The AIDC notes with deep concern the World Bank’s approval of a $1.5 billion loan to South Africa. This loan is not an act of charity from a benevolent international institution. The choice to pursue this foreign financing is a political choice that was made without democratic oversight, to satisfy the narrow interests of private investors and business elites at the expense of the public good, public finances and economic sovereignty.
Strategic public investment and reindustrialisation, driven by domestic resource mobilisation supported by a new set of trade and industrial policies, is needed to create millions of jobs and serve people’s basic needs. Instead of breaking with a decades-long commitment to neoliberal economic policy, the government’s growing appetite for foreign loans from the World Bank, which wields its power to undermine economic sovereignty by imposing conditionalities on the government, deepens the country’s social crisis and economic stagnation.
Language tricks – “Modernisation” is code for privatisation
The World Bank’s Infrastructure Modernisation for South Africa Development Policy Loan allegedly aims to provide funds for the country to “enhance energy security, increase port and rail volumes and support the transition to a low-carbon economy”. Promising economic growth and job creation, the World Bank, aided by the Treasury, is actually supporting the gradual privatisation of key public assets and services. We are witnessing the use of state power and public funds to produce private profits.
This can be seen through the loan conditions that require the ongoing unbundling of Eskom through inviting private investment into the transmission network, primarily through Public-Private Partnerships and private investment into distributed generation. Combined with the liberalising of the energy sector is the unbundling and corporatisation of Transnet to create a competitive market for private players in ports and rail.
To receive a development policy loan, a country must meet “prior actions”. The program for what actions the World Bank demands is set out in the ‘Country Partnership Framework’ (CPF), signed by the Treasury and the Reserve Bank without any debate in June 2021. That it existed was only known to Parliament in 2022. It was in the beginning of that year, SA then got its first “policy-based” World Bank loan; the first one ever.
Thus, the World Bank wants policy actions that support the objectives of the loans. These “prior actions” are policies to which the Treasury has already committed, through Operation Vulindlela and the Government-Business Partnerships. Operation Vulindlela (OV) is the lynchpin of the Treasury’s plan to resolve economic blockages and accelerate growth to a “blistering” 2.6% by 2032 – scarcely enough to keep up with population growth.
Beyond the structural reforms in Operation Vulindlela, the conditionalities of this new loan agreement remain a mystery. The exact terms of the agreement, the interest rates, the pace of disbursement or the agreement’s durations – this vital information must be revealed to the public and parliament to undergo democratic scrutiny before the agreement. Moreover, the absence of clarity on conditionalities risks further entrapping the government in neoliberal reforms unsuited to the country’s developmental needs.
A key condition for the success of Operation Vulindlela is that the government mobilises R1 trillion in financing from the private sector for infrastructure development.
Now, infrastructure projects are incredibly capital-intensive and risky, and by their nature, private firms prioritise profitability, returns on investment and maximising shareholder value. To seduce private investment into infrastructure development, the government is pressured by elite interests to “de-risk” infrastructure projects through deploying so-called “blended finance”, turning infrastructure into a class of assets or Public-Private Partnerships.
Blended finance is beloved by exploitative institutions such as the World Bank. Through using public and development finance to attract private investment in infrastructure projects, blended finance arrangements offer private investors capital grants, low-interest rates, revenue or credit guarantees, equity investment and subsidies. In simple terms, it is the use of public money for the benefit of private investment.
De-risking measures are not a mutually beneficial arrangement. In reality the government takes on greater risk through high-transaction costs with private partners, increased contingent liabilities in the form of providing insurance (e.g. credit guarantees) to private investors in the instance of project delays, defects or an underestimation of costs, as well as profit guarantees which lock the state into buying whatever is needed to make the private operator turn a profit.
