The World Bank South Africa Covid-19 Response Development Policy Operation (P174246) Program Information Document (PID) Appraisal Stage | Date Prepared/Updated: 05-Aug-2020 | Report No: PIDA30192 Page 1 of 8 The World Bank South Africa Covid-19 Response Development Policy Operation (P174246) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) South Africa Covid-19 South Africa P174246 Response Development Policy Operation (P174246) Region Estimated Board Date Practice Area (Lead) Financing Instrument Macroeconomics, Trade Development Policy AFRICA EAST 22-Sep-2020 and Investment Financing Borrower(s) Implementing Agency Republic of South Africa National Treasury Proposed Development Objective(s) To protect jobs, businesses and vulnerable households from the adverse socio-economic impacts of the COVID-19 pandemic and open the economy to competition. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 750.00 DETAILS -NewFin3 Total World Bank Group Financing 750.00 World Bank Lending 750.00 Decision The review did authorize the team to appraise and negotiate B. Introduction and Context Country Context The proposed stand-alone Development Policy Operation (DPO) of US$ 750 million supports the response of the Government of South Africa to the socio-economic crisis resulting from the COVID-19 pandemic. South Africa is the epicenter of the COVID-19 pandemic on the African continent and the fifth country in the world with the most infections. The global pandemic exacerbated South Africa’s existing economic woes. The economy is expected to shrink significantly Page 2 of 8 The World Bank South Africa Covid-19 Response Development Policy Operation (P174246) in 2020, after five consecutive years of negative per capita growth. Before the pandemic, the unemployment rate was already 29.1 percent, with youth unemployment almost double that. Inequality is deeply entrenched and the highest in the world by any measure. Almost a fifth of South Africans live in extreme poverty. A range of structural and regulatory factors has constrained growth prospects by impinging on labor markets, competitiveness, the investment climate and the financial sustainability of State-Owned Corporations (SOCs). Gross Domestic Product (GDP) is expected to fall by 7.2 percent in 2020 and the fiscal deficit in 2020/21 to be more than twice its level in 2019, reflecting in part government’s measures to fight the pandemic. Public debt is expected to rise from 62 percent in 2019 to reach 86 percent of GDP in 2022. COVID-19 threatens to push 3 million South Africans into poverty. Recognizing the severity of the crisis, the National Treasury took the historical step of reaching out to the WB and other IFIs for budget financing. The proposed budget support operation is the World Bank’s first in South Africa. It represents a unique opportunity to address longstanding constraints to broad-based growth, while mitigating the immediate adverse socio-economic impacts of the pandemic. South Africa continues to face long-standing challenges to growth and development. Growth has been slow for a protracted period reflecting structural constraints that have been difficult to address. And fiscal discipline has flagged in recent years, resulting in rising primary deficits and higher debt levels. Nevertheless, the country also enters this crisis with many policy and institutional strengths – an independent central bank committed to price stability, coordinated fiscal, monetary and exchange rates policies, well-developed and deep domestic capital markets, and a well-established record of transparency regarding fiscal and debt management. The government’s response to COVID-19 has been decisive and is being implemented so as to minimize the long-term damage from the pandemic. Sustained efforts will be needed by the authorities to address structural impediments to growth and to control spending while improving its composition and efficiency in order to improve economic prospects. This operation will support these efforts to improve economic outcomes by sustaining macroeconomic stability and promoting inclusive growth. If this unprecedented global and national crisis can be used to build the needed consensus to implement these reforms, including achieving fiscal consolidation, and to mobilize external support, South Africa should be able to transition to a medium-term path of more rapid, inclusive and sustainable growth. Relationship to CPF The proposed DPO for South Africa balances a short-term emergency response to protect jobs, businesses, and vulnerable households from the adverse socio-economic impacts of the COVID-19 pandemic with long-term economic transformation to open key sectors of the economy to competition. The first Focus Area of the Country Partnership Framework (CPF) focuses on competition, investment and job creation. The operation is fully compatible with the CPF through (a) protecting people to help avert an additional 3 million and more people falling into poverty; (b) protecting businesses to avert further job losses; and (c) protecting the economy through the development of a structural reforms program. C. Proposed Development Objective(s) To protect jobs, businesses and vulnerable households from the adverse socio-economic impacts of the COVID-19 pandemic and open the economy to competition. Key Results Key results in this operation include reducing the number of days to register a business from 40 days to 10 days, and the number of procedures from 7 to 3; increasing the number of small-scale embedded generation installations from Page 3 of 8 The World Bank South Africa Covid-19 Response Development Policy Operation (P174246) 29 MW to 1500 MW; increasing competition, regulatory certainty and efficiency in the ICT sector; preserving 3 million jobs in 300,000 firms; and keeping 1.8 million people out of poverty. D. Project Description The first pillar of this stand-alone DPO contains measures to mitigate the adverse socio-economic impact of the COVID-19 crisis on businesses, jobs and vulnerable households. The first measure in this pillar channels relief payments to 17.5 million existing beneficiaries of the child support, old