Publication: Financial Mail Issued: Date: 2001-05-04 Reporter: Ferial Haffajee Editor:

Arms and Empowerment - Cadres Cash In

Publication  Financial Mail
Date 2001-05-04
Reporter Ferial Haffajee
Web Link


MK Inc companies secure R4bn in arms subcontracts alone

The post-liberation journey of a coterie of former African National Congress guerrillas has been a swashbuckling ride from the trenches to the boardroom. Fortunes have been made as formerly socialist cadres have switched from battle fatigues to pin-stripes. Theirs is a brand of frontier capitalism involving big money and few rules.

Over the past year, former leaders of the ANC's military wing, Umkhonto we Sizwe (MK), have been the beneficiaries of at least R4bn in subcontracts linked to SA's R50bn arms deal.

They trade not only on business acumen, but, naturally enough, on their political capital as well. Through their access to political power, the military veterans (who sometimes bid as part of rival consortia) have secured niches in the telecoms, taxi, technology, road concessioning and media industries.

Is this a form of corruption, as many have labelled it? Not necessarily . What "MK Inc" - as we've dubbed it - represents is a new boys' network - the rise of a new generation of business which owes its allegiance to the ruling ANC.

Government, for its part, has backed their drive into industries it sees as important economically and politically.

The party benefits from this trend, not only by way of donations from businesses that have grown as a result of its patronage, but from the formation of a "patriotic bourgeoisie" - essential to keeping it in power. For example, businessman Schabir Shaik says he regularly contributes to ANC activities.

"MK Inc" operates when former politicians  and ANC-linked civil servants leave office, set themselves up in business and win State procurement contracts ; or when contracts are granted to former close comrades.

But State procurement rules are tough and tendering is competitive. "MK Inc" has benefitted primarily from the institutionalised weighting given to black empowerment ventures, as have other, non-ANC, black companies. No doubt their struggle credentials also help.

The flip side is a system of crony capitalism. 

In cronyist systems, little attention is paid to transparent, competitive procedures. Contracts are won on networks alone. The investigation into SA's multibillion-rand arms deal is looking at whether political connections were used to win contracts in violation of standard rules against conflicts of interest. Such trends are not peculiar to SA, but common wherever there is rapid economic and political change.

The MK-linked companies argue that their actions are above board and that their deals have been struck fairly. They point out that they have also lost a number of tenders.

"Together with senior comrades I controlled millions of dollars leaving and coming into the country for the ANC. I travelled extensively with the late treasurer general Thomas Nkobi and with Thabo Mbeki to Malaysia, Pakistan and the UK. But you can't say that just because we walked the walk with these guys [the politicians], we can simply get contracts from them," says Shaik, referring to his close personal relationships with several Cabinet Ministers.

There is a substantial MK presence in the consortium bidding for SA's third cellular phone licence, Cell-C, whose spokesman, Zwelakhe Mankazana, is an MK veteran. Former MK comrades are also involved in the tenders for the taxi recapitalisation project (the third-biggest procurement after the arms deal and the Home Affairs national ID systems project, or Hanis), electricity payment systems, the R40m contract to issue new driver's licence cards, and the Hanis project itself. They have also taken smaller stakes in media (Yfm, now sold, and e-tv), leisure (casino licences and new tourism ventures) and State housing contracts.

The biggest money, however, will be made from the arms deal.


Joe Modise Schabir Shaik

The "CEO" of MK Inc is former Defence Minister Joe Modise, a former commander-in-chief of MK and now a director of companies that have won or are vying for defence and other contracts. His "chief operating officer" is the SA National Defence Force (SANDF)'s head of procurement, Shamin "Chippy" Shaik, who reportedly secured a steady flow of business to companies that are either wholly or partially owned by a coterie of MK vets. Joint "MDs" are a former MK commander, Lambert Moloi, who is Modise's brother in law and who also served as Modise's aide de camp after 1994; and Schabir Shaik, the older brother of the SANDF's procurement chief. Their company, African Defence Systems (ADS), a subsidiary of the French multinational Thomson-CSF, has won the most valuable subcontracts in the arms deal.

