There is no lead lining to junk status

2017-04-23 23:21

Now that the initial financial market turmoil caused by our being downgraded to junk status has subsided, along with the inevitable outpouring of public anger and dark humor that did the rounds on social media, it might be an appropriate time to contemplate what being downgraded would actually mean for South Africa‘s nuclear plans. A sentiment that appears to have become prevalent in the intervening weeks since our downgrade to junk status is that it is likely to spell the end of the government’s nuclear ambitions. According to this view, our junk status rating will make the cost of financing this project more expensive, almost to the point of being unaffordable. Given the commitment that the government has undertaken to proceed with the nuclear programme only at a pace and scale that is affordable, it follows that the government will abandon its nuclear ambitions. For a number of reasons, however, this view may be somewhat simplistic. It might thus be premature to write off the government’s nuclear ambitions. Moreover, if the downgrade to junk status raises the already sizeable stakes involved in this programme, as is argued below, it is likely to pose bigger challenges for nuclear supporters and opponents alike. Seen from this perspective, the hint of complacency engendered by subscribing to the view that government will abandon its nuclear plans in the face of its being downgraded to junk status could be deemed downright reckless.

For instance, it would be worthwhile for nuclear supporters to consider that junk status impedes our ability to raise funds in international financial markets. This puts the government (including state owned enterprises like Eskom) in a more precarious bargaining position when negotiating the terms of any large scale infrastructure projects. As far too large a percentage of South Africans is painfully aware, blocking access to the formal credit market all too often tempts borrowers to seek access to alternate sources of credit where lenders enforce more onerous repayment conditions. In the case of billion-dollar infrastructure projects that have long-term contingent liabilities attached in particular, this increases the likelihood that conditions attached to ‘soft loans’ that are frequently used to sweeten the deal and appear at face value to offer more generous financial terms than those attached to loans from more traditional funding sources which one would have previously qualified for may impose harsher conditions on borrowers in the long term. Turning to the nuclear deal, a sound strategy for the shrewd vendor of nuclear wares would be to opt to demonstrate their goodwill by forgoing some of the financial benefits which they could extract on the financing part of the deal in exchange for slipping in hidden conditions which usually have further reaching consequences and more costly financial implications attached thereto. This would typically entail the relaxing of safety standards and the granting of immunity from any liabilities incurred during the course of operations. Needless to say, the relaxing of these conditions increases the odds that the events they seek to avoid incurring liability for occurs in the first place. The recent historical record is tragically replete with examples of industrial accidents that attest to this version of events; anybody care to remember the role which the application of lax safety standards and poor managerial oversight played in India’s Bhopal tragedy?

Alternatively, it would be worthwhile for opponents of nuclear power to consider that the downgrade to junk status is likely to highlight and possibly magnify rifts in the marriage of convenience between the centre-right Democratic Alliance and the numerous civil society groups which purport to represent the poor and working class that it has joined forces with to oppose the government’s nuclear plans. To see how this could occur, it can be reasonably presumed that the downgrade to junk status will cause government debt servicing costs to rise. Once it does, questions about the sustainability of government debt levels and how best to reduce it by making better use of state resources will arise. In this situation, those on the more conservative side of the political spectrum, such as the Democratic Alliance, are likely to lobby the government to adopt austerity measures and generally follow a more neoliberal economic agenda in order to reign in expenditure. As part of their efforts, it is likely that they will put forward policy prescriptions such as the privatisation of public enterprises and the cutting back of social services such as social grants. These recommendations are bound to put them at odds with their civil society partners who have joined them in litigation to stop the government’s nuclear procurement plans, for whom these policy prescriptions are likely to be anathema. Consequently, tension is likely to develop between these partners thereby weakening the coalition that has been formed to oppose the roll-out of nuclear power. Of far greater impact, tensions within this group and civil society in general could undermine these groups’ ability to work together and hence their capacity to fulfill the important public watchdog role of overseeing policymakers and key stakeholders. This function is crucial as close oversight of these actors would hopefully ensure greater levels of transparency and accountability in the government’s nuclear dealings irrespective of whichever decisions the government ultimately makes in this regard.

Based on the arguments above, it is contended that there is no lead lining to junk status. Junk status does not absolve policymakers of the responsibility of having to make difficult policy decisions in this regard nor can it protect South Africans from the fallout caused by poor decision-making. Since it cannot act as a containment vessel for these repercussions or stifle government’s nuclear ambitions and since it raises the financial stakes considerably, it is one’s view that junk status increases the urgency of the need for greater vigilance when it comes to any decisions related to nuclear power in South Africa.

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