4 Financing

The flow chart overleaf (Figure 4) is an expression of the South African climate finance landscape for the period of 2017-2018, published by the Climate Policy Initiative.43 The chart follows the flow of financing by source (public/private/blended) and traces it through to the sector where the funds are ultimately deployed. While green energy dominates the per-sector spend on climate finance, health is not represented in the chart and it is assumed that the health sector is represented in other defined sectors (e.g. the built environment, cross-sectoral).

Of note from the chart is the ratio of government spend vs private financing. Of the R63.1 billion total climate spend, only 19% is pure government spend. While government is represented in the blended financing options, these represent just under 8% of all climate financing. Private entities, including local commercial entities as well as NGOs, donors, and philanthropic organisations, are responsible for 56% of climate spend in South Africa.

An alternate mapping of the availability of climate finance through different categories of finance institutions was undertaken by the Climate Finance Accelerator and is reproduced in Table 2 below.44 It shows the availability of climate funding in the different stages of project initiation, project development, primary project funding, and secondary markets and refinancing. Approximately 85% of the identified funding support initiatives were directed towards advancedstage projects (e.g. providing operational support), and only 10% offered a degree of earlier stage funding such as pre-feasibility or feasibility studies. As expected, the analysis found a larger funding focus on mitigation rather than adaptation; mitigation is a more mature market for financing, whereas adaptation is lagging behind, and the financing options specifically for health and climate change are not well developed.

Key: Available Partially available

Source

Commercial banks

Institutional investors

Private equity

Corporate funders

Asset managers

Venture capital

Impact funds

Angel investors

Microfinance, credit unions

Government budget

Climate funds

Bilateral dev partners

Multilateral dev partners

NGOs, philanthropic orgs

Table 2: Availability of funding through different climate finance institutions

43 Cassim A, Radmore JV, Dinham N, McCallum S (2021). South African Climate Finance Landscape 2020 Climate Policy Initiative, Bertha Centre, GreenCape. https://www.climatepolicyinitiative.org/publication/southafrican-climate-finance-landscape-2020/

44 Climate Finance Accelerator (2022). Climate Finance Landscape: South Africa Summary https://www.nbi.org.za/wp-content/uploads/2022/02/Climate-Finance-Accelerator-South-Africa-ClimateFinance-Landscape-Summary-Report.pdf

4.1 Barriers and enablers

The Climate Finance Accelerator has identified barriers and enablers to accessing climate finance in South Africa through their analysis of the climate financing landscape.45 Key findings include the following:

Barriers

1. Misalignment between green economy vision, industrial policy, and structure of the financial system

2. Limited funding opportunities for early-stage projects, higher-risk projects, project development support, or progressing projects from development to commercialisation

3. Challenge to find funding options for mid-sized projects as the ticket size is either too small or too large

4. Limited focus on non-energy related low-carbon projects, i.e., outside the energy sector. Need diversification to fund a wider range of projects/interventions, including both mitigation and adaptation

5. High transaction costs for commercial finance of climate projects

6. Grant-based funding is constrained by unfavourable global economic conditions

7. Where dedicated financing facilities do exist, the criteria for accessing them may be unclear

8. Project sourcing and evaluation skills shortages in the financial sector

9. Lengthy development and approval of policies due to high levels of bureaucracy which impact investor certainty

10. Sophisticated tracking systems are required to keep track of stakeholders, funding channels, currencies, aggregation, co-financing, etc.

Enablers

1. High disbursement rate of committed climate finance (above global average)

2. Green economy policies are strong in South Africa

3. South Africa is prioritising decarbonisation of the electricity sector

4.2 Existing funding options

Funding options for climate and health initiatives in health in South Africa are limited, with a number of local stakeholders in both the public and private health sectors lamenting the lack of funds accessible for innovation and development in the adaptation space in particular. There are, however, existing climate finance initiatives for green infrastructure development and renewable energy projects that can be further explored in the health care sector, with energy representing the largest focus for climate finance investments in South Africa.

