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.
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.
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 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 sovereign level debt-for-climate swap 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.
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