Unleashing the power of pension funds and debt cancellation to finance a just energy transition

25 August 2020 by Dominic Brown

Illustrative image: sources Pixabay / Flickr

Debt cannot be repaid, first because if we don’t repay, the lenders won’t die. That is for sure. But if we repay, we are going to die. That is also for sure.”

Those were the words of the revolutionary former president of Burkina Faso, Thomas Sankara. Taken from his speech to the OAU in 1987, months before his assassination, his words are as true now as they were then. And especially so when locating the issue of debt in the context of the Covid-19 pandemic and the massive socioeconomic impact of the lockdown.

The issue of debt must also be situated within the overarching context of the need to finance a transition from a fossil-fuel economy to a low-carbon economy in the struggle to mitigate against the deep impacts of the ecological crisis. Repaying government debts, especially debts incurred against the 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. of the majority of the population, leaves less money to invest in the roll-out of renewable energy and the genuine, just transition that South Africa needs. 

The issue of South Africa’s debt permeates throughout. The situation at state-owned enterprises (SOEs) and the government’s increasing debt-to-GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
ratio is of serious concern. In response, the government, led by the Treasury, has prioritised debt-service costs at the expense of higher levels of social spending. As a result, debt-service costs are the fastest-growing budget item in the national budget. 

Despite prioritising debt payments, South Africa’s debt-to-GDP ratio has continued to grow and is likely to exceed 80% by the end of the year, rising from the February 2020 Budget estimate of 65.6%. At the end of the first quarter of 2020, South Africa’s gross external debt – what lies behind the growing debt-to-GDP ratio – stood at just over $155-billion. While an improvement since December 2019, with a decrease of $30-billion, further interrogation of SA debt is needed.

South Africa’s debt problems are strongly intertwined with Eskom’s growing financial woes. Eskom’s debt is expected to jump from R450-billion (in 2019) to at least R500-billion by the end of 2020. 

Most reports link Eskom’s rising debt to the increased prevalence of corruption. This is an important factor, but it is not the only factor. Other considerations include: the increasing commercialisation and corporatisation of Eskom; the original high costs of the renewable energy independent power producer procurement programme (REIPPPP) contracts and the related 20-year power-purchase agreements; as well as the rapid increase in the cost of coal. These factors are detailed in the recently launched research report, Eskom Transformed.

It is undeniable that corruption and wasteful expenditure are major problems. Reports indicate that the Special Investigating Unit (SIU) is investigating the theft of tens of billions of rands from Eskom. Included in this are payments to the value of R139-billion in contracts related to the building of Medupi, Kusile and/or Ingula power stations. 

An insider estimates that the cost of corruption in relation to Eskom’s contracts could potentially be as high as R500-billion. A seemingly clear-cut example of corruption relates to the World Bank World Bank
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.

loan to Medupi in 2010. Eskom is still repaying this loan: in fact, more than R1.3-billion was paid during the months of lockdown and, based on Alternative Information and Development Centre’s (AIDC) calculations, Eskom will only repay the debt in full by the end of the century.

That the loan was granted to build the biggest coal-fired power (read carbon-emitting) station in South Africa – contradicting the outcomes of the World Banks’ own research that indicates climate change has negative consequences for development – coupled with the fact that the loans seem to be infested with corruption, makes this a quintessential case of odious debt Odious Debt According to the doctrine, for a debt to be odious it must meet two conditions:
1) It must have been contracted against the interests of the Nation, or against the interests of the People, or against the interests of the State.
2) Creditors cannot prove they they were unaware of how the borrowed money would be used.

We must underline that according to the doctrine of odious debt, the nature of the borrowing regime or government does not signify, since what matters is what the debt is used for. If a democratic government gets into debt against the interests of its population, the contracted debt can be called odious if it also meets the second condition. Consequently, contrary to a misleading version of the doctrine, odious debt is not only about dictatorial regimes.

(See Éric Toussaint, The Doctrine of Odious Debt : from Alexander Sack to the CADTM).

The father of the odious debt doctrine, Alexander Nahum Sack, clearly says that odious debts can be contracted by any regular government. Sack considers that a debt that is regularly incurred by a regular government can be branded as odious if the two above-mentioned conditions are met.
He adds, “once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors.”

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

So clearly for Sack, all regular governments, whether despotic or democratic, in one guise or another, can incur odious debts.
. There have already been calls for this debt to be cancelled, by the South African Federation of Trade Unions (SAFTU)AIDCPublic Affairs Research Institute and Daily Maverick’s Kevin Bloom, among others.

