9 March 2010

South Africa: Carbon Ironies - Rich Countries Should Welcome World Bank Loan


Johannesburg — HOW ironic. For years, the World Bank wants to lend SA money for development but SA keeps saying no. When it finally turns around and says yes, a couple of rich countries jump in to try and prevent the loan on the grounds, essentially, that SA isn't "first world" enough when it comes to clean air standards.

Eskom and the government have been in talks with the World Bank for more than a year on a 3,75bn loan that would help Eskom fund its R400bn build programme. The loan apparently has stringent clean-air conditions built into it, which makes it inexplicable, even counter-productive, for the US and UK to oppose.

The World Bank deal would fund specific components of Eskom's build programme, such as the giant coal-fired power station Medupi. And, according to Eskom, it would "simultaneously catalyse new and lower carbon technologies such as large-scale solar thermal and wind power".

Eskom would have had to watch the carbon emissions on its new power stations anyway, adding to the cost of those stations, but the World Bank loan is arguably one of the levers that ensures it will watch that carbon footprint. So it's not clear at all why the US and UK are grandstanding on this one.

Perhaps this just reflects the tension between advanced and emerging economies over carbon emissions standards. With its dependence on coal-fired power stations and its sizeable carbon footprint, SA is inevitably a target. And that is despite the fact that the US, which has some pretty dirty coal-fired power stations itself, hasn't committed to any carbon-reduction targets while SA, perhaps naively, has committed to cutting its footprint 34%.

Whatever the politics of it, SA must stand up to the first-world grandstanding and make its case as a developing country with a rather dire need for infrastructure funding. A mega-project such as Medupi may not seem that developmental in nature, but without it (and other new coal-fired stations), there would be severe constraints on SA's economic growth and therefore on its ability to create jobs and reduce poverty.

The government has already provided Eskom with equity capital and guarantees, and can't really provide more, at least not without cutting into social spending. The National Energy Regulator has agreed to steep tariff increases for Eskom, increases that will have a negative effect on the economy.

And that leaves borrowing to fill the gap: Eskom needs to borrow as much as it can on the market, at rates as attractive as it can get. Not only will the World Bank loan bring Eskom funding that is attractively priced and appropriately timed, it also provides a balance of payments boost for SA.

SA had always resisted World Bank and IMF loans because it didn't want the strings that were attached. If the strings this time are about clean air, rich countries should welcome the loan, not undermine it.

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