Schabir Shaik protests that the assertion is unfair, saying ADS won only one of 33 arms subcontracts it tendered for. However, the contract is worth R2,6bn (one of the largest local subcontracts), for integrating the various systems aboard the submarines and corvettes bought as part of the arms deal.

A subsidiary of ADS, Futuristic Business Solutions (FBS), won several contracts , as have smaller companies in their fold like Xcel, which writes training manuals for weapons systems.

Others in the fold include former MK intelligence head Keith Mokoape and two former MK KwaZulu-Natal operatives, Diliza Mji and Yusuf Mohamed. This group forms the elite of MK Inc. But trying to unravel their corporate profile is difficult. It is a knot of cross-holdings and parallel directorships combined with elements of a family business.

Some MK-linked companies run several concerns under one roof. The ADS switchboard, for example, can transfer you to FBS and to an IT company, Temoso.

Two "branches" of MK Inc are evident; the head office appears to operate in Gauteng, where Modise and Moloi work. Modise works in various Johannesburg offices, but most often at Labat Africa, which supplies IT and traffic management systems to the State. He is also involved in the arms, cabling, prepaid electricity metering and tourism businesses.

Moloi works from ADS, primarily in arms, but he is also a director of Cellsaf, an equity partner in Cell-C.

Moloi's son-in-law, Tsepo Molai, and son Chris, as well as Modise's granddaughter, Lerato, also work for ADS, as does Chippy Shaik's wife, Zarina Mohammed.

Mokoape works for Applied Logistics Engineering, a Pretoria-based company where Modise began his business career.

The other branch of MK Inc has its roots in Durban, where Schabir Shaik runs the show.

Each of the MK Inc pointsmen is the director of several other companies.

Their businesses got off the ground with State contracts - a factor that several of them say is the only way for black businesses to get started. The former soldiers lack finance because many spent their early productive years in full-time service of the liberation movement, so they bring political capital to the table. A State contract becomes the launch pad for getting private-sector business.

Government spends R80bn/year on procuring goods and services from business.

That militarists-turned-businessmen have concentrated on the arms deal should come as no surprise.

To understand why, cut to the early Nineties, before 1994, when the party began to consider what it would do with the defence industry - into which the apartheid State had poured billions. Then MK commander-in-chief Joe Modise was a keen lobbyist for the defence industry and was already feted by the arms multinationals and the local defence industry.

Later, as Defence Minister under President Nelson Mandela, Modise became political steward of the Defence Industry Interest Group of SA (Digsa), an Armscor project formed in 1995. Armscor is the State arms procurement agency.

Digsa was a lobby group for black business, which wanted a slice of the action. A home for non-ANC black arms-supply companies like Kunene Technology, Lechabile and Kgorong, it was also the breeding ground for MK Inc.

It was at Digsa that the business relationships and several of the companies taking centre-position got started.

The old defence industry, seeking to keep a place in the sun, courted the former guerrillas and other black businesses, or sold out. Afrikaner magnate Bill Venter sold half Altech's defence business to France's Thomson-CSF, which in turn partnered Shaik to establish ADS. He was later joined by Moloi, once he quit as Modise's aide de camp. Modise left office to join Log-tek and Labat.

A second important aspect of the MK Inc phenomenon is the way appointment to the Armscor board has been a path into the defence business.

Thirdly, defence was the one area in which the ANC had a group of people ready to take up the cudgels of black empowerment. Hence, the relationships between the ruling party and the black players are much closer than in other industries. It is therefore not surprising that some in the MK Inc stable, like Schabir Shaik, believe they were "deployed" by the party to go into the arms business.

But critics of MK Inc domination of the arms subcontracts charge that the former guerrillas have traded on insider information that their access to power allowed them.

