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South Africa’s most successful public-private partnership to date has just turned into a R200 billion liability – casting doubt on new plans to “mobilise private capital” to avoid a downgrade.
Treasury quietly announced a new R200 billion contingent liability in last month’s Budget Review to cover the Renewable Energy Independent Power Producer Programme.
The programme is the model invoked by this year’s budget to boost “private participation” in the public sector – harking back to the 2012 Presidential Review Commission report which President Jacob Zuma “rereleased” with his state of the nation address.
Treasury is hoping that the global credit ratings agencies recognise this liability as being almost risk-free and do not count it against the government’s creditworthiness in the same way they would the guarantees for Eskom or SAA.
The agencies are apparently still figuring that out too.
The liability was always there, but until this year, had been kept off the books due to Treasury’s judgement that it is virtually risk-free. However, the books are what get sent to the ratings agencies.
Standard & Poor’s, one of the major agencies that has South Africa on the brink of a downgrade to so-called junk status, said it could not comment on how it would approach the matter.
“We are still engaging with Treasury to understand the nature of the contingent risk to government,” said Gardner Rusike, the agency’s leading analyst for South Africa.
Fitch Ratings director Jan Friederich, however, says his agency is unconcerned about the “formal recognition” of a liability that was always there. “The risk ... seems contained,” he said.
“National Treasury was not clear how the guarantees ... should be reflected,” Treasury spokesperson Phumza Macanda said via email this week. “The regulatory model specifically provides that the costs be passed through to consumers via the tariffs.”
“The World Bank advised that all contingent liabilities should be reported and that this should include the guarantees on the power purchasing agreements.”
The R200 billion represents what government would have to cough up if Eskom’s ability to pay the private power stations collapsed. “Treasury has taken the most conservative approach of reporting the maximum termination compensation exposure,” Macanda said.
The Renewable Energy Independent Power Producer Programme has worked through bidding “windows”, where the government auctions off guaranteed 20-year power purchase contracts to private companies to build solar and wind power plants.
There have been four windows thus far, leading to 102 different projects. About R194 billion has been invested into the projects and the model is now being extended to build South Africa’s first large-scale gas and coal power plants in private hands.
According to Macanda, the ratings agencies could be expected to “apply their own qualitative assessment in evaluating the risk profile of the sovereign debt”. Technically, government’s exposure to these private partnerships is now comparable to the guarantees used by all the state-owned companies, which amount to R258 billion.
“I think this is a significant shift,” said Anton Eberhard, a professor at the University of Cape Town specialising in infrastructure reform and regulation, and a member of the National Planning Commission.
“It adds R200 billion to government’s contingent liabilities and this will, I would imagine, factor in agency ratings,” he said. “On the other hand, the risks are relatively low for government,” he said, echoing Macanda’s comments.
Since the costs would automatically be passed through, it was ultimately electricity customers who would pay, said Eberhard. Paul Boynton, CEO of Old Mutual’s Alternative Investment division, countered this: “A contingent liability is still a liability. The rating agencies will worry about it,” he said.
He cautioned against government launching another Renewable Energy Independent Power Producer Programme-type scheme before the current one runs its course.
If government guarantees income from projects too much, it could “to some extent” defeat the purpose of drawing in private capital to begin with, he said.
Old Mutual is the largest private investor in Renewable Energy Independent Power Producer Programme projects, with shares in 20 of them. “It is a great example of mobilising private capital,” said Boynton, adding that programmes could work without total guarantees like those for the independent power producer programme.
The point was not just to ease the fiscal burden, but to “mobilise expertise”. For government to build all 102 projects “would be phenomenally complex, even if it had the capital”, he said.
