- On 24 February 2023, global money laundering and terrorist financing watchdog, the Financial Action Task Force, announced that South Africa had been placed on its ‘grey list’ – a list of countries subject to increased monitoring in respect of strategic deficiencies in preventing money laundering and terrorist financing.
The collective effort South Africa put into avoiding a greylisting following the release of the Financial Action Task Force (FATF) Mutual Evaluation Report on the country in October 2021 was significant – ultimately, though, it was a case of too little, too late.
The direct effect of South Africa joining countries such as Democratic Republic of the Congo, South Sudan and Senegal on the grey list is that international investment in South Africa will become less attractive; transacting across South Africa’s borders will be more burdensome from a compliance and regulatory perspective and therefore more expensive; international banks are less likely to provide correspondent banking facilities to South African banks; and all of this is likely to have a disastrous knock-on effect on GDP.
The effects on foreign direct investment into the country are particularly worrying if one considers the ostensible wins that South Africa has gained both from domestic and global efforts to encourage and support the country’s Just Energy Transition (JET).
COP26 in Glasgow in 2021 saw the formation of the Just Energy Transition Partnership (JETP) between South Africa, France, Germany, the UK, the US and the EU, which introduced a nascent financing cooperation mechanism intended to help a selection of heavily coal-dependent emerging economies effect a just energy transition.
The goal is to support these countries – including South Africa – in moving away from coal production, in terms of self-defined pathways, while addressing the social consequences involved. This involves considering issues such as alternative job creation for displaced workers and new economic opportunities for affected communities.
The JETP model is being considered by other developing countries with similar fossil fuel dependencies, and a second tranche of countries has been announced as partners in the JETP model, including India, Indonesia, Vietnam and Senegal.
Africa has been making ambitious noises in holding developed countries to account for their historic financial pledges to developing countries to prevent climate change damage and consequential loss, and to fund their transition away from fossil fuel-generated power.
In addition to South Africa’s perceived victory at COP26, where $8.5-billion was committed to funding the country’s transition away from coal, South Africa signed further concessional loan agreements with French and German development banks worth €600-million at COP27 in 2022.
The intention is for the COP26 Funding to be provided over a period of three to five years, to be utilised not only for the transition of South Africa away from coal-generated electricity, but also for, among other plans, the development of other infrastructure (including green hydrogen hubs and export facilities at ports), social investment and the rejuvenation of the South African manufacturing industry – all aimed at creating jobs where unemployment is the norm, while responding to the global call to take urgent action to combat climate change.
The realisation of South Africa’s JET is also a part of South Africa’s desperate strategy to keep the lights on – not just a worthy cause, but a necessity for a flailing economy.
While the JETP announcements are to be welcomed, their implementation will be the true test of their contribution.
There are concerns about the funding models.
Stakeholders have made it clear that JETP finance must not be used to subsidise private profit or be used in sectors or initiatives that can currently be financed by the market.
There are also concerns regarding delays in the implementation of the JETP (and thereby the JET) as this would ultimately have the effect of compounding prospective loss and damage costs and may even jeopardise trade relationships with several trading partners.
JETPs are also highly political, requiring direct negotiations between host governments and their international development partners.
But what of the greylisting?
The cumulative JET funding to South Africa is intended to be realised through various financial mechanisms, including grants, concessional loans and investments, and risk-sharing instruments. Along with these instruments, we expect commercial lenders to play a part in the total funding required to achieve a just transition by assisting in the funding of new generation and transmission projects.
This can already be seen in the flourishing captive (private) power market.
South Africa currently benefits from a mature commercial lending market and can fund significant rand-denominated debt tickets.
The most obvious direct effect of the greylisting of South Africa on the country’s JET dreams is that debt-based funding is likely to become more expensive with new compliance and regulatory hurdles.
Private entities doing business with greylisted governments and entities based in greylisted countries will also have to deal with these.
Greylisting may also raise questions for lenders as to whether it remains affordable and worthwhile to proceed with funding South Africa’s JET, or whether such funding should be allocated to other developing countries that are equally in need, but are not greylisted.
Moreover, foreign governments or international private entities considering pledging money to South Africa may question whether the country’s inability and/or unwillingness to protect the global financial system from the threats of money laundering and terrorist financing would breach the constructs of Environmental, Social and Governance investing (ESG) – in particular the last element (the ‘G’ for ‘Governance’).
The risk will loom large that substantial sums of money intended to be invested in a green energy transition for the country will find their way into the hands of terrorist organisations intent on destabilising and/or overthrowing foreign governments.
We find ourselves at a moment in history when good news is difficult to find – and this again is not good news. South Africa’s JET is shrouded in clouds of grey. But we must also remain realistic, and, importantly, astute to the risks to our economy that lie ahead. Forewarned is forearmed, so to speak.
If any of the country’s JET dreams are to be achieved, we believe the private sector will have to play a pivotal role in convincing would-be investors to continue with their pledges, notwithstanding the regulatory headwinds, and ensure that invested funds are protected and channelled to where they are intended to be spent.
Africa is a diverse, divergent and challenging investment destination. However, legitimate investment in the continent carries the potential for significant change that would realise the goal of sustainable finance and impact investment.
The effect of greylisting on South Africa’s JET ambitions will undoubtedly add a layer of complexity.
However, investors, financiers, contractors and other parties in the supply chain who can navigate an increasingly arduous regulatory landscape are well-placed to realise the potential for tangible results in a country that faces a real risk of collapse without the likes of JET funding.
Strategic and innovative navigation of the domestic regulatory and economic landscape will be essential to success.
Authors: Gillian Niven and Rebecca Thomson
Gillian Niven is a specialist ESG lawyer with wide experience in the environmental regulatory field, particularly in the energy, mining, oil and gas petroleum, nuclear and industrial sectors; and Rebecca Thomson is Senior Associate in Litigation, with broad experience in regulatory investigations, mining law disputes and corporate investigations, at Allen & Overy, Johannesburg
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