Oilgate lessons: state capture is expensive and difficult to undo

The Oilgate judgment underlines the cost of state capture and the enormous difficulties of untangling illegal decisions.

Ultimately, taxpayers will bear these costs as the SOEs must pay.

OUTA intervened in the case as an amicus curiae (friend of the court), to ask the court to prioritise public interest over company profits.

OUTA is referring the judgment to the National Prosecuting Authority (NPA) Investigating Directorate.

The judgment

The 166-page judgment was handed down on 20 November 2020 in the Western Cape High Court, and overturned the sale in 2015/16 of 10 million barrels of South Africa’s strategic oil reserves. South Africa gets ownership of the oil back and, in a complicated calculation, must both refund the sale price plus pay additional costs for some of the parties involved. 

The transactions involved the state-owned entity (SOE) the Strategic Fuel Fund (SFF), a wholly owned subsidiary of the Central Energy Fund (CEF), selling the crude oil to three businesses, two of which on sold the oil. Although ownership changed, the oil didn’t leave the SFF tanks and various storage agreements were made. The court ruled all the transactions involving the SFF invalid due to illegality and corruption, and found two of the original buyers were also implicated. While the CEF and SFF themselves brought the action, the court found that they were unnecessarily tardy about doing so which unnecessarily inflated the costs of innocent parties, so the state must bear additional costs.

The oil was sold for $280 830 970 (worth R3.317 billion in March 2018 when the case was launched and R4.313bn at current rates) and SFF must now pay $420 802 481 (R6.463bn) in restitution and compensation to get it back. While the oil did not disappear, reversing the sale meant that SFF did not have to buy it back at an even higher rate.

The judgment pointed out the culprits: the then acting CEO of the SFF, Sibusiso Gamede, who engineered the sale of the oil at heavily discounted prices, kept the deals as secret as possible, arranged ministerial permissions, took bribes and didn’t keep proper records; and the then Minister of Energy Tina Joemat-Pettersson, who signed what Gamede – who was also her advisor – told her to sign without applying her mind. Both Gamede and Joemat-Pettersson unsuccessfully tried to intervene in the court case; they failed or withdrew because legal precedent has held that reputational harm is not a justification for intervention.

While they were the main culprits, the court found wider failures in governance, with “a pervasive lack of oversight and intervention by SFF’s senior management and the boards of SFF and CEF” and pointed to the “acquiescence or supiness of SFF’s senior managers and directors”. This points to the entrenched nature of corruption and the weakness of those entrusted with governance.

The businesses involved were not all innocent: Venus Rays Trade and Taleveras Petroleum Trading (two of the three who bought from SFF directly) were found to be complicit. Venus had no history in the oil business and made a profit of $10.536m by buying 3 million barrels from SFF and on-selling these the same day to Glencore, then made another $9.742m over about 20 months by leasing storage from SFF at $0.11 per barrel per month and charging the unknowing Glencore $0.25 a barrel. Taleveras paid bribes to Gamede to get the deal. The judge’s payment order does not benefit Venus and Taleveras; rather, they may be open to further action by those who bought oil from them.

The lessons for South Africa

There are hard lessons from this case.

•    Those implicated in illegality – particularly Gamede – should be prosecuted. This was not a small deal. It was massive, took weeks of writing and rewriting paperwork, and ultimately involved a group of people, with a wider group who became aware of it. This should be regarded as organised crime and prosecuted as such.

•     Joemat-Petterssen did not fulfil her duties as Minister diligently and should not have been redeployed to Parliament. Joemat-Petterssen was also linked to the illegal attempt to make a deal with Russia to build nuclear power plants, but she remains in a senior position in Parliament.

•    Consideration should be given to bringing civil claims against Gamede, Joemat-Pettersson and possibly other CEF-SFF executives and board members for the losses.

•    This is another deal which illustrates the massive failure of corporate governance, not just by one or two people but by a wider group. Governance standards are clearly inadequate. This underlines the need for higher standards for ministers, and SOE directors and executives.  South Africans should start demanding these standards and should show their dissatisfaction next time they are asked to vote.

•    Two of the businesses involved – Venus and Taleveras – were dishonest and their directors should face prosecution as well. We believe their profits could be regarded as proceeds of crime and call on the Hawks and NPA to investigate this.

•    These were strategic stocks and should have had better safeguards.

•    South Africa does not have procurement standards which are sufficiently clear and unequivocal: not only did an international company not know that a private deal is not legitimate but the SFF management and board didn’t either. This needs to change.

•    Taxpayers cannot expect to dodge the costs of such illegal deals, as the SOEs involved in them must bear the costs, because money lost to corruption is gone and, in this case, because of the additional costs of restitution and compensation. “Improvement will only happen when public bodies are made to bear the adverse consequences of their officials’ conduct,” said the judgment. OUTA agrees, but ultimately, the taxpayer has to cough up for the actions of the delinquent directors at SOEs. We need serious reforms to how “public bodies are made to bear the adverse consequences of their officials’ conduct”. We need accountability enforced by government and political parties. 

•    While the current management of the CEF and SFF brought the action to reverse the illegal deals by previous management, their unnecessary delay in doing so added costs to be borne by these SOEs.

•    There are still insufficient consequences for not just bad governance but outright criminal behaviour.

•    Not all the strategic reserves were recovered. The judgment did not address the loss of the remaining 300 000 barrels of the reserves, which were “loaned” to a business which failed to return them, as that business was not cited in this case. This is a failure by the CEF-SFF to pursue this matter.

A soundbite with comment from Advocate Stefanie Fick, OUTA Executive Director: Accountability Division, is here.