Chancellor House, the untouchables

Hitachi South Africa is building the boilers for the two new power stations, Medupi and Kusile. Eskom says there is no bigger construction project under way than Medupi. So we’re talking big money. Not like election campaign money of around R200 million.  According to the Independent Democrats, we’re talking about R80 billion for the entire power station. Yes, BILLION.

Here’s the worst-case scenario: the ruling party, through its network of deployed cadres is able to tell Eskom it needs new power stations (if only they’d thought of this a little earlier), and then, perhaps, has a few of those cadres in whichever closed-door meeting gets to decide who gets the tender. Control your shock when you do the maths and arrive at the pretty inescapable conclusion.

We don’t know that is what happened, but it is a plausible scenario.

So it’s wrong to tell us that “it’s no big deal”. Mantashe’s argument is that the ANC should not be banned from investing its money just because it’s the ruling party. Well, no actually, why should it not be? If it needs money from somewhere, surely it can find other companies in which to invest. You know, ones that don’t tout for government business. And if that doesn’t work for you, how about blind trusts. They’re the new in-thing in countries that are more transparent. Hell, even US Supreme Court judges use them.

There are three other ancillary issues. We think they’re “big deals” too.

Hitachi’s 25% partner in the project is Chancellor House, and Chancellor House is a function of the ANC. This we know. Presumably, Chancellor House is partnered with Hitachi in the project on the basis that it is the BEE partner in the project; 25% is, after all, the general level of BEE participation. But since when is the ANC formally a BEE organisation in terms of empowerment legislation? The ANC, of course, has a large proportion of black voters, but it’s a political organisation open to all races. So how could Hitachi claim it has a legitimate BEE partner for the deal?

The second issue is that before any profit comes out of this project, the shareholders, being Hitachi and Chancellor House, have to put real money into the project. What we don’t know is the proportion of investment each side has put in. Is Chancellor House getting a free ride, only taking money out once the project hits profitability? This remains an open question.

The third issue is that not only is it a conflict of interests on the tendering side, it’s also a conflict of interest at the consumer end. The ANC effectively sets electricity rates, since it controls the appointments to the regulatory bodies that set electricity prices. The spate of electricity price increases that are about to hit consumers are a function of the need to build power stations from which the ANC is profiting. So, all of a sudden, it’s actually in the financial interest of the party to ensure these price increases are put into effect because it profits from that decision down the line. It’s a perverse case of a political party actually having an interest in price hikes.

How much will the ANC make out of the project? The back-of-the-cigarette-box calculation goes like this: the project leader is Alstom, but the R19.9 billion boiler contract has been awarded to a consortium comprising Hitachi Power Europe and Hitachi Power Africa, which had, in turn, awarded the boiler construction contract to Murray & Roberts. This means a profit at the normal rate of return of around R4 billion for the consortium with a stratospheric profit to Chancellor House of about R950 million. That’s a lot of money in any political book.

But what’s really difficult to understand is the U-turn the ANC made on Chancellor House. After the new leadership was swept into power, the then new ANC treasurer general Mathews Phosa, promised to break with the practices of his predecessor, Mendi Msimang, and sell this stake in Hitachi. It was early 2008, February to be precise, when he used the word “immediate” in referring to getting rid of this stake. So why didn’t he? Political correctness or not, it must have been pretty difficult to convince everyone involved to sell such a lucrative stake.

Then there are the realities of running a political party. We know last year’s election campaign account came in at around R200 million for the ANC, and they are yet to tell us how they could have afforded it. Then there’s another campaign next year. And all the parties, events and giant marquees to hire.

Political parties do need to be funded, and it’s a tense issue everywhere. The biggest of them all, the US, tries to control undue influence over political parties by making all donations public and limiting the size to $2,300 each election cycle. Presidential candidates are entitled to receive $85 million from the state, but are limited to raising exactly the same amount privately. If they opt out, they get no matching funds. Germany does provide political parties with funds in proportion to the size of the party. South Africa has for the most part adopted this system; being the biggest party, the ANC probably likes it the most.

But many countries also prohibit political parties from investing in government contracts for reasons that are so blatant it’s hard to understand why the ANC fails to understand them. If the ANC thinks it’s not a big deal, then the DA can surely route all Western Cape provincial contracts through its investment vehicle, and Inkatha can do the same in municipalities it controls. What would be the ANC reaction then?

Any way you look at this, Mantashe is wrong. Political parties should not be allowed to invest in companies that bid for government contracts. It’s pretty simple, really.

By Stephen Grootes and Tim Cohen

(Grootes is an EWN reporter)