MSIZI KHOZA: Debt-for-nature swaps would help ease fiscal pressures

Debt-for-nature swaps could provide a much-needed funding boost for SA’s state-owned entities (SOEs), many of which are saddled with huge, unsustainable debt.

Under such arrangements, which have already been used elsewhere in Africa, borrowers are granted some debt relief on condition they use the freed-up capital for environmental projects. These transactions can be implemented directly between creditors and debtors or led by a third party.

For instance, a philanthropic organisation or an environmentally conscious investor could buy a debt security from a creditor and renegotiate the terms with the borrower (or replace the instrument altogether). The new holder of the debt accepts a lower yield, and in return the borrower commits to investing in biodiversity initiatives.

In August last year Gabon finalised a landmark debt-for-nature swap, repurchasing a portion of its costly debt and replacing it with a $500m 15-year “blue bond”, which has lower interest rates. The savings will go towards ocean conservation activities, according to the terms of the deal.

Increasingly attractive

Considering SA’s unsustainable debt problem and our concurrent need to preserve our natural environment in the face of a rapidly changing climate, debt-for-nature swaps appear an increasingly attractive option. In the past, such transactions may have been interpreted as a negative sign for a country’s creditworthiness. Now they are more mainstream and are increasingly recognised as a handy tool to reduce funding costs and raise capital for environmental endeavours.

And fiscal relief is sorely needed in SA. Over the medium term, debt service costs will constitute the state’s single highest expenditure item, sucking up a fifth of every rand collected in revenue. Alarmingly, interest repayments will consume a greater share of the budget than social development, healthcare, community development, economic development, or peace and security.

It is patently clear that reducing these costs is critical for growth and development, and for reversing the country’s economic malaise. Overextended SOEs that have government debt guarantees may be a good place to start, with Eskom and Transnet being obvious candidates.

The savings from a reduced Transnet interest bill could, for example, be used to raise the SA National Parks budget. That, in turn, could yield new jobs and a boost to tourism, while also enhancing protection for critical natural ecosystems. It may even be possible to invest in projects that generate carbon or biodiversity credits, thereby raising additional funding.

The savings from a debt-relief deal for Eskom could be used to partly fund SA’s climate change adaptation efforts — including water-security projects. The national power utility is a heavy water user itself, so it would be fitting that funds freed up from its debt obligations go towards improving water reticulation systems.

Closing the gap

Bear in mind that finding money for these types of projects isn’t always easy, despite their growing importance. The majority of international climate finance is directed towards mitigation programmes, such as the accelerated rollout of clean energy, since these are more bankable and offer investors clearer returns.

As such, debt-for-nature swaps could help to close that funding gap. Many global environment, social & governance (ESG) funds have explicit mandates to support adaptation projects, but often struggle to find ones that are of a scale that can make a real difference. SA’s debt-laden SOEs could offer projects that fit the bill.

The country’s sophisticated financial services industry is well placed to facilitate and arrange such transactions, and regional development banks could play an important role too. The African Development Bank said in a 2022 report on debt-for-nature swaps that “given the multilayered needs of African countries, environmentally linked financial instruments could be an extremely effective way of addressing multiple issues at once”.

Given the many crises facing the country — including tightening fiscal pressures and failing infrastructure — it’s time for decisionmakers to be bolder and more decisive. A willingness to try new things would be a welcome and timely development. We need not reinvent the wheel — there is a well-established template to follow after a number of landmark deals.

As a first step, all stakeholders would need to buy into the idea. We believe it is an attractive proposition. Debt-for-nature swaps would allow SOEs to take a big step forward in environmental stewardship while also reducing their interest bills and overall reliance on the fiscus. Meanwhile, the state would have more capacity for critical projects that will help SA exit its low-growth trap.

• Khoza is managing executive for ESG at Absa Corporate & Investment Banking.