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The Green Stimulus Opportunity in South Africa

National Business Initiative, April 2020

Business Action for Sustainable Growth

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The NBI Just Transition Plan

Projects To Unlock Green Stimulus

The Green Stimulus Opportunity

Executive Summary

South Africa And The Need For A Just Transition

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Executive Summary, Progress and Next Steps

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South Africa is severely exposed to climate risk, transition risks drive the need to invest in green

The need to stimulate the economy post COVID will require government borrowing that will weaken their ability to support the finance of transitioning South African industry

COVID19 poses an unprecedented threat to the South African economy. GDP is expected to contract at least by 4% to 10%, with up to 1 million jobs and 1600 businesses at risk.

Green Stimulus is a key opportunity to help fast-track job creation, improve liquidity and put South Africa on a path to economic recovery without compromising long term competitiveness

A Green Stimulus provides four strategic advantages to South Africa

1. Access to more funding | Up to $83bn additional funding available 2. Access to cheaper funding | On average up to 18bps cheaper bonds 3. Positive job impact | Up to 500k direct jobs unlocked in green investments 4. Economic prosperity in the long term | Mitigates up to R1.8Tr in transition risks and enhancing competitiveness

Today, leading nations are already voicing the importance and benefits of a 'Green Recovery' – multiple countries have already indicated that stimulus packages will be 'Green' stimulus packages. If South Africa does not invest in a similar way, we risk trade pressure, limited access to capital markets and ODA and entrenching structural challenges in our economy threatening long term competitiveness

In South Africa, various investment opportunities with substantial short- and long-term economic benefits could qualify for green stimulus and already exist as part of government or business plans

Accelerating Green Stimulus serves the purpose of fast-tracking South Africa's economic recovery, locking in long term competitiveness and advancing the country's Just Transition agenda

– a concrete NBI plan is already in place to bring it all together

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Executive

Summary

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Highlights since last time we met

We have agreed with the BUSA board to work on this together

We have secured a letter of support from DEFF

We have had some key discussions with other government stakeholders (DSI, DTI. Treasury)

We have secured support from key CEOs

We have begun some of the quantitative research

We have been providing input into national conversations about green stimulus

We have updated the narrative to include COVID thinking and the nature of short-term stimulus

We have agreed several sources of funding and are finalising contracts

NEXT STEPS

Finalise funding

Set up working groups (please email us your interest: Steve Nicholls (SteveN@nbi.org.za) or Reitumetse Molotsoane (ReitumetseM@nbi.org.za)

Setup 1st CEO dialogue

Continue with supportive research

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Proposed project structure

Directional decisions

Methodological comments

Development of content

Overall project management

Information

Working groups

Industry Group 1Heavy Industry

Industry Group 2Energy

Hydrogen

Commerce, trade, services, & pvt.households(incl. buildings)

Special workshopsE.g., agriculture, sector coupling, other overarching topics

Mobility & transport

Steering committee

NBI, BCG, BUSA (and selected companies/sectors)

Potential core working team (TBD)

CEO Process

Develop leadership and industry wide support

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How to get involved

Please let us know: • if you would like to join a working group (the core working

team will be largely decided by the working groups). You may be invited anyway.

• Are the working groups below complete? Does your company fit into the below or are the below to high level?

• If you would specifically like us to include your CEO in the CEO engagements

• If you would like to nominate someone for the steering committee

Initial Sector Working Group for Discussion (these can evolve as we progress, and spawn more specific working groups):• Energy• Heavy Industry• Mining• Mobility and Transport• Commerce, Trade and Services• Agriculture and Forestry

Initial Technology/Process Working Groups• Green Hydrogen• Adaptation

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Two Month Priority PlanJ u s t Tra n s i t i o n

Establish Governance Structure

Establish Steering Group Members, Write ToR, Invite Members

Determine Priority Sectors, Establish Working Group Members, Write ToR, Write NDA, Invite Members

Prepare Sector Kick-Off Decks

Prioritise priority sectors, schedule role out plan, research each priority sector and prepare kick off

deck

First Sector Consultations

Define working group formats, select facilitators, develop technology plan, set up MS

Teams folders and access rights

Prepare CEO Briefing Documents

Develop CEO awareness deck and narrative, select CEO champions and pre-meet with CEOs,

send invite from NBI and CEO champions; prepare ambition statement (modelled on ACA)

First CEO Consultation

Host first CEO consultation; write up and distribute notes clearly

articulating what is expected of them

JUN W3 JUN W4 JUL W1 JUL W2 JUL W3 JUL W4 JUL W5 AUG W1 AUG W2 AUG W3 AUG W4

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The Green Stimulus Opportunity

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In the short term (2020), COVID19 will put large number of jobs at risk

Economic stimulus packages must be

deployed to fast-track job creation and improve liquidity

However, this should not risk long term competitiveness

Source: April Monetary Policy Review, Business For South Africa – Scenario Analysis

Between

4-10% contraction in GDP*

Between

370k – 1Mjobs lost this year

At least

1600business insolvencies

* At a minimum (best case scenario)

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South Africa will have to borrow in order to incentivize the economy across the short, medium and long term. It is critical that each incentive does not compromise other timelines and that investment maximizes long term competitiveness.

