summit in 1943 when Stalin and Roosevelt over-ruled him and insisted that a Second Front had to mean an Allied invasion of France in 1944. Churchill, who feared a bloodbath on the landing grounds, had wanted to avoid this at almost any cost - and he was used to getting his own way. He complained bitterly to his Foreign Secretary, Anthony Eden: “This is monstrous. It's absolutely awful having allies who can just out-vote one like this. The only thing worse than having allies….is not having allies.”

For Churchill had had to face the world without allies in 1940. He knew that help came with conditions but it was still better to have help.

R.W. Johnson