Financial and policy advisory company Krutham, formerly Intellidex, has recommended that the Presidential Climate Commission, with the support of the National Treasury and the Auditor-General of South Africa, undertake a detailed study on municipalities – particularly in Mpumalanga – to establish what support is required to improve their financial position and how to incorporate the just energy transition (JET) into their long-term financial planning processes.
The Mpumalanga provincial government, with support from the Mpumalanga Green Cluster Agency, could also work with municipalities to develop coherent JET strategies, the company states.
“There is a need to rethink how JET activities can be included in public sector budgets especially [those of] local municipalities, because they are close to communities.
“Additionally, there is a need to mainstream JET activities across all departments to take full advantage of the public sector funds,” Krutham MD Peter Montalto says.
Krutham has published a report unpacking some of the public finance issues being experienced as the JET unfolds, particularly the bankability of municipalities that are supposed to assist communities affected by the JET.
Two preceding reports issued by Krutham discussed financing the JET through capital markets and funding the social justice component of the JET, while the third and final report looks at more outstanding questions to achieve scale for financing the JET.
Particularly, the latest report focuses on the financial position of municipalities, political dynamics and fiscal options available.
Montalto says the bankability of municipalities and the borrowing constraints of provinces are prominent issues that limit the flow of funds from the Treasury and other potential sources of funding.
Krutham research manager for impact investing Jana van Deventer highlights that Mpumalanga will need the most funding in respect of the JET, as it hosts the majority of coal-fired power stations due for decommissioning.
However, many of its municipalities are vulnerable, owing to weak financial positions and uncreditworthiness, the company warns.
For example, Krutham says the Emalahleni, Steve Tshwete, Msukaligwa, Dipaleseng and Dr Pixley Ka Seme municipalities, in Mpumalanga, are all unlikely to secure private financing, while some are not even eligible for Treasury support, let alone philanthropic assistance or development finance institutions, barring Steve Tshwete which has some reasonable prospects.
Additionally, the Emalahleni municipality is already R5-billion in arrears with State-owned power utility Eskom, while others, such as Msukaligwa, have an average creditors payment period of 1 227 days.
Some of these municipalities are classified as going concerns and most do not submit good-quality financial statements for audit, Krutham points out.
Mpumalanga nonetheless receives, as a province, its equitable share of the national budget, direct conditional grants, indirect conditional grants and spending by national departments on initiatives within the province.
Krutham CEO of the South African business Roy Havemann says there are, overall, three fiscal measures available for JET financing on national government’s part, including tax instruments, public expenditure measures and financial incentives for specific activities.
He explains that tax instruments are designed to change behaviour by changing the relative prices of activities with high levels of emissions, while public expenditure measures include subsidies and transfers to regions, firms and households to support climate reduction, adaptation and mitigation.
The financial incentives include, for example, subsidies for low-emission technologies such as lightbulbs or electric vehicles.
These measures are typically, however, only accessible to bankable and creditworthy municipalities, which Krutham believes should start being addressed by national government through a stronger focus on capacitating municipalities and more efficient use of fiscal mechanisms to support the province.
Krutham proposes that, perhaps, money from the Carbon Tax could be used as a means to unlock revenues for the JET.
The company also suggests that municipalities start thinking ahead about how they will be affected by the decommissioning of coal-fired power stations and how to plan accordingly, including by quantifying the exact funding requirements to transition effectively.
Havemann explains that, while there is JET funding available, there is a pipeline problem in getting funding to projects. Therefore, government could enhance accessibility of mechanisms used to channel JET funding.
Proactive engagement with labour and communities is also important.
Owing to municipalities being affected in a discreet and nuanced manner, not all will require significant JET funding, hence the need for planning and research.
Montalto says achieving scale in financing at a subnational level will remain exceptionally hard for mitigation and adaptation without solving deeper underlying problems first.
He adds that there is a need for wholesale rethinking on fiscal funding, with particular emphasis on how the fiscus can engage more efficiently with JET-affected municipalities.
Notably, Montalto says there is no “free money” available for municipalities, hence the need for them to properly plan and undertake targeted budgeting.
Van Deventer adds that, although municipalities are not the only way funding can be channelled from Treasury or international institutions, the fiscus can play a role in realising projects and ultimately help mobilise more funding at scale from philanthropic sources.
She explains that it was initially envisioned that JET funding would flow freely from Treasury to municipalities; however, the bankability problems have proven to be problematic.
Montalto explains that despite municipalities such as Emalahleni and Steve Tshwete needing both short-term adjustments and longer-term development opportunities – which need transitional funding from a variety of sources – there is currently little thinking at a national level about these issues when it comes to public finances.
Krutham’s main recommendation in the report centres around strengthening institutions in Mpumalanga’s municipalities and in key provincial departments, particularly at a time when Treasury is thinking about reforms to conditional grants and stress testing plans to deal with local effects of the JET.