This article is an excerpt from the 2020 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In their December 2019 report entitled Nuclear Enrichment: Russia’s Ill-Fated Influence Campaign in South Africa, Andrew S. Weiss and Eugene Rumer detailed the failed attempt of former South African President Jacob Zuma to directly award a US$76 billion nuclear power plant construction project to a Russian state-owned monopoly. As Weiss and Rumer explained, the attempted sole-source failed after a South African court ruled that President Zuma’s attempt to bypass the legislature and award the contract by executive fiat was procedurally flawed and unconstitutional. The ensuing scandal ultimately led to the president’s resignation in the face of a parliamentary non-confidence vote over escalating corruption allegations.
As Weiss and Rumer noted, the President’s attempt to enter into a multi-billion-dollar sole-source with a foreign country ultimately failed due to South Africa’s system of checks and balances:
Over the past eighteen months, the Kremlin’s gains in Africa have attracted widespread attention. Curiously, South Africa seldom features in these accounts. Yet, for nearly a decade, it was one of Russia’s biggest foreign policy success stories. Why are Russia’s recent inroads in South Africa (and the dramatic reversals that followed) being overlooked, and what do they reveal about the effectiveness of Moscow’s broader strategy and overall tool kit on the continent?
The Kremlin often takes advantage of cultures of corruption, and, to a certain extent, its efforts in South Africa fit this broader pattern. The high-water mark for Russia–South Africa relations occurred during Jacob Zuma’s presidency (2009–2018), which was marred by a series of corruption scandals commonly described by South Africans as the period of “state capture.” Yet Russian engagement with South Africa during the Zuma era was more deeply rooted. It relied on a web of relationships at the highest levels of both governments, the promotion of multi-billion-dollar projects involving state-owned companies particularly in the energy sector, and the leveraging of Cold War–era ties forged during South Africa’s period of national liberation.
In the end, much of what went wrong for Russia was a testament to South Africa’s remarkably robust system of institutional checks and balances. Zuma’s excesses, which led to his resignation under pressure in February 2018, generated a strong pushback from various quarters. South Africa’s competitive political system, civil society, judiciary, and news media served as dogged champions of accountability and transparency. South Africans, from vantage points inside and outside of government, closely scrutinized Russian activities, meticulously documented them, and launched a series of political and legal challenges in response. Their ability to challenge a controversial head of state stands as a powerful example for policymakers elsewhere on the continent and in other parts of the world who are contending with Russian malign activities.
As Weiss and Rumer summarized, President Zuma’s “shady deal” saw him bypassing established legal and administrative norms for government procurement in an attempt to directly award the largest public sector deal in South Africa’s history:
The Makings of a Shady Deal
Viewed from South Africa, the most troubling aspects of the deal were its enormous cost, the disregard for the established legal and administrative norms for government procurement, and the likelihood that the chief personal beneficiaries would be Zuma and the Guptas. The Guptas are a trio of immigrants to South Africa from India who became close with Zuma and enriched members of the Zuma family, his inner circle, and themselves. From Rosatom’s point of view, the deal appears to have been little more than a loss-leader. South Africa’s lackluster economic prospects and questionable ability to shoulder the costs of constructing and operating a new constellation of civil nuclear power plants meant that financial rewards for Rosatom were far from a sure thing. Ultimately, any commercial upside for Rosatom would have been derived from lucrative long-term agreements for nuclear fuel, reactor maintenance, and decommissioning activities over the plant’s projected fifty to sixty years of service life. Accordingly, the geopolitical value of a deal positioning Russia as a major actor in South Africa’s economy (with an eye toward further expansion elsewhere on the continent) would have been far more consequential.
Discussions with Moscow on nuclear cooperation accelerated shortly after Zuma ascended to the presidency. From the outset, there was a race under way between the protagonists of the Zuma/Russia nuclear deal and the many checks to it which, early on, were activated. As early as the autumn of 2011, Zuma told then finance minister Pravin Gordhan that he wanted to award the entire construction deal to Russia. He brushed aside Gordhan’s insistence on following established procedures for state procurement, according to Gordhan’s written testimony to the state capture commission.41 Gordhan warned Zuma that failing to follow the established procedures could land the president in trouble similar to the fallout over the earlier arms sales scandal that had nearly ended his political career. As Gordan’s successor Nhlanhla Nene, who served as finance minister from May 2014 to December 2015, put it, the nuclear project “would have constituted the largest public investment program in South African history, and, relative to the size of the South African economy, would have been one of the largest public sector investments ever undertaken internationally.
In their report, Weiss and Rumer also detailed how the President and his private partners assumed an increasing level of direct control over the deal after the President faced due process resistance from the government’s bureaucracy:
As negotiations continued, Zuma loyalists, like those in the Department of Energy, tried to sideline opponents of the deal. Zuma himself assumed direct control of the process through a special energy commission. This bureaucratic wrestling match, along with efforts to conceal information about the deal from parliamentary oversight, made it impossible to evaluate the project’s potential impact on the country’s financial health. Gordhan and other officials were largely cut out of the discussions. Concerns about tax incentives offered to the Russians as part of the deal were largely disregarded.
Treasury officials also worried about the projected societal impact of the public debt associated with the project and the possibility that future electricity price increases would be passed on to the general population.
The South African opposition party Democratic Alliance, investigative journalists, and civic activists all charged publicly that the nuclear reactor deal was concocted in large measure to benefit the Gupta family. In 2010, the Guptas had partnered with Zuma’s son Duduzane and used state funds to purchase a major uranium mine, a move that positioned them as potential suppliers of the country’s future nuclear power plants. (U.S. officials warned South African counterparts at the time that the Guptas’ expansion into uranium mining “may have been funded by Iran and that uranium from this mine was destined for Iran’s nuclear program.”) The Guptas also ensured that Zuma installed their allies on Eskom’s board, thus giving them a major say in the running of the company.
