South Africa warns $8.5bn climate package risks fueling debt burden

The South African government has criticized the structure of an $8.5 billion funding package provided by developed countries to help it transition from coal to clean energy, saying it was too dependent on loans that would increase the country’s debt burden.

The $8.5 billion initiative was originally unveiled at the UN’s COP26 climate summit in November 2021, with details of the grant and loan mix announced on Friday.

Only 4%, or $330 million, of the international funding plan — known as the Partnership for a Just Energy Transition in South Africa — is in the form of grants, officials said. The rest is a mix of sovereign and multilateral loans and credit guarantees.

“The energy transition can only truly be fully and properly executed if there are more subsidies and if there is more financing made available in the form of concessions. [low-interest] ready,” South African President Cyril Ramaphosa said, releasing the details.

“The main challenge for South Africa and our sister countries on the continent is access to new, predictable and large-scale financing that does not further aggravate our debt crises.”

Enoch Godongwana, South Africa’s finance minister, said other countries receiving international climate finance were likely to raise similar objections. “Is this thing attractive? Is this real? Other countries will have to consider the implications,” he said in an interview. “It may well be that if this [grant] the composition is not changed, other countries, such as Indonesia, Vietnam and India can then say that it is not worth it.

South Africa’s Finance Minister Enoch Godongwana, left, said other countries receiving funds under similar initiatives may also question it © Brenton Geach/Gallo Images/Getty Images

The $8.5 billion envelope was provided by France, Germany, the European Investment Bank, the United Kingdom and the United States.

South Africa has included the funding in an $83 billion five-year plan, recently presented to its cabinet, to finance a transition from coal to solar and wind power, as well as to develop green hydrogen production and of electric vehicles.

The nation is one of the most coal-dependent countries in the world, with 85% of its electricity coming from fossil fuels. At least 100,000 jobs depend directly on coal in a country where the official unemployment rate is 34%. Its aging and poorly maintained coal-fired power plants struggle to meet peak energy demand of 38 GW, causing power outages = blackout during the last years.

The ruling African National Congress has stressed the need for a “just transition” that safeguards communities dependent on mining.

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The lenders behind the international financing say it will be a catalyst for investments from elsewhere. Spain has already announced that it will provide an additional $2.1 billion in financial instruments to support Spanish companies investing in renewable energy in South Africa. Norway and Denmark are also considering investments.

An official with deep knowledge of the financial package said South African leaders were engaging in “theater” and it was always clear that only a small part of the funding would be in the form of grants.

“We hold our heads up high. It was always intended to be catalytic funding,” he said.

Mafalda Duarte, head of Climate Investment Funds, a multilateral investor, said the $500 million CIF had pledged to the program under its Accelerating Coal Transition initiative was highly concessional and included a 10% grant.

The rest of the CIF funds, intended to help withdraw 5 GW of coal-fired power, amounted to a subsidy share approaching 50% and involved low interest rates, she said. CIF estimates that its investment alone will boost total funding of $2.6 billion.

“I’m optimistic about the model,” Duarte said. “I’m not saying it’s going to be easy. But both on the South African side and on our side, institutional arrangements are in place to address this issue.

South Africa’s five-year plan had a funding gap of $39 billion, officials said on Friday, adding they were in talks with other countries and organizations about possible funding deals.

Although South Africa is a middle-income country, with a gross domestic product per capita of around $7,000, its sovereign rating has deteriorated and its borrowing costs have risen as its debt has grown. as a proportion of GDP.

Of the $8.5 billion, the EIB, France, Germany and the United States each provide about $1 billion. The UK is providing $1.8 billion in support, including $1.3 billion in guarantees to the African Development Bank, which will expand the bank’s lending capacity and enable it to channel funds to South Africa.

The rest of the UK money will come from British International Investment, its development finance institution, which is supporting the upgrade of a coal-fired power plant with turbines that can run on gas and possibly hydrogen.