RW Johnson asks what an analyst for a credit-rating agency would've made of events of the last few weeks?

Jacob's amazing multi-coloured dreamcoat

Imagine you are an analyst for one of the credit-rating agencies. What do you make of the events of the last few weeks?

Privatization by stealth

You have been watching with fascination for some time as the government insists that it will never privatize anything but in fact presides over the growing privatization of almost everything. Law and order and health were long since privatized with the rise of private security companies, medical aids, private hospitals and the massive flight of doctors into private practice.

Education has been moving the same way, with more and more pupils being taught in private schools, including low-fee private schools in townships. Then there's telecommunications. Not long ago Telkom owned 100% of this sector. The rise of the cellphone companies, of Skype (and its imitators) and of fibre optic cable operators has changed all that.

The question now is whether Telkom will survive at all. Then there's energy. Again, under apartheid Eskom not only owned 100% of the market but had 25-30% spare capacity. Now independent power producers are sprouting everywhere.

Ominously for Eskom, it is being left with all the “bad old” technology like coal-fired power stations while the IPPs own the nicely green stuff – wind and solar. Even justice is increasingly privatised. Faced with many judges whom no one trusts, more and more disputants opt for mediation, settling on mutually agreed arbitrators, invariably lawyers or judges of great distinction. In effect they choose their own private judges.

Until now, you had noted, higher education was another example. Year by the year, the government reduced its level of support to the universities. This forced the universities to depend more and more on private income streams, of which there were three: fees charged to students; donations and endowments; and charges for services (meals, accommodation, registration, library and parking fines etc).

This model worked for a surprisingly long time, although only a few of of the more privileged universities had alumni willing to cough up useful sums and sufficiently well-heeled students (black or white) to pay increasingly high fees and charges. In truth, the real point of this model was nothing to do with the universities themselves. It was simply that this enabled the country's ruling bureaucratic bourgeoisie (which includes government ministers) to spend more and more on itself.

This model, which could be called sleep-walking privatization, required a Minister for High Education who was asleep at the wheel. After all, the government had successfully insisted that the universities must admit hundreds of thousands of extra students, most of them educationally handicapped and from relatively poor homes. They clearly didn't belong in such a model: there was no way they could pay higher and higher fees and charges. The student loan scheme was massively in debt (like all student loan schemes worldwide) and, by the Minister's own admission, was corruptly administered.

The decision to admit all those extra students was financially crazy: most were completely unprepared for tertiary education and 80-90% of them failed, a huge waste of effort and money. And, finally, only a few of the old, formerly white universities had (at least some) well-heeled students plus alumni willing and able to make donations. So while the latter could just about live with this model, the majority couldn't.

In effect, all the old black universities (Fort Hare, Turfloop, Venda etc) were bankrupt. The only leading university which had successfully “transformed” (UKZN) had not only gone bankrupt but run up a R1.8 billion debt. And many of the old “tribal colleges” were deeply in debt too. Normally, any Minister of Higher Education would have read these red lights long ago.

Free higher education?

However, your ears as a rating analyst had really pricked up when you noticed that Minister Nzimande not only seemed to be paying no attention to any of this but, from time to time, he would also issue demands for free tertiary higher education without any apparent idea as to where the money for this might come from. This was considerably alarming.

When you had first arrived in South Africa you had carefully read the Freedom Charter and noted that although it exhorted the possibility of free schooling, it was careful to avoid any such commitment about tertiary education – a reflection, no doubt, of the fact that those who wrote the Charter were men with university degrees.

It was, of course, preposterous for a country like South Africa to believe it could afford free higher education when even far richer countries like America and Britain did not manage to do so. Moreover, within Britain the Scottish National Party had insisted, when it came to power in Scotland, that higher education in Scotland would be free. The result was increasingly run-down and threadbare universities in Scotland, steadily falling behind their English, Irish and Welsh counterparts. Indeed, international experience suggested that populism in higher education invariably had such results.

