Options on the table as South Africa wrestles with funding higher education

The storm clouds above South Africa’s universities could be dissipated with careful fiscal planning.
Reuters/Mike Hutchings

A report into the feasibility of offering free higher education at South Africa’s universities has finally been released. It has been nearly two years in the making, developed by a commission of inquiry that President Jacob Zuma set up in response to nationwide fee protests.

The lengthy report provides an accurate diagnosis of the state of higher education funding, as well as the problems it faces. But its proposed solutions are problematic. Many of its limitations arise from a failure to properly integrate an understanding of public finance and public economics into the analysis and recommendations.

The Commission’s report gets two critical things right – even though neither will please student activists. The first is that planned student numbers are simply too high and should be revised downwards. The second is that the country simply can’t afford free higher education for all students given its other priorities and weak economy.

But its recommendations are poor. Models are proposed that represent, I would argue, a significant step backwards from scenarios developed by the Department of Higher Education and Training two years ago. The department’s scenarios are indirectly supported in another report that’s just been released, by the Davis Tax Committee.

The tax committee endorses a hybrid scheme for higher education funding. This would retain and increase grants for poor students’ university fees. It would use loans to fund the “missing middle” – students from households that earn too much to qualify for government funding but still can’t afford higher education. If South Africa’s concern is really about immediate improvements in equitable access to higher education for poor students, this is the option that should be receiving the most attention.

The Fees Commission report

I have argued previously that one reason for the current state of affairs has been excessive student enrolment, relative to appropriate standards and adequate resources. Yet various policy documents propose rapid increases to enrolment in the coming decades.

The fees commission correctly argues in its report that these projected enrolment numbers are unrealistic. It points out that such high student numbers threaten quality and make adequate funding even more unlikely. It recommends that the numbers be revised downwards.

The commission also does well in recognising that – given the state of South Africa’s economy, public finances and other important government priorities – free higher education for all – or even most students – is simply not feasible or desirable. It rejects both the possibility of fully funded higher education and the demand for university fees to be abolished. But it endorses the abolition of application and registration fees, along with regulation of university fees.

There are three critical issues within the current student funding system.

1. What household income threshold should be used to determine student eligibility for support from the National Student Financial Aid Scheme (NSFAS) to ensure all students who need partial or full support are covered?
2. What resources are needed to ensure that all students below the threshold receive the adequate funding; up to full cost where necessary?
3. How should the support provided be structured in terms of grants versus loans, or combinations of these?

The commission errs in trying to address these questions.

A worsening of equity

The fees commission’s fundamental proposal in response to the demand for free higher education is the adoption of an income-contingent loan (ICL) scheme. Under this all students regardless of family income who register for university are funded by loans up to the full cost of study.

These loans would be from private banks based on guarantees of repayment from government. In other words, after a specified number of years either the student or the government would have to start repaying the loan. There are numerous problems with this model.

The ICL would, in some ways, constitute a worsening of equity. Poor students who currently qualify for NSFAS grants would now only get loans.

In the ICL scheme, either students pay or the government does. The current state of the higher education system suggests a significant number of students will not be able to repay such loans. But nowhere does the commission calculate the implications for future government expenditure.

A number of other proposals are seriously problematic. One involves extending the loan scheme to students in private higher education institutions. This constitutes a dramatic change in post-apartheid policy, potentially leading to indirect privatisation of the higher education system without proper consultation or sound basis for doing so.

Another is the suggestion that higher education expenditure should be benchmarked as 1% of South Africa’s Gross Domestic Product. This is wrongheaded because it does not take into account the proportion of young people in the country or the state of the basic education system.

The Davis Tax Commission’s report is more narrowly focused but, perhaps as a result, endorses arguably the best and most feasible way forward for tertiary funding.

Better scenarios

The current NSFAS threshold is R122,000, which means that students whose households earn less than this in a year qualify for funding by the scheme. There are two problems: first, not even all students below this threshold are getting all the financial support they need. Second, there are students in the “missing middle” who are above the threshold. They cannot fully fund themselves but have no access to support.

In 2015 the department of higher education and training provided rough estimates of the cost of raising the NSFAS threshold and fully funding students below the different, hypothetical thresholds.