That inside track was the Defence Review, which took place between 1995 and 1997 and can be considered MK Inc's business plan. Its members - like Chippy Shaik, Moloi and Modise, who were still in government - helped decide, through the review process, what SA needed to buy to stock a new defence machine.

Centrally placed to make contacts with multinational suppliers, they also knew all the decision-makers. In effect, some MK Inc members wrote the procurement rules and then went to play the game.

Government decided in the Defence White Paper to keep the defence industry going. The ANC government could not afford to manufacture everything, but decided to focus its defence capability at the top end.

It sought to develop expertise in command systems, intelligence gathering and radar technology. Black empowerment companies with these capabilities would be encouraged and assisted.

But it soon became clear that certain empowerment companies and partners were favoured above others, says Richard Young, MD of CI Systems. He says black empowerment was zero-rated in the final stages of the bidding. His company lost out on a R38m information management system contract for the corvette combat suites to a Thomson-CSF subsidiary, Detexis, even though he had an empowerment plan in place.

"I have no problem with true empowerment," says Young, "but major capital acquisition programmes need to follow transparent and rigorous tender processes, not ad hoc ones as was the case. What concerns me is that the defence industry is being manipulated out of local hands into foreign hands. These foreign companies in turn partner with selected empowerment companies." These selected companies, he avers, all have links to the ruling ANC - links he has painstakingly plotted.

Schabir Shaik counters that "99% of local business still goes to old, white business".

Government says foreign participation in the local market is part of the global concentration of the defence industry.

"It's impossible for the process to have been fundamentally flawed," says Rocky Williams of the Institute for Security Studies, who was part of the Defence Review when he worked at Defence.

He says there was civilian oversight of the process, several departments took part and no single person was responsible for any one decision.

Corruption is therefore likely to have been relatively small - confined to discounts on a vehicle, a holiday or bursaries for decision-makers' children. Such sweeteners are par for the course in the international arms business. Taking a fee for lobbying agreements like the one struck between the German corvette manufacturer Thyssen and FBS (see illustration) are illegal, but critics say between 3% and 5% of the value of all major arms contracts may be paid as "sweeteners" or "commissions".

But the real local money in the arms deal is being made by the MK Inc relationships - a factor that has angered some in government who tried to keep the process more open.

A source in Armscor who sought to ensure benefits for a wide range of companies, including those with MK links, confirms"The process benefitted some empowerment companies more than others."

For this, Chippy Shaik is likely to fall soon, or to resign. It's generally thought that he tried to push business towards his political and family connections. His brother, Schabir, denies this, saying Chippy did not have the authority to swing contracts.

That said, the heat generated by the arms probe suggests there will be a fall guy.

Williams says the lesson from the arms deal is that the relevant parliamentary committees need to be more closely briefed to ensure parliamentary oversight, and that the arms subcontracts with local companies should be more transparent.

Government Communication & Information System spokesman Yacoob Abba-Omar says procurement under the current government is more transparent than it was under previous governments. The ANC, for example, introduced competitive tendering in place of price negotiation, which is more secretive.

However, he says, the system can be improved. "We need to narrow confidentiality down to its bones." And with lobbying becoming more pronounced and the procurement bill bigger, he says it may also be time to consider US-style lobbying rules to regulate how companies can influence politicians.

For MK Inc, meanwhile, the capitalist struggle continues, as the web of companies linked to the former cadres continues to grow.

Umkhonto We Sizwe - Roots to Fruits

Founded in December 1961, Umkhonto we Sizwe (MK), or "the spear of the nation", was the ANC's armed wing. Leaders of the guerrilla army were trained primarily in the Soviet Union, Eastern Europe and Cuba and its camps were dotted across Africa. In SA, it functioned in cells.

MK was officially integrated with the old SA Defence Force after freedom came in 1994. Integration has been a difficult process and still continues. The "MK Inc" grouping represents a tiny proportion of the former organisation. Many former soldiers are destitute; scores have turned to crime.


With acknowledgment to Ferial Haffagee and Financial Mail.