Budgeting for black-out in South Africa
By Patrick Bond
March 3, 2019 — Links International Journal of Socialist Renewal — Upon taking power in a palace coup a year ago, Cyril Ramaphosa’s African National Congress (ANC) government was supposedly going to sweep out the prolific corruption associated with the 2009-18 Jacob Zuma ANC regime. But although excruciatingly-slow progress is being made in evicting the most obvious villains, durable Zumite influences remain, and whistleblowing continues to unveil rapid ANC degeneracy, even stretching into the Ramaphosa family.
Last week’s Budget Statement confirmed that Finance Minister Tito Mboweni is funding ever more of it. Corporatisation, corruption, carbon-intensity and capitalist bias run amok in state spending, as Treasury allocations worsen climate change and provide lower-than-promised social grants and even tertiary education funding (in spite of intense student protests this month).
The African country with by far the most advanced infrastructure and largest energy supply increasingly appears to be on the verge of a nervous breakdown, in its economic, ecological and electricity systems. On a Sunday afternoon, February 10, generation capacity of more than 6500 MegaWatts of power supplied by the parastatal agency Eskom failed to materialise. The next five days witnessed an historic low point when the country’s installed electricity dropped to only 60% availability (27,000 MW out of 43,000 MW), resulting in persistent ‘load-shedding’ black outs.
Presenting his $130 billion 2019-20 Budget Statement on February 20, Mboweni faced two main top-down pressures: to fund sufficient electricity supply for the world’s largest mining and smelting corporations (just 30 energy-intensive firms consume more than half of South Africa’s power), and to avoid a final junk rating on South African state securities, since the state guarantees Eskom’s unrepayable $33 billion debt.
Corporates have long been dominant within South Africa’s notorious ‘Minerals-Energy Complex.’ Mboweni’s success in serving their interests entailed what the SA Federation of Trade Unions called “a savage attack on the workers and the poor… the budget was delivered by a business representative who lives in a different world from the majority of South Africans. There was not a glimmer of appreciation of the desperate plight of the unemployed, the marginalised casual workers, subsistence farmers, single parents and all the others who struggle to survive every day.”
This is apparently acceptable to the ratings agency that best represents the world’s creditor class in South Africa, Moody’s, which has been threatening South Africa with a national sub-investment grade rating for years. In 2017, Standard&Poors and Fitch had already punished Zuma with junk status for firing his neoliberal finance minister, Pravin Gordhan (who last year was rehired as Public Enterprises minister, in charge of Eskom). Mboweni’s street credibility among financiers may help him avoid Moody’s axe, even though the state’s public deficit/GDP ratio is now rising slightly to 4.4% this year, significantly higher than the bankers’ desired 3%.
The two main factions of South Africa’s militant working class – pro- and anti-ANC – are still at loggerheads, politically. But at a time state functions like policing, schooling and telephones have been replaced by private services for those who can afford them, the trade unions all agree that the threat to their jobs represented by Mboweni’s handling of Eskom is worthy of repeated demonstrations. Two were held last week and more are scheduled for late next month.
Irvin Jim, leader of South Africa’s largest trade union, the (leftist, anti-ANC) metalworkers with 350,000 members, opposes Eskom’s unbundling: “This is nothing more than privatisation through the back door and we reject it. The ANC and its cronies looted and destroyed Eskom and now they have identified privatisation as a convenient way to cover up for more than two decades of rampant mismanagement, looting and corruption. The ANC is punishing workers for its failures.”
The largest public sector union (which is pro-ANC) was just as angry about Mboweni’s “neoliberal, orthodox and anti-growth” approach to the budget: “The austerity measures it proposes, will cripple the capacity of the state and undermine service delivery to the poor and the marginalised in our society… there is no clear coherent plan to create jobs, drive a broad-based industrialisation that targets strategic sectors that are shedding jobs in the economy.”