It estimated that increasing the NSFAS threshold to R217,00 and covering full cost of study for all students below that would require an extra R12.3bil in 2016/17 for approximately 210,000 students.

The Davis Tax Commission effectively endorses this scenario, proposing a hybrid scheme that retains and increases grants for poor students and university fees, but uses income-contingent loans to fund the missing middle. It estimates that an additional R15 billion could be raised annually for higher education through a combination of increasing the rate of income tax for the highest earners by 1.5%; increasing capital gains tax for corporations; and, raising the skills levy by 0.5%.

In contrast, the commission’s proposals for raising funds for the loan scheme and other proposals – such as taking R50 billion from a surplus in the unemployment insurance fund for infrastructure investment – arguably violate some fundamental public finance principles and may be illegal.

The tax committee’s report suggests that the department’s scenario is feasible from a public finance perspective. If the government is genuinely concerned with creating maximally equitable access to higher education for poor students, this is the immediate option that should be receiving the most attention. The design and cost of a more modest income-contingent loan scheme for those students who are not covered, even with expanded support, will require detailed technical analysis and further discussion. Some related work has been done under the umbrella of a separate income-contingent loan initiative, the Ikusasa Student Financial Aid Programme, which could be useful. As the commission report notes in rejecting it, however, there are various concerns about the actual financial aid programme proposal that make it an unconvincing option at this stage.

The different all-or-nothing approaches being proposed by student activists and the fees commission risk the possibility of hundreds of thousands of poor and needy students not being assisted – even though the resources are available to do so.

Seán Mfundza Muller, Senior Lecturer in Economics and Research Associate at the Public and Environmental Economics Research Centre (PEERC), University of Johannesburg

This article was originally published on The Conversation.

South Africa should prepare for the worst case scenario: seeking help from the IMF

IMF Managing Director Christine Lagarde at the “G20: Compact With Africa”.
Reuters/Mike Theiler

Prudence teaches that societies experiencing difficult and uncertain times should hope for the best but prepare for the worst.

South Africa should take this lesson seriously. It is facing a serious crisis. South Africa’s economy is growing too slowly to address its profound challenges of poverty, inequality and unemployment. Social tensions are rising. Business is not transforming quickly enough. The governance and solvency of key state-owned enterprises (SOEs) are collapsing. Government finances are deteriorating. Credit downgrades may limit government access to finance. The institutions of governance are decaying. The complex political situation is paralysing policymaking.

Countries facing analogous crises of confidence like Nigeria, Poland and Turkey have had to seek IMF support.

South Africa can hope that the situation will improve. But it should also plan for the possibility that it will not and that confidence in the government’s ability to manage its deteriorating financial situation will evaporate. This will lead to both higher borrowing costs and reduced access to financing for the government and state owned enterprises. It could also lead to state owned enterprises defaulting on their debts and their creditors calling in their government guarantees. As government loses the ability to fund its operations, it will be forced to turn to the IMF. It is the one organisation that can help it regain access to financing – on condition that South Africa agrees to implement an IMF approved set of reforms.

No-one wants an IMF programme for South Africa. First, it means the government accepting an outsider, dominated by rich countries, overseeing its economic policies. Second, IMF support will be conditioned on the country agreeing to painful reforms such as:

• Reducing the government’s budget deficit and the current account deficit so that it can meet its financial obligations
• Deregulation and labour market reforms designed to encourage investment.

But if South Africa begins preparing for this possibility it may be able to mitigate its worst effects and be ready to exploit whatever opportunities it creates.

Negotiating with the IMF

The South African government has considerable experience dealing with the IMF, which regularly visits each of its member states to consult about the state of its economy— the most recent IMF mission visited South Africa in early November. However, it is over 20 years since South Africa negotiated a financing arrangement with the IMF.

Unless challenged, the IMF is likely to condition its financial support on a standard recipe of reforms. However, over time the IMF has become more amenable to supporting the programmes proposed by its member states. It has learned that, while there are similarities between macro-economic crises in different countries, there is more than one strategy for resolving such crises. In fact, the optimal solution depends on each country’s institutional arrangements, history, and particular economic, social, environmental and political characteristics. It also depends on the impact of macro-economic policies on such social factors as gender, equity and environmental and social sustainability.

