As government spending experiences a slower growth rate year on year, a widening capital gap within the public sector is constraining climate and green investment, presenting a unique opportunity for the inclusion of private capital to bolster climate and green investments. Much of the state’s limited fiscal capacity is absorbed by addressing infrastructure shortfalls in struggling state-owned enterprises such as Eskom and Transnet. These allocations are crucial for maintaining a stable electricity supply, robust transport networks, and overall economic stability. However, they come at the expense of other priorities, with public climate finance often geared towards these enterprises. The result is not a simple diversion of funds away from climate goals, but rather a reflection of competing fiscal pressures where immediate service delivery and economic continuity take precedence over longer-term adaptation and mitigation needs. South Africa’s challenge of building sustainable infrastructure and responding to climate change has therefore shifted more responsibility onto the private sector. With global donor support decreasing and lending practices becoming more risk-averse and security-driven, the burden of investment increasingly falls on private sector participation to offset both government expenditure and reduced international flows.
Against this backdrop, financial value has been prioritised over social and environmental returns. In South Africa, government expenditure and debt continue to crowd out private investment, leaving private capital reactive to fiscal policy rather than proactive in supporting adaptation and mitigation (Zimbali Mncube, 2025). This blog examines the limits of private capital mobilisation through concessional loans and public–private partnerships (PPP). While these mechanisms have supported infrastructure development, they often exclude social and environmental value in favour of financial returns. For private finance to play a meaningful role in climate adaptation and mitigation, a shift is needed toward an integrated value approach that embeds social and environmental priorities alongside financial viability, ensuring resources are directed to vulnerable communities while maintaining fiscal responsibility.
Public-Private Partnerships
Amidst limited government funding, there is a growing need for integrated climate finance solutions that generate not only financial returns but also social and environmental value. Yet under fiscal pressure, most resources still go to offsetting capital risks caused by weak public investment and infrastructure management. This helps explain why entities such as Eskom and Transnet have been slow to adopt climate sustainability and Greenhouse Gas (GHG) mitigation models, as these shifts require significant capital and greater mobilisation of private finance.
Within South Africa’s climate finance pipeline, including the Just Energy Transition Investment Plan (JET IP), and the Climate Investment Fund (CIF), around US$10.9 billion is pledged, of which only US$ 2.3 billion has so far been secured; however, with limited payouts following the halting of CIF distribution from the World Bank due to US divestiture vetoes. National Treasury estimates a broader requirement of US$22 billion to finance emissions reduction infrastructure and climate initiatives (National Treasury, 2025). Meeting this shortfall will depend on moving beyond government and multilateral loans towards more diversified instruments. Public–Private Partnerships (PPPs) offer one such avenue. While existing PPP frameworks have largely prioritised industrial and transport development cycles with limited emphasis on environmental value, they provide critical access to private capital. If better aligned with climate objectives, PPPs could help channel investment into renewables, adaptation projects, and community-level initiatives, reducing the burden on state budgets while expanding the reach of green finance.
Garvin & Bosso 2008
PPPs in South Africa are being promoted as a vehicle to mobilise private capital for infrastructure in the 2025 Budget, with Treasury signalling willingness to streamline PPP processes and engage the private sector to help meet the country’s infrastructure needs (National Treasury, 2025). Furthermore, PPPs as mobilisation vehicles are also key drivers of including market, industry and social interests in the development of supportive infrastructure projects. A key theme that is often overlooked, however, across PPP promotion and general financing and is evident in the figure above, is that environmental value is broadly excluded or grouped under social interests, placing the range of balance onerously onto industry, market and state interests. This is reflected in practice with the continued use of the original PPP framework, which has not been substantially updated over the past 15 years to account for green and climate initiatives (Ferris & Seleka, 2024).