Moreover, mainly-unregulated pollution from Eskom’s coal-fired power plants and associated coal mining has become a national farce, given that every day on average, 5.1 violations of the firm’s atmospheric emission licence limits occur. In denial (when not begging for compliance exemptions), Eskom leadership believe they can continue massive emissions of sulphur dioxide, nitrous dioxide and other dangerous forms of particulate matter. Where these emissions are thickest in the air, in the pollution-saturated eastern Mpumalanga Highveld, more than 300 residents suffer premature death annually, thanks explicitly to Eskom. A Greenpeace Africa study found that in mid-2018, Mpumalanga was “the largest NO2 air pollution hotspot in the world.”
Meanwhile, Mboweni’s latest contributions of an extra $2 billion in annual interest payments to Eskom will keep its lenders happy – but undeservedly so, given their own malpractice – especially the World Bank. In addition to charging consumers 15% more in real terms for electricity in 2019-20, however, Mboweni also demands a restructuring of the power utility which will solve none of its central problems – corruption, climate change and the over-charging of poor consumers – but will instead, infuse the utility with a corporatised mentality.
Threats to not only ‘unbundle’ but also privatise Eskom’s generation, transmission and distribution of electricity are repeatedly made by Mboweni, e.g. in his budget speech: “Isn’t it about time the country asks, do we still need these enterprises?” Ramaphosa denies he will pursue Eskom’s privatisation, but fragmentation and corporatisation of its functions are moving rapidly ahead, aimed in part at breaking worker solidarity.
For while the World Bank claims Eskom’s 42,000 employees results in overstaffing of 66 percent, this entirely neglects the potential for a ‘million climate jobs’ through further grid roll-out to nine million residents (and tens of millions more in the region) who remain unserved, through replacing coal with renewables (in solar and wind power construction and maintenance), and through a variety of other energy-saving and low-carbon employment activities Eskom could readily undertake, were it finally run in the interests of the people and planet.
A neoliberal politician often applauded in western financial markets (in spite of a sometimes wild-man twitter habit), Mboweni was appointed to run the Treasury last October once his predecessor, Nhlanhla Nene, was implicated in the notorious Gupta brothers’ empire. Nene in 2015 had courageously, and successfully, resisted Zuma’s desired $100 billion in nuclear energy reactor purchases from Moscow’s Rosatom, and was then fired. Brought back by Ramaphosa a year ago, he was unveiled as a liar when initially denying his meetings at the Gupta mansion.
The most notorious of the Guptas’ ‘state-captured’ officials oversaw massive corruption as head of Eskom from 2015-17, and of the state-owned transport agency Transnet from 2011-15, Brian Molefe. But dating back far prior to his leadership, Eskom failed to investment in any new generation capacity for two decades starting in the mid-1980s. During that period of oversupply, when the economy was suffering an apartheid-induced crisis, Eskom also made sweetheart cheap-power deals with BHP Billiton and Anglo American Corporation (at $0.01 c/kWh). This resulted in periodic black-out incidents from 2008-15, when the commodity super-cycle peaked, along with excessive demand by those and other smelting and mining firms.
But in order to fix that problem, instead of undertaking the massive drive necessary to exploit South Africa’s excellent solar and wind sources of renewable energy, Eskom and ANC leaders decided to construct the two largest coal-fired power plants now being built anywhere on earth, known as Medupi and Kusile. After multiple setbacks, the new generation capacity is today less than a third completed, and in compensating for the delays, Eskom’s fleet of a dozen 40-60 year old coal-fired power plants have suffered scrimping on maintenance.
When four of these stations plus three out of six Medupi units of 800 MegaWatts each failed in February, the question arose of who to blame, since the two new power plants suffer core design flaws by multinationals Hitachi and Alstom. The former bribed ANC leaders to get the contract in the first place, raising the old South African problem of systemic corporate corruption.