Yanis Varoufakis, former Greek finance minister, reports in his book on his experiences negotiating with Greece’s creditors that countries like Poland, through careful planning and shrewd negotiations, were able to convince the IMF to follow their plan rather than the IMF’s standard approach. His book also shows that the cost of failing to prepare adequately for negotiations like these can be very high indeed.

So what should South Africa do to ensure that it gets the best possible deal?

First, South Africa must establish clear and realistic objectives for the plan that it wants the IMF to support. Second, it must get its diplomatic ducks in a row so that it can strike the best possible deal.

Fixing the budget

As a priority South Africa should focus on restoring a sustainable budget situation. This will require government to make some painful policy choices about levels of expenditures as well as the purposes for which funds are allocated.

The government can build confidence in these choices if it can show that:

• the benefits exceed the costs and that the costs are being equitably shared.
• Policy choices are based on both the human rights imperatives stipulated in the South African Constitution and on promoting growth.
• it’s serious about addressing the governance problems in state owned enterprises and government departments.
• it is complying with the legal procedures applicable to government finances and the open budgeting processes that it used in the past.

Finally, government must encourage other social actors – such as business and labour who have contributed to the crisis – to help mitigate the pain. A demonstration of broad support would help convince the IMF to support the government’s strategy.

Diplomacy

As Varoufakis’ experience shows, the cost of under-estimating the impact of international economic diplomacy on the outcomes of complex international financial negotiations can be unacceptably high.

The South African government must therefore prepare to sell its programme to the IMF. This requires it to appoint negotiators who have a good understanding of both the IMF as an institution and global financial diplomacy. They can make the South African case in the way that is most likely to convince the IMF staff and Board of Executive Directors to support the South African programme.

These negotiators should also seek to exploit all the benefits that South Africa can harvest from its membership in the institutions of global economic governance. For example, they can tap the experience and expertise of groups like the G24, a lobby group for the interests of IMF developing member states in which South Africa participates, to help it prepare for these negotiations.

They can also draw on the stores of information in international organisations like the IMF, the World Bank and the African Development Bank that have had extensive experience dealing with developing countries facing macro-economic crises. Access to this information should be a benefit of membership. The executive directors that represent South Africa at these institutions can help the government gain access to this information and, if appropriate, identify the relevant experts to consult.

Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria

This article was originally published on The Conversation.

South Africa moves one step closer to a sugar tax -- and a healthier lifestyle

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South Africa has joined only a handful of countries in the world close to imposing a sugary drinks tax. A new bill that imposes a tax on sugary drinks has cleared the first of three hurdles in South Africa’s law-making process. One of two houses of parliament has approved what is being called a health promotion levy. The bill is expected to be passed by the other, The National Council of Provinces, and then signed in by the President. Implementation is expected in April 2018, but industry interference may still have an impact. The Conversation Africa’s Health and Medicine Editor Candice Bailey spoke to Karen Hofman and Aviva Tugendhaft about the tax.

How important is the sugary drinks tax and why?

The decision by South Africa’s Parliament is a very far sighted decision. It shows that the country’s parliamentarians fully understand the health implications of a product that is excessively high in sugar and has no nutritional value.

The sugary drinks tax – or health promotion levy – is expected to prevent a wide-range of obesity related non-communicable diseases. These include diabetes, cancer, stroke and heart disease. This is important because South Africa’s public health sector is severely overburdened. Public hospitals are seeing on average of 25 000 new hypertensive cases a month as well as 10 000 new diabetic patients each month. These are estimated to be only half of the real numbers because both are silent conditions.

The effect of the reduction in the prevalence of non-communicable diseases will be twofold: it will help the country to implement National Health Insurance (NHI) as an overwhelmed health system will be a barrier to NHI. And it will reduce the negative effect that chronic non-communicable diseases have on economic growth because of the impact on the workforce due to increased absenteeism and decreased productivity.

Already, there are signs that obesity related diseases are affecting the country’s economic growth rate.

The sugary drinks tax will also help people make healthier choices. In Mexico, after a sugary drinks tax was implemented soda consumption decreased by between 7% and 10% and water consumption increased.

