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ESG implications of South Africa’s 2019 Election: what’s next?
14 May 2019
South Africa’s 2019 election result, which saw the ANC win 57.5% of the total votes, is largely positive for investors. The picture would probably have looked very different had Cyril Ramaphosa not managed to narrowly secure the ANC presidency in December 2017, and replaced Jacob Zuma as president in early 2018. While ANC’s electoral support cannot be explained by any single factor, Ramphosa’s popularity, particularly among constituencies that were deserting the party under Zuma, appears to have played a major role in convincing voters to give the ANC another chance. Ramaphosa’s promises to address corruption, unemployment, inequality and policy uncertainty have resonated, especially amid voter scepticism of what opposition parties offer, despite the fact that he will still face considerable opposition from within the ANC to his proposed reforms.
From an environmental, social and governance (ESG) perspective, South Africa faces numerous challenges. Here are a few of the ESG areas we will be monitoring in the weeks and months following the election.
While the ANC and DA election manifestos were clear in their support for investment in offshore oil and gas exploration and, in the DA’s case, for fracking, the election campaign and party manifestos barely touched on environmental issues, particularly climate change. This is despite the draft National Climate Change Adaptation Strategy, which was published for public comment on 6 May 2019, reporting that “There is evidence that extreme weather events in South Africa are increasing, with heat wave conditions found to be more likely, dry spell durations lengthening slightly and rainfall intensity increasing” and that “climate zones across the country are already shifting, ecosystems and landscapes are being degraded, veld fires are becoming more frequent, and overused natural terrestrial and marine systems are under stress.”
As Ramaphosa’s drive to attract R100bn of foreign direct investment over the next five years gets back into swing after the election, investors will need to remain aware of potential environmental risks as there is little indication, apart from the long-awaited introduction of the Carbon Tax on 1 June 2019, that these issues will see greater attention that under previous administrations. Meanwhile, civil society will fill the accountability vacuum as demonstrated by recent appeals against a water transfer project, that will supply water to a number of existing and new coal mining and power projects in the water-scarce Waterberg region; and litigation against government’s plan to double the amount of sulphur dioxide (SO2) companies are allowed to emit.
The updated and finalised Integrated Resource Plan for Electricity (IRP2019) is one of several policy decisions being keenly awaited by investors. Despite the Department of Energy (DOE) and Minister of Energy Radebe repeatedly stating that the IRP would be finalised by March 2019, this did not happen. The IRP has now been tabled at the National Economic Development and Labour Council (Nedlac) for consideration. Once the Nedlac process is concluded, the IRP will be sent to cabinet which could make further policy adjustments before the IRP is finally gazetted.
The latest IRP draft proposes an energy mix that includes 48% coal, 9% gas (or diesel), and 28% renewable energy in 2030. This is a significant adjustment from the 2018 proposed mix of 72% coal and 7% renewable energy. However, delays to finalising the IRP will affect the timing of the respective procurement programmes. The renewable energy sector, for example, is waiting for Bid Window 5 of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) to open. In previous bids, it has generally taken around 18 months from the time the RFP was issued until financial close. With Eskom’s operations deteriorating and problems at its new 4,800MW power stations, new capacity is seen to be increasingly urgent, and frustration is building at delays.
However, the IRP and the government’s plan to unbundle Eskom into separate companies for generation, transmission and distribution are likely to come under considerable pressure from unions and those with vested interests, particularly in coal mining. Unless the social consequences of the transition are addressed, investors can expect ongoing uncertainty over energy policy, with associated operational risks resulting from unreliable power supply.
One of Ramaphosa’s greatest challenges will be to address governance issues, within government and state-owned companies. As revealed repeatedly during testimony at the Commission of Inquiry into State Capture, led by Deputy Chief Justice Raymond Zondo, corruption and patronage thrived during Zuma’s tenure. The way in which Ramaphosa’s government and the prosecuting authority deal with the commission’s finding will be important in rebuilding investor confidence.
Ramaphosa will also need to fulfil promises not to appoint those involved in state capture to cabinet, and take further steps to steps to restore good governance at state-owned companies if he is to meet investor expectations. While at some state-owned companies, such as Eskom and SAA, credible (if not effective) changes have been made to the boards and executive, many others, like those under the Central Energy Fund (CEF) are operating under a conveyer belt of acting directors. The Mpati commission of inquiry into allegations of impropriety at the PIC, which is due to submit its final report at the end of July 2019, will also present Ramaphosa with an opportunity to address governance failures at a key institution.
While these reforms will start to reverse the decline in governance standards under Zuma, it is expected that Ramaphosa will also need to overcome significant opposition including from compromised factions within the ANC, which still have a strong influence within the ANC’s National Executive Committee. To tackle difficult issues such as unbundling Eskom, Ramaphosa will need to make concessions and balance divergent interests. This is likely to mean that progress will be more haphazard than the current optimistic reaction to the election result suggests.
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