South Africa enters the COVID crisis in a recession, low fiscal space, 62% debt-to-GDP ratio, 29% unemployment, 50% youth unemployment and ratings agencies predicting negative growth and medium-term debt-to-GDP ratio trending to 90%. It is now almost certain that debt-to-GDP ratio will reach 100%.

GD

P G

row

thQ1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

2025

2030

2035

2040

2045

2050

- 13%

0%

13%

The immediate health and humanitarian crisis: focus on saving lives. Boost health care capacity, address hunger, protect firms and households from cashflow limitations and evictions

Economic Stimulus and Recovery: focus on saving livelihoods. Boost demand, provide replacement income, facilitate new investment. The primary challenge is SMME and household stability in the real economy.

Long-term economic recovery: focus on saving the economy. Grow economic competitiveness through labour and capital productivity, enhance trade balance, reduce input costs. Resilience to future shocks is key.

Governments need to deter structural damage to the economy

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79

64

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19 15 13 13 11 9 6

40

0

20

70

10

30

50

60

80

A precedent of Green Stimulus set post global financial crisis and entrenched through green stimulus post COVID widens the structural competitiveness gap between those that invest and those that don't

South Korea, European Union, China and many others used Green Stimulus to promote economic recovery post the global financial crisis

KOR CHN GERGBRFRA USA CAN JPNEU (total)EU (direct)

~$60bn ~$220bn ~$20bn~$10bn~$10bn ~$110bn ~$5bn ~$40bn~$60bn~$25bn

Country

Absolute

Green stimulus as per cent of total stimulus by the end of 2009 (in %)

Note: EU direct = EU wide package. EU total = including individual EU countries additional stimulus packages | Source: Green Stimulus Measures, ILO (2010)

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There is already green pressure on COVID related stimulus packages from around the world

Source: IMF, National Authorities, Oxford Economics

Size of stimulus package relative to GDP (%) (as of April 26, 2020)

Country

3 - 22 146 5 591 4 10 - 1036 423 342 11 1169 157 13 55 638 21

8 23 14 18 5 22 11 18 380 133 111 120 18 1569 138 21 64 448 125

MEX IND RUS KOR ARG ITA TUR IND CHN DEU GBR FRA ZAF USA CANSAU BRA JPN AUS

USD bn

USD bn

1%1% 2%

3% 3% 4% 4% 4% 5% 6% 7% 8% 9% 10%0%1% 9%

1%

32%

1%1%

3%

30%

16%13%

5%5%

10%12%

1% 1% 1% 1% 2%

2%

2%

Revenue and expenditure measuresLoans, equity injections and guarantees

$4.6bn

$3.2bn

South Korea embraces EU-Style Green Deal for COVID19 recovery (Apr 2020, Forbes)

Signatories to European green recovery alliance to put EU's Green Deal "[…] central to a resilient recovery after COVID19."Other signatories: Austria, Denmark, Finland, Latvia, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Greece

(Apr 2020)

"When the acute phase of the virus is over we are planning an [additional] stimulus package that advances the nation technologically and helps the economy move towards climate neutrality."German Finance Minister Olaf Scholz (Apr 2020)

"By using the European Green Deal as our compass, we can turn the crisis of this pandemic into an opportunity to rebuild our economies differently and make them more resilient."

European Commission President Ursula von der Leyen (Apr 2020)

"The world must work together, as it has to deal with the coronavirus pandemic, to support a green and resilient recovery, which leaves no one behind."Climate Secretary, Alok Sharma (Apr 2020)

"[The new legislation] demonstrates how forward-thinking policy can be used to boost the state economy and create jobs while bringing abundant, clean, renewable energy to all New Yorkers."Secretary of State Rossana Rosado on New York State's new legislation for green recovery (Apr 2020)

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Green stimulus a key opportunity SA must take advantage of

Four reasons why…

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Up to

$83Bn more in international funding

accessible

Additional funding 2

On average

18bps cheaper for Green Bonds vs. Vanilla

Bonds

Cheaper funding 3

Up to

500k direct jobs unlocked in green

investments

Positive job impact 4

Mitigate transition risk of

>R1.8Trto ensure long term economic prosperity

Long term economic prosperity

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$83Bn in additional funding available for “green” projects, over and above secured funds

