The loan is provided to South Africa’s power utility, Eskom, and was brought about by unique circumstances including South Africa’s energy crisis of 2007 and early 2008, and the global financial crisis that exposed the country’s vulnerability to an energy shock and severe economic consequences, according to the World Bank.
"Without an increased energy supply, South Africans will face hardship for the poor and limited economic growth," said Obiageli K. Ezekwesili, World Bank Vice President for the Africa Region.
"Access to energy is essential for fighting poverty and catalyzing growth, both in South Africa and the wider sub-region. Our support to Eskom combines much-needed investments to boost generation capacity for growing small and large businesses, creating jobs, and helping lay the foundations for a clean energy future through investments in solar and wind power."
In approving the project, the World Bank Board of Executive Directors noted South Africa’s achievement in increasing energy access from around 30 percent of citizens to more than 80 percent since the fall of apartheid in 1994 and noted its Free Basic Electricity policy that provides 50 kilowatt hours (KWh) of free electricity per month to poor families.
The Board noted South Africa’s pivotal role as generator of 60 percent of all electricity consumed on the African continent and the importance of a functioning electricity sector for job creation, economic progress, human welfare, and poverty reduction.
However, the United States, the biggest shareholder of the World Bank, abstained in the vote, citing that it has concerns about "the significant greenhouse gas emissions" the power utility would produce.
Without measures to offset carbon emissions, "the projects is incompatible with the World Bank’s strategy to help countries pursue economic growth and poverty reduction in ways that are environmentally sustainable," the U.S. Treasury Department said in a statement.
Earlier this week, World Bank President Robert Zoellick defended the proposed loan to South Africa, saying it would be hard to deny help to a developing country as it emerges from a crisis "sparked by conditions in the United States and the developed world."
"Coal is still the least-cost, most viable, and technically feasible opinion for meeting the base load power needs required by Africa’s largest economy," Zoellick said, noting that the power plant would use efficient "supercritical" technology, enable electricity sales to neighboring countries and help avoid the power shortage that plagued South Africa in 2008.
The project development objective (PDO) of the Eskom Investment Support Project for South Africa is to enhance its power supply and energy security in an efficient and sustainable manner so as to support both economic growth objectives and South Africa’s long term carbon mitigation strategy.
There are three components to the project. Component A: International Bank for Reconstruction and Development (IBRD) support of about US$3,040 million for the financing of the Medupi coal-fired power plant (4,800 MW using supercritical technology). This loan will finance supply and install and construction contracts for the power plant and associated transmission lines. Interest during construction, payable to IBRD and to other lenders to the project will also be financed by the proposed IBRD loan.
Component B: IBRD support of about US$260 million for financing investments in renewable energy (Wind Energy and Concentrating Solar Power Plants).
Component C: IBRD support of about US$440 million for other low carbon energy efficiency components comprising the Majuba Rail Project (railway for coal transportation) and a technical assistance program for improving supply side efficiencies.