Masondo’s Eskom ‘fix’ raises more questions
After so many unkept promises of solutions coming soon, it should be no surprise that many have lost interest in when the government will finally come up with a solution to Eskom’s R400bn debt mountain.
That’s something that’s been coming in “a month or so” for about three years, the last pledge from public enterprises minister Pravin Gordhan having been reported on by Hilary Joffe in Business Times about 10 months ago.
Perhaps there’ll be a greater sense of urgency now with the release in August of the latest report of the Intergovernmental Panel on Climate Change, with its call for drastic action. One cannot look at the findings of that report and conclude that Eskom, which uses coal to produce 85% of its electricity, has a future in its current form.
Mineral resources & energy minister Gwede Mantashe would like to say that there is a choice in the matter, but the facts don’t support him. The risks for SA’s economy that were laid out in a speech by Eskom CEO André de Ruyter, who described the need to move away from carbon as “an economic, social and environmental imperative”, are not a mystery to anyone.
Seeing that SA is by far the biggest polluter in a continent that’s set to suffer disproportionately from climate change, he could have added a moral obligation. The economic arguments for SA are also indisputable. SA will not be able to get funding to invest in more coal-fired power stations and its carbon-intensive exports will be shunned by potential customers, such as the EU, which is considering a carbon tax.
After at least a decade as the poster child of state capture, Eskom must embark on this transformation while it cannot generate enough cash to even service its debt and relies on handouts from a government that’s also weighed down by a junk ratings status and its own debt load approaching 80% of GDP.
Speaking on the company’s Just Energy Transition (JET) strategy, De Ruyter estimated that making current power stations compliant would cost R300bn, so it clearly makes more sense to invest in renewable sources of energy, something it may be able to fund by borrowing at belowmarket rates from developmental agencies.
There’s also the legacy debt the government has been kicking down the road for years, something that needs to be sorted if Eskom is going to have a sustainable business model. It should therefore have been exciting to read a speech given by deputy finance minister David Masondo at Wits University’s School of Economics and Finance this past Tuesday.
At least, someone in authority was coming up with a potential solution. But there are lots of reasons to be cautious on this one, not least that it came with a rather huge disclaimer. These were all Masondo’s personal views. Not only were they not government policy, they still hadn’t been discussed with “relevant stakeholders”. Considering the implications for those stakeholders, SA’s credit rating and borrowing costs, it’s unclear why it was so urgent to go public now.
As it turned out, bond markets barely moved, despite Masondo having publicly suggested that investors may need to take a haircut to facilitate Eskom’s green transition, going so far as to put a figure to it.
Masondo proposed that investors forgive about R146bn of debt they have lent to the government, which would then pass on a similar amount to Eskom, provided the latter met certain climate targets.
Governments talking publicly about debt forgiveness is no small thing. ANC leaders have long understood this, and once they were in power, they never seriously entertained the idea of reneging on debt obligations inherited from the apartheid government. Even voluntary forgiveness would have come with costs.
Masondo’s speech left many other questions unanswered, such as what motivation the holders of SA’s sovereign debt would have to go along with it. They are already getting paid attractive interest rates and are guaranteed to get their money back. It’s not clear why SA would be deemed to be in need of or deserving of this act of charity and why they would provide it. That’s a big missing piece, especially as there was also no indication in Masondo’s speech that he had any form of coercion in mind.
AS THE POSTER CHILD OF STATE CAPTURE, ESKOM MUST EMBARK ON THIS TRANSFORMATION
GOVERNMENTS TALKING PUBLICLY ABOUT DEBT FORGIVENESS IS NO SMALL THING
When it comes to managing its finances and those of stateowned enterprises, SA doesn’t have a great recent track record, making it hard to believe that creditors would just write off about $10bn and give the country a second chance with nothing more to go on than a pledge that this time it’s really going to be different.
Masondo also cited IMF MD Kristalina Georgieva among “leading international figures” who have voiced support for “debt-for-climate swaps”.
At a media conference in April, she was asked about this and she gave an answer that indicated that what she had in mind were “low-income” nations rather than a bailout for a middle-income country such as SA.
“Connecting debt relief to poverty reduction, debt relief to environment, there is history in that,” she said. “And when we are faced with this dual crisis — the debt pressures on countries and the climate crisis, to which many low-income countries are highly, highly vulnerable — it makes sense to seek this unity of purpose. In other words, green debt swaps have the potential to contribute to climate finance.”
It also seems that something concrete is still far in the future, with Georgieva only committing to working with the World Bank to devise an “option” before the UN Climate Change Conference, COP26, to be held in Scotland late in October. It will then, she said, be up to “creditors and debtors to decide whether to embrace”.
Something may be brewing, and that could turn out to be a good thing. Masondo has form in speaking out of tune, not least on the Reserve Bank’s independence and monetary policy. That’s not necessarily bad. But he may have jumped the gun on this one, and created false hope of an imminent solution that won’t come.