In practice, however, PPP activity remains highly centralised and skewed toward national and provincial brownfield projects (for example, the Gautrain rail link, Ports of entry redevelopment), while community and municipal-level climate adaptation and mitigation projects are largely overlooked. Historically, only a small set of PPPs have reached full feasibility and implementation (Selele, 2023). The Treasury’s PPP annexure and government summarise a record 34 ongoing PPP projects across different implementations with a combined value of about USD 30.4 billion since the PPP regime began (National Treasury, 2025). These projects account for a minor share of total public infrastructure expenditure, maximising with an average of 2% overall, meaning PPPs have so far played a limited role in financing local adaptation needs, with only 140 total projects concluding with centralised project development based on Greenfields (completely new infrastructure and development) (The World Bank Group, 2025) To further highlight the disparity in PPP utilisation, National Treasury has reported that there has been a decrease in the number of new project transactions, from an estimated R10,7 billion in 2011/12 to R7,1 billion in 2022/23 (Ferris & Seleka, 2024)
This narrow deployment has direct implications for climate finance. Municipal participation in PPPs is shaped less by outright exclusion and more by structural and financial constraints. Debt-stressed municipalities typically lack the creditworthiness to support large PPPs, leading to engagement with alternative pooled finance mechanisms and special purpose vehicles. This promotes the concentration of PPP projects within national agencies, provincial programmes, or multinational investors and limits the flow of green finance into communities most exposed to climate risks. In light of these challenges, there are different pathways for climate financing across municipalities: metropolitan municipalities may pursue direct project finance through PPPs; intermediate city municipalities can leverage blended finance, guarantees, or concessional loans, while smaller municipalities often rely on pooled arrangements or management contracts. In practice, however, these mechanisms provide only partial coverage, and environmental value is often not fully integrated into project design. As a result, much of climate finance is channelled through concessional or blended instruments with restricted reach, leaving municipalities and vulnerable communities with limited access to private sector resources needed for climate adaptation.
Concessional Loans
Physical risks from climate change, such as floods, droughts, storms, and rising sea levels, directly damage infrastructure, disrupt supply chains, and reduce the value of collateral, increasing the likelihood of loan defaults. As a result, banks and investors become more cautious, tightening lending or withdrawing financing in high-risk areas. In contrast, transitional risks arise from failing to finance mitigation and adaptation efforts, including costs from policy shifts and carbon regulations. While industries are moving toward private financing to manage these transitional risks and cut emissions, continued exposure to physical risks keeps lending conservative, creating capital instability and limiting large-scale investment in climate adaptation and mitigation.
Climate adaptation is increasingly tied to shifts in lending behaviour, as the growing physical impacts of climate change raise the risk of borrower defaults. Globally, banks are becoming more conservative in their lending procedures as floods, droughts, and storms damage assets and erode collateral values, leaving borrowers less able to service debt (Chalabi-Jabado & Ziane, 2024). Transition risks, such as carbon taxation, also add costs for companies and reduce their borrowing capacity, but it is the physical risks that are proving more disruptive to credit markets. This dynamic is particularly evident in climate finance. As highlighted by Chiapinni et al. 2025 physical climate risks and South Africa’s 2019 carbon tax reduce bank lending, with transition risk affecting mainly non-financial firms and physical risk weighing more heavily on overdrafts than mortgages, particularly in commercial banks.
While mitigation investments such as renewable energy promise high returns, they remain vulnerable to high upfront borrowing costs and exposure to physical shocks like heavy storms. Adaptation needs, such as bolstering climate-resilient infrastructure, are even more challenging, as they tend to be perceived as riskier with limited revenue streams. At the same time, coal and other high-emission investments remain persistent, creating a contradiction where banks are cautious about withdrawing too quickly from carbon-intensive sectors while also being hesitant to expand lending for large-scale mitigation or adaptation projects.
Evidence across the banking sector supports this observed trend. A study by the South African Reserve Bank covering 38 banks between 2009 and 2024 finds that climate shocks, such as floods and droughts, consistently lead to a deceleration of credit growth, as banks become more reluctant to extend loans when collateral values fall and default risks rise (SARB, 2024; Chalabi-Jabado & Ziane, 2024). Firms exposed to these shocks face profit pressures, recovery costs, and operational disruptions that further reduce their creditworthiness. Long-term loans secured by physical assets are especially vulnerable, and sectors such as agriculture, infrastructure, and property in climate-exposed areas experience sharper retrenchments in lending. The factors compound, limited borrowing and risky lending factors create a feedback loop in which reduced lending limits for adaptation and resilience investment impacts borrowers, leaving businesses and communities more exposed to future climate shocks and further constraining credit markets (Chalabi-Jabado & Ziane, 2024)
As a result of these lending practices, key investment and transitional funding increasingly come from multinational development agencies and banks, which absorb the physical risks local institutions avoid. Domestic banks shift the burden of concessional lending to these entities, especially for high-impact climate projects. For example, the World Bank, through its Climate Investment Fund recently partnered with the African Development Bank to provide South Africa with access to a USD 1 billion global facility. As shown in Figure 2, foreign banks are more inclined to finance project-based, non-financial corporate or asset loans, while local banks prioritise household lending, which in the context of climate finance, is geared towards low-end household adaptation projects such as solar PV installation. The hesitancy to engage with municipal infrastructure investment for climate adaptation is further highlighted by challenges tied to governance and financial maturity among state and municipal agencies, which is considered an impactful risk among South African banks, hence the shifting of funding towards multinational banks despite local willingness to support municipal infrastructure project finance.