However, as Weiss and Rumer expained, while the deal was encountering increasing resistance, the President forged forward, firing a senior minister who raised concerns about a lack of transparency regarding the details of the contractual arrangements with the Russian enterprise:
Rosatom’s Kiriyenko said at the time that the construction portion of the deal was worth upward of $40–50 billion. The total deal was estimated to be worth $76 billion. Scrutiny from civil society groups and Zuma’s political opponents—as well as the government’s lack of transparency about the deal and about Russia’s central role in it—created an escalating series of political and legal problems. Soon thereafter, Ecodefense!, a Russian environmental nongovernmental organization, leaked a copy of the confidential September 2014 agreement to two South African activists. The contents of the document made it difficult for the government to convince anyone that it was conducting a proper tender based on bids from French, South Korean, and U.S. firms, let alone subjecting the deal to parliamentary review. The activists, Makoma Lekalakala and Liz Mc- Daid, won considerable acclaim for stirring grassroots opposition and organizing legal challenges.
Neither Zuma nor the Russian government appeared to fully appreciate the controversy that they had created or the scale of opposition to the deal. According to former finance minister Nene’s testimony, Zuma was fully committed to proceeding with the deal at the BRICS summit in Russia in July 2015, even though key financial details had not been resolved. Nene raised concerns with Zuma that the financial details of the deal had been kept from treasury officials, only for Zuma to criticize him for allegedly failing to fulfill his duties. Nene was fired in late 2015.
Notwithstanding the President’s efforts, the legal issues continued to escalate. In its April 2017 decision in Earthlife Africa v. The President of the Republic of South Africa, the High Court of South Africa (Western Cape Division, Cape Town) struck down the proposed deal as procedurally flawed and unconstitutional. While the government attempted to defend the deal by arguing that it was an executive policy decision and therefore not subject to judicial review, the Court disagreed, ruling that government contracting decisions were legally reviewable administrative actions and that the failure to engage in public consultations prior to making such a major contracting decision constituted a flawed process:
There is no serious dispute that the decision to procure 9.6GW of nuclear new generation capacity will have far reaching consequences for the South African public and will entail very substantial spending on a particular type and quantity of new infrastructure. The applicants estimated that the costs, which will ultimately be met by the public through taxes and increased electricity charges, could be approximately R1 000 000 000 000 (one trillion Rand) and this estimate was not disputed by the respondents. As the applicants point out, the allocation of such significant resources to the project will inevitably affect spending on other social programmes in the field of education, social assistance of health services and housing. They also point out that the decision embodied in the sec 34 determination has potentially far reaching implications for the environment.
In my view, in light of these considerations, a rational and a fair decision-making process would have made provision for public input so as to allow both interested and potentially affected parties to submit their views and present relevant facts and evidence to NERSA before it took a decision on whether or not to concur in the Minister’s proposed determination.
The Court also stated that proceeding “without even the most limited public participation process renders its decision procedurally unfair” and in breach of the National Energy Regulator Act and of the Promotion of Administrative Justice Act. Further, the Court ruled that even if the contracting decision did not constitute an administrative action, it still had to “satisfy the test for rational decision-making, as part of the principle of legality” and that the decision “fell short of constitutional legality for want of consultation with interested parties.”
While the Court concluded that the contracting decision was procedurally incorrect and constitutionally invalid, it declined to adjudicate on the substance of the proposed contract, ruling that this would be an improper judicial incursion since the President was required to seek legislative approval if he wanted to proceed with the contract and the Court did not want to pre-empt that legislative review. However, the Court noted that the substance of the proposed contract was justiciable and could be judicially reviewed in the future if such a review proved necessary:
Should the executive then choose to table the Agreement before Parliament in terms of sec 231(2), a parliamentary/political process will follow in which the Agreement will be debated in both the NA and the NCOP with a view to its approval or disapproval by Parliament. It may very well also be the subject of a process of public participation conducted through Parliament. The outcome of this process cannot be foreseen nor should it be anticipated. In these circumstances it would be invidious if the Court were, at this stage, to declare that certain of its provisions are inconsistent with the Constitution and, more specifically, sec 217 thereof. This is not to suggest, however, that the Court will lack jurisdiction to deal with such a question in future if the need should arise.
For these reasons I consider that the principle of separation of powers calls for the Court to exercise judicial restraint at this stage and to decline to consider the further relief sought by the applicants in relation to the Russian IGA.
As noted in the Weiss and Rumer report, even after this ruling, President Zuma insisted on proceeding with the deal but the resulting scandal ultimately forced his resignation:
Even after an April 2017 high court ruling that the nuclear deal was unconstitutional, Zuma remained defiant. He brushed aside demands to adhere to state procurement procedures and accusations of corruption while continuing to look for ways to resuscitate the agreement. In the months prior to his resignation, he stirred additional controversy by assigning intelligence chief Mahlobo to run the Department of Energy.
Zuma’s abrupt resignation sealed the fate of the deal. Since then, his successor, Ramaphosa, has maintained a respectful stance toward Moscow even as he has made clear that the nuclear deal is simply unaffordable for now.
As this case study illustrates, the failure to follow due process puts the legitimacy and defensibility of government contracting decisions in a state of peril. All government officials, no mater how senior, and all government contracting decisions, no matter how large, remain subject to checks and balances in jurisdictions governed by the rule of law.