South Africa secures $1.5 billion infrastructure loan

From the newsletter

The World Bank approved a $1.5 billion loan for South Africa to support structural reforms in the energy and freight transport sectors. A key part of the reforms is enhancing energy security, moving away from Eskom's monopoly towards a more open and competitive electricity market, allowing more providers to generate, transmit and distribute power.

• South Africa faces a deepening jobs and growth crisis. In 2023, power outages cut GDP by 2% and cost 500,000 jobs, while rail and port inefficiencies reduced exports by around 20%.

• The reforms aim to add 3,500 MW of new renewables capacity (8% of the current total) by March 2027. Private investment is to build 200 km of transmission lines and deploy 50,000 smart meters to improve revenue collection.

More details

• South Africa has pledged to modernise its state-owned enterprises and open critical industries to competition. The country's unemployment rate has hit over 31%, and its GDP growth stagnated with annual growth of less than 1% in the last decade. The loan will provide funding for state-owned Eskom to strengthen the electricity grid and support renewable energy integration. It will also assist Transnet, the country's port and rail operator, to expand its freight transport capacity.

• President Cyril Ramaphosa, speaking last month about his government’s infrastructure drive, emphasised its importance to South Africa’s future. He said, "Infrastructure is the flywheel that our economy needs to boost growth and to create jobs. Infrastructure that is well constructed and maintained encourages investors to see our country as a great investment destination.”

• The World Bank's reform support will help address the longstanding bottlenecks to attracting investment and enhancing public service delivery. This could potentially create 250,000 jobs by 2027 and about half a million jobs by the early 2030s.

• South Africa has begun reforms, and they're bearing fruit. The 2022 Energy Action Plan opened the sector to private investment and improved regulation. It supported the country in  2022 with a $750 million COVID-19 Response Development Policy Loan and a $1 billion Energy Transition Development Policy Loan in 2023. Eskom’s debt relief helped raise energy availability from 55% to 63% by late 2024.

• Investments in South Africa's energy sector are now being viewed positively by both investors and development partners. The liberalisation of the electricity market has led to a noticeable increase in renewable energy projects, with at least 3,300 MW currently under development, as tracked by the Renewables Rising project database over the past four months. These projects alone have attracted investments worth more than $6 billion.

• Despite the investments in power generation, the transmission infrastructure lacks the capacity to evacuate power. Plans are underway to roll out the National Transmission Company of South Africa (NTCSA), which will handle the country's transmission systems, with operational plans expected by April next year. It plans to use the private sector to build about 14,000 km of transmission lines by 2034.

Our take

• The development policy loan is designed to break existing policy and regulatory bottlenecks, thereby attracting private sector investment. This funding is crucial given the scale of electricity demand in South Africa, as it will facilitate the formulation of structures to make private sector investment easier.

• To truly capitalise on these investments, the build-out of transmission infrastructure needs to be fast-tracked. Key priority regions should include areas like the Northern Cape, Western Cape, and Eastern Cape, where grid transmission capacity is particularly constrained.

• This acceleration will also create a significant opportunity for local companies to participate in the expansion and modernisation of the energy sector. South Africa should provide the necessary support, especially in capital.