Author’s adaptation from Helen Chiappini, Laura Nieri and Stefano Piserà, SARB 2025 South African Reserve Bank Working Paper Series
In practice, this means domestic banks favour safer transitional finance, such as household solar PV installations, while offering little support for large-scale climate initiatives. Limited creditworthiness among government agencies and municipalities further constrains borrowing, which the World Bank’s Credit Guarantee Vehicle aims to ease by unlocking metro and municipal capacity. Yet this reliance on multinational concessional loans to absorb local risk pushes private capital toward safer but often higher-emitting industries, leaving large-scale green infrastructure underfunded. Moreover, South African lending remains tied to government borrowing, where dominance in energy, water, and disaster risk management crowds out private equity. With concessional finance focused mainly on financial returns, the exclusion of social and environmental value deepens borrowing risks in underdeveloped communities.
Conclusion
As the effects of climate change worsen, vulnerable communities within South Africa will become ever more desperate in acquiring green finance to bolster adaptation and mitigation efforts. However, this would require strong collaborative engagement between the government and the private sector. Currently, the private sector is too tied to global standards on financial value for the promotion of climate finance initiatives, ignoring integrated social and environmental value. This is evidenced by the broader lending practices by banks and financial institutions tied to safe and stable government-supported value chains across energy and transport, while neglecting municipal green finance schemes and the development of new projects tied to high physical risk. Coupled with physical risk, green finance has limited manoeuvrability. Banks and local financial institutions also generally neglect integrated value funding as concessional loans in promoting adaptation and mitigation are risky and usually offloaded on multinational finance institutions, such as the World Bank. Municipalities are further constrained, relying on government grants or multinational finance institutions and the IDC, due to the high risk accompanying municipal investments.
The alternative would seem to be PPPs to bridge the capital gap between the private sector and the government. However, mistrust between the private sector and government creates a notable barrier to integrated value generation, meaning that private sector capital is reluctant to feed into government initiatives and projects (Selele, 2023). This challenge is further exacerbated by government expenditure pressures, rising debt levels, and reliance on state-funded companies. At the same time, large-scale financing initiatives such as the Climate Investment Funds (CIF) and the Just Energy Transition Investment Plan (JET-IP), coordinated with the National Treasury and other government agencies, approach public–private partnership (PPP) frameworks with limited flexibility.
The case of the Gautrain rail link highlights government influence in PPP capital expenditure, mobilisation and implementation due to the large portion of investment being from the provincial government fiscus, limiting the broader impact of private capital throughout the project. Similar pushbacks are noted in energy, where PPPs and its aligned SPVss have limited to no negotiation range for capital and spending allocations and collaboration with NERSA and Eskom, which locks out funding for transitioning to renewable energy away from coal and diverting finance initiatives to align with blended finance mechanisms instead.
If South African business communities are to mobilise private capital to bolster adaptation and mitigation finance, both the public sector and private capital would need to implement and develop adjustment mechanisms that shift away from solely financial value generation towards integrated value generation. Finance mechanisms such as PPPs and Concessional loans will not be able to offset the shortfalls in integrated value generation unless there is a concentrated shift in national finance and lending practices. PPPs and concessional loans have proven to be highly beneficial when applied in key investment portfolios.
The first step would be to foster trust between the private sector and government by ensuring that national and provincial fiscal and regulatory policies are stringent and stable. As noted with Regulation 309, this would bolster PPP investments by moving beyond a focus on mere compliance toward a more enabling framework that encourages long-term collaboration and value creation. Such value creation would enable an integrated value approach accounting for financial, social and environmental value. Secondly, there needs to be a culture shift of lending from banks and risk fallback mechanisms to promote lending for green projects by offsetting the physical risks through environmental value generation instead of relying solely on positive lending practices guided by transitional risks. Mechanisms such as carbon tax credits have already been tested and would be a strong baseline to promote green finance lending, as they provide strong transitional incentives; however, they do not account for physical risks. Similarly, credit guarantees for safe high-emitting industries such as coal would need to be scaled down substantially to ensure that it becomes risky to invest in non-climate-friendly industries or sectors from the government. While banks have avoided high-emissions lending, the stubborn capital investment in coal and high-emitting energy still presents a key challenge to transitory and physical lending practices.
References
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