The welfare function

Intrigued by this and by the frequency of student unrest, you had read more and come across Charles van Onselen's seminal article, showing that student unrest in South Africa must be understood quite differently from the way it is understood elsewhere.[1] Student unrest, he argues, is not really about education but is “an insistent plea for the alleviation of acute rural (and urban) poverty and distress via a youth cohort which is acutely aware of its responsibilities to the extended family”. What Van Onselen shows is that tertiary education institutions have become welfare institutions for this youth cohort, providing accommodation, food, transport and general living expenses.

Even by the mid-1990s it was very common for such students to be funnelling money back to their (often fatherless) families. Thus in effect, this youth cohort are young migrants to the city, acquiring bursaries and student loans which then help feed revenue streams back to their destitute families.

Hence the desperation over the issue of “exclusion”: if the student either fails his exams or fails to pay his fees, he may be excluded by the university. This not only means an end to his hopes of upward social mobility but also cuts off his source of food and accommodation in the city and his ability to transmit revenue back home. Anyone would fight for that.

This might, you realise, help explain something rather odd. Normally on university campuses it is very difficult to whip up much in the way of student activism on the eve of crucial exams – everyone is too frantically focused on revision. Yet the current wave of protest erupted in late October, just on the eve of exams.

However, Blade Nzimande has been pushing many hundreds of thousands of extra students into the universities. Even before he did this, the failure rates among poorer black students were horribly high because their school education had been so deficient.

By definition, the extra students now pushed in will be weaker still. In other words, there will be very large numbers of students on all campuses who, by October, know they are virtually certain to fail and thus be excluded. To which, of course, one has to add those who have already exhausted their bursaries and loans – with some of their fees still unpaid. All of these students were, by October, living under the lengthening shadow of exclusion. At this point – amazingly – university managements decided to announce their double digit fee increases for 2016. Had they left their announcements until December, nothing would have happened.

A rating analyst naturally has to be focused mainly on the bottom line, on how likely it is that a country or an institution can pay their debts. That judgement is all about numbers. But analysts also have to look at governance, at how things are done.

It was, for example, distinctly alarming that the South African government connived with President Al Bashir to ensure that he evaded the law when he visited South Africa. You know that investors rely heavily on the country they invest in to observe the rule of law. If the government doesn't care about the rule of law, no one's investments are safe.

The big event of the year from an analyst's point of view was obviously going to be the settlement of the pay dispute with the public service workers. Over and over again the IMF and the ratings agencies had questioned whether the government really had the backbone to stand up against this, the bureaucratic bourgeoisie, of which government is part. The answer was a resounding No.

In the same quarter that South Africa's economic growth went into reverse at -1.3%, the public service workers got a settlement variously reckoned at 10.1% to 11.5%. Once again, the government had decided to reward a minority of well-paid workers already in work rather than help the unemployed with infrastructural spending. The numbers are eloquent about who the new ruling class is. If you can get a 10.1% rise when the economy is shrinking and everything else is going to hell, that really is power. That settlement used up the government's contingency reserve for three whole years ahead.

The failure of the law

But to go back to the university crisis. By law the fee levels are set by University councils. But in no time the press was showing pictures of Vice Chancellors being hustled and jostled by demonstrators. Adam Habib at Wits capitulated by suspending his university's rise. This created an impossible situation for all the other universities.

Worse still were photos of Habib kneeling down next to student leader Mcebo Dlamini, the Hitler admirer so recently sacked by Habib – this time in an apparent act of supplication or, at the least, exaggerated respect. Then the Minister stepped in and, out of thin air, conjured up the idea of a 6% cap to fee rises.

This was in blatant disregard of the law which says it is the university councils, not the Minister, who sets fees. This was surpassed only by the President who then announced a 0% increase. Zuma clearly believes that a Zulu chief can just decide the law by personal fiat. The rule of law counted for nothing. No vice chancellor objected. Not one of them stood up for the rule of law.