• Climate change mitigation• Climate change adaptation• Sustainable use and protection of water and marine resources

• Transition to a circular economy, waste prevention and recycling• Pollution prevention and control• Protection of healthy ecosystems

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Ho

use

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nd

s

23

(4%)

Tota

l

9

(2%)

DFI

s(m

ult

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DFI

s(n

atio

nal

)

Go

vern

men

t b

ud

gets

183

(32%)

DFI

s(b

ilate

ral)

Clim

ate

Fun

ds

57

(10%)

73

(13%)

579

(100%)

3

(1%)

132

(23%)37

(6%)

55

(10%) 5

(1%)

$83Bn

CommercialConcessional and commercial

Origin of climate finance, Ø 2017-2018 ($Bn)

To qualify, project must meet one of six objectives

Additional funding 1

Sustainability aspects are already requirement for general funding1

Increased demand for funding post-COVID19 makes this a critical pre-requisite to access limited funds

1. Funding which is not explicitly dedicated to "green" initiatives | Source: World Bank

151. Development finance institutions 2. Includes the international bank for reconstruction and development (IRBD) and the international development Association (IDA) 3. Includes commission of the European communities and the European development Fund | Source: OECD 2016–2017 Climate related development finance database

Top 10 multilateral DFIs1 and institutions ($37Bn)

Top 10 bilateral providers (DFIs1 and agencies) $24Bn Top 10 climate funds ($5Bn)

Int. finance Corp.

European Inc. Bank

($B)

The World Bank2

EB for Restr. And Dev.

3.50

Inter-American DB

EU Institutions3

Asian DB

Asian Infra. Inv Bank

African Dev. Bank

GGGI

10.50

5.50

4.60

3.80

3.40

2.90

1.60

1.30

0.02

($B)

0.6

Japan

Germany

USA

France

United Kingdom

Norway

Netherlands

Sweden

Switzerland

1.5

Canada

7.2

6.7

4.3

0.8

1.3

0.7

0.5

0.4

Strategic climate fund

Least Dev Count. Fund

Int. Fund for Agr. Dev.

($B)

1.2Green Climate fund

Global Env. Facility

GEF general

Clean technology fund

Climate Inv. Funds

Adaption Fund

0.3

Nordic Dev. Fund

1.0

0.9

0.1

0.6

0.3

0.5

0.1

0.1

Backup

$67Bn (80%) of total committed green stimulus funding in 2017

Additional funding1

30 providers cover ~ 80% of $83bn of green stimulus funding in 2017, which indicates the orientation of some of South Africa’s biggest trade partners and multilateral funders

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Green stimulus drives long term economic prosperity and can mitigate up to R1,8Tr in South Africa's transition risk

1. “Transition risk” is widely regarded as the risk that the value of assets and income are less than expected because of climate policy and market transformations, such as the switch away from coal-fired power | Source: Understanding the Impact of a Low Carbon Transition on South Africa; Climate Policy Initiative (2019)

Long term economic prosperity 4

Createsjobs and improves social well-being

Creation of as much jobs as coal, and up to 2.5X more in the best case, with increased resilience and quality of work

due to higher skilled workforce

Enhances economic competiveness on an

international level

Close widening "green gap" between SA and its main

trade partners e.g.; EU and China, and remain

competitive and relevant for new markets / demand

Improves SA'sclimate resilience

Adaptation measures to mitigate local climate change risks and ensure water, food and energy security needed

Mitigates up to >R1,8Tr of SA'stransition risk

Measures address SA'stransition risk of >R1,8Tr in

present value terms between 2013 and 2035 due to

stranded assets1

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Projects To Unlock Green Stimulus

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Green investment opportunities with substantial short-and long-term economic benefits

Buildings

Drive retrofitting measures and high-efficiency building constructions

Industry

Promote energy and resource efficiency, waste management, de-carbonisation activities incl. green hydrogen

Transport

Launch public transport expansion and fleet renewal programmes

Energy

Accelerate large scale renewable energy deployment and grid expansion and upgrade

Agriculture and land-use

Promote agricultural resilience programmes and accelerate land use management

Water

Accelerate water conservation and water mgmt. measures

Wild life economy

Promote wildlife conservation and develop high-value eco-tourism sector

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The Just Transition Plan

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A coordinated national effort

is requiredon critical questions

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What is the roadmap to a Just Transition, particularly in the

geographies and sectors that will be most affected?

Based on physical and climate risk, what is an appropriate level of

ambition to reduce GHG emissions by 2050?

What concrete measures can be implemented in each sector

and how can we create an enabling policy environment to

reach the ambition?

What are the associated social and economic costs

and what are the support requirements of the

international community?