age, and disability grant for a period of 6 months, and provides cash grants of 19 US$ per person to about 3 million unemployed people and informal sector workers who do not receive any other assistance for a period of 6 months. The second measure introduces digital technology to enhance the coverage, transparency, targeting, and efficiency of a poverty-targeted COVID-19 response cash-transfer program. The third measure discourages layoffs, hence retaining jobs, by subsidizing wages of temporarily laid-off formal sector workers through monthly cash payments of no more than 363 US$ per beneficiary until the end of lockdown. The fourth measure supports the launch of an $11.7 billion Guaranteed Loan Scheme with private banks, to help SME cover their operational costs. The second pillar supports the opening the South African economy to competition. It consists of five measures. The first measure establishes a Deposit Insurance Scheme to protect vulnerable depositors in South African banks. The second measure is the launch of a one-stop-shop portal for business registration that significantly improves the ease of doing business. The third measure addresses competition issues, by temporarily releasing high demand spectrum (HDS) to meet the spike in demand for broadband services and enable licensees to lower cost of internet access to consumers through a competitive and innovative application process. This temporary measure will be followed by the launch of the long-delayed auction for high demand radio spectrum in South Africa, contributing to an improved regulatory and competition regime in the mobile market. The fourth measure enhances competition and private sector participation in power generation by increasing the size of small-scale embedded generation (SSEG) – mostly renewable – operating without the need for a government license. The fifth measure focuses on strengthening the country’s Carbon Tax Act, a core policy in the country’s plan to build a low-carbon economy. Specifically, it establishes regulations for Green House Gas emission intensity benchmarks in the industrial and mining sectors, emission allowances for sectors with respect to their trade exposure, and eligibility criteria and a procedure for accessing carbon offset allowances. It also issues a notice to support the purchasing of renewable energy. This DPO is coordinated with the AfDB, the NDB and the IMF. The Executive Board of the IMF approved a Rapid Financing Instrument (RFI) of US$ 4.3 billion on July 27, 2020. The Executive Board of the African Development Bank (AfDB) approved a budget support loan of US$ 300 million on July 22, 2020. The New Development Bank (NDB) disbursed a US$ 1 billion budget support loan on July 20, 2020 and is preparing a second US$ 1 billion loan this fiscal year. The European Union, the European Investment Bank and the Governments of Germany and France also came forth with some US$ 686 million budget support loans and US$ 57 million in grants. The WB has set a budget support coordination platform for these partners to exchange information, avoid duplication and align internal processing and delivery timelines. It is working closely with the IMF on the macro-economic framework. It has also held its discussions with National Treasury and other technical counterparts jointly with the AfDB, with which it is has a joint policy matrix. E. Implementation Institutional and Implementation Arrangements The National Treasury (NT) is the implementing agency responsible for overall implementation of the proposed operation and for reporting progress and coordinating actions among other concerned ministries and agencies. The WBG and the Page 4 of 8 The World Bank South Africa Covid-19 Response Development Policy Operation (P174246) Department of Planning, Monitoring and Evaluation (DPME) at the Presidency of the Republic have agreed to jointly monitor the result indicators of this operation, as an integral part of the monitoring of government’s implementation of its response to COVID-19. The WB, in partnership with the Open Government Partnership (OGP), will help DPME build a dashboard to monitor select indicators of the government’s response and support a platform for government to work with citizens, civil society and business to track spending on the COVID-19 response, so that the resources achieve their intended goals. In doing so, the WB builds on years of sharing international good practice in performance monitoring and evaluation. F. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts The Poverty and Social Impact Analysis estimates the impacts on poverty of Prior Action 3 about the TERS scheme of the Unemployment Insurance Fund (UIF) and of Prior Action 1 about the topped up and additional social protection measures. Government allowed furloughed worked covered by the UIF to receive monthly benefits for up to 3 months. It also topped up existing social grants and added a new Social Relief of Distress (SRD) grant to cover people neither already covered by the UIF nor accessing other social grants. The extension of UIF payments to furloughed worked prevents 0.8 to 1 percentage points of the population from falling into poverty. Accordingly, the TERS scheme of the UIF supported in Prior Action 3 prevented some 630,000 people from falling into poverty. Top-ups to the three largest existing social grants, supported by Prior Action 1 prevent 0.7 to 1.02 percentage points of the population from falling in poverty. An increase in disability grants and old age pensions of 250 ZAR per month and an increase in child support grants of 500 ZAR per household per month, with a one-time bonus of 300 ZAR per child, would protect 594,000 people from falling into poverty. Social Relief of Distress (SRD) grants, also supported by Prior Action 1, prevent up to 0.17 percentage points of population from falling into poverty. The SRD grants provide benefits to those who lost their jobs and are not receiving any other form of assistance. The aggregate mitigating impact of the TERS scheme of the UIF, of the top-ups of existing social grants and new SRD grants is substantial. It prevents about 60 percent of