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The JETP is a pilot for climate finance, especially for developing countries, and so the Presidential Climate Finance Task Team needs to stand firm on the right financing terms, writes Louise Naudé.
Cabinet announced its approval of the Just Energy Transition Partnership Investment Plan (JETP-IP) in its statement after its 19 October 2022 meeting.
The JETP-IP is South Africa’s pitch for spending the $8.5 billion promised by Germany, United Kingdom, France, the EU and USA at the United Nations’ COP26 climate conference last year. This initial tranche of JETP monies (€8.6 billion; R154 billion on 24/10/22) is intended to fund a socially just energy transition in South Africa, and lays the basis for more funding to come.
In response to the pitch, donor governments are making finance offers. Public information about these offers comes from a statement on a German government website and a leaked summary.
This statement tells us Germany “has now pledged additional funds totalling 320 million euros for the next two years to support the energy transition and its social cushioning, of which 270 million euros will be in the form of low-interest loans and 50 million euros as a grant”. Much of this will go to construction of solar, wind and biomass plants, and investment in the grid to fit it for renewable energy transmission. Eskom is committed to doing this, but is hamstrung by debt.
It is concerning that 84% of this piece of the JETP is in the form of loans. This flies in the face of the UNFCCC principle of ‘common but differentiated responsibilities and respective capabilities’ (CBDR-RC). The principle enjoins those countries historically most responsible for climate change to take the lead on deeply reducing their own greenhouse gas emissions and supporting developing economies, which are less responsible and have fewer resources, to follow suit.
Commenting on the JETP-IP, the Minister of Forestry, Fisheries and Environment Barbara Creecy said it was critical to ensure that any deal would not increase "sovereign indebtedness". South Africa has a high ±70% debt-to-GDP ratio and public electricity utility Eskom is ridden by debt of around R400 billion which the fiscus has to bail out. Loans fail to meet the intention of supporting a socially just energy transition. Climate action and development are mutually inter-dependent and should never be made to be mutually exclusive through the introduction of adverse effects of interest-bearing loans.
The summary would seem to indicate that overall the picture is even worse: reportedly only 2.7% of the offers are grants, with the other 97% in the form of loans. Of the loans, 54% is concessional loans and 43% a mix of commercial loans and investment guarantees to attract private investors. Altogether it appears that less than 1% is directly targeted for social investments.
WWF South Africa offers three reflections in response to this skewed loans/grants funding mix:
Firstly, in line with CBDR-RC, climate finance to developing country governments should come mainly in the form of grants. We urge the developed country partners in the JETP to reconsider and minimise the use of loans. Putting developing countries into further debt merely perpetuates geopolitical and geo-economic injustices.
Secondly, rather than adding debt, one way to support developing countries would be write off existing debt using debt-for-climate swaps, a variant of the tried-and-tested debt-for-nature swaps. The OECD estimated that between 1991 and 2003, debt-for-nature swaps generated almost $1.1 billion for conservation measures, in return for debt with face value volumes of almost $3.6 billion. The Commonwealth Secretariat proposed the use of climate finance pledges to write off multilateral debt in exchange for investments in climate change adaptation and mitigation initiatives. Debt-for-climate swaps involve a bilateral or multilateral donor, private investor, or non-governmental organisation, writing off or paying off a portion of a country’s foreign debt in exchange for the country financing climate change adaptation and mitigation projects using local funds. Holding about 1% historical responsibility for climate change, South Africa must do our own fair CBDR-RC share of climate action and could be rewarded through having debt written off.
Thirdly, it would seem some JETP monies are envisaged to de-risk or subsidise private sector in the transition. Loans to private sector entities are appropriate, but should those not be raised commercially? We are way past the point where renewable energy and electric vehicles can be considered risky investments. Companies and lenders should stand or fall by their own ROI judgement; isn’t that how free enterprise works?
Germany has long been a good climate partner to South Africa, funding through grants much of this country’s climate change policy and other work. We owe Germany great thanks and have trust in its bona fides – we now ask it to continue in the same grants path. And for the other donor countries to follow suit.
At stake is not just what unfolds for South Africa. The JETP is being watched as a pilot for climate finance. What we settle for here will have consequences for other developing countries. While we need the money – government estimates that about R1 trillion over the next eight years is needed to effect the transition – we urge our Presidential Climate Finance Task Team to stand firm for the right financing terms.
*Louise Naudé is WWF South Africa’s Senior Manager: Climate Change Portfolio and a Presidential Climate Change Commissioner. This article was first published in Business Live.