SA needs just transition financing mechanism to move the needle

By Khwezikazi Windvoel

We all should be knowing that the climate transition is going to be very disruptive to our economy; some sectors will grow while others will decline. This is the clarion call which inspired the National Treasury and the Presidential Climate Commission (PCC) to collaborate in hosting a Climate Resilience Symposium, which was officially opened by President Cyril Ramaphosa in Pretoria yesterday.

At the back of this symposium, the PCC released its Recommendations Report for a Just Transition Financing Mechanism (JTFM) to address the financial barriers and mobilise and allocate finance effectively, ensuring that projects which deliver community empowerment, alternative livelihoods, aid in diversifying local economies, and skills development are adequately structured and financed.

Multiple market failures and complex challenges

The JTFM provides an evolutionary roadmap on how we can finance and support the transition to a low-carbon economy, ensuring that it benefits all South Africans, particularly those who have historically been marginalised.

Our research and stakeholder perspectives clearly demonstrate the complexities and challenges, exacerbated by multiple market failures hindering the mobilisation and scaling up the just transition financing, and these are:

The lack of common definition and standardised metrics which undermine the consideration of just transition objectives in project development and investment strategies, as traditional economic models do not adequately address the sustainability costs associated with transition projects.

Complex risk profiles of many just transition projects bearing new or greater risks, which traditional financing-mechanism institutions are reluctant to stomach and further exacerbated by the exponential transaction costs of relatively small-sized projects thus making them less attractive to investors.

There is an investment mismatch and limited funding sources, worsened by the reality that just transition projects often require patient, long-term capital which is not aligned with shorter investment horizons typical in the finance sector that have not bettered the situation.

Time to act now, learn and gain traction

It is clear that a number of important functions need to be performed to address these challenges in the design of a just transition financing ecosystem that will deliver a just society.

Some of the immediate actions should include a project preparation facility to support projects from ideation to implementation, including capacity building at local government-level for credible pipeline development.

These functions will need to evolve over time, and to that extent the PCC recommendations suggest that the ecosystem for funding just transition proceeds in phased stages to ensure systematic and sustainable progress.

In the immediate phase, over the next 18 months, our recommendations support the setting up of the JET Investment Plan Funding Platform to perform matching and project preparation functions in relation to the components of the JETIP, and as the PCC monitor and track success and draw lessons for further rollout.

We also need to redouble efforts towards small, medium and micro-sized enterprises (SMMEs) support and development and explore avenues through which SMME support and development can be achieved by use of the grants and concessional finance commitments in the JETP package.

The role of National Treasury

National Treasury has a crucial role to play in all of this. The PCC recommends that National Treasury undertakes a comprehensive fiscal review from the perspective of the just transition, and evaluates the extent to which industrial, social and labour market policy interventions are calibrated with the pace of decarbonisation and adaptation investments.

Over the next three years, the functions described above will need to be institutionalised within our national development finance institutions (DFIs) by building on existing capabilities within the DFIs such as the Industrial Development Corporation, National Empowerment Fund, and Development Bank of Southern Africa to address gaps.

This should complement the work of the recently established DFI CEOs Forum in coordinating the integration of the functions within their realm and influence.

For the next three to five years, we must work on a robust Just Transition Financing Mechanism as a centrally coordinated institution charged with the daunting task of capitalisation, mobilisation of increased funding and the development of innovative structures to support a wide range of just transition projects.

Our international partners are important players in this system and their support can be truly catalytic. As we move forward with these financing arrangements, we urge our partners to make additional, quality funding available and explore and deliver innovative and creative approaches to grant financing to ensure that grant support can be effectively utilised to support, de-risk, and scale just transition projects.

The JTFM marks a significant milestone in our accelerated efforts to address climate change while promoting social and economic justice – all in all, the recommendations propose options for action in addressing immediate functional gaps, and system-level reforms needed to enable finance to flow to a just transition.

Khwezikazi Windvoel is a municipal project finance manager in the Presidential Climate Commission Secretariat responsible for climate finance and innovation.

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