Given the scale of corruption, a publicly disclosed forensic audit of all SOE and government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. – with the intention to repudiate the odious debt – is necessary. This is in line with the demands made by Sankara more than three decades ago, and the more recent call by more than 200 global organisations for debt cancellation following the outbreak of Covid-19. 
Such an agreed debt cancellation would immediately create much needed fiscal room for enhanced social spending and public investment.

Notwithstanding the need for debt cancellation, it is important to recognise that a high government debt-to-GDP ratio is not inherently a problem. For instance, theUK (80.7%), France (98.1%), Belgium (98.6%), USA (107%), Singapore (126%) and Japan (237%), all maintain rather high government debt-to-GDP ratios. 

The bigger question relates to a country’s ability to service those debts: for example, an economy that is experiencing rapid levels of growth is able to service debt costs easier than a country in an economic recession. Furthermore, when GDP is growing, it also reduces the overall debt-to-GDP ratio. Therefore, rather than focusing solely on the level of debt, a good debt policy is one that borrows to invest in improving a country’s productive capacity. Historically, this has proven to reduce the debt-to-GDP ratio in the medium to long term. Conversely, fiscal consolidation in order to prioritise debt-service costs has often resulted in exactly that which it was meant to avert – a higher debt-to-GDP ratio.

 Break the chains of dependency

Besides borrowing to invest in improving the country’s productive capacity, another aspect to consider relates to the level of domestic debt compared to debt denominated in foreign currency. Prioritising borrowing domestically should be preferential even if 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.
from foreign creditors are lower than domestic bonds, because borrowing from foreign creditors requires paying back in foreign currency. Financial inflows are needed for this purpose. 

This requires higher interest rates which lead to higher interest payments (and dividends) paid to non-resident bondholders, which inevitably creates a vicious cycle of dependency on export-oriented growth and high interest rates to attract further financial inflows.

South Africa’s dependence on financial inflows to boost the financial account, and in so doing offsetting the current account deficit in the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. -of-payments, is a significant contributor to the country’s growing gross external debt. 

Around 70% of the $30-billion decrease in SA’s gross external debt from December 2019 to March 2020 relates to falling general government 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). to non-resident bondholders (from $78-billion to $56-billion). In other words, of the 16% decrease in the country’s gross external debt, 11% pertains to fewer liabilities owed to non-resident bondholders after a considerable decline in the foreign ownership of domestic bonds (to an eight-year low). This, following the sale of close to Rand(R) 100-billion in domestic bonds by non-resident bondholders in the first quarter of the year. 

Introducing more stringent capital controls could both reduce the level of outflows and alleviate the pressure on the current account by limiting the amount (and delaying the time) of dividends and interests paid to non-resident bondholders.

While a small 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. (10%) of government debt is foreign-denominated debt as a percentage of its total debt, approximately 50% of SOE’s debt is held by foreign creditors. A good debt policy for both SOEs and government would be to prioritise borrowing from domestic creditors over foreign creditors. This brings us to the second major potential financial resource – pension funds 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.

 The power of pension funds

Increasingly the power of pension funds is being understood. In 2002, Robin Blackburn in Banking on Death or Investing in Life points out:
While a good pension regime could help to reinforce a healthy and sustainable pattern of economy, a bad and short-sighted one will compound economic dangers and social distempers.”

As financial capital became increasingly dominant within the global economy during the 1980s, investments shifted from productive capital in the real economy to greater levels of investment in stock markets, derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). and speculative markets. With this, we see the intensified commodification and, in some instances, even privatisation of public goods such as electricity, water, health, housing and transport. 

These essential goods and services are increasingly produced for 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. maximisation rather than meeting people’s needs. Pension funds, public and private, are massive contributors to this trend.

 Addiction to equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. and the shackles of finance capital

South African pensions have amassed more than R4-trillion in accumulated reserves, making it one of the largest pension systems in the world. Much of this is invested in the JSE. 

For example, more than half of all the Public Investment Corporation’s (PIC) R2-trillion in assets under management is invested in the JSE. The largest contributor to the PIC’s assets is the Government Employees’ Pension Fund (GEPF). Currently, the GEPF has approximately R1.8-trillion in accumulated reserves: two-thirds of this, just over R1-trillion is invested in the JSE.

Source: GEPF 2018/19 Annual Report

The GEPF’s investment strategy and its fixation on financial investments is exactly the kind of bad and short-sighted pension regime that Blackburn was referring to. The GEPFs overinvestment in the JSE as a result of the PIC’s addiction to equity has come at a huge price – the cost of growing unemployment and income inequality – due to the lack of investment in an industrialising, job-creating strategy. This process, coupled with declining labour share as a percentage of gross value added (i.e. falling real incomes), has meant that it is only through credit that households are able to make ends meet.