World-leading corruption continues
A central reason for the fiscal squeeze, unmentioned by Mboweni, is overcharging by corporations in the state’s $50 billion procurement budget (a phenomenon sometimes termed ‘tenderpreneurship’ when black-owned businesses are involved, but white-owned firms are far more to blame). Outsourced goods and services, according to former Treasury Procurement chief Kenneth Brown (who quit his job two years ago due to death threats), suffer a 35-40% mark-up, or more than $20 billion annually. Procurement investigations and prosecutions received at least a brief mention in prior finance ministers’ budget speeches, but not from Mboweni.
This is especially troubling when it comes to Eskom and Transnet, which were responsible for 83% of all state capital spending last year. If their mega-projects remain corruption-riddled, then it’s reasonable to ask for a halt to these. It’s also logical to query the interest charges on loans being repaid to their lenders, led by the World Bank and China Development Bank, at a time Eskom’s massive debt load threatens the economy as a whole.
As the Treasury Budget Review conceded, “Most of Eskom’s [2018-19] expenditure was on the Medupi and Kusile power stations. Transnet reported that 40 per cent of expenditure was for acquisitions of locomotives and pipelines.” In all such cases, extreme forms of graft have been exposed, especially at the two climate-destroying coal-fired power plants whose construction costs rose from an average of $5.4 billion a decade ago to $15.7 billion each now (for which Eskom has budgeted $1.4 billion in the next two years):
- Then Eskom chair Valli Moosa’s granting of lucrative boiler-construction contracts for both coal-fired power plants to Hitachi after the Japanese firm gifted the ANC – on whose finance committee Moosa sat – a 25% share in the local subsidiary via Chancellor House. The deal was so awful that not only did the then public protector Lawrence Mushwana label Moosa’s conduct ‘improper,’ the U.S. Securities and Exchange Commission in 2015 compelled Hitachi to pay a $19 million out-of-court settlement fee to end Foreign Corrupt Practices Act prosecution (although that fine went to Washington, not the SA Treasury or Eskom customers). Hitachi continues stumbling along, recently drawing tough criticism from Gordhan – though GreenpeaceAfrica’s calls to terminate Kusile so as to not contribute to further waste and pollution have been ignored.
- The latest revelations of $10 billion worth of theft associated with what a police spokesperson said last week were “11 identified contractors appointed by Eskom,” working on Medupi, Kusile and a third (much smaller) hydropower project.
- In 2010, the World Bank’s $3.75 billion loan for Eskom to build Medupi was its largest-ever in spite of the plant’s Chancellor House infamy, but Bank ‘Vice President-Integrity’ Leonard McCarthy (of the South African ‘Spy Tapes’ scandal fame) refused to penalise Hitachi or put it on the Bank’s extensive debarment list. Lender liability should now be forcefully invoked, as well as on the China Development Bank for last year’s $2.5 billion loan to Eskom to build Kusile.
- Meanwhile Eskom has just announced yet another $1.1 billion borrowing spree, to finance the spending of $900 million for new coal mine digs.
- Transnet’s locomotive purchases – needed for the largest National Development Plan (NDP) project, which is the $60 billion investment needed to export 18 billion tons of coal – were corrupted by the Gupta link to its main supplier, China South Rail. Although a small portion ($44 million) of the loot was repaid by the railroad firm last month at the insistence of the new Transnet leadership, the rot continues.
- Indeed, Transnet had to urgently halt work underway last November on the latest phase of the second-largest NDP project – the $18 billion port-petrochemical expansion in South Durban – once a whistleblower pointed out the notorious fingerprints of Shauwn Mpisane on a fraudulent Italian-led port-deepening project. The 40% of that project funded by the BRICS New Development Bank (NDB) should also be added to lender-liability claims, a point civil society critics will raise at the NDB’s annual meeting in Cape Town in early April.
- And Transnet has not yet punished those responsible for the vast cost escalation in the Durban-Johannesburg New Multi Product Pipeline, from $36 million to $2 billion, of which more than $143 million is still due to be spent in the next two years.
