South Africa’s 1994 transition from apartheid to constitutional democracy remains one of the most important and impressive political transitions of our time. It is a powerful demonstration of the proposition that a peaceful, negotiated path from conflict and injustice to cooperation and reconciliation is possible, despite the complex history of oppression, institutionalized violence, and diverse social fabric that has defined South Africa.
Since 1994, the African National Congress (ANC) has won landslide victories in all four democratic elections. Elections are well-managed and fair, and the press is unrestrained. Opposition parties, among them the Democratic Alliance, Independent Democrats, and the Congress of the People (COPE) enjoy full political freedoms.
In April 2009, the country held its fourth general elections, and predictably the ANC won obtaining a 65.9 percent majority. H.E. Jacob Zuma was sworn in as president of South Africa in May 2009. A new cabinet was announced as a tripartite alliance that includes the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP). The cabinet was expanded from 28 to 34 ministries to include improved planning, performance monitoring, and service delivery functions.
South Africa is increasingly gaining prominence on the international stage where it is becoming a more active participant in events such as the Annual Meetings of the International Monetary Fund and the World Bank, the G-20, and the G-24. South Africa’s tremendous success in hosting the 2010 World Cup has also helped to burnish its image globally. President Zuma has also made outreach to emerging economies and alliances such as BRIC and IBSA as a priority for his presidency. South Africa will host the 2011 meeting of the Convention of Parties, U.N. Framework Convention on Climate Change in November and December 2011. South Africa continues to grapple with extreme differences in incomes and wealth. Robust economic growth in the post-apartheid period has enabled a measurable decline in income poverty. However, inequality has increased and as measured by the Gini coefficient, inequality rose from 0.64 to 0.67 in the period 1995 to 2008. At over 25 percent, the unemployment rate remains very high, and the poor continue to have limited access to economic opportunities and basic services.
Human development challenges also loom large. These include a disappointingly low life expectancy of 51 years. South Africa has the largest number of people living with HIV/AIDS in the world (over 5.5 million) and continues to battle a dual epidemic of tuberculosis and HIV/AIDS, bearing 24 percent of the global burden of HIV-related tuberculosis. Current health problems are rooted in the unique legacy of South African apartheid history. The migrant labor system has contributed to many of the major current health problems through social changes that have led to destruction of family life, alcohol abuse, and violence—particularly gender-based violence—while the health delivery system is heavily skewed in favor of the elite.
At the same time, policies working to rectify the many inequities of apartheid have contributed to some notable achievements. Between 1991 and 2008, net secondary school enrolment went up from 45 percent to 72 percent. Since the end of apartheid, 1.6 million free housing units have been constructed for low-income families. Access to electricity went up from 34 percent in 1993 to 81 percent in 2007. Similar improvements have also been recorded for water and sanitation. The social grant system, which primarily supports children, has expanded coverage from 2.5 million beneficiaries in 1999 to over 13 million in 2009.
Recent Economic and Social Developments
Prior to the financial crisis South Africa’s economic policy was largely successful despite underlying structural issues including high unemployment, low domestic savings and investment, and a large current account deficit. The global economic downturn helped trigger South Africa’s first recession in 17 years. However, as 2010 draws to a close, a broad-based upturn in the economy has prompted a 3 percent annual growth rate. Driven primarily by renewed global demand for commodities and spending related to the World Cup 2010, the turnaround has also been supported by a revival in the automobile industry as well as increased demand for chemical products.
The fiscal space created by years of budgetary discipline has also played a role in the turnaround. South Africa’s low public debt combined with its deep and liquid capital markets have provided the access to global finance necessary for the government to expand its own spending in areas such as infrastructure and social services. Although this spending has resulted in the national budget going from a surplus of 1.7 percent of GDP in 2007 and 2008 to a deficit of 7.3 percent of GDP in 2009 and 2010, international trade and the financial sector remain strong. After an initial dip following the onset of the financial crisis, foreign portfolio investment has recovered and provides solid cover for South Africa’s large current account deficit. There has also been an increase in foreign trade with imports outpacing exports.
