EPaper

Debt guarantees a hurdle in green deal

Strings attached to funding a just transition emerge as central difficulty in talks with envoys

Carol Paton

The conditions attached to green finance, particularly the requirement for Treasury guarantees, are emerging as a central difficulty as SA seeks to secure a just transition transaction with developed countries ahead of the COP26 conference in Glasgow in November.

Climate envoys from the UK, US, Germany and France in September met members of the cabinet as well as Eskom and other stakeholders to discuss a transaction that would provide grant and concessional funding to support the transition to a low-carbon economy.

However, Business Day has learnt that the grant funding on offer was disappointingly small, in the region of $200m, which has since the initial meeting increased to $250m. The countries made clear they would require government guarantees for bilateral funding coming from their national development finance institutions.

But SA’s high national debt burden as well as Eskom’s inability to take on more debt at this point, given its unsustainable balance sheet, are posing difficulties in reaching a deal.

The presidential climate commission, the stakeholder body established by President Cyril Ramaphosa to negotiate a “just transition”, received a highlevel briefing from the presidency on Thursday. But despite pressure from commission deputy chair Valli Moosa, few details of the proposals were publicly revealed.

Rudi Dicks, head of the project management office in the presidency, said the government envisages the establishment of a just energy transition fund, through which funding for all aspects of the transition would flow. Eskom, for instance, is unable to raise funding without the permission of the SA sovereign. He said, though, that the cabinet ministers who had been involved in the talks with the envoys, led by environmental affairs, forestry & fisheries minister Barbara Creecy, were concerned about the conditions attached to their proposal.

Dicks said: “There is a lot of concern that there is very little

grant finance. A lot has been spoken about concessional finance but the [degree of] concessionality of that is not always quite clear. Is it, for example, at 0% interest or close to that? After how many years do we need to make a first repayment? Does it require [faster] repurposing of coal plants?”

Treasury director-general Dondo Mogajane, who also attended the commission meeting, said SA had to be cautious about the risks involved in green financing, as it was still money that had to be repaid.

“We have to take into account the conditionalities, obviously making sure that we get the best deal for the country. As we access finance, we need to consider our national debt, which is heading towards 80% to 90% of GDP, plus Eskom’s R400bn or so of debt. Then we are talking about several more billion. It is the balancing of that which is going to be quite critical in terms of our just transition programme,” he said.

Other institutions, such as the IMF and World Bank, are also considering concessional green financing and these terms also need to be looked at.

Finance minister Enoch

MOGAJANE SAID THAT ADDITIONAL GUARANTEES FOR GREEN FINANCING ARE NOT A DEAL BREAKER FOR THE TREASURY

Godongwana has previously said he would not have any objection to Eskom using its existing guarantee space of which there is about R40bn in raising green finance. But this is unlikely to be anywhere near sufficient.

Dicks said initial estimates of the cost of the first phase of the transition involve funding for Eskom amounting to R400bn over 10 years; funding for the transition to electric vehicle manufacturing (R150bn); and an initial estimated cost of the establishment of a green hydrogen manufacturing industry of $850m, with scenarios of between $119bn and $145bn over the next 15 to 25 years.

In an interview after the meeting, Mogajane said additional guarantees for green financing are not a deal breaker for the Treasury.

“Something will have to give. The question is, can Eskom take on more debt? Guarantees are a contingent liability and we have to approach them carefully. In issuing a guarantee, the key question to answer is, ‘Will the entity be able to repay its loan?’ The fiscal liability committee that recommends to the minister whether to grant a guarantee or not considers this issue first.”

Eskom is unable to service its R400bn debt from revenue and has been dependent on grants from the fiscus to do so for the past three years. At most, its balance sheet is able to sustain about R200bn of debt.

SA, as well as other developing countries, have emphasised that they require substantial financial support from the developed world to transition to a low-carbon economy. At COP21, developed nations promised $100bn a year for five years to assist.

Creecy said not all of this funding had been mobilised and about $75bn-$80bn of a combination of grant and private finance had been made available. This money is available strictly for mitigation and not for adaptation, which is desperately required by the developing world on which the disastrous effects of climate change are being disproportionally visited.

The demand for adaptations funding as well as for mitigation funding beyond 2025 will be at the heart of SA’s negotiating position in Glasgow, she said.

Whether the conference is able to mobilise the funds to which developed nations have already committed will be “the big determinant as to whether COP26 will be successful”.

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2021-10-22T07:00:00.0000000Z

2021-10-22T07:00:00.0000000Z

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