It is always worth stressing that though these cases involve the state and parastatal agencies, South Africa’s ranking in last month’s Transparency International corruption perceptions index (among 180 countries) was only slightly worse than the year before: 73rd least graft-riddled bureaucracy (down from 71st in 2017 and 23rd in 1994). In contrast, the biannual PwC economic crime report repeatedly awards the gold medal to the Johannesburg-Cape Town-Stellenbosch-Durban corporate team, i.e., what the Sunday Times terms “world fraud champs: leader in money-laundering, bribery and corruption, procurement fraud, asset misappropriation, and cybercrime” (still ahead of the highly-competitive Nairobi and Parisian bourgeoisies who last year won the silver and bronze medals in PwC’s Olympic games of capitalist corruption).
These and other corrupt White Elephants all have something else in common: carbon intensity, at a time South Africa’s responsibility for CO2 emissions is out of control. The prior week, a climate-unconscious Ramaphosa celebrated that a billion barrels of oil-equivalent wet gas (whose methane will be twenty times more potent than CO2) were identified by French firm Total for extraction off the Western Cape coast, with more deposits soon to be announced by U.S. and European multinational oil corporations ExxonMobil, ENI, Statoil and Sasol offshore KwaZulu-Natal.
There has been, simultaneously, a dramatic increase in solar and wind power from near-zero to 4,500 MW today, in what one booster, University of Cape Town energy expert Anton Eberhard, calls “one of the top ten renewable energy programs globally.” However, red-green critics at the Alternative Information and Development Centre argue that in supplying renewable energy through private firms, not only is there an excessively high profit mark-up, “local job creation has fallen dramatically short of projections, while projects have been riven by a litany of failures due to the competitive pressures of privatised ownership of what should be social goods: exaggeration of jobs created; use of labour brokers; inadequate consultation with affected communities; and exacerbation of community tensions due to lack of transparency and oversight.”
Carbon conflicts of interest burn hot, here too. Mboweni until last year chaired SacOil, a firm mainly owned by the crony-capitalist Public Investment Commission (a $143 billion civil servant pension fund), with oil assets in two wretchedly resource-cursed countries, the Democratic Republic of the Congo and Nigeria. Ramaphosa ran his private Shanduka Holdings – with very substantial coal-mining and supply links to Eskom through a Glencore partnership – until compelled to divest when he became South Africa’s deputy president in 2014. Energy Minister Jeff Radebe and Ramaphosa both have immediate family connections to the richest black South African, coal magnate Patrice Motsepe (who is their brother-in-law through their wives, who are sisters), leading to an embarrassing conflict of interest, including when Motsepe recently began venturing into privatised solar supply.
But although solar and wind inputs to the national grid will continue growing within Radebe’s recent energy plan, to 2030 projections of 20,000MW supply, the fossil fuel component also continues to rise, from current installed capacity of 43,000MW to projected 2030 capacity of 46,000MW. Against the vast fossilised investments, Mboweni’s puny US$0.01/liter petrol price increase is the main component of a new carbon tax coming into effect in June. Mboweni anticipates this will raise just $128 million in state revenues this year, and is, in turn, is a small portion of the $0.20/liter gas price increase, which his itself well below the country’s 5% inflation rate. Hence there’s no incentive to cut back on private transport. In any case, this is the most regressive way to impose a tax, hitting hardest the people who commute from faraway apartheid-era townships.
That carbon tax should supposedly translate into a per-ton fee of $8.48, according to a long-delayed law Parliament passed last week. However, it’s a scam because not only will the policy re-introduce offsets and carbon trading (also fraud-riddled and ineffectual), but tax-free allowances through 2022 permit a 95% discount, i.e., with the effective carbon tax dropping to a level of $0.42/ton, which is desultory compared, say, to Sweden’s carbon tax of $130/ton.