all vulnerable people from falling into poverty. TERS UIF benefits, social grants and SRD together reach nearly all those experiencing job loss. They may reduce the poverty impact of the pandemic by 3.18 percent points out of 4.87. Put differently, close to 1.8 million people will be able to escape poverty thanks to the COVID-19 relief package. Environmental, Forests, and Other Natural Resource Aspects Prior Actions 4, 6, and 7 are likely to have negative impacts on the country’s environment, forest and other natural resources, if suggested mitigation strategies are not put in place. Investments in digital infrastructures, business registration and support for SMEs are expected, when applicable, to consider environmental and social due diligence. Registered SME that will benefit from the Covid-19 guaranteed loan scheme under Prior Action 4 will need to comply with Environmental Assessment regulations. If they are not compliant but are still deemed eligible, these SME would be required to develop an environmental compliance plan to gain access to the guaranteed loan scheme. Prior Action 6 is expected to lead to an increase in the number of formally registered SME. It is important that this does not happen at the expense of weakening or eliminating environmental and social due diligence. This is particularly important if detailed risk assessments and public consultations are required as part of the registration process. Prior Action 7, which may lead to increased investments in digital infrastructure is likely to increase the profile of potential environmental and workplace risks associated with their installation. Investments in digital infrastructures will need to comply with the Occupational Health and Safety Act 1993 as amended and NEMA 2014 EIA regulations. Prior Actions 8 and 9 are directly linked to strengthened environmental management and country’s climate change Page 5 of 8 The World Bank South Africa Covid-19 Response Development Policy Operation (P174246) resilience and qualify for climate Co-Benefits. Prior Action 9 about promoting renewable energy and incentivizing emitters to transition their operations to cleaner technologies will contribute to reduce South Africa’s GHG emissions, increase climate resilience and protect the environment. Taking the negative externalities of climate change and environmental damage into account in future production, consumption and investment decisions, requires government to set up and enforce monitoring, measurement and reporting requirements for Greenhouse Gas Emissions. Prior Action 8 will reinforce the measure on the implementation of the Carbon tax because most small-scale embedded generation (SSEG) are solar photovoltaic systems and technologies related to wind and biogas. G. Risks and Mitigation The overall risk rating for this DPO is substantial. This assessment is consistent with that of CPF. Political and governance risks are rated as substantial. The majority ruling African National Congress (ANC) party governs by consensus. It encompasses diverging and often opposing interests from trade unions, organized business, community leaders, and the party base about the timing, opportunity, formulation and implementation of reforms. As a result, government’s ability to adopt planned regulations to open the economy to competition in the ICT, energy, finance and infrastructure sectors could be delayed or even stalled. For this reason, this operation focuses mainly on the relief and recovery measures in government’s own program. It also features two critical measures government has been planning for but not adopted yet. These measures are prior actions 7 and 8, respectively on ICT broadband regulation and energy self-generation. Macroeconomic risks are substantial. They stem from concerns about the sustainability of the trajectory of the debt, the reduction in revenues, the expanding deficit as a result of the socio-economic response to COVID-19, and the financial viability of large SOC like Eskom and Transnet. These risks, already described in Section 2 of this program document, could increase if the COVID-19 pandemic deepens continues for longer than anticipated. The successful adoption and implementation of fiscal and structural measures in government’s Supplementary Budget Review for FY 2020 will help mitigate these risks. The risks pertaining to sector strategies and policies, technical design, institutional capacity for the implementation of the proposed program, and fiduciary issues are moderate. Social and environmental risks are substantial. Stakeholder risks are substantial and related to political risks. The risk from the COVID-19 pandemic stems from cross-cutting concerns on the economy and the general welfare of the population and is assessed as substantial. As of July 25th 2020, South Africa had more than 434,000 COVID-19 cases, with over 6,600 confirmed deaths. South Africa alone accounts for more than half of all COVID-19 cases on the African Continent. Despite the Government’s imposition of a hard lock down, including closure of businesses and schools and the enforcement of social distancing rules, the number of COVID-19 cases continue to grow, although some levelling-off is starting to take place in the Western Cape province. Government’s wide-ranging set of measures to support lives, livelihoods and business recovery has helped mitigate some of the immediate impacts. . . Page 6 of 8 The World Bank South Africa Covid-19 Response Development Policy Operation (P174246) CONTACT POINT World Bank Edouard Al-Dahdah Senior Public Sector Specialist Borrower/Client/Recipient Republic of South Africa Nolundi Dikweni Chief Director, Multilateral Banks Nolundi.Dikweni@treasury.gov.za Implementing Agencies National Treasury Nolundi Dikweni Chief Director, Multilateral Banks Nolundi.Dikweni@treasury.gov.za Thembi Mda Senior Analyst: Debt Issuance & Management Thembi.Mda@treasury.gov.za FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Edouard Al-Dahdah Approved By APPROVALTBL Country Director: Asmeen M. Khan 30-Jul-2020 Page 7 of 8 The World Bank South Africa Covid-19 Response Development Policy Operation (P174246) Page 8 of 8