Lastly, tackling chronic noncommunicable diseases will ensure that South Africa doesn’t lose the gains it has made in life expectancy after the introduction of antiretrovirals to treat HIV infections. Life expectancy has improved to 62.5 years of age after falling as low as 52.1 at the height of the AIDS pandemic in 2003. Without further policies to promote health, the country’s life expectancy is likely to reverse. This has been seen in countries like Brazil.

The initial lobby was for a 20% sugar tax. But in the end it was only 11%. Is it good enough?

It’s a start. The sugar tax is similar to the one introduced in Mexico which contributed to a 17% reduction in the consumption of sugary beverages among poor people.

Once the tax is implemented in South Africa it will be monitored and an evaluation will be done to establish if it has helped.

What will this levy mean for consumers?

The industry is clearly against the tax. This was illustrated by the fact that the chairperson of the finance committee in parliament, Yunus Carrim, spoke out about industry interference in the process.

The sugar industry sees South Africa and sub-Saharan Africa as their growth market This means that they will continue to find a way to increase profits. We’re expecting to see the industry change their products in an effort to ensure their bottom line is not affected. The tax will be levied on sugar content, which will hopefully encourage industry to lower the sugar content in its drinks and create healthier alternatives.

The sugar tax has been criticised because it deals with only one factor among a myriad that lead to obesity. What’s your response?

This is true. But that criticism only stands if you view it as a single event. The levy is the first step in a very long journey of a range of different interventions that will need to happen.

This was also the case with tobacco. The first step was a tobacco tax. This halved smoking rates over two decades. It was followed by the banning of advertisements and very clear labelling about the dangers of tobacco.

The health promotion levy – which research shows is by far the most effective mechanism – will need to be followed by clear and transparent labelling. We need to move away from just having sugar levels listed in grams on the back of cans. There should be labels in large letters on the front of cans informing consumers about the number of teaspoons of sugar they’re drinking.

The second intervention should be marketing and advertising regulations of these drinks, particularly to children.

Karen Hofman, Program Director, PRICELESS SA ( Priority Cost Effective Lessons in Systems Stregthening South Africa), University of the Witwatersrand and Aviva Tugendhaft, Deputy Director, PRICELESS SA, Wits/MRC Agincourt Rural Health Transitions Unit, Wits School of Public Health, University of the Witwatersrand

This article was originally published on The Conversation.

Lessons for South Africa's Jacob Zuma in Robert Mugabe's misfortunes

The political troubles of Zimbabwean President Robert Mugabe comes with lessons for his South African counterpart Jacob Zuma.
REUTERS/Siphiwe Sibeko

President Robert Mugabe’s endgame in Zimbabwe holds various lessons for his South African counterpart, Jacob Zuma, as the latter too, considers his prospects towards the end of his presidency. The first, obviously, is that while, from the pinnacle of power, a country’s president may feel the monarch of all he can survey, it is always possible that the blade of the guillotine is just around the corner.

Accordingly, it is always prudent to keep at least two bags packed for a hasty exit: one full of suit, shirts, underwear and socks, another full of foreign currency (preferably dollars or Euros). You just never know how things might pan out, so it is best to be prepared.

Following the almost-coup, Mugabe has been in a stronger position than many African dictators before him because the African Union has in recent years become a lover of democracy and a hater of coups. It therefore now demands that changes of leadership must have at least a veneer of constitutionality.

This has always been the Zimbabwean military’s weak point during this past week of flirting with political power. Hence its insistence that, despite its take-over of the airwaves, State House and parliament, alongside its house-arrest of the president and his family, its actions are not a coup.

In turn, this has provided Mugabe with a considerable degree of wriggle room, which he has sought to exploit to the full. Indeed, it has remained his key bargaining chip, not least because the African Union does not want to be seen as party to the overthrow of a hero of African liberation.

Explicit political actor

Zuma will feel confident that whereas in Zimbabwe the army has long been deeply involved in the ruling party’s internal affairs and the wider political arena, the South African National Defence Force is not an explicit political actor. He stands in no fear of a military coup (or even a Zimbabwe-style non-coup). Yet he does have to worry about what happens within his political party, the African National Congress (ANC).

