South Africa: Bain, McKinsey… The role foreign firms played to aid the capture of state-owned firms

By Xolisa Phillip, in Johannesburg
Posted on Friday, 4 February 2022 12:01

South Africa's former President Zuma faces a state corruption inquiry, in Johannesburg
South African Deputy Chief Justice Raymond Zondo attends the Judicial Commission of Inquiry into Allegations of State Capture, where South Africa's former president Jacob Zuma is summoned to face a state corruption inquiry, in Johannesburg, South Africa, February 15, 2021. REUTERS/Siphiwe Sibeko

The Commission of Inquiry led by Justice Raymond Zondo has concluded that state capture took hold in South Africa. The capture of key institutions and state-owned entities (SOEs) was enabled and facilitated by foreign firms, including Bain, McKinsey and the now-defunct Bell Pottinger, according to the commission report.

Between 2009 and 2017, a period referred to as the ‘Zuma years’, when Jacob Zuma was both the president of South Africa and the governing African National Congress (ANC), targets of state capture included the South African Revenue Service (SARS), South African Airways (SAA), Transnet, Eskom, Denel, among others.

In the wake of the release of the inquiry report, Karam Singh, the executive director of Corruption Watch, says: “I think what remains to be seen, which is of interest to us, is what would be the reaction now of the state in South Africa towards these firms. In some cases, there hasn’t been a proper accounting for the role that they played.”

“[…] Bain and McKinsey have, sort of, disavowed that they did anything wrong, although they’ve paid back the money. It becomes a bit of a cautionary tale of how we go forward,” Singh told The Africa Report in an interview on Thursday.

During the course of the inquiry, the commission heard testimonies from more than 300 witnesses over a period of 400 days.

The report contains damning testimony of Bain’s role in the capture of SARS, South Africa’s tax-collection agency, under the leadership of former commissioner Tom Moyane, through an organisational redesign.

We are, however, disappointed that Part I of the commission’s report mischaracterises Bain’s role at SARS.

McKinsey is implicated in the capture of SAA, to a limited extent, but features prominently in questionable dealings at Transnet and Eskom. Bell Pottinger, which went under, ran a sustained misinformation campaign to support the state capture project.

Both Bain and McKinsey have repaid the millions of rand in fees generated from SARS, SAA, Transnet and Eskom. McKinsey paid back R12.4m ($165,947), R870m and R902m earned in fees from SAA, Transnet and Eskom respectively. Bain repaid the R167m that the consulting firm earned in fees from SARS.

Following the release of Part I of the commission’s report, Bain came under public criticism for its re-admission as a member of a local business lobby group. The backlash resulted in Bain’s resignation from the business lobby.

“We have noted the findings of Part I of the Zondo Commission’s report. Bain is supportive of the Zondo Commission and its work, as well as its important role in helping to end the damaging effects of corruption in South Africa. We are, however, disappointed that Part I of the commission’s report mischaracterises Bain’s role at SARS,” the consulting firm said in a statement.

However, the commission has found that SARS offers “one of the clearest demonstrations of state capture as observed in other SOEs and state institutions”. Examples cited include “the collusion between SARS, the executive (including President Zuma) and the management consultancy … Bain, with a planned and co-ordinated agenda to seize and restructure SARS, well in advance of the appointment of either Bain or Mr Tom Moyane,” the report says.

Furthermore, “[contrary] … to the explanation they give, the evidence shows that Bain did not arrive at SARS as an unwitting participant in the events that followed. In fact, Bain arrived at SARS, as Mr Moyane did, with a restructuring agenda,” the report says.

Nonetheless, Bain countered, in a statement, that the commission “relied heavily on the account of one individual who admitted to having ‘no first-hand knowledge’ of Bain’s work at SARS in his affidavits and testimony to the commission.”

All under ANC’s watch

The report also highlights the fact that state capture “… happened under the watch of the government of the ruling party, the [ANC].” The main modus operandi used to capture SOEs and other institutions was the deliberate subversion of procurement frameworks to circumvent public tender rules. This was done at the behest of senior executives at SOEs with support from bent board members.

We want to see a much stronger sanctioning type of regime put in place to deal with corporate transgression…

“We’re encouraged [that] these roleplayers have been identified in the narrative, which has unfolded about state capture. They’ve been referred to at different places as enablers or facilitators of state capture,” Singh says.

“We want to see a much stronger sanctioning type of regime put in place to deal with corporate transgression. It is not clear in the current dispensation [whether] there are proper mechanisms for dealing with corporate accountability. If I’m wrong, then it’s a problem of political will and the mechanisms are there, but they are not being utilised,” he tells The Africa Report.

The conduct of foreign firms in state capture was symptomatic of a deficiency in the system coupled with a lack of political will to sanction these companies, according to Singh.

“[…] within the South African domestic law you have the Companies Act, where you can look at things like liabilities of directors. But when we look at things like databases for restricted suppliers, there’s a tender defaulters’ database,” Singh says. Such databases would include both domestic and foreign firms implicated in wrongdoing.

“I do think there’s a gap, particularly when it comes to sanctioning the conduct of multinationals. That’s something South Africa needs to look at and address,” Singh tells The Africa Report.

The prosecution dilemma

Singh also drew attention to “the capture of the criminal justice system, which was a feature of this period and the weakening of institutions, particularly the prosecuting authority.”

“The prosecuting authority has a special place in the South African legal system in that they are the only entity empowered to prosecute. At the moment, they admittedly don’t have the capacity to handle the volume of cases that they need to handle,” he says.

It boggles the mind how we can make this kind of investment in the commission and then not properly fund the institutions that would need to carry out remedial action.

In addition to the capacity constraints at the prosecuting authority, Singh says Corruption Watch is worried that more cuts in funding will be instituted against anti-corruption institutions in the upcoming national budget. “It boggles the mind how we can make this kind of investment in the commission and then not properly fund the institutions that would need to carry out remedial action.”

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