31 May 2021

Ann Bernstein says it may have been cheaper just to have cut the Gupta’s a cheque for R50bn

The cost of corruption runs far deeper than rands and cents 

31 May 2021

A golden rule for corruption can be expressed this way: “Don’t let corruption cost more than the amount of money that is actually stolen.”

Paul Holden presented evidence at the Zondo commission recently that Gupta-related entities scooped up nearly R50bn in payment for goods and services rendered to the state. I didn’t hear his testimony but some reports implied that the whole amount was stolen and generated no value for SA.

This is, of course, not true: though some of the “transactions” amounted to rent extraction pure and simple, matters are more complicated with the largest ones. There was, for example, plenty of corruption involved in Transnet’s purchase of locomotives – by far the largest of the transactions, accounting for about half of the R50bn. However, it is not the case that the entire contract generated zero value: locomotives were paid for and are being delivered, though substantial facilitation fees were paid to Gupta-linked vehicles.

But even if it were true that every cent of the R50bn was stolen and that the state derived no value from any of these transactions, we should ask ourselves a critical question: how could the theft of so little money so fundamentally affect the country’s prospects?

Don’t get me wrong. By most standards, R50bn is an incomprehensibly large sum. Converted into time, 50-billion seconds is nearly 1,600 years and takes us back to a time when the Roman empire was at war with the Visigoths.

But by the standards of SA’s national economy, R50bn is not that much at all – about 1% of GDP in today’s terms, less than 5% of this year’s budget. Given that the losses were incurred over the course of a decade, the figures are not so large that they should result in permanent changes to a country’s prospects.

If, for example, someone stole 1% (or even 5%) of your annual income, you wouldn’t expect disaster. You would make a few adjustments to spending plans for the next year or three, and would expect to be more or less back on track thereafter – a little poorer, a little wiser.

Why is that not the case with the losses the country suffered from the Guptas? Why is it that the costs are so much greater than the value of the losses incurred?

The answer is that the state was gutted in order to make possible Gupta-linked looting. The cost of that in catastrophically bad governance is immense – and far, far greater than the amount of money the Guptas managed to extract.

The kind of grand corruption that generates tens of billions of rands extracted through corrupt deals is possible only if you destroy the internal checks and balances that every company needs.

You also need a CEO whose priority is redirecting revenues from legitimate to illegitimate and corrupt uses. You need a board that protects the CEO or goes along with him. You need auditors who turn a blind eye to malfeasance or sweep it under the carpet.

You need a social milieu among the business and political elite in which those who are credibly accused of wrongdoing are not shunned and shamed. You need a political discourse in which it is easy to accuse whistleblowers and journalists of being puppets of “white monopoly capital”, “racists” and “attacking black excellence”. You need a prosecution service that is rendered toothless, and a tax authority afraid to go after politically connected beneficiaries.

With all these things in place, the damage done by each specific act of corruption spreads and metastasises.

This process does not end with only Gupta-linked activity but results from and helps to create an environment within all levels of the state and around the state and state-owned enterprises (SOEs) that promotes corruption by others. If it starts at the top and no-one is punished for illegal acts, then more retail-size crooks are encouraged.

You end up with a system in which economic activity is dominated more and more by bad actors. And, critically, a system in which businesses are less and less able to manage risks.

If the policing and prosecution of wrongdoing does not take place, if it is widely known that contracts are given to “the connected” and extraordinary sums of money charged for routine activities, how can ordinary firms be confident that they can do business with the state or hold accountable people they deal with if cheated?

You also end up with failing infrastructure. The CEOs of SOEs willing to assist in looting their businesses were not interested in or good at ensuring that those institutions could deliver on their core mandates.

It turns out, then, that the damage done by the theft is minuscule compared to the damage done by the steps taken to make that theft possible in the first place: a country with key institutions “hollowed out” to serve evil ends rather than the national interest. We would, I suspect, be better off if we had just written the Guptas a R50bn cheque.

This has important implications. For one, when deputy chief justice Raymond Zondo issues his report on state capture, he should devote at least as much space to the desperate need to fix our governance as he does to documenting the malfeasance of offenders.

We know he is thinking about this, if only because the questions posed to Gwede Mantashe and Cyril Ramaphosa about cadre deployment reflect at least one important component of what has gone wrong.

Much more is needed. We need to rethink a great deal about the way in which the country runs its affairs, the many ways in which we incentivise bad behaviour and create impunity for wrongdoing in the public and private sectors. We need to rethink what a “conflict of interest” is and how we manage such conflicts in both the public and private spheres.

We need to rethink the governance models of SOEs and the impact of cadre deployment on them. But we also need to reconsider the extent to which the existence of these monopolies creates opportunities and temptations for the corrupt that could be mitigated by more competition. Above all, we need to rethink accountability. Individuals need to face the legal consequences of their actions, and justice Zondo will hopefully be making some strong recommendations on this, with the National Prosecuting Authority ready to leap into action.

But what about the political structure as a whole? Our electoral system, parliament and political culture insulate politicians far more than is healthy, and we need – desperately – to find ways to undo this.

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Ann Bernstein is executive director of the Centre for Development and Enterprise

Article first published by Sunday Times.