Even if his favoured candidate, Nkosazana Dlamini-Zuma, were to win the party leadership at the ANC’s December congress, Zuma’s continuing as South African President might be seen as a political embarrassment. If strong contender Cyril Ramaphosa wins, even more urgent calls will be made from within the ANC for the him to be “recalled” because he will be viewed as an electoral liability.

It is a fair bet that, whoever wins, an excuse will be made for a delegation from the party leadership to visit the president and to ask him to stand down. Just ask former President Thabo Mbeki who was fired by his own ANC. If Zuma refuses to cooperate, then the ANC might turn to parliament, where enough ANC MPs might feel emboldened to vote with the opposition to dethrone him.

Fighting for survival

Like Mugabe, Zuma will be battling for a dignified exit. Even more urgently, he will be fighting for survival. In previous years, Mugabe may have feared the prospect of retribution for his sins, and would have been determined to secure immunity from prosecution.

Now, at 93, he is confident that once out of office he will be left in peace. He may or may not appreciate the irony that, unlike his country’s last white ruler Ian Smith, he will not be able to stay in Zimbabwe after he has been forced to stand down, but he will know that he has to leave.

Neither the army nor Zanu-PF will want him hanging around, fearing his ability to continue pulling strings. So off he must go, to South Africa, Dubai or Singapore (anywhere with a few decent shops for his shopaholic wife Grace). His major immediate concern then, we may presume, is safe passage and immunity for his family. We may further presume, that there is lots of money stashed away in foreign bank accounts to keep the crocodile from the door.

Zuma’s tricky position

Zuma is differently placed. If he loses the Presidency he stands in all sorts of dangers, not least of which is prosecution for past financial crimes and the prospect of his ending his days in prison. In other words, he has much more to bargain for, and he will be doing so from a considerably weaker position. Not least of his problems is that he is a lot younger than Mugabe, so could spend quite a few years in jail.

Zuma’s major strength is that, whoever wins the party leadership, the ANC will probably want to grant him immunity and get him out of the way, as otherwise they face the prospect of their former leader facing a corruption trial during the lead up to elections in 2019.

But for a start, there is no provision for presidential immunity in the constitution, and its grant would face a strong challenge in the courts. Furthermore, if the Gupta or other Zuma allies in the project of “state capture” were to be prosecuted, Zuma could face being dragged into court as a witness.

In short, Zuma will realise that it will make sense to hot-foot it out of the country, preferably to a comfortably authoritarian country which will turn down requests for extradition.

The fickle people

What Mugabe is learning now, and it is something of which Zuma should take good note, is that the people are an ungrateful lot, and are likely to turn against you just when you most need their support. Up till a week ago, it was presumed that Mugabe retained the backing of all who mattered in Zanu-PF and that he would again be its candidate for president at the next election. But now, like many a dictator, he is having to learn fast that the people no longer love him.

Past allies, like the war veterans, had already turned against him, repudiating his apparent bid for his wayward wife, Grace, to replace him. Zanu-PF Youth leader, Kudzai Chipanga, initially declared his willingness to “die for Mugabe” and labelled Major-General Constantino Chiwenga, the leader of the non-coup, a traitor when the army first intervened. After being locked up, he shamefacedly read out an abject apology, begging forgiveness, and pleading the inexperience of youth.

This has been followed by all 10 provincial organisations of Zanu-PF calling for Mugabe to go, and even encouraging ordinary people to join the marches being organised by opposition parties and civil society demanding his dismissal.

Zuma is too wily a politician not to know that once he loses the party presidency, his support base will drain away, and that he will become known as yesterday’s man. Yet like Mugabe, he will take comfort from the regional body, the Southern African Development Community (SADC), for there is nothing his fellow presidents dread more than the prospect of any one of their number facing impeachment.

He will also know that, unlike Mbeki, whose stature in Africa remains high, he has no viable future as a roving ex-president. Zuma will know that if he wants to enjoy his retirement in peace, he has to leave South Africa before he gets tangled up in court proceedings.

His best option will be to grab those two suitcases, make a hasty exit and move in next door to Bob and Grace in Dubai.

Roger Southall, Professor of Sociology, University of the Witwatersrand

This article was originally published on The Conversation.

