[Music] the last time we spoke with Gabriel cruss he gave us some very good insights into the actual ownership of land in South Africa dispelling a myth which said that 70% of the land is owned by whites that was from well some selective reading of research it basically took onethird of the number and then extrapolated it we're going to get a little more mythbusting today when we talk about be and in particular the results that have just come out of a world Bank research report into how to get South Africa going [Music] again Gabriel thank you for joining us is this your day job looking at difficult subjects researching them and then sharing with the rest of us yes it's certainly a big part of it and it's something that I enjoy I think South Africa is uh underperformance is not because of a lack of Goodwill but because of a lack of good Insight so just sharing facts I think is is very helpful to our country and the World Bank report how much time do you do on something like that to fully understand what it is that they they're trying to tell us uh the report itself uh is pretty short to read There are some attending documents that are a bit longer um there was the IM media junket that they did last week uh which I wasn't able to attend personally but I spoke with people who were so I don't know let's say a day into the World Bank reports itself but I think to understand previous work by the World Bank and by other organizations has taken a number of years to see how we got to this point what is interesting from the World Bank report is it's not a isolated suggestion that we relook the be regulations and legislation in South Africa Harvard University had something similar the international monetary fund had something similar the zondo commission uh as you wrote in a a piece that you put out yesterday also recommended the same thing you talk about a be premium and I guess that's something we should unpack right at the outset what exactly is it so uh acting Chief procurement officer of Treasury who presides over about 1. 2 trillion round of spending Vil Mula has explained repeatedly that a be premium is the legal amount that the government can spend extra uh in order to procure from a racially preferred buyer so to give an example from the City of Cape Town's value for Money Report uh two suppliers were willing to sell traffic light controllers for about 7,000 Rand there's the original manufacturer and then there's another supplier so selling exactly the same part exactly the same deal but the original manufacturer didn't have as many be points so they didn't get the contract the tender uh the supplier that did get the tender sold exactly the same thing for 7,000 Rand extra for 7% extra I think it was about 6,000 extra so that is a be premium of about 7% uh MrMatula has explained that be premiums are capped at 25% for contracts under 50 million Rand and they're capped at 11. 1% for contracts over 50 million Rand so if you got 100 million Rand contract legally uh you can spend an extra 11.
1 million Rand for exactly the same uh building exactly the same length of Road exactly the same part for a power station uh you can spend that extra 11. 1 million Rand legally in order to uh uh go to the the company with the higher B points and that's actually legally required unless treasury gives an exemption so it's in the law it's in South Africa's uh well it's the rule of law in South Africa and that's part of our laws and that is one of the issues that is in very strong debate at the moment especially as we've run out of money in this country but when you ask when you look back at that premium where does that on the 100 million Rand contract that 11 million brand which is just what taxpayers are paying extra where does it go who gets it well I mean the the company that got the bid I think that the the important uh the the underlying question there is is that money um getting the maximum value is it uh getting productivity uh to grow at the greatest possible rate and and the answer is no um one of the key overall measures that we look to is the fiscal multiplier uh so economists including at the South African Reserve Bank well they published a working paper at the South African Reserve Bank two or three years ago and another group um at the UN University uh more recently uh published studies analyzing when South Africa's government spends IR Rand does it add to the economy so it goes to this person but then that you know they're spending it on the next thing and it kind of all grows together or is it really just wasteful and to give a sense of things if the if the answer is one that means you spend a Rand you get a Rand uh in in really good cases like South Africa in the mid 2000s under eki and after Mandela we had a fiscal multiply about 1. 5 so when the government was spending a Rand it was getting one and a half Rands worth of value um as of 2018 it was negative which is almost the only uh recorded thing in the world world uh of of consistent negative fiscal multipliers the average over the last 5 years is zero that means it would literally have been better to to burn the money uh to to pour it down a drain uh than to try and spend in the way that it has been spent so where does it go that extra uh in a sense is going nowhere uh in in literal terms some of it gets shipped offshore some of it gets squired away some of it gets spent on consumer goods but in terms of the overall impact on the economy South Africa's spending um on the margins is is is worse than worthless so the the money that is extra and this is the be premium that we the people do not really understand exists we think well be is good because it's uplifting black people that's the that's the propaganda but Essence what you've said to us now up to 50 million Rand you can in fact you are requireed ired to give the contract at a 25% extra pay 25% extra um as long as the to the best be credentials so if you had two two firms with uh with the same product as you've explained before the one who has the better be credentials is going to get it and we're going to pay 25% more to them even though there might be a slight difference uh only a very small difference between the to for instance how how prevalent is this in the economy how much of South Africa's State spending is actually subjected to this 25% rule up to 50 million or 11% over that so the short answer is just about all of the public procurement spend which is roughly 1.