In addition, the profit motive puts the affordability of essential public services for South Africans at risk. Electricity prices are already too high, and the introduction of PPPs to expand the transmission grid is likely to worsen this. This loan is expected to unlock private investment in 200km of new power lines, but no private partner will be willing to build this at cost price, much less the remaining 14,300km of power lines that are required by 2034 according to the Transmission Development Plan. Instead, investors will recover their costs through additional tariffs, which will in turn be passed down to electricity users. Research last year showed that transmission tariffs will need to be increased in order to create a business case for independent transmission.
International experiences of PPPs in Spain, Mexico, India, Scotland and several other countries reveal that these projects severely lack democratic governance. In the absence of transparency from private contractors or accountability of private investors, the needs of communities are sidelined, and consultation with them is shallow. In Latin America, PPP projects have facilitated corruption through bribery, collusion, money laundering and other corporate crime.
At a time when South Africa desperately needs an alternative macroeconomic policy that can respond to social and economic crises, massive loan agreements with the World Bank undermine the country’s economic sovereignty, needlessly increase public debt, encourage brutal budget cuts and weaken the state’s capacity to serve its people. Moreover, foreign loans in support of economic programmes such as Operation Vulindlela lock us into economic policy decisions made by this government for years to come.
More foreign loans increase debt and motivate austerity
The continued lack of transparency, parliamentary oversight and public deliberation in the forging of loan agreements is unacceptable. The management of public finances is the concern of all South Africans. The Treasury cannot continue to avoid its constitutional mandate of democratic accountability.
Since 2010, South Africa has entered into six loan agreements with the World Bank. National Treasury has reported that financing from foreign loans will increase to R90 billion annually over the medium term, with the government raising an estimated $15 billion from international finance institutions and capital markets during this period. Foreign loans deepen indebtedness as they are not denominated in Rands and require payments of interest in a foreign currency as the Rand depreciates. Foreign loans expose us to the whims of biased Western credit rating agencies. Further, debt not denominated in Rands compromises South Africa’s monetary policy sovereignty.
The cost of debt repayment and servicing contributes to the pursuit of austerity measures that have weakened state capacity to provide basic services and desperately needed social welfare – debt has been invoked as the rationale for Treasury’s pursuit of a budget surplus since 2020, a pursuit that has resulted in a collapsing public sector, no growth, and an increase in unemployment.
There are alternatives
Infrastructure development is absolutely essential for job creation and breaking the country’s unsustainable dependency on coal-fired power. Macroeconomic policies created and implemented should first prioritise public welfare and not the wealth accumulation of private investors and their firms. South Africa needs to build Eskom and Transnet into democratically governed public utilities equipped with the financial and operational capacity to provide universal access to energy and support green reindustrialisation.
There are many alternative sources of finance which do not include taking out any new debt. For example,
- Increasing effective personal income tax rates of the elites and close tax breaks for high-income earners
- Implementing a net wealth tax for the top 1%
- Stop illicit financial flows and profit shifting by corporations
If Treasury does not have the political will to increase taxes on the rich and ensure corporations pay their fair share, there are better, alternative sources of debt. For example, the Government Employees Pension Fund holds R2.38 trillion in various assets. Selling bonds to the fund at concessional rates can provide a cheap source of funding for the state, while at the same time, the fund benefits from an investment that is safe and reliable, and not subject to volatile market forces, unlike its current investment in volatile stock markets. The GEPF currently invests 57 percent of its assets in stocks – the largest investments are in Naspers, Firstrand, Gold Fields, Standard Bank and British American Tobacco.
National Treasury continues to take on new foreign debt while refusing to raise domestic resources through progressive taxation or using alternative financing mechanisms. Running to the World Bank for loan agreement hinders the government’s ability to serve the most economically vulnerable people.
For further comment, please contact:
- Dick Forslund on 082 895 7947 or dick@aidc.org.za
- Andile Zulu on 082 748 5621 or andile@aidc.org.za
- Jaco Oelofsen on 084 376 9019 or jaco@aidc.org.za
