Standard Chartered, one of the biggest providers of sovereign debt solutions to African nations, has become the latest big-name financial services firm to pour cold water on plans to encourage private sector investment into Eskom’s coal-fired power plants.
Kgosientsho Ramokgopa, the electricity minister, in April urged “bold and decisive” action to enable private investment in Eskom’s ageing plants to extend their lifespan in an attempt to alleviate SA’s electricity crisis. But the plan flies in the face of SA’s stated commitment to the just energy transition, which targets the achievement of net-zero carbon emissions by 2050.
Asset managers Futuregrowth and Allan Gray almost immediately ruled out the likelihood that private capital would be lured into investing in Eskom’s plants, saying the pressure that financial institutions are under to stop funding fossil fuel projects means the plan is doomed from the start.
Now Kweku Bedu-Addo, CEO of Standard Chartered Bank Southern Africa, has echoed those sentiments, saying investing in Eskom’s power plants could leave private investors unable to exit their investments in future due to pressure from climate lobbyists to cease funding such projects.
“It would be difficult because investors will want to avoid being trapped in stranded assets in the future,” Bedu-Addo said in an interview.
“Standard Chartered has announced that from 2030 our operations must be net zero and by 2050 our financing operations should also be net zero. We are working towards that target, so I do not see us engaging in actions that take us away from targets that we’ve announced for the whole world.”
Sovereign bond sales
SA may also find it more difficult to use sovereign bond sales to fund further investment in Eskom as such arrangements typically include use-of-proceeds clauses.
Private capital providers such as asset managers may therefore become increasingly reluctant to buy government bonds knowing that the capital allocated to such debt instruments may end up being used to fund coal-fired plants.
“Investors increasingly are becoming more vocal on how capital is deployed,” said Bedu-Addo. “You have activist shareholders looking into what exactly institutions are doing.”
Deputy public enterprises minister Obed Bapela said last week that recapitalising SA’s ailing state-owned enterprises is necessary to stimulate the stagnant economy. But with SA’s projected budget deficit of 4.2% of GDP for 2022/23 likely to worsen if the economy falls into recession, the government has limited options to source funding beyond an already overburdened tax base.
Bedu-Addo also warned that remedying SA’s power crisis goes far beyond generation and requires significant investment in electricity distribution and transmission as well.
“As a global financial institution, what we can do to remedy the situation is to help with the financing of clean energy solutions. That’s one quick win.
“At a group level we’ve put a couple of billion dollars on the table. That’s the benefit of being a big global bank. Where there is a need that requires financing solutions, we can pull it from the rest of the world.”
That appears to fly in the face of Ramokgopa’s recent comments suggesting that the planned decommissioning of roughly half of Eskom’s generating capacity (about 22,000MW) by 2035 should be delayed given the severity of the electricity shortage. During a recent tour of Eskom’s plants, Ramokgopa suggested extending the life of plants such as Grootvlei and Tutuka by refurbishing them through additional investment.
That has irked activist groups such as the Centre for Environmental Rights, which has said Ramokgopa’s plan could imperil the $8.5bn pledged for SA’s just energy transition from the US, the EU, France, Germany and the UK.
“The financial package is premised on SA phasing out coal. The reason we attracted that financial commitment is because it’s relatively cheap for SA to do so. If we’re now signalling the opposite intentions it really puts our attractiveness as an investment destination at risk,” said Brandon Abdinor, acting programme head for pollution and climate change at the centre.
Long-term prospects
“Any investment in anything more than essential maintenance just locks us into that fossil fuel-based system for longer.”
Yet despite the challenges of SA’s power crisis and economic slowdown against a background of heightened geopolitical tensions, Bedu-Addo remains positive about the country’s long-term prospects.
“SA is a country that is the most industrialised in Africa by a long stretch. It has a deep capital market, it has know-how in terms of value addition. Those are not qualities you lose overnight,” he said.
“Any economy that has this resilience — capital, industrial capacity, financial and human resources and raw materials — presents a fair dose of resilience. Crises may come or there may be temporary setbacks, but the existence of those factors presents sufficient resilience and future-proofs the country to bounce back once the conditions are put right.”
With Denene Erasmus and Hajra Omarjee
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