What are the consequences of local and global inaction and

how would the country adapt to physical risk?

In the context of a post-COVID

economy

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The project exists at two levels, the NBI process and the NBI Process + BCG analytics and support

The NBI and BUSA working together with

business partners

The NBI project with significant

analytical support from

BCG

+

Business Leadership

Dialogues: CEO Engagement

Business-led Mulit-stakeholder Dialogues

Climate Transitions Research

Programme

Communications and Knowledge Dissemination

BCG Global Experience

BCG Analytics and Quantitative Assets

Accelerate 'green' infrastructure to support the economy post-COVID 19

Still

to

be

fu

nd

ed

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Phase 1 aims to accelerate 'Green Stimulus' post-COVID 19…

… and fulfil a dual objective of:

Key Activities Deliverables

• Develop long list of green infrastructure projects (leveraging Business for South Africa initiative and industry engagement)

• Assess feasibility and impact per project (socio-economic and environmental)

• Prioritise and short list key projects for implementation

• Define enabling government and industry interventions to unlock project execution

• Track green funds and COVID response funds – prepare and articulate structured responses for prioritised applications

• Shortlist of Green Infrastructure projects to be accelerated assessed along key dimensions (not exhaustive) :– Gross Value Added– Jobs created– Emissions reduction

potential

• Report on enabling interventions (e.g. policy reform, administrative debottlenecking etc.)

• Funding opportunities pipeline and prepared responses

Stimulating economic growth & job creation

Advancing SA'sClimate change agenda

Detail - Phase 1: Post-COVID green stimulus

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This study has the potential to move SA away from …

And create enormous value by …

Stalled progress due to resistance from pockets concerned about being left behind

Inconsistent policies & regulations which incentivise counterproductive behaviour

Self-optimized company scenario planning due to national level uncertainty

Limited and haphazard cooperation between companies

Unlocking & channelling local & international support to high need & impact areas

Laying a foundation for consistent and effective policy development

Defining an optimized pathway at national level to decrease uncertainty for business

Mobilising coordinated cross-industry collaboration

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ReferencesBCG, 22 March 2020. Covid-19 Economics: V-to-U, the risk of structural damage, and the impending policy battle.

JP Morgan, 20 March 2020. Coronavirus update: COVID-19 and the markets.

London Business School, February 2020. The economics of a pandemic: the case of Covid-19.

Econometrix, 15 April 2020. From our chief economist, Vol10920/0412. Massive downward revisions by IMF of forecast growth in 2020 for all countries, but remarkably optimistic for 2021

McKinsey and Company, 13 April 2020. COVID-19 Briefing Materials, global health and crisis response.

PWC South Africa, 31 March 2020. Thinking through the possible Economic consequences of COVID19 for South Africa.

Singular, 8 April 2020. 2020: How to pivot a crisis into a time of opportunity? Singular’s view: COVID-19 impact in South Africa.

WEF, 14 April 2020. Coronavirus: 5 predictions for how the economy might recover. https://www.weforum.org/agenda/2020/04/alphabet-soup-how-will-post-virus-economic-recovery-shape-up/

World Bank, 14 April 2020. Planning for the economic recovery from COVID-19: A sustainability checklist for policymakers. https://blogs.worldbank.org/climatechange/planning-economic-recovery-covid-19-coronavirus-sustainability-checklist-policymakers.

Harvard Business Review, 3 March 2020. What Coronavirus Could Mean for the Global Economy. https://hbr.org/2020/03/what-coronavirus-could-mean-for-the-global-economy?ab=hero-main-text.

UCT GSB PRESS OFFICE - 6 April 2020. Everything has changed: The world and South Africa's economy after COVID-19. https://www.gsb.uct.ac.za/ideas-exchange/covid-19/everything-has-changed-economy-after-covid-19

World Economic Forum, 2014. Global Risk Report. In NBI, November 2015. NBI Green Economy Finance Project Research Report – Project Overview: The power of collective action in green economy planning

NBI, November 2019. NBI Climate Mapp (download from your favorite app store).

NBI, 2018. 2018 CDP Infographics. https://www.nbi.org.za/communications/infographics/

Stats SA, 2018. Online economic statistics.

DTI, 2017. Online database of commodities traded.

NBI, 2019. 2019 CDP Infographics. https://www.nbi.org.za/communications/infographics/

Climate Policy Initiative, March 2019. Understanding the impact of a low carbon transition on South Africa. https://climatepolicyinitiative.org/wp-content/uploads/2019/03/CPI-EF-Understanding-the-impact-of-a-low-carbon-transition-on-South-Africa-2019.pdf

Harvard Atlas of Economic Complexity, last accessed Nov 2019. https://atlas.cid.harvard.edu/