4.2.1 GCF, DBSA, CFF

The WHO is a delivery partner for the Green Climate Fund (GCF), from which South Africa qualifies for funding grants. The funding, however, is limited to $1 million USD per country per year with strict sub-limits for spend. Helen Yaxley, the FCDO Climate and Health policy lead, mentioned that the GCF has said there isn’t a lot of demand from the health sector, but also that she has heard that countries are having difficulties accessing the GCF.

The Development Bank of Southern Africa (DBSA), based in South Africa, is accredited by the GCF and “provides sustainable infrastructure project preparation, finance and implementation support in order to improve the population’s quality of life, accelerating the sustainable reduction

45 Climate Finance Accelerator (2022). Climate Finance Landscape: South Africa Summary https://www.nbi.org.za/wp-content/uploads/2022/02/Climate-Finance-Accelerator-South-Africa-ClimateFinance-Landscape-Summary-Report.pdf of poverty and inequity, and promoting broad-based economic growth and regional economic integration”.46 The DBSA and the GCF co-finance the Climate Finance Facility (CFF), the first climate finance facility in Africa to use a “green bank” model, each committing matching investments of $55 million USD for a total of $110 million initial capital.

The CFF has the following 5 investment criteria:47

1. Low-carbon infrastructure, climate-related goals

2. Market transformation

3. Technically and economically feasible but unable to secure commercial financing

4. Demonstrate leverage and the ability to crowd in commercial investment

5. Address climate adaptation related goals particularly where they require water Green banks focus on facilitating private investment into climate-resilient infrastructure development, and thus the CFF is an important potential funder for the health care sector to investigate when planning new sustainable health care facilities.

4.2.2 Funding sources

Pfunzo Mudau from the British High Commission Pretoria noted some existing initiatives in South Africa for climate change mitigation through decarbonisation, though these do not explicitly involve the health sector. The Just Energy Transition Partnership aims to accelerate the decarbonisation of South Africa's economy with an initial commitment of $8.5 billion USD from the UK, France, Germany, the European Union and the United States, “through various mechanisms including grants, concessional loans and investments and risk sharing instruments, including to mobilise the private sector.”48 A key part of the UK’s technical assistance under this partnership is the UK PACT programme (Partnering for Accelerated Climate Transitions), jointly funded by FCDO and the Department for Business, Energy and Industrial Strategy, which has been running since 2020 to help South African companies implement government policy on emissions reductions and renewable energy uptake. Furthermore, the NAMA Facility project ‘Energy Efficiency in Public Buildings and Infrastructure Programme’ is utilising EUR 20 million funding49 to scale up decarbonisation and transformative energy efficiency efforts in public buildings.50

In regard to funding of climate change and health programmes, Yogan Pillay at CHAI is working on a programme which aims to understand the effects of extreme heat on maternal, neonatal and child health in townships, and co-produce solutions with communities. While a small pilot was funded by CHAI for a single township, additional funding was being sought from the Wellcome Trust and the UK National Institute for Health and Care Research to expand the programme. Mr Pillay mentioned that although the government adaptation strategy has not really been implemented, it is good for potential funders to see that there is an enabling policy

46 Green Climate Fund. Development Bank of Southern Africa https://www.greenclimate.fund/ae/dbsa (Accessed 4 October 2022)

47 Convergence, DBSA, Coalition for Green Capital (2019). Case study: Climate Finance Facility https://greenbanknetwork.org/wpcontent/uploads/2019/07/Convergence__Climate_Finance_Facility_Case_Study__2019.pdf

48 Gov.uk (2021). Press release, Joint Statement: International Just Energy Transition Partnership https://www.gov.uk/government/news/joint-statement-international-just-energy-transition-partnership

49 The NAMA Facility is funded by the German Federal Ministry for Economic Affairs and Climate Action (BMWK), UK Department for Business, Energy and Industrial Strategy (BEIS), Danish Ministry of Climate, Energy and Utilities (KEFM), Danish Ministry of Foreign Affairs (MFA), European Commission, and Children's Investment Fund Foundation (CIFF) framework. James Irlam at University of Cape Town mentioned that universities fund much of the climate research in South Africa.

50 NAMA Facility. South Africa – Energy Efficiency in Public Buildings and Infrastructure Programme (EEPBIP) https://www.nama-facility.org/projects/south-africa-energy-efficiency-in-public-buildings-and-infrastructureprogramme-eepbip/ (Accessed 30 September 2022).