2 trillion Rand perom at this stage and that is about 15 17% of GDP uh so it's about a about a sixth between a seventh and a sixth of the economy so you think of it as one day of the week um and I I just to sort of revert back to a previous question in terms of where does the money go I do want to emphasize that the people who take advantage of that extra are not all of One race um as a as a sort of anecdotal example I had a scholarship to go to uh one of the most expensive schools in the country in santon and uh when I did a research project I discovered that some of the best be beneficiaries were white graduates of that school uh who were Sons and Daughters of very wellestablished captains of industry people running J listed companies uh so you know white people have benefited from these be premiums black people Indian people colored people it's a matter of uh being able to gain the system uh versus traditional procurement where the the winning company is is the one that is best able to deliver value uh at the end of the for the for the consumer for the for the customer being citizens and residents uh so you know 1. 2 trillion round is subject to these be premiums we applied some pressure to treasury uh some organs of States applied for exemptions uh in the last few years we know that transet and escom have both been granted caseby casee exemptions so it's not every single Rand that is subject to this but treasury has refused thus far to heed our call and the zondo commission's recall to allow a maximum value for money approach and it's uh it is worth uh making the point that uh I mean there's a couple of point about numbers if I if I can just give you a few numbers uh treasury has has not been public with this information but it did disclose in the process of the public procurement Bill going through Parliament that uh its own records indicate that more than half of government spending to private companies in fact 60% plus goes to 50% plus owned black companies so they they did a review of 1. 2 trillion Rands worth of spending since 2017 so 1.
2 trillion is it's a big review we're only covering a fraction of the whole amount not being spent but it's a big CH and of that 1. 2 trillion they found 588 billion was spent on majority blackowned companies so I'm not talking about just be scores I'm talking about 51% plus blackowned companies so you know 80 billion 60 billion in 2018 72 billion in 2019 90 billion the next year 94 billion 101 billion during the plague 90 billion coming down a bit 80 billion last year and that is uh a fraction of the total government spend because treasury didn't review all of the spending then we ask ourselves can we extrapolate you know with the earlier conversation we can we extrapolate no we can't what treasury says yes we can with this they said uh in submissions to Parliament very serious submissions they said these data are representative of the broader amount of spending and so you run the numbers it's a very calculation and you find that since 2017 treasury has spent an estimated 3. 5 trillion r on majority blackowned companies so the notion that we live in a society dominated by white Monopoly capital is debunked the notion that uh we require this kind of intervention in order for there to be major established black owned businesses is debuck with 3.
5 trillion Rand already having gone to majority black owned businesses we know that we're dealing with a very wellestablished uh um uh Supply base and our submission is the World Bank submission is IMF submission is if you now relax these be rules it's going to be free competition for all a lot of those black businesses are going to keep competing they're going to do better and it's going to be better service delivery for ordinary South Africans at a at a cheaper price at a time where we we don't have enough money to to keep paying extra for uh racial engineering sounds like a massive scam just take that 3 and a half trillion and if you were to use 25% of that because legally you can pay a premium of 25% of it that's 800 billion uh We've now got a government that's scratching around trying to jack up vat from 15 to 177% to pay a fraction of that 800 billion it it Gabriel this doesn't sound right all of it just does not sound right why are we not listening as a nation why if the IMF and the World Bank and and we'll talk about zondo in a moment but why are the politicians not listening is it is it as simple as to say well their buddies are actually benefiting so and maybe even they get funded by those buddies in an oblique way that they're not not countenancing any uh way of addressing this gigantic scam on the South African people I think that is part of it aleec we we do track uh the sort of participation of of politicians uh close relations themselves family members business partners partaking in transactions and we've got an investigation project that we think will will help connect those dots in a more systemic way but that is not the whole story look we've got a GNU government we've had a budgetary uh halt for the first time in the rainbow Republic's history and so this is a great opportunity for the Democratic Alliance uh Freedom front plus ifp AC you know series of parties patriotic Alliance could be stepping up and saying uh two things firstly let's get transparent about be premiums treasury has never even told us how much it cost you you you went imagining it's 25% every time it's probably not that high but uh whatever it is you know it's certainly billions tens of billions maybe hundreds of billions if you add it up over the years you know we deserve to know actually the Constitution requires transparency and I have met with people in a range of parties encouraging them to call for transparency in a very serious way and I haven't gotten much traction I mean you can look at the record and so I don't want to be too critical in the sense of uh you know some meetings you can't really say the names but I would very