Groundswell against nuclear in South Africa could put paid to a power deal

President Jacob Zuma has appointed David Mahlobo, a close ally as energy minister.
Flickr/GovernmentZA

South African President Jacob Zuma, has a maximum of 18 months left as head of state. This time he hopes to rescue a nuclear power deal involving a proposed contract to build between six and eight new nuclear reactors in South Africa.

In an attempt to push through the deal, Zuma has appointed his former minister of state security, David Mahlobo as energy minister. The president trusts that Mahlobo, a close ally for over ten years, will act decisively to implement the deal. He appears to be under orders to get a deal with Russia done and dusted.

The nuclear deal contract is for nuclear reactors to produce 9600 megawatts of power. This would be five times the amount of energy generated from Koeberg, South Africa’s only nuclear power plant which generates a maximum of 1844 megawatts.

But the facts show that the country does not need this extra power. Demand for electricity has come down every year since 2011. And the National Treasury argues that the costs, in the range of at least R1-1,8 trillion, will be prohibitive.

Nuclear energy will also be the most costly electricity source, according to work done by energy experts. In a climate where the state utility Eskom is deeply in debt and is therefore trying to raise the price of electricity by 19.9% for the next few years, investment for nuclear will force up the cost to consumers, and meeting the borrowing requirements will put unnecessary pressure on an already stressed economy.

Zuma’s push for nuclear continues to emphasise how isolated he really is. The anti-nuclear lobby is no longer confined to environmentalists. Large sections of civil society, business, academia and even sections of government have come out against it. My hunch is that democracy will win, and the people will triumph over a tainted and over-extended kleptocrat.

Massaging the energy strategy

Zuma’s efforts to get the deal underway have been stopped in their tracks following a court ruling that declared previous attempts to privilege Russian interests as illegal. The court ruled that before the deal can be reinstated, it has to go through a public participation process and parliament has to approve it. The court also ruled that state efforts to put Eskom in charge of procurement were illegal, as the proper procedures weren’t followed.

It is unlikely that even Mahlobo can meet these legal requirements in the time that his boss has left in office.

Mahlobo’s first step has been to try to speed up the state’s energy strategy – which was supposed to be updated in April 2018. Although the plan is supposed to be updated every two years the 2010 version – which called for more nuclear procurement – is officially still on the table. A subsequent revision in 2013 questioned the need for nuclear. But this plan was never tabled in parliament by the Department of Energy.

The 2018 plan being promised by Mahlobo is expected to re-emphasise the commitment to nuclear. Zuma wants the plan fast tracked. But by speeding it up, the government has indicated to parliament that it will be excluding a public participation process.

This is likely to be challenged given that the plan is the closest thing South Africa has to a national discussion on its energy future.

But even if the plan can be massaged in Zuma’s interests, it won’t be enough to ensure the deal goes through. It will be challenged by political parties and NGOs who are prepared to litigate to challenge a rigged plan if necessary.

Additional hurdles

The public participation process that the national electricity regulator must manage – as prescribed by the April 2017 court judgement – is far from being established. The regulator was berated by the court for not doing this. It has to happen before procurement takes place. The process will provide the perfect opportunity for organisations to make the case that the scientific, environmental and economic arguments against new nuclear are backed by solid evidence.

Even if this process approved the orders of new reactors, there are other hurdles to be cleared. Before the competitive procurement process can be initiated, South Africa would need to renew a series of legal memoranda of understanding with vendor countries. These include France, Russia, China, South Korea and the US. This would ensure that these are free of contractual content, and then sanctioned by parliament. Only then can the procurement proceed legally. And government would have to ensure that the process abides by the Constitutional requirements of “fairness, equity, transparency, competitiveness and cost-effectiveness.”

This means that it will be illegal and unconstitutional to offer Russia preferential treatment in guaranteeing that it secures the deal.

Any transgression of the law or the Constitution will be met by litigation from the environmental lobby. It will be strengthened by an array of other actors, ranging from tax and anti-corruption to human rights activists.

Zuma can of course flout the rule of law, but would he want to jeopardise what is left of an already problematic legacy over this more or less unwinnable issue?

David Fig, Honorary Research Associate, University of Cape Town

This article was originally published on The Conversation.