 Liberate the GEPF

A shift in investment strategy to a greater share of investment in bonds rather than in equity is what is needed by the more than 1.7 million people – 1,265,000 public employees and 464,000 pensioners – who are directly dependent on the fund. 

Moreover, the majority of South Africans who indirectly suffer, given the negative socioeconomic impacts of austerity-based macroeconomic policies, also stand to benefit from such a change in investment strategy. This shift will have a number of advantages, including the potential room to invest in the development of socially owned renewable energy, as well as stable and positive returns on investment.

Source: GEPF 2018/19 Annual Report

 Back to a pay-as-you-go scheme

The amount of resources available is dependent on whether there is a continuation of the GEPF as a fully funded scheme, or if it shifts back to a pay-as-you-go scheme. 

The growth of the fund is partly due to the transition in the fund from a pay-as-you-go scheme to a fully funded scheme. This transformation culminated with the amalgamation of various public pension funds with the GEPF’s establishment in 1996. The reasons behind this shift and its implications have been elaborated on before.

Prior to the outbreak of the pandemic, the GEPF was estimated to be 108% funded, and probably remains at approximately these levels in spite of the initial fall in the JSE. Under the GEPF law (1996), the fund can be 90% funded. There is also a view that 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/
consider public pension funds finances to be healthy if they have more than 80% of their liabilities covered.

Reducing the GEPF’s funding level to 90% would liberate more than R300-billion for investment, while remaining within the confines of the GEPF law. It is possible to go further and liberate an additional R200-billion by reducing the level of funding to 80% of its total liabilities. 

If the fund is transformed back into a pay-as-you-go scheme, more than R1-trillion in resources can be made available for investing in sustainable low-carbon, labour-intensive industries in driving a low-carbon reindustrialisation programme.

As we have previously mapped out, this has the potential to create a number of jobs in the development of renewable energy infrastructure manufacturing and the transformation of Eskom into a fully public renewable energy utility. But a just transition must be more than the development of renewable energy: it should also be about the development of a mass public housing programme, the improvement of the public transport system in urban and rural communities, as well as financing the transformation of our agrarian system from large-scale industrial farming to small-scale agro-ecology.

In addition to mitigating against carbon emissions, these developments are also labour and employment intensive – both directly and in downstream industries – and therefore they have large employment potential. 

This is a major advantage for the GEPF in the medium to long term, and a necessity if it shifts back to a pay-as-you-go scheme. As Blackburn pointed out, this potential pool of finance that pension funds present to governments strikes fear into financiers and private investors (Banking on death, or investing in life, p74). 

This may explain why some investors are dead set against utilising the GEPF in this way, as it may set a precedent that soon would require private pension funds to invest in domestic bonds as well. The Congress of South African Trade Unions (Cosatu) has already indicated that it would be in favour of reviving similar policy measures.

 Make the Energy Intensive Users Group (EIUG) pay

Finally, in addition to the cancellation of government debts and liberating large levels of investment from the GEPF towards financing a just transition, it is also important to shift the pay structure of energy consumption and, in doing so, force disproportionately high-level electricity users to pay their fair share. 

This includes not only the high level household consumers, but also those corporations and SOEs which form part of SA’s energy-intensive users group (EIUG). As electricity tariffs increase – approximately by 400% over the last decade – South African household consumers pay more in order to effectively subsidise the cheap electricity costs afforded to these 28 corporations. Almost half of the EIUG comes from mining and quarrying – major contributors to SA carbon emissions and increasingly employing fewer and fewer workers as the industry becomes increasingly capital intensive. 

The current electricity tariff structure should be evaluated and more reasonable tariffs should be paid by intensive energy users, particularly major corporations.

 Only the public can save us

In the February 2020 Budget, the finance minister said the Department of Public Enterprises’ (DPE’s) Eskom Roadmap is non-negotiable, opening the path for the unbundling of Eskom and the greater privatisation of the SA electricity sector. This is reminiscent of the way former finance minister Trevor Manuel introduced GEAR in 1996. 

Emboldened by Finance Minister Tito Mboweni, Eskom CEO Andre de Ruyterrecently indicated that the Eskom board intends expediting this process. As we have shown in previous articles, unbundling will not solve Eskom’s problems, nor will it help to catalyse a renewable energy transition – only a public pathway to a renewable energy transition can meet the challenge of climate change.

The resources to finance the transition are available, but to harness those resources requires us to rethink our understanding of the role of the economy. This necessitates shifting the thinking from what is financially affordable, to how we raise the finances required to meet the needs of our people and the planet.

This struggle over the economy is at the heart of the struggle to meet the challenges of climate change and the ecological crisis.

Dominic Brown

Dominic Brown is an activist and leads the economic justice programme at the Alternative Information & Development Centre, Cape Town, South Africa .



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