SA stands out from the crowd at COP27, but needs to seize the investor opportunity

10 Nov 2022

It’s a rare occasion when South Africa’s government shines, and it did so when it became the first developing country to share a detailed climate transition plan that has received the backing of developed nations. It’s ambitious — perhaps too ambitious, because there’s a looming R700bn funding gap that will need to be bridged.

There have been all too few moments since Jacob Zuma took over the presidency in 2009 when we have been afforded the opportunity to feel proud of our government — and the unveiling of South Africa’s Just Energy Transition Investment Plan (JET-IP) at the COP27 Climate Change Conference in Sharm el-Sheikh, Egypt, this week was one of them.

South Africa had its moment in the sun when it delivered a plan that, in its detail, ambition and initial financial support, is a first for a developing country and, if executed successfully, could lead the way for other emerging markets and vulnerable economies that are suffering the human, environmental and financial consequences of the climate crisis.

However, as South Africans, we have learnt the hard way that a convincing plan is just a plan until you see the on-the-ground implementation of it and, as it stands, the R1.5-trillion plan has little chance of seeing the light of day if it cannot be fully financed and if the government doesn’t move quickly on creating the right conditions for private sector support.

The Just Energy Transition Partnership - including France, Germany, the UK, the US and the European Union - has come through with the initial financing it committed to at COP26. While that’s a vote of confidence in the plan, the $8.5-billion committed and other existing domestic funding commitments still leave a R700-billion funding gap that will need to be filled over the five-year term of the plan. The government certainly doesn’t have the means to bridge the gap and globally, climate finance raising, which is still in its infancy and faces many challenges, has made little progress since the previous climate conference in Glasgow.

Government debt burdens

So, South Africa will not be alone in its endeavours to raise the finance needed to make the transition to a fossil-free future without imposing massive societal costs and without increasing already unsustainable government debt levels.

Most developing economies have seen their government debt burdens soar over the past few years. According to figures released by The Nature Conservancy, between 2010 and 2020 developing countries’ public debt expanded to an average of 62% — an increase of 22 percentage points on the 40% at the beginning of the period. Most worrying is that a third of the increase occurred in 2020.

A World Economic Forum article, COP27: How climate finance and adaptation can support vulnerable countries, points to research exploring “The Climate Finance Conundrum”, which quantifies the makeup of climate finance raised from 2011 to 2020, with only 12% ($47-billion) of it low-cost or concessional and 61% ($384-billion) comprising debt funding.

Despite the $100-billion commitment by developed countries at COP26 to provide financial compensation to developing economies that are suffering the consequences of the irreversible climate damage inflicted by the developed countries, pledges have been unmet.

Authors Anis Chowdhury and Jomo Kwame Sundaram say: “The world faces a climate finance conundrum owing to the failure to resolve the underlying issues equitably through international cooperation. Consequently, it would not be an exaggeration to describe the current situation as a mess.”

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Debt funding is not a sustainable solution and governments will need to rely on innovative funding methods that don’t overwhelm public finances and do bring the private sector on board at scale. The common consensus is that the solution lies in blended financing, which spreads the risk across governments, asset owners, developed finance institutions, private sector investors, and other innovative funding methods.

Innovative funding methods, such as the “blue bonds” that have been used in Seychelles, resolve the problem that faces private-sector investors who cannot afford to finance climate adaptation without receiving a financial return. The blue bonds provide a solution by generating earnings from investing in sustainable blue oceanic projects. Green and sustainable bonds operate in a similar fashion.

Seeking alternative funding solutions is all well and good, but what do these sizeable funding challenges mean for the South African government’s roll-out of the JET-IP over the next five years?

Oxford Economics Africa economist Deon Fourie says that although the R128-billion that was committed by the International Partners Group (IPG) in the form of grants, concessional loans, investment and risk-sharing instruments will play “an important catalytic role to mobilise increased private-sector funding to help accelerate a reduction in greenhouse gas (GHG) emissions”, it still falls far short of what is needed. He calculates that the R1.5-trillion needed over five years is 11.5 times bigger than the funding committed by the IPG at COP26.

Other potential sources of funding that are detailed in the JET-IP include R500-billion from SA financial institutions, R150-billion from domestic development finance institutions and the New Development Bank, leaving a R700-billion funding gap that needs to be affordably secured to implement the investment programme in its entirety.

That’s neither going to come from large-scale grant and non-debt instruments at the scale and speed needed, says Fourie, nor is it going to come from the fiscally strapped government’s coffers. That leaves the private sector — and to win its confidence and backing, there will need to be a conducive policy as well as a regulatory and administrative environment.

And therein lies the rub. The government has put together a comprehensive plan with a convincing roadmap, including all the details needed. Presenting this at COP27 provided National Treasury with the invaluable opportunity to get the attention of investors worldwide.

But to garner their confidence and financial backing, the government will need to move fast. Fourie sees the priorities as concluding the public consultations and implementing the structural and policy reforms needed.

Without these, South Africa’s new energy future will become nothing but a mirage — and in the meantime the government would have wasted the invaluable international visibility it achieved at COP27 and the opportunity to get private investors from around the world to open their coffers. DM/BM

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