Bain under fire for enabling South Africa corruption

This is an audio transcript of the FT News Briefing podcast episode: Bain under fire for enabling South Africa corruption

Joanna S Kao
Good morning from the Financial Times. Today is Monday, January 17th, and this is your FT News Briefing.

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We’ll start today’s show with a scoop about pension money, private equity and Israeli spyware.

Kaye Wiggins
Investors that have for a long time been able to hide behind, you know, not disclosing their involvement in this messy situation will now have to be sort of held accountable for it.

Joanna S Kao
And global management consultants have been under fire for aiding state corruption. The latest is Bain & Co for its role in a scandal in South Africa. The FT’s Joseph Cotterill will tell us about that. And new data on European car sales shows electric moving ahead of diesel. I’m Joanna Kao, in for Marc Filippino, and here’s the news you need to start your day.

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The FT has learned that pension money from the UK’s largest energy supplier was used to buy an Israeli spyware maker that’s blacklisted by the US, the parent company of British Gas. These retirement funds become a major investor in a private equity fund. This fund then bought a majority stake in the Israeli company called NSO. The FT’s private capital correspondent Kaye Wiggins broke the story, and she reminds us why NSO is so controversial.

Kaye Wiggins
NSO is an Israeli company that makes cyber weapons essentially, so spyware that can be used to hack phones. So that has been found on the phones of human rights activists and journalists. So NSO itself has now been put on a trade blacklist by the US Department of Commerce, which says that there’s evidence that it supplied its spyware to foreign governments, which had then used that to maliciously target people ranging from journalists to government officials to activists, embassy workers, academics.

Joanna S Kao
And NSO is also being sued by two of the biggest US tech companies, right?

Kaye Wiggins
So WhatsApp and Apple are both also suing NSO Group. Apple saying it wants to block it from using its products and WhatsApp saying that NSO exploited a vulnerability in the WhatsApp system to deliver this spyware to people’s phones.

Joanna S Kao
So we should make clear that NSO says this was a misuse of its product and has zero tolerance for the use of its cyber tools to monitor dissidents or activists or journalists. But Kate, what about British Gas or rather its parent company, which is Centrica? Could Centrica have known what its pension money was being used for when the private equity fund bought NSO in 2019?

Kaye Wiggins
Centrica couldn’t have known at the time of committing the money that that’s what it was going to be used for because the nature of a private equity fund is you commit money to a pool and then the people who run that private equity fund go on to make decisions about how to invest it. So Centrica wouldn’t have known at the time that that’s what would be done with its money. But they certainly would have known when NSO was purchased, that that was what had happened.

Joanna S Kao
So Kaye, at this point can Centrica take its investment out of NSO?

Kaye Wiggins
Not very easily, I think, is the short way of answering that question [laughs]. The slightly longer version is the private equity fund behind this investment has itself been through a lot of turmoil in the past year. So the founders of that fund have been removed from their role in controlling it, which is a highly unusual step in the world of private equity funds. And so a US consultancy firm is now running the fund with a mandate to sell the companies that earn and try and return some cash to investors. So it’s very much uncertain at the moment how much money Centrica and all of the other pension funds and other investors will end up getting back from that process.

Joanna S Kao
Kaye Wiggins is the FT’s private capital correspondent.

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Electric vehicles have reached another milestone. EV sales in Europe overtook diesel models for the first time this past December. In 18 markets, including the UK, more than one-fifth of new cars sold were powered by batteries. Diesel cars were just under a fifth, and that’s according to data compiled for the FT by an independent auto analyst. The shift comes as drivers continue to choose subsidised electric vehicles over diesel. And diesel car sales have been falling ever since the Volkswagen emissions cheating scandal back in 2015.

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The global consulting firm Bain & Co is under fire for enabling state corruption in South Africa. The firm was cited in a report out this month on looting under former President Jacob Zuma. Trillions of rand were stolen from government coffers. The FT’s Joseph Cotterill says the corruption peaked after 2014, Zuma was voted out in 2018.

Joseph Cotterill
And it’s in that period that Bain’s work, consulting for or restructuring the South African Revenue Service, became a major part of what’s been called “state capture” in South Africa.

Joanna S Kao
State capture has become a buzzword in South Africa. Joseph told us what the term means.

Joseph Cotterill
Essentially it refers to the capture “of public resources for private gain” and the revenue service in South Africa was a major obstacle to that for obvious reasons. Zuma, as president, appointed an ally as commissioner of the revenue service, and along with that commissioner came Bain. And now this inquiry report has said that service was so well regarded, so highly effective it did not need consulting in the first place. And yet, nevertheless, Bain and Zuma’s appointee persevered, and essentially it led to a purge. Officials who opposed what Zuma’s appointee wanted to do were removed and essentially the inquiry said Bain’s strategy formulation, its plans were used as the pretext to do this.

Joanna S Kao
Joseph, this report cites Bain in particular for its role in the corruption scandal. Was Bain the only global consulting firm involved?

Joseph Cotterill
There is an entire rogues gallery of international professional services firms. McKinsey, Bain’s peer was also compromised by what he did for state companies that were also part of the looting under Zuma. And it apologised, to pay back the fees. KPMG, it also did work related to the revenue service. Again, it apologised, it paid back fees. And many other international companies were also involved at various points in facilitating the looting.

Joanna S Kao
How has Bain responded to all of this, have they defended themselves?

Joseph Cotterill
They have not exactly been repentant. They’ve come out swinging, actually, and it’s very different to how McKinsey, KPMG and the others responded. Bain insisted that this inquiry mischaracterised its work and that it did not in any way wilfully or knowingly support state capture at the revenue service or elsewhere, despite reams of evidence in the inquiry that, for example, its managing partner in South Africa met Zuma on average every six weeks for a period of two years, was close to the company, owned by an associate of the president and so on.

Joanna S Kao
So do you see this report leading to any change? Zuma’s successor Cyril Ramaphosa has promised big anti-corruption reforms. What’s happening with that?

Joseph Cotterill
They have really become bogged down. And many activists, corruption fighters in South Africa do fear that something like the Bain scandal could happen again, that a management consultant, particularly one with a, you know, a big global reputation, could manipulate state institutions once again. Unfortunately, the key reforms recommended by the state capture inquiry, which include setting up a dedicated anti-corruption agency, protection for whistleblowers and other changes to procurement, many people expect these will take years to be effective, if they are at all.

Joanna S Kao
So Joseph, what does this mean for Bain globally?

Joseph Cotterill
First of all, Bain alongside McKinsey, KPMG and other companies involved in South Africa’s worst ever post-apartheid scandal, these are all big global brands. And they all do major work in emerging markets beyond South Africa, from Saudi Arabia to India, all around the world. So wherever there is corruption, wherever there are weak state institutions, what has happened in South Africa will be extremely important to how these firms respond in other markets and how the people who oversee them will respond if there is ever a scandal like South Africa’s state capture again.

Joanna S Kao
Joseph Cotterill is the FT’s Southern Africa correspondent.

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Before we go, a quick correction. Last week we played an advertisement about Exxon’s research into algae and fuel. We incorrectly said that the ad was produced by WPP. We apologise for the error. You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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