Private Equity Funds, such as the Summit fund, are a prominent feature in new health facility developments, particularly in the private sector. Some of these, especially if there is foreign government or institutional backing within the fund, will drive an ESG mandate as part of the overall project; however, the environmental spend is likely to be focussed almost entirely on the security of energy supply.

4.3 Funding models to be explored

4.3.1 Co-financing models

A 2019 study by the London School of Hygiene and Tropical Medicine examined the adoption of co-financing models in the health sector to explore the potential of leveraging non-direct health sector funding that may impact social and non-biological determinants of health.51 Co-financing is defined in the paper as “the joint financing of a programme or intervention by two or more budget holders that have different sectoral objectives to jointly achieve their separate goals more efficiently.”

The paper further explains that the benefit of co-financing would mean “increasing the resource envelope for health spending by pooling funds with non-health sectors and thus leveraging additional investment in health, as well as more efficient purchasing of health-producing interventions beyond the health system”.

An example of this would be a Ministry of Health and Ministry of Education each allocating a portion of their budget to a school nutrition programme. The programme has both positive health and learning outcomes and the pooling of funds would mean a wider rollout to more schools for longer periods.

The types of financial mechanisms for co-financing, taken directly from McGuire et al., are:

• Revenue collection o Pooled funds: At least two budget holders make contributions to a single pool for spending on pre-agreed services or interventions. This can be done at various levels (national, regional, local) and accessed in different ways (i.e. grants or regular budgetary system). o Aligned budgets: Budget holders align resources, identify own contributions towards pre-specified common objectives. Joint monitoring of spending and performance, but management remains separate. o Structural integration: Full integration of cross-sector responsibilities, finances and resources under single management or a single organisation.

• Purchasing o Joint or lead commissioning: Separate budget holders jointly identify a need and agree on a set of objectives, then commission services and track outcomes. The commissioning itself can be done through a joint authority board or through one agency taking commissioning responsibility. o Cross-charging: The mechanism whereby a cross-sector financial penalty is incurred for the non-achievement of a pre-specified target. Cross-charging compensates sectors who incur an external cost from another sector’s poor performance. o Transfer payments: Sectoral budget holders make service revenue or capital contributions to bodies in other sectors to support additional services or interventions in this other sector.

The study identified 81 successfully implemented co-financing cases, with only five cases not involving the health sector. Over half of the cases were collaborations between the health and social care sectors, with education the next most frequent co-financing partner. Most of the successful programmes were identified in high-income countries, with only four executed in Africa. All African cases were promotion-based cases (single-sector investment in another sector to leverage resources and influence factors that affect its own outcomes) involving the health and education sectors. Financing also involved international donors and development agencies such as the World Bank, United Nations Development Programme, Japanese International Cooperation Agency, and Bill & Melinda Gates Foundation. Each of those agencies and donors are well represented in South Africa and may be good partners in exploring potential climate and health programmes in the country going forward.

4.3.2 Blended finance: Social Impact Bonds

An increasing number of investors are looking for new ways of meaningfully deploying their capital. Since 2010, several companies, private investors, organisations and governments have worked together to form "Social Impact Bonds" (SIBs), which are a form of impact investment that uses the money of private investors to fund programmes that accomplish socially beneficial goals.

Also known as Pay-for-Success Bonds or Social Benefit Bonds, these are outcomes-based contracts whereby the government contracts a financial intermediary to sell bond-like instruments to investors in order to pay for the upfront costs of implementing or expanding programmes that have pre-defined priorities and outcomes. In this way, beneficial and innovative programmes can be implemented which would otherwise not have been able to secure funding from government due to the financial risk and upfront costs. SIBs do not yield a fixed rate of return like conventional bonds, but rather the return to investors is paid out based on government savings resulting from the success of the programme Repayments cover the initial investment plus a financial return, depending on the project’s measurable outcomes. The innovative model means that each stakeholder has financial exposure, thus spreading the risk, and each stakeholder wins if the programme is a success (government saves money and can claim a successful programme that benefits society, investors make a return on investment, programme beneficiaries benefit from the positive impacts of the interventions).52

Given that an SIB is an outcomes-based contract, the framework for defining success and assessing results is very important. Metrics should be straightforward and measurable. While this may seem simple in principle, each stakeholder is likely to have their own views and interests. For example, governments have a political incentive to claim success, yet also an interest to set the bar high to maximise value for money Investors must balance between setting a goal low enough to secure financial returns, but high enough to ensure the integrity of the programme. An independent advisor will usually help to negotiate reasonable returns and success metrics with both sides as well as the service providers.