much like the U all South Africans to be respected uh in the basic way required by the Constitution which is you know we pay taxes and treasury has a duty to tell us how those taxes are being spent so the first thing is there should be transparency about this and the people not calling for transparency are also in opposition then the second thing is to call for a reduction of be premiums down to zero R and our polling indicates polling by The Institute of race relations who asked this very specific question last year and uh we found 70% of all respondents similar numbers across races 65% of black respondents said they would like the premiums to come down to zero R so there's a huge political opportunity for anyone who's willing to have the guts to get up and stand and say it very clearly repeatedly you have to be consistent on this kind of thing we want the premiums to be explicit and we want them to be zero you have to say it over and over again you have to use various range of channels and then uh you can make some political gains out of that because it's common sense that it's a good idea uh it's it's hard for me to answer the question why the opposition is not doing it excepting for the fact that I will say politics is a matter of prioritization and I think uh very interesting important people have said this is not a priority my humble submission maybe not so humble is that this is a huge priority because we are running out of money and this is a very clear way to save money our report estimates our report estimates at that the be perom savings that we could Garner is 150 billion Rand and uh conservatively 100 billion of that could go to cutting V to 11 a half% from 15% which would directly inject money into the economy stimulate demand it wouldn't add to the debt because it would be paid for by cutting the premiums it would uh be very welcome relief or poverty relief for the bottom income group uh who would uh not suffer so much that the exemptions don't really work and it would stimulate uh you know business activity because there'd be an extra hundred billion Rand instead of the government spending it in a way that adds nothing to the economy there'd be private consumers deciding how to best make ends meet how to best uh buy things that are going to actually make a lasting difference we think that's a very winning formula uh in this time of need we'd very much like to see something like that happen but unfortunately uh it looks like March 12th is going to come by and and we might be stuck in the same position where we're effectively taking from ordinary South Africans to give to Elite South Africans in a way that destroys value growth job opportunities and so on what did the zondo commission say about all this the Z commission volume one page starting about around 797 um gets into the analysis of the the legal Mosaic it calls and this is really a very important part of of the commission because what it's doing is it's it's saying you know we've been sitting for years spending a huge amount of money listening to how terribly corrupt South African why is it so corrupt you know some sociologists or some people with that kind of bent they'll say it's a cultural thing uh others will say you know it's just a few bad apples but really there's bad apples in every country and there's cultural problems in every country there's not State capture at the scale we have had in every country just to give a sense underlying the Z reports analysis from the World Bank we found that the rate of decline of South African government spending Effectiveness since 1996 is the fastest of any open democracy in the world and it's the third fastest of any sort of region in the world it's an astonishing so so we started out the World Bank does this analysis of how effective are governments at spending their money they've been putting it out every year since 1996 and then they rank all the countries and then you get a percentile ranking so 1996 we were in the top 20% and we improved a little bit we stagnated in the 2000s we improved a little bit and then we started sliding and sliding and sliding so now we're in the 40th percentile that means 60% of countries are better than us and 40% are worse than us so there's a lot of countries with worse governments than us DRC Somalia the strip you know they are in absolute terms we're not the bottom of the pile but if you look at how fast we've gone down from 80 to 40 there's there's practically nothing else like it it's a huge huge decline that estate capture what's happened at the same time is tax revenues as a portion of GDP have inclined dramatically and if you look at that combination of more and more money going into the government and the government spending it worse and worse we find uh the the classic definition of State capture from the 19th century uh and on we developed a an index which quantifies it and ranks every country in the world we call that the fukuyama index because Francis fukiyama came and gave a talk to address this point in 2019 on the Fuki on that index uh the value for money index South Africa is the worst performer in the world uh on these trend lines so the Z report is faced by that it's the worst case of State capture uh on record on these macro numbers and people know what it's like the potholes the blights that don't turn on it's the worst case of it and and he's trying to find the root cause of the problem and he finds one of the in the systemic analysis one of the systems levels problems here is the problem in the legislative design and the problem in the legislative design is that you've got one imperative which is to maximize value for money in spending all of this government money then the other imperative is racial social engineering and the problem is twofold he says the first problem is that there is inevitably a conflict between these multiple imperatives being pursued by a single act you you're buying pencils or traffic lights or Transformers or