Unleashing the power of pension funds and debt cancellation to finance a just energy transition (Part 4)

 

“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 of the majority of the population, leaves less money to invest in the rollout 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 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 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. There have already been calls for this debt to be cancelled, by the South African Federation of Trade Unions (SAFTU), AIDC, Public 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 – 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 calls 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, the UK (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 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-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 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 R100-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 (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.

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 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 maximisation rather than meeting people's needs. Pension funds, public and private, are massive contributors to this trend.

Addiction to equity 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

Source: GEPF 2018/19 Annual Report