Table 3 presents advantages and disadvantages of SIBs, adapted from the paper Financing Healthcare Services for the Poor 53

52 Impact Investment Shujog Limited (2014). Financing Healthcare Services for the Poor https://www.issuelab.org/resources/23598/23598.pdf

53 Impact Investment Shujog Limited (2014). Financing Healthcare Services for the Poor https://www.issuelab.org/resources/23598/23598.pdf

Advantages Disadvantages

• Transfers majority of financial risk from government to investors

• Transfers upfront programmatic costs from government to investors

• Strong emphasis on social impact with third-party evaluation of results

• Exposure to broad set of investors

• Creates multi-stakeholder solutions with public and private support

• Incentivises innovative solutions that meet social needs

• Limited to programmes with clear, measurable impact and targets, in which savings from the intervention will exceed the project cost and return to investors

• Relies on public sector buy-in

• The backing government must be creditworthy

• Data-intensive nature requires support from a mature M&E system

Table 3: Advantages and disadvantages of social impact bonds

In emerging markets, SIBs are also called Development Impact Bonds (DIBs). A DIB model for energy efficiency was published by the Center for Global Development and Social Finance, outlining the case study for this investment.54 A significant barrier to implementing energy efficiency measures in LMICs is the substantial upfront cost of these measures, whereas the savings accrue over a longer time period. This makes it an attractive case for DIBs, as the relevant environmental (e.g. lower energy usage, GHG reductions) and monetary (e.g. cost savings) outcomes can be easily measured with existing technologies. The case study notes that “since this model can be financially sustainable, the gains to the DIB investors can be recycled into other investments, thereby increasing the impact”.

4.3.3 Project bonds for infrastructure

The need for building new health and energy infrastructure and updating existing infrastructure necessitates a large amount of funding. Stricter regulations on banks and their lending requirements after the financial crisis of 2007-2009 means that large infrastructure and energy projects can no longer be funded by traditional bank debt alone Project bonds are an alternative avenue to finance infrastructure projects, by offering a long-term and fixed-rate investment opportunity to finance a specific project where the return is paid from the revenue of the project. This type of funding model is attractive in the energy sector because of the likelihood of stable, long-term return on investment once the project is built and operational. There is, however, a level of risk inherent in construction of new infrastructure that some funders will not be comfortable with.

The first infrastructure project bond in South Africa was listed on the Johannesburg Stock Exchange in 2013 to finance a solar power project located in Touwsrivier in the Western Cape. The bond offers repayment terms of 11% over a 15-year period, allowing for the principal and interest to be repaid at the same time.55 Since reaching its commercial operating date in December 2014, the project is now one of the largest operating concentrated photovoltaic facilities in the world, and the electricity generated by the plant feeds into the national grid

54 Center for Global Development, Social Finance (2013). Investing in Social Outcomes: Development Impact Bonds. The Report of the Development Impact Bond Working Group. https://www.cgdev.org/sites/default/files/investing-in-social-outcomes-development-impact-bonds.pdf

55 Deloitte. Project Bonds: An alternative source of financing infrastructure projects https://www2.deloitte.com/za/en/pages/finance/articles/project-bonds-an-alternative-to-financinginfrastructure-projects.html (Accessed 30 September 2022) operated by Eskom.56 Its success paves the road for more project bonds to finance infrastructure development in South Africa.

56 Theron A (2020). juwi awarded Touwsrivier CPV Solar Project O&M contract. ESI Africa. https://www.esiafrica.com/solar/juwi-awarded-touwsrivier-cpv-solar-project-om-contract/ (Accessed 30 September 2022).