This was already quite fantastical but it now emerged that neither the President nor the Minister had the slightest idea as to where the money was coming for to pay for the 0% increase, the cost of which was variously estimated at between R2.7 and R4.2 billion. So a committee was set up to work that out consisting of representatives of the students, the vice chancellors and the Ministry. This was ludicrous: none of them could possibly know how to re-arrange the nation's finances. This will obviously have to be done by the Treasury.

As an analyst what you couldn't help notice was that every rule of rational or even merely legal decision-making had been broken. Everything was up for grabs and the only real rule was that the government could not withstand determined pressure from any direction. It had given in to the public service workers despite the already widely forecast danger that this could cause another ratings downgrade. And now it gave in to the students with no idea where the money was coming from.

BRICS and HDUs

Various schemes were floated. The government was planning to use the R2 billion “over” from the sale of its Vodacom shares to make its first down payment to the BRICS bank. Why not take that? One reason is that South Africa is committed to paying $10 billion to the new BRICS bank, of which 3% should be up-front and 7% on call. Even the 3% up-front comes to R40.5 billion. With the government having used up the contingency reserve, there was already a big question about where that R40.5 billion was coming from. It just got bigger.

But stay with the universities. As we have seen, their income rested on (shrinking) government support + fee income + income from charges + donations. But of course, only four or five universities at the most can count on getting serious amounts in donations. None of the former tribal colleges (the Historically Disadvantaged Universities, to be correct) could get money that way and the nature of their clientele meant they also could not claw much more out of them by way of charges and fees. The state has been steadily decreasing its grant to the universities without paying any attention as to what that meant on the ground. Minister Nzimande has paid so little attention that Fort Hare – an iconic university for the ANC – has gone bankrupt on his watch.

The fact is that at least eight of the HDUs are now in a state of financial collapse and if they are to continue at all, the state will have to bail them out. But the list hardly ends there – we know, for example, that William Makgoba left UKZN R1.8 billion in debt. Zuma's 0% interest decision could well be the point where a dozen or more of these institutions simply throw in the towel. Would the state bail them out? How could it not? The sight of an ANC government shutting down ten or twelve universities would not only lose it the coming local elections: it would ruin the brand. Yet bailing out those universities won't cost R2.7-R4.2 billion. More likely five times as much. Even after that there's still the 0% to pay for.

Poor Nene

As an analyst, you have paid close attention to Nhlanhla Nene, South Africa's first black finance minister. Everything you have seen suggests that he is a thoroughly decent, honourable and competent man. What no one among your fellow analysts can understand is why the government has set him up to fail. He is a Zulu, after all, from Kranskop and headed the ANC's Bambatha region.

He was a regional administrative manager of Metropolitan Life Insurance for 15 years. Nowhere was he followed by the slightest breath of scandal. When he was once photographed falling to the floor as a chair collapsed under him he made not the slightest attempt to criticize the media for showing that clip over and again. He just picked himself up and grinned. In a rational government he would be the next President.

Among analysts it has been realised for some time that Nene is going to have the unpleasant job of announcing that there is no money for NHI and no money for Russian nuclear power stations. But the combination of the public service settlement, with its R63.9 billion over-run, and now the university crisis have brought forward that moment.

Whichever way the university funding crisis is settled, the one certainty is that this is but the first of many such crises. The government appears to be punch-drunk. Any well organized group that pushes hard enough will get what it wants. The rule of law is no barrier. The relevant Minister and the President will give way, leaving only Nene to block the way. Increasingly, discontented Ministers will urge, well we control the Reserve Bank, why don't we just print the money? Nene will oppose that too, knowing full well from the Zimbabwean example that he is guarding the gates of hell.

So how come Nene has been set up to fail? The stunning answer – too simple to be believed by many – is just that Zuma and his gang so little understood the economy that they had no idea what they were doing. But we are getting ahead of ourselves. As was posited at the outset, imagine you are an analyst for a credit ratings agency.

How, then, will South Africa pay to bail out its collapsing universities? And how will it pay to fund the 0% increase? Beyond that, how will it pay for free higher education when even Britain and America can't afford it? And how, after all that, will it pay the first R40.5 billion down-payment for the BRICS bank? As analysts say, go figure.