Throughout 2010 these underlying socioeconomic tensions came to a head in the form of industrial action and lightning strikes. In August, a coalition of unions representing over 1 million public servants—including teachers, doctors, nurses, police, court officials, and government bureaucrats—launched a strike after the government rejected the unions’ demand for an 8.6 percent salary increase and 1,000 rand monthly housing allowance. Pressures were exacerbated by the fact that in order to avoid strikes during the World Cup, public entities such as Eskom and Transnet had approved similar wage increases earlier in the year. As a result, perception of widening disparities between haves and have-nots has become acute, jumping to the forefront of the national psyche and fueling discontent about poverty, lack of employment opportunities, and rampant failures in service delivery especially for poor people. Since late 2008, the ranks of “discouraged workers” have swelled by 739,000. The disenchantment has been simultaneously compounded by South Africa’s difficult macroeconomic situation, and although the economy is beginning to show signs of growth, employment generation continues to lag. Furthermore, jobs shed in aftermath of the global financial crisis which hit South Africa harder than other middle income countries in Eastern Europe and Asia, are yet to be replaced exacerbating an already dire unemployment situation.
Government Policy priorities
South Africa’s development strategy faces a number of significant challenges, including accelerating growth and sharing its benefits more broadly, extending opportunities to all and improving the coverage of delivery of public services.
To help address these challenges, the South African government has launched a Medium Term Strategic Framework (MTSF) for 2009 to 2014 with ten priorities:
- more inclusive economic growth, decent work and sustainable livelihoods
- economic and social infrastructure
- rural development, food security and land reform
- access to quality education
- improved health care
- the fight against crime and corruption
- cohesive and sustainable communities
- improving public service delivery
- sustainable resource management and use
- support for the creation of a better Africa.
The Government of South Africa has placed particular emphasis on accountability for quality of outcomes, and has recently introduced performance contracts for cabinet ministers.
The Bank jointly with International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA), and the South African Treasury prepared in 2008 the Country Partnership Strategy (CPS) for 2008-2012 which was updated through a CPS progress report in April, 2010. The CPS sets out a framework for engagement with South Africa. It reflects, most importantly, South Africa's own development priorities as set out in the Accelerated and Shared Growth Initiative-South Africa (ASGISA) and its unique leadership position at sub-regional and continental levels. Priority areas for World Bank engagement include: electricity sector, urban development; land reform and agriculture, private sector development; public sector service delivery and building partnerships for Africa.
Between 1951 and 1966, the Bank made 11 loans to South Africa, totaling US$242 million, largely for expanding the country’s rail and harbor systems and for generating and transmitting electricity. The Bank ceased lending operations to South Africa in 1966, and the loans from that earlier period were fully repaid.
In 1991, the Bank resumed activities in South Africa through a comprehensive program of economic policy advice and capacity building. After 1994, the Bank Group continued to provide policy advice, but also limited lending and grants. In addition, the Bank resumed project lending through the Industrial Competitiveness and Job Creation Project in 1997, now closed and fully disbursed. A Technical Assistance Loan for the Municipal Financial Management Technical Assistance Project was approved in 2002 for an amount of US$15 million, and the project has since closed. The US$3.75 billion Eskom Investment Support Project (EISP) was approved by in April 2010, marking the Bank’s first significant energy sector project lending in the country.
The EISP seeks to enhance South Africa’s power supply and energy security in an efficient and sustainable manner so as to support both economic growth objectives and South Africa's long-term carbon mitigation strategy. The project has three components: US$3.05 billion for completing the 4,800 megawatt Medupi coal-fired power station using proven, efficient supercritical technology, US$260 million for piloting a utility-scale 100 megawatt wind power project in Sere and a 100 megawatt concentrated solar power project with storage in Upington, and US$485 million for low-carbon energy efficiency components, including a railway to transport coal to reduce greenhouse gas emissions.
South Africa and Lesotho have jointly implemented the Lesotho Highlands Water Project, with South Africa repaying the two World Bank loans associated with this project for a total disbursed amount of about US$90 million. The project transfers water from the highlands of Lesotho to the Gauteng region of South Africa.
The Global Environment Facility (GEF) program is one of the largest with a number of national and regional GEF grants for nature conservation and renewable energy, for a total of just under US$80 million. The main focus has been on conserving globally significant biodiversity, supporting South Africa’s efforts to mainstream biodiversity conservation into its economy, phasing out toxic chemicals and ozone depleting substances, and promoting the use of renewable energy and energy efficiency. The country is also playing an active role in the global agenda for combating climate change, both on adaptation and mitigation fronts.
