How to grow R130 billion into R500 billion: Rand Merchant Bank boss

The chief executive officer of Rand Merchant Bank (RMB), James Formby, says that the recent R130 billion concessional climate finance ‘Green Deal’ at COP26 from the US, UK, Germany, France and the European Union (EU), could translate into a R500 billion boost to help South Africa’s Just Energy Transition to decarbonise its sources of energy.

Partner countries will mobilise an initial $8.5 billion (R131 billion) over the next three to five years through a range of instruments, including grants and concessional finance, to support the implementation of our revised NDC through a just transition to a low carbon and climate-resilient economy.

The funds will be used to accelerate investment in renewable energy and the development of new sectors such as electric vehicles and green hydrogen. This will provide a significant boost to investment and growth while ensuring Eskom can access resources to finance the repurposing of coal-fired power stations due for decommissioning over the next 15 years.

A joint task force will be established to take forward the partnership over the coming months, said president Cyril Ramaphosa.

“We are yet to see the details behind these financial commitments such as the timing and conditions, but overall we are optimistic about the potential substantial decarbonisation benefits for South Africa that will move us closer to globally accepted emission targets,” said Formby.

The finance he said, is earmarked to help Eskom ultimately retire its coal power stations and assist it in building the renewable energy sector while preventing up to 1-1.5 gigatonnes of emissions over the next 20 years.

He said that the initial commitment of $8.5 billion for the first phase of financing, could ‘crowd in’ up to a further R390 billion of local and foreign private investor capital.

Because of the fairly predictable cash flows, debt funding can be as much as 70-80% of total financing required. Assuming 75% of debt and assuming the R130 billion (25%) comes in as grant money or can be back ranked to commercial lenders, this means that up to R390 billion could be unlocked in the form of debt funding from South Africa’s banking and savings industries.

It will be important that the terms of this $8.5 billion enable this. This also assumes an appropriately capitalised and separate ‘gridco’ which would give lenders confidence that the power produced would be paid for, without requiring further government guarantees.

Formby said infrastructure assets are an ideal long-term asset match for the liability profile of pension funds which need the yield to preserve wealth for pensioners.

“This is why there are proposed changes to Regulation 28, which governs where pension funds can invest, to include an explicit infrastructure category to support the allocation to infrastructure assets, subject to the discretion of fiduciary asset managers of course.”

The non-bank assets under management of the South African savings industry are approximately R11 trillion as at 31 December 2020, mostly invested in equities, so the country has the capacity to help unlock this transition, Formby said.

Banks play a key role in structuring the transactions and assuming risk during the development phase of the projects.

“Having this financing to anchor projects will create great confidence in private investors to invest in these green transition projects. It will allow the government to leverage the initial funding many times over resulting in a far greater impact in developing green sources of energy than just the initial funding number suggests.”

Formby added that, while this won’t solve Eskom’s debt burden and capital structure, the deal was very positive news for South Africa.

“As we once again struggle with load shedding, it’s clear Eskom needs urgent help with accelerating the decommissioning of coal plants and replacing them with renewables, gas bridging and storage.

“We also need to ensure that there is a Just Transition that supports affected people as well as benefiting and uplifting local communities. Let’s hope that the headlines can translate quickly to renewable projects that can pivot South Africa’s energy mix. In addition, this funding can unlock new opportunities for South Africa, for example in green hydrogen and electric vehicles,” Formby said.

Over the course of the next 12 months, the task force commits to carrying out the following plan.

1. Within six months:

  • Pursue the political dialogue on the just transition and provide a leader level update on the advancement of the partnership;
  • Determine the scope of supported actions;
  • Outline terms of financing taking into account the joint commitment to enable a just transition in South Africa;
  • Identify initial sources of financing for the first phase of a broad-based just energy transition brought forward by South Africa in the electricity and coal mining sectors and appropriate financing options for initiating the development of the electric vehicles and green hydrogen sectors;
  • Assist South Africa to structure sustainable financial and technical support within the broader transition to a low emission economy; and
  • Set up coordination platforms with development finance institutions and key stakeholders to further develop the conceptual approach and leverage additional technical and financial support towards their most impactful uses.

2. Within a calendar year:

  • Develop a full programme of work for this partnership on the basis of an investment plan for the just energy transition of the South African government, including support to address the social and economic impacts;
  • Provide a leaders’ level update to review progress;
  • Identify potential financing instruments and policies that will act to improve Eskom’s long term financial sustainability;
  • Work to address South Africa’s longer-term funding needs to lower emissions across all sectors of the economy; and
  • Identify how to leverage further financial resources including domestic resources to that effect.

Read: Ramaphosa on stage 4 load shedding: ‘The calamity of all calamities’

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How to grow R130 billion into R500 billion: Rand Merchant Bank boss