PETER ATTARD MONTALTO: Begging for more to fund just energy transition is no option

Climate finance and SA’s ability to finance the costs involved appear to have become increasingly contorted as evidenced by events at COP27 last week.

The argument goes that as SA is already overindebted there is no room for more debt to fund the just energy transition. But that only serves to confuse and conflate a range of issues.

There has been a build-up of government debt to a level that is seen as bordering on problematic. Debt service costs as a share of GDP will rise from 3.6% three years ago to a forecast 4.7% in the next fiscal year. That has started crowding out other forms of spending.

Through the pandemic there has been concern that banks and investors would rather buy government bonds than lend more money into the economy. The concern was that that lending rates would have to be so much higher to compensate for rather buying high-yielding government bonds. This is the crowding-out effect.

The binds on the fiscus are related to its ability repay the debt, given constraints that ultimately come from its ability to issue new debt at low interest rates and on its ability to raise much more tax. Pushing too far on either debt issuance or tax has adverse consequences in the economy, including higher interest rates (compounding the crowding-out problems) or slower growth and lower tax take.

This paradigm for the fiscus is not true generally in the economy. While government bonds aren’t tied to underlying productive revenue streams, for the just energy transition they often are.

Debt to build photovoltaics (PVs), wind or battery storage is tied to tariff income (tariffs that are now lower than what it costs Eskom to produce electricity). Debt to build a hydrogen plant will be linked to export volumes or revenue from domestic use. The same is true of electric vehicles exported or sold domestically. Debt to build a local manufacturing facility for PVs, or for an SMME to have working capital to do rooftop installations again has productive revenue sources. Debt in these cases are used to smooth future income.

Debt swap

This should be as true for a profitable, sustainable Eskom as it is for any private entity. The issue has been huge corruption and cost overruns that are divorced from this logic. Someone ultimately has to pay to clean up the mess, and that’s why the inevitable swapping of Eskom debt for sovereign debt will finally occur next year. Deleveraging Eskom’s balance sheet is the only plan that has ever been on the table, despite the many fanciful distractions in the media of debt for equity swaps and so on.

The point of the debt swap is to take about R200bn of Eskom’s debt — and service costs of about 9.6% — on to the sovereign balance sheet and allow the government to refinance it at a lower rate of about 7%. Ultimately, this is a saving to the taxpayer and a reduction in the risk of large, disorderly — and more expensive — bailouts.

Eskom, meanwhile, then has space to take on new, much cheaper climate loans and so its annual debt service bill can fall, perhaps by a third. This certainly doesn’t solve all Eskom’s problems, but it does allow space for new funding.

Cue the problem of counterfactuals. The “debt is bad” view says that Eskom shouldn’t be relevering, or shouldn’t be relieved of the debt in the first place because you are just replacing it with other debt. But where else is the money to fund huge transmission build expected to come from?

Bizarre, deep-seated views emanating from the Left permeate SA’s political economy on the evils of financialisaton. The financial community may have many problems — greenwashing tendencies, the obsession with ticking ESG boxes and so on — but ultimately there isn’t a viable alternative. How else are you going to find R1.5-trillion over five years to fund the just energy transition? The antifinancial alternatives simply don’t add up.

The default, easy, option has been to plead the charity case and ask for more grants, but there is little sympathy for SA as a middle-income country that for too long didn’t fix Eskom or the broader electricity supply industry.

Frankly, it is demeaning; there are far more deserving cases of charity among lower-income countries with underdeveloped financial systems. SA has a deep savings pool and a huge appetite for funding projects that are properly formed with good look through to underlying revenue sources. SA also has a complex insurance sector and deep capital markets that can deal with adaptation finance, as well as loss and damage funding domestically.

Core problem

Everyone has a role. Offshore official-sector support can be efficient in derisking and lowering the cost of borrowing domestically. For its part, the government needs to concentrate on flattening the sovereign yield curve to lower the cost of funding for everyone associated with the just energy transition — a policy with economic benefits that always seems to be overlooked.

A core problem around the hype of the Just Energy Transition Investment Plan is linking the funding requirements to a viable investment case to unlock domestic funding rather than just looking offshore.

The hard work on that starts now. It will require a different approach to the cap-in-hand offshore view, given the scale of need domestically and the competition from more deserving peers.

 Attard Montalto leads on markets, political economy and the just energy transition at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.