Committee for the Abolition of Illegitimate Debt

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 World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, 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 Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. , 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 Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates, revenue or credit guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). , equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. 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 Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). 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 Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. 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 Rating agency
Rating agencies Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/ . 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 Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. , there are better, alternative sources of debt. For example, the Government Employees Pension Fund Pension Fund
Pension Funds Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets. 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 at aidc.org.za
• Andile Zulu on 082 748 5621 or andile at aidc.org.za
• Jaco Oelofsen on 084 376 9019 or jaco at aidc.org.za