Inexplicably, Mboweni’s Budget Review brags that this trivial effort “gives effect to the polluter-pays principle, prices greenhouse gas emissions and aims to ensure that businesses and households take these costs into account in their production, consumption and investment decisions. The tax will assist in reducing emissions and ensuring South Africa meets its commitments under the 2015 Paris Climate Agreement.”
Capitalist biases run roughshod
There is similar Trump-calibre fibbery when it comes to commitments the state makes to its neediest citizens. The 12 million recipients of a measly $29/month grant to raise a child are not only victimised by this year’s ($71 million) “Delay in implementing extended child support grant.” Even more costly to the poor, the Budget Review allegation that these “Social grants are adjusted in line with inflation projections to maintain their real value” ignores recent research on differential rates by income.
According to an International Monetary Fund study last year, the poorest 40% of South Africans suffered a 2009-17 inflation rate that was between 0.7% and 2.5% higher than the top 20%’s inflation rate (depending on the year, e.g. at worst, 7.65% compared to 5.1%). Given rising food prices for maize and other staples due to the ongoing drought in the country’s bread-basket regions, this represents a significant shortfall in poor people’s budgets. (In contrast, both main opposition parties promise to raise that grant: by either 41%, in the case of the centre-right Democratic Alliance, or 100% in the case of the Economic Freedom Fighters.)
Since the word inequality is mentioned in passing just three times in the Budget Review (completely lost among its 135,000 words), in spite of South Africa having the world’s highest rate, there’s clearly not much interest at Treasury. Until last October, Mboweni’s employment also included high-level advisory services to Goldman Sachs, a bank whose leadership – according to the Washington Post –‘personifies’ the global inequality crisis.
It’s no surprise, thus, that South Africa’s corporate tax rate is still just 28% – half of the 1994 rate of 56% – with no prospect of raising it, due mainly to Donald Trump’s U.S. corporate tax cut from 35% to 21% last year, which is causing a global race to the bottom. Thus while in nominal terms, corporate tax contribution to the state rose from just 6% – from $15.5 billion to $16.4 billion – over the past two years, the revenues from Value Added Tax (i.e. 15% on purchases of all goods aside from a few exempted foods) soared 21%, from $21.2 billion to $25.7 billion in the same period.
Anger at all these fiscal injustices should soar as the implications become clear, and with climate change decaying the future of the world’s youth, we may anticipate new waves of generational rage. This may be felt, even more than in recent days, at universities in South Africa.
Although the state’s biggest spending category is education at $26.8 bn, of which 28% is for universities and technical colleges, it’s nowhere near enough to ensure the success of the student movement’s world-renowned campaign #FeesMustFall. Zuma acceded to the pressure in late 2017 by promising no tuition fees for families with less than a $25,000 income. Student protests in most cities continue due to continued underfunding. In one case earlier this month, a Durban University of Technology student, Mlungisi Madonsela, was murdered by the school’s security guards during a march.
Yet as Higher Education minister Naledi Pandor explained in 2017, “Government has planned to increase subsidies from 0.68% of GDP to 1% of GDP over five years.” Mboweni apparently didn’t get the message, for even though such subsidies received the Budget’s highest increase, at 9.3% annually in the coming three years, it is still nowhere near enough to keep the 1%-of-GDP free-tuition promise.
Who should pay Eskom’s bill?
But the biggest fiscal headache Mboweni faced was the financing of Eskom. Ironically, one source of relief may come from the man identified as most likely to succeed the ultra-erratic Jim Yong Kim as president of the World Bank, David Malpass. For he knows at least the broad outlines of the financial-energy crisis in South Africa described above. Just over a year ago, when he testified to the U.S. Congress about the World Bank, Malpass fingered the nexus between Eskom financing and institutional corruption – stretching from Washington to Pretoria – when remarking of Bank staff:
Malpass: “They’re often corrupt in their lending practices, and they don’t get the benefit to the actual people in the countries. They get the benefit to the people who fly in on a first-class airplane ticket to give advice to the government officials in the country, that flow of money is large, but not so much the actual benefit to normal people within poor countries, and that's what I'd like to see change.”