a power station you're trying to do two things at once makes it complicated and the second thing is the way the legislation is set up it's not transparent it's not clear exactly how you're supposed to resolve this dispute and it's the that lack of clarity which is Manifest by the fact we don't even know what the be premiums are that are being spent at a national level it's never been published by treasury that shows how intransparent it is uh as another data point there was a survey within one organ of State uh a number of years ago where they asked the procurement officers are you spending be premiums and half of them said yes and half of them said no you know it's a big problem if your accountants can't even agree if they're spending money on a particular thing that's how confusing it is and zondo says this confusion creates the room firstly for for good faith actors to make accidental mistakes and that's a problem but secondly and much more dangerously for bad faith actors to intercede to move in the shadows and grab whatever they can so confusion creates discretion discretion opens spaces for corruption and that's the language that the World Bank uses they say that this cumbersome process has opened up spaces for corruption and that is why they recommend and that is why zondo recommended maximum value for money unambiguously he said you need to choose what's the top priority value for money or racial social engineering as per section 2172 of the Constitution which is an interpretive point he says you got to choose one of these two things as your priority and ultimately his on reports words the national interest is best served by getting maximum value for money in public procurement and all procurement officers should be so advised we've repeated that advice ever since and we note that that came out 2021 immediately there was backlash from the ANC uh one of its former NEC leaders called zondo called the Judiciary captured by Colonial forces but since then uh the Harvard Kennedy report came out the IMF came out with multiple reports the world bank has not come up with this report we think zondo really broke through the war and we are very excited to see others walk through it and we would like South Africa's political opposition to take their turn to walk through the Gap in the worldall to and uh and to end be premiums why haven't they aleec I'm I'm I'm flabber gued the they that they haven't even tried do they not understand it have they not done the research have they not read your your The Institute of race relations material which I mean you guys have been around for nearly a 100 years it's it's highly reputable people all over the world read and uh and know the credibility of the irr why would the our opposition parties not pick this up and run with the ball I think that I think part of it is an understanding issue um and I think you know keeping you know getting the information out there I think does help it does take time to assimilate I think people get confused between the difference between the illegal side and the legal side because you know one of the things that we hear is you were estimating imagine if the premium of 25% which is the cap imagine if that was being spent every time when I speak to uh some insiders in government they say you know but it's not really the cap that's being spent every time part of the reason is that uh companies have already run away that wouldn't be able to compete on be points so you're not seeing that thing in the procurement numbers part of the reason is is that um Sometimes the best cheapest business is majority black run so you know even if you had no be premiums the the black run business would be getting the think so you're not seeing a cap and and and some of the times it is 25% uh and some of the times it's 50% or 100% or these markups that that kind of don't even fit within the system so I think a lot of people really want to go after the corruption and I think in that sense thec has set the agenda by saying corruption is the problem and making out as if corruption can be solved if we just have one more sort of moving speech coming from one more charismatic politician you know it's like this time with feelings like some rugby moment is going to bring us all together and stop us from being corrupt that's the feeling that I get you know I debated this issue with the former head of stats and Matthew Parks katu's main spokesperson just two days ago on musim Africa and they they both gave this impression corruption is the big problem that's why be is not working but how are you going to solve it well they want to keep the policy let's just get more inspired about how we deal with corruption and unfortunately I think the opposition is a little bit stuck in that same framework of like going after corruption and being afraid of connecting be and Corruption because there's a wrong way to do that there's a very wrong way to do that to make that connection the right way to make that connection is the way the zondo report makes that connection and if they if they follow that lead and they follow the lead of the World Bank and IMF and and and those who have meticulously tread this part I think there's a very clear and winning argument to be made but it does take um a bit of understanding a bit of you know Readjustment don't just straightforwardly go after corruption uh because there are real policy issues that that program for corruption you know one of the examples I like going to is the United Kingdom let's say 250 years ago it forbade the sale of linen from Belgium from from the Flemish parts of Europe it forbade the sale of porcelain as well from from coming in the Corn Laws you know and at that time British uh officials were notoriously corrupt they had stupid laws that programmed for corruption they then canceled those laws and the corruption reduced significantly to the point where their officials let's say in the early 19th century had the reputation of