DAVID MASONDO: Public debt, Eskom and a low-carbon economy
Debt-for-climate swap proposal should be seriously considered to deal with legacy debt
The unreliable electricity supply from ageing coal plants has been constraining economic growth and redistribution. Resolving the current energy crisis requires a transition to cleaner energy sources, in line with SA’s commitment to the Paris Agreement towards decarbonisation. The just transition to a low-carbon economy is not reducible to Eskom. However, Eskom is not only trapped in R400bn debt but is also the largest carbon dioxide emitter in SA.
It is estimated that decommissioning the old coal-fired power stations SA could reduce carbon emissions by 1.5GT by 2050. The transition has to be just in that it should not leave workers and communities worse off and contribute towards the Eskom debt. It is estimated that Eskom will require R400bn to undertake a just transition towards cleaner energy over a period of 15 years.
During the July 2021 Presidential Climate Commission Eskom presented a convincing finance proposal that needs to be wholeheartedly supported by everyone. In essence, Eskom intends to raise additional low-cost debt from international investors to finance the accelerated decommissioning of its old coal-fired power plants, coupled with a programme to build large-scale renewables plus gas power infrastructures.
In light of the forthcoming historic COP26 meeting, it would be remiss for Eskom and SA not to be first in the queue for the large quantities of cheap climate finance becoming available for countries that are seriously committed to accelerated decarbonisation of their economies.
Eskom proposed that international lenders make available funds within a special-purpose climate finance facility that will then be released to Eskom on condition certain agreed performance targets are achieved. These targets include both decommissioning of existing old coal-fired power stations and ramping up renewables to compensate for the capacity lost. Given SA's energy and finance position, this structure makes sense.
Public debt, including Eskom debt, serves as a constraint towards the transition, amounting to over 80% of GDP excluding the state-owned enterprises’ contingent liabilities. The energy transition will be difficult, if not impossible, without the R400bn Eskom debt solution. Eskom’s transition transaction proposal is about raising new debt finance of about R400bn for funding Eskom’s just energy transition pathway. However, the proposal does not claim to address Eskom’s legacy debt which is, in turn, a major barrier to its ability to be commercially viable. Hence a complementary sovereign supported transaction to the Eskom-level transaction is required.
Eskom’s revenues are insufficient to cover its debt obligations and are unviable, even if tariffs were increased, which may harm the economy. Anyway, the main cause of the Eskom debt is the cost overruns at the Medupi and Kusile build programmes. It does not make sense to pass on the costs of poor planning and execution of the build programme, and corruption, to energy users, including the poor, via increased tariffs.
The solution to a debt problem is not necessarily taking on more debt, even if it is at concessional rates. As a stand-alone transaction this may worsen Eskom’s financial position and cause further concerns among the ratings agencies. Emphasising the debt challenge in no way undermines what Eskom has proposed. All it does is highlight why the sovereign cannot adopt a hands-off approach.
Hence, a complementary transaction that works with the Eskom transaction to address the legacy debt issue is required. The sovereign should consider measures that will assist Eskom to achieve its objectives by helping it become a more attractive and viable borrower. Fortunately, all the biggest financial institutions in the world (including development finance institutions such as the World Bank and asset managers like Black Rock) have made decisions to divest from coal, and increasingly from all fossil fuels. Even gas investments are now regarded as potentially stranded assets in future. The pool of finance available to lower-to-middle income countries to transition to net zero economies has increased.
Renewables are now cheaper globally per unit of energy than the cost of keeping existing coal-fired plants going, and therefore much cheaper than new coal-fired power plants. It is for this reason that several middle developing countries (such as Indonesia) have made unambiguous commitments to accelerated decarbonisation coupled with accelerated investments in renewables.
Various studies show that constructing 5GW of renewables per annum will create 50,000 jobs per annum, and will also catalyse the largest industrialisation programme since 1994 as we manufacture the required components, which, in turn, triggers spin-off industries. The solution requires new thinking supported by new financial instruments. The solution should support economic rebuilding efforts and current energy sector reforms that are unfolding locally and globally.
The sovereign must play a key role in supporting Eskom’s commitment to an energy transition. The sovereign already has a policy of supporting Eskom and enabling it to access the debt markets with government guarantees and successive equity injections. Supporting Eskom to enable it to address its challenges is, therefore, nothing new. We just need to be more creative.
The sovereign level debt-for-climate swap (DFCS) proposal should be seriously considered to deal with legacy debt. The sovereign-level DFCS mechanism is gaining momentum in the climate finance space and as part of the middle-income-country debt solution. Leading international figures such as International Monetary Fund MD Kristalina Georgieva and the UN secretary-general have in recent months referred in positive ways to the role debt swaps can play in addressing economic and climate crises. The use of the DFCS should still respect the rights and obligations of Eskom’s funders.
The sovereign level DFCS mechanism opens up the opportunity to other finance bodies that want to engage in SA’s energy transition but might not be interested in a concessional finance deal at the utility level. A package of complementary but unlinked transactions comprising a sovereign level DFCS and an Eskom-level climate finance transaction as proposed by Eskom enables different types of finance — concessional, commercial, philanthropic and so on — to participate in SA’s energy transition at different levels.
All of these transactions have the same goal, namely a net-zero emissions economy. However, they work with separate stakeholders that have different conditionalities and will therefore derive different benefits. The complementarity is such that one transaction derisks the other, because they work together at different levels to strengthen the transition finance environment, crowding in further finance as the risk of investment is diminished over time.
A sovereign level DFCS is a transaction between the sovereign and existing (or new) creditors. The creditors would “forgive” a portion of existing sovereign debt (say R146bn) on condition the same amount is made available for: an equity injection into Eskom (for example R87bn) conditional on a decarbonisation/coal closure programme culminating in net zero by an agreed date; and as an additional debt guarantee by the sovereign to support further loans to Eskom (of, for example, R58bn).
A portion of the R146bn could also be injected into a separate Just Transition Fund, with the objective to finance the re-industrialisation and compensation of social losses for communities and workers affected by the closure of coal.
This mechanism entails no extra burden for the sovereign. It is, in effect, a “pass through”. In short, the DFCS commits SA to decarbonisation targets similar to what Eskom wants to achieve in return for debt forgiveness.
The upshot is greater liquidity that helps Eskom resolve its balance sheet challenges, while helping secure guarantees for additional sustainability-linked loans at the Eskom level, thus decreasing the cost of these loans. However, for this to work the sovereign will require Eskom to close power plants in accordance with agreed targets along the pathway to net zero.
• Dr Masondo is deputy finance minister. This is a shortened version of the speech he presented at the Wits University Centenary webinar series hosted by the School of Economics & Finance on Tuesday evening. The views on Eskom are his, and do not reflect those of the National Treasury. Discussions around the just energy transition proposal are ongoing within government and with relevant stakeholders.
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