Rep. Maxine Waters: “Do you have an example of that?”
Malpass: “Well, for example, we have countries such as South Africa that are deteriorating rapidly as their government is unable to provide efficiency and effectiveness... South Africa is heavily indebted and not making progress and is not being well served by its relationships with international financial institutions.”
Malpass is very likely to win the World Bank presidency next month, in a telling collapse of global elite opposition to Trump. When he does, it would make perfect sense for South Africans to rise in unity to demand not only punishment for Bank officials – especially the chaotic former president Robert Zoellick (2007-12) – who were “corrupt in their lending practices” by financing Medupi in spite of the Hitachi-ANC bribery, but also the loan’s repudiation and cancellation.
A major civil society campaign tackled Zoellick in 2010, forcing a change in the U.S. vote: from a certain approve to abstain. The day before Zoellick pushed the loan through, editorialists at even the (pro-Bank) neoliberal newspaper Business Day argued, “The World Bank board will be in breach of its own regulations... because hundreds of millions of those dollars will end up in the bank accounts of the ruling ANC. The World Bank surely cannot allow this to happen… The ANC’s direct take out of these contracts will be big enough to make it one of the richest political parties in the world and to utterly skew SA’s hard-won democracy in its favour for decades to come. It isn’t right and the World Bank should have none of it.”
The Bank’s decision to invest more than $3 billion in a corrupt, ultra-polluting, design-flawed, anti-poor, coal-fired power plant should have consequences, ones that relieve South Africa’s society and environment from the fiscal-ecological strangulation of repayment that Eskom is placing on Mboweni, who in turn is willing to pass the costs to those least able to afford them. The resistance of electricity activists, such as in Soweto where 86% of households have illegal connections, will only increase.
And at national level, South Africa’s leading environmental-justice critics of Eskom have also offered alternative strategies, e.g. in groundWork’s Coal Kills pamphlet last year, which is premised on “human solidarity and equality as well as a relationship to the environment which enhances rather than degrades the functioning of eco-systems both for their intrinsic value and for the eco ‘services’ they provide.” Like the U.S. Green New Deal, the leading South African organisations’ demands include an emergency infusion of state resources for:
• a new energy system based on socially owned renewables with jobs in manufacturing as well as construction and operations;
• rehabilitating mining regions to restore and detoxify damaged land and ecosystems and using these lands to build utility-scale solar farms;
• people’s food gardens as a first step towards creating a healthy food system under democratic control, based on ecological agriculture and ensuring enough for all;
• reconstructing settlements in anticipation of the intensified storms and droughts;
• energy-efficient homes supplied with solar water heaters;
• reliable public transport;
• a zero waste economy and composting of organic wastes;
• a basic income grant for all to enable poor and unemployed people, who are most vulnerable to climate change, to participate more actively in all areas of life.
Whether opposition will once again – like in 2010 – take the form of a holistic critique of neoliberal, fossil capitalism, there will be also be a national-level fight-back against Mboweni and Eskom. In the short term it will be concentrated on labour relations and the parastatal’s institutional form. In this contradiction-filled era, prior to a genuine red-green worker-women-unemployed-youth front, the demand for an eco-socialist version of the Just Transition will be raised only occasionally, if at all.
In sum, divide-and-conquer remains a central strategy of African nationalism, with the national budget still driven by the ANC’s black-empowerment billionaires, to serve not the society and environment, but the corrupt status quo power brokers and their irresponsible bankers. At some point there will be a profound price to pay, perhaps including a costly down-payment on May 8, when the ruling party’s voting share continues to fall, on the next national election day.
Patrick Bond teaches political economy at the Wits School of Governance. A shorter version of this was originally published in the Mail&Guardian.