being the most Incorruptible in the world so there is a connection between the system you put in place we do a lot of systems analysis in South Africa but very little of of the upto-date nature the system in place actually does impact the behavior of people because be people uh Chase incentives and I think that um takes a bit of uh understanding to shift one's mindset from this thing of just like corruption is bad and we must get rid of a few bad apples to no we actually have to change the system in order to make it possible for the limited resources of the NPA and of the procurement oversight teams to be able to make sure that the bad apples are removed and that systemic change that introduces transparency that makes it much cheaper and more efficient to uh to clean out the Bad actors that's what the Z report is really focused on and and and that's where we think the greatest gains are to be had that's that's the winning ticket that we we encourage the the opposition to take up anyway anyone who understands economics knows that human beings are driven by incentives and if the incentives are skewed we have many many examples in history just have a look recently at Wells Fargo and the big disaster that happened there and the incentive there was open accounts and as a consequence this huge bank one of the the greatest banks in the United States was brought to its knees because the people who worked for it were opening accounts in a corrupt Manner and here we have we have a state that says no it's cool as long as the guys tick all the boxes you can give them 11% more than you would ordinarily or 25% more if it's below 50 million those are huge numbers anyway uh because that's the way that we do things in South Africa so first things first we could avoid the vat increase simply by your numbers simply by doing away with this uh be premium and that would mean reassessing the system that we have at the moment just to to close off with South Africa's economy how is it performed under this scenario you you did write in your report something that that we haven't done anything since 2007 have not grown in real terms since 2007 what does that mean yeah I mean the the World Bank highlighted that as their first data point in their report uh so per capita you look per person and you and you control for inflation you you Peg yourself to stable International currency then you look at what the economy's done and it is it has not grown at all since 2007 uh that is uh that's astonishing I don't think you'll easily find another open democracy constitutional order that that that has that poor performance record and and uh you can't just sayc it's not just the party because thec governed South Africa from 94 to 2007 and there was great growth there it's it's a change in policy that we think is responsible for that including the entrenchment of be which really kicked in in the late 2000s in a big way the impact that that's had I think is most extremely seen in our unemployment numbers just about the worst in the world probably the certainly the worst in the world if you look at open democracies Angola maybe just ahead of us at the moment but over 11 million people are unemployed in South Africa on the expanded definition over 8 million on the narrow definition and if you look at black unemployment former colleague of mine forced me to face this issue because I I wanted to just abstract to unemployment overall but he said look at black unemployment because the whole thing of be is supposed to be to help those people who got stuck in the shadow of apartate and it is true that apartate you know viciously and deliberately oppressed the majority of his population black people on the basis of their race that did inhibit people's opportunities get them stuck in poverty traps and open economy would release that but that that started to happen in the 2000s but you know 6 million odd black South Africans were still unemployed in 20067 that number is now over 11 million it is roughly a doubling almost a doubling of black unemployed people in a period where 3. 5 trillion Rand has been spent on majority black owned companies just in the last six seven years so I think that the the picture that that creates really is one of entrenched new privilege being defended and financed at the cost of people who were found themselves stuck in the shadow of bate and then found that shadow extended by a new series of bad rules and I think that the the picture that is emerges from that is very gloomy and I think it also does speak to an opportunity if you if you take the advice to make these be premiums explicit even if you just do that first the fact that it's so unpopular will drive them down to zero once they go down to zero you've got extra money from saving the premiums you've also got a lot of extra money from making the system transparent so it's much harder to steal that extra money can go to improving the conditions required to allow for economic growth and we think that the best way to do that paying down the debt and cutting tax uh will will will really put people who are stuck in poverty stricken conditions back into a position where they can work their way up we think there's a huge appetite for that uh and and and that potential energy can be unlocked the moment we come to terms with this harsh reality and just remember there are those who have benefited from it those who've been gaming the system at the um well taking the all the benefits away from the majority from most people it's quite a horrific number that that you unpack there and we haven't even got on to the point of be being a tax on investment and heaven knows if you want to ask someone to invest you can't imagine that they're going to build a business or build a factory if they got to give away 25% before they even start it just doesn't happen Gabriel Krauss is a fellow at The Institute for race relations thanks for unpacking all this for us gabri and I'm Alec hog from bus news.