The International Finance Corporation’s (IFC) committed portfolio in South Africa as of June 30 2010 was US$552 million in 30 projects. The IFC’s strategy in South Africa is focused on enhancing private sector access to funding by providing short-term liquidity and longer term foreign currency funding to financial institutions, supporting South African companies in their efforts at “going north” and “going global,” providing advice and financing in underserved niches of the South African market, imparting technical assistance and related support for small businesses with a focus on the informal sector and education, and supporting the development of renewable energy projects.
The Multilateral Investment Guarantee Agency Currently has issued guarantees for two projects, financed by Swiss and Mauritian-based German investors, in support of the country’s financial services sector. The combined gross exposure for these investments is US$12.6 million. During FY11, MIGA is working with an U.S. investors to provide coverage of two projects in the agribusiness and tourism sectors in South Africa.
As an investor country, South Africa continues to be the most active user of MIGA guarantees among the category two countries, and its investors account for $143.1 million of the Agency’s gross exposure. The current portfolio of South African sponsored investments is diverse, consisting of seven projects in the agribusiness, infrastructure, manufacturing and oil and gas sectors in such countries as Afghanistan, Kenya, Mozambique, Swaziland and Syria. While MIGA views South Africa predominantly as an investor country, it continues to facilitate inbound investment in an effort to foster South African development.
The World Bank Institute (WBI), the capacity development arm of the World Bank Group, has been active in South Africa for a number of years. Given the size of South Africa’s economy and its leadership role in the region, and under WBI's strategy, it has enhanced its efforts in South Africa with a view to scaling up the scope of its knowledge-sharing and capacity development programs in support of the nation’s development priorities. The capacity development program is envisioned to focus on the needs identified by stakeholders in South Africa and is geared toward strengthening partnerships and capacity with local institutions and centers of excellence. An important cornerstone of WBI's efforts will be to build on and leverage the knowledge and institutional assets in South Africa to link them more closely with other partners in the Africa, Asia, Latin America and the Far East.
The Bank has collaborated with the European Commission (EC) on South Africa’s first Public Expenditure and Financial Accountability Public Financial Management Performance Assessment. The Bank also partners closely with the African Development Bank (ADB) to support the energy sector. Both ADB and World Bank are jointly supporting the Clean Technology Fund package for South Africa. The Bank’s EISP is a complement to an ADB loan for the power sector. The Bank also works with the GEF to support various initiatives to protect the global commons.
The UN family and the Global Fund are close partners in the fight against HIV/AIDS. UNICEF and the Bank supported the evaluation of South Africa's Supplementary Child Support Grant scheme, and worked with UNAIDS to finance a study that reviewed the impact on HIV on people with disabilities and how to improve service delivery to them. The Bank and the IMF jointly undertook the Financial Sector Assessment Program (FSAP).
On the knowledge front, WBI, Finland, Norway and the EC have partnered with the South African Department of Science and Technology to support the development of the knowledge economy on the African continent. This partnership supported a series of SADC regional science and technology workshops, publications and grass roots level activities with South African university students. Finland and Norway have financed Bank-managed trust funds to support the knowledge economy activities in South Africa. The Bank also works with the Netherlands on a study of skill development in South Africa and the employability of labor.
In the area of regional integration, the Bank partners with DFID, for example towards the North – South transport corridor in South and East Africa, as well as with NEPAD on knowledge sharing events such as the WDR and the Africa Infrastructure Country Diagnostic. With regard to South – South Exchange, the Bank is facilitating knowledge sharing with China in the area of land reform and other areas. The Republic of Korea financed a Bank-managed trust fund to support a social innovation pilot targeted at university students and other youth who had dropped out of school.
The Bank also partners with the Public Private Infrastructure Advisory Facility (PPIAF) to support the South Africa Cities Network. The sub-national Technical Assistance Facility of the PPIAF provided grants to help improve the creditworthiness of cities in South Africa and access financing for service delivery. A similar partnership was developed with Cities Alliance and UN Habitat to support slum upgrading activities in several local authorities in South Africa.
