May the best bid win

Helen Suzman Foundation | Jan 30, 2001
There is a lot more to the fiasco of the third cellphone license than simple mismanagement.

FOREIGN DIRECT investment in South Africa plummeted by 43 per cent last year according to financial analysts BusinessMap. It cited perceptions of gloom in Zimbabwe, events surrounding the arms procurement package and the débâcle over the award of the third cellphone licence as contributory factors for this reverse. The least understood of these affairs is that of the lucrative third cell licence, which communications minister Ivy Matsepe-Casaburri conditionally awarded to the Saudi-backed consortium Cell C on February 16 - nearly two years behind schedule and only weeks before a judicial review of selection process was due to begin.

The competition for the third licence peaked a year ago
amid allegations of corruption, death threats, smear tactics, procedural irregularities and executive interference. Not surprisingly the selection process, which picked Saudi-backed consortium Cell C against the advice of independent financial assessments, degenerated into a total shambles. But there is much more involved than simple mismanagement.

Anyone who wondered at the time what was really going on has reason to be grateful to Sam Sole, political editor of the Sunday Tribune. In December, Sole was named Telkom communications and technology journalist of the year in the newspaper category for his articles on the labyrinthine politics surrounding the selection of the preferred bidder for the third cellular licence.

Sole's research suggests that the government had in fact promised the third licence to the Saudis long ago as part of a wider package deal including arms shipments. It then had to push this pre-arranged deal through an "independent" selection process and against world class competition.
Sole's interest was sparked, he says, after he heard Snuki Zikalala's "hatchet job" on Nape Maepa in August 1999. Zikalala, a former Umkhonto commander and ANC insider, was the SABC's executive editor for news. Maepa was chairman of the government-appointed but supposedly independent South African Telecommunications Authority (Satra), which had just begun the process of selecting the winning consortium from a final group of six. "I wondered what Maepa had done to draw such high-profile criticism from Zikalala, who gave the impression of acting like a kind of commissar for the political establishment," said Sole. "In whose way had Maepa got?"

Finding the answer to that question led him to scrutinise:

  • a decade of "extraordinarily close relations" between the ANC and the Saudi royal family that included a $6om donation to ANC coffers and numerous presidential and ministerial visits;
  • the stalled 1997 R7bn arms sale to Saudi Arabia (not to be confused with the 1999 R43bn arms procurement package), for which state arms manufacturer Denel paid a R100m "commission" - now being investigated by the auditor-general and the office of serious economic offences;
  • Saudi Oger, a construction company, which enjoys the patronage of the Saudi royal family and is the majority shareholder in Cell C;
  • Cell C's empowerment partners, who include Shabir Shaik and his brother Yunis, Yusaf Mohamed, Jakes Gerwel, Mandela's "tailor" Yusuf Surtee and many other of the individuals and companies that also allegedly benefited from South Africa's R43bn arms purchase.

Sole concluded that the winner, Cell C, occupies "the enviable position where Saudi Arabian royal interests, ANC party interests and South African 'national interests' coincide." Further, he suggested, the award of the third cellular licence might be "the final sweetener" for the 1997 arms sale to go ahead. One of the reasons for the sale's delay, he reasoned, could be the débâcle over the licence.

The selection process had many bizarre features, which the judicial review will doubtless consider. They include:

  • the crescendo of allegations of corruption and conflict of interest against Nape Maepa, who was believed to oppose Cell C. He finally recused himself in controversial and disputed circumstances immediately before the critical decision-taking meeting on February 18, 2000;
  • allegations of conflict of interest against Maepa's deputy, senior ANC insider Eddie Funde, who is also a director of Denel and a member of the Eskom Electricity Council, were not investigated;
  • Communications minister Ivy Matsepe-Casaburri cutting short the auditor general's investigation of alleged irregularities in the awarding of the licence. The reasons given were lack of funds and her desire not to delay the selection of the winner;
  • President Thabo Mbeki ordering the National Intelligence Agency, which deals with matters of national security, to investigate the probity of the bidders;
  • Satra's disregard for two independent evaluations of the competing bidders' business plans, both of which raised doubts about the financial viability of Cell C and favoured Nextcom. It also ignored the findings of its own internal technical assessment;
  • Grant Thornton Kessel Feinstein (GTKF) which produced the second independent evaluation of bidders' plans was accused of conflict of interest. The firm took advertising space in Business Day to rebut the allegations;
  • the presence of minister Ivy Matsepe-Casaburri and representatives of Cell C at the secret venue where Satra took its final decision and unconfirmed reports that the minister in the president's office Essop Pahad was also there;
  • the representation of minister Matsepe-Casaburri by an advocate at that critical meeting of the selection committee;
  • press reports claiming that the councillors were told that Cell C had to win the licence because it was in the national interest;
  • conflicting opinions on whether the final decision by the remaining five councillors was unanimous or not;
  • the tape recording of the meeting that selected Cell C, and which would have settled some of these questions, turning out to be blank.

As Satra's chairman and chair of the selection sub-committee of six councillors, Maepa was placed under immense pressure. Some of the detail that Sole quoted comes from Maepa's sworn affidavit that will be evidence in the judicial review. In it he claims that he was the victim of a concerted smear campaign designed to oust him from the selection process, and that he also received death threats.

Rumours associating Maepa with nepotism and maladminstration - he was said to have employed a cousin, intervened in the awarding of a tender and misused expenses - first surfaced in press reports back in 1998. They were made the more plausible because serious misuse of public funds had come to light not long before at Satra's sister organisation, the Independent Broadcasting Authority. (The two bodies have since been merged to form Icasa, the Independent Communications Authority of South Africa.)

The accusations then gained momentum in August 1999 after Snuki Zikalala claimed on SABC news that a report by forensic auditors Gobodo Inc had confirmed the "damning allegations" of nepotism, mismanagement and in-fighting at Satra. However, a month later, the Broadcasting Complaints Commission ruled that Zikalala's reports gave the impression that Gobodo had already investigated and come to conclusions about the truth of the allegations, when they had not, and instructed the SABC "to rectify any misunderstanding in this respect". No evidence has been advanced to support any of these allegations.

In the next two months Parliament's communications portfolio committee held a series of closed meetings into allegations of irregularities and called for the auditor general to investigate. The committee seems to have concentrated on the allegations levelled against Maepa, rather than those against his deputy, Eddie Funde, who made no secret of his preference for Cell C. According to Sole, Funde is close to Enos Banda, head of Zader Investment Corporation, one of Cell C's shareholders. Banda is also chairman of the National Electricity Regulator. Eskom had previously expressed an interest in buying a share in the winning consortium.
In the end Maepa's recusal, which he states "was not voluntary", was secured just before Satra's final selection meeting. This followed a late night confrontation with presidential legal adviser Mojanku Gumbi, an acrimonious telephone conversation with her the next morning and finally a meeting at the venue with minister Matsepe-Casaburri herself.

In a lengthy statement issued on April 3, 2000 the minister rebutted accusations of political interference, saying that at no stage had she forced Maepa's recusal. Rather she had suggested that Maepa should consider recusing himself because, according to the Telecommunications Act, "there may be perceptions of a possible conflict of interest on his part". At issue was whether Maepa remained a registered director of Sun Telecommunications (Pty) Ltd because his co-director, Mashudu Tshivhase, was linked to one of the licence bidders, Africa-Speaks through the non-profit Tshivahase Development Foundation Trust. The auditor general's investigation, which was inconclusive because it was cut short, found that though Tshivahase "was not an applicant, he appeared to have an interest in the third cellular licence application; and that both the co-director and the chairperson were registered directors of the telecommunications company."

According to Sam Sole, however, Sun Telecommunications was set up to bid for the first two licences (won by Vodacom and MTN) and was dormant. Tshivase Trust has less than a 1 per cent holding in AfricaSpeaks and Mashudu himself has no personal interest in it. In February Maepa circulated Satra councillors with copies of the document stamped by the registrar of companies that confirmed his resignation as a director. A legal opinion, commissioned by Satra, also found that he had no conflict of interest.

Even after his recusal, Maepa refused to lie down. On June 25 he announced that since the alleged link between him and a bidding consortium had proved unfounded he had written to the president and the minister informing them that he was returning to the adjudicating panel. Maepa's return could have been devastating for Cell C, because although Matsepe-Casaburri maintained that the decision of the five remaining panel members was unanimous, the Mail & Guardian reported that two of them had opposed Cell C. However, Mojanku Gumbi informed Maepa that he was disqualified from returning to the panel because a company search on June 27 had found that he and Tshivase were still registered as directors of Sun Telecommunications.

Not only were strenuous efforts made to remove Maepa from the selection process, but reports by independent consultants that failed to support the Saudi-backed consortium were also undermined. Early in the selection process Satra commissioned accountants BDO Spencer Steward to study the various bidders' business plans. BDO raised doubts about Cell C, finding that it would be technically insolvent during start up and rated Nextcom's bid as the best.

In April, as the losers started their legal battle and it became clear that the ignored BDO report would be part of their ammunition, Satra decided to commission another expensive consultancy report. In a letter inviting tenders for the second assessment Satra's acting CEO Nicky Maredi explained: "The authority decided, for a variety of reasons, that it was open to doubt whether the conclusions reached in the BDO report were correct and consequently the authority decided to disregard most of those conclusions."

Like its predecessor, the second assessment, by auditors Grant Thornton Kessel Feinstein, confirmed BDO's findings and raised further questions about Cell C's ability to raise the capital necessary. As this second blow to the consortium leaked out, simultaneous allegations of conflict of interest at GTKF surfaced. The company, it was said, had done work for two firms in bidding consortiums - Ikwezi and Distacom. GTKF, a member of Grant Thornton International, did not take this assault on its integrity lightly and published a display advertisement in Business Day (June 27) rebutting the allegations. It pointed out that GTKF had disclosed this information to Satra in its draft report, as it was bound to do, and had provided further details orally and in writing. Its advertisement explained that a director of Distacom (a 40 per cent shareholder in Nextcom), contacted the Hong Kong trade office in South Africa to request an introduction to the Chinese ambassador. The firm was not paid and provided no advice. In 1999 it was engaged to conduct a due diligence review on Ikwezi, a 5 per cent shareholder in the Khuluma 084 consortium. Subsequently Ikwezi itself engaged GTKF to carry out four further reviews. None of them related to the third cell licence.

Whether the communications minister's February 16 announcement is the end of the story is not yet known, for a judicial review of the whole selection process, initiated by losing consortium Nextcom, may still go ahead in the
Pretoria High Court. In the affidavit that Icasa (Satra's successor) has submitted to the court, it maintains that the selection process was fair and impartial. We shall see.