6th May 2024

OPINION | True community ownership in the shift to renewables – just how far off are we?

The shareholding by community trusts in publicly procured renewable power plants should be strategically leveraged to encourage meaningful participation by communities in the transition, as part of the path towards justice, write Yumnaa Firfirey, Holle Wlokas, Masechaba Mabilu and Avela Pamla.

Yumnaa Firfirey, Holle Wlokas, Masechaba Mabilu and Avela Pamla.

In the past three decades, community trusts in South Africa have been established to facilitate more inclusive development in sectors such as mining, tourism, conservation, land reform, and renewable energy.

If effectively managed, community trusts can promote the participation of communities in the transition to renewable energy, while also driving further impact through investments into other local development priorities.

Government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has mandated a minimum 2.5% shareholding in bid windows 1 to 4, for communities within varying proximity of these power projects.

This echoes a similar strategy used by mining companies for Broad-Based Black Economic Empowerment (BBBEE) transactions, reinforced by the 2018 revised Mining Charter – mandating a 5% equity equivalent benefit for communities.

However, in the mining sector, it has been acknowledged that community trusts are vulnerable structures with designs not well-suited to their purpose and have largely been unsuccessful in achieving meaningful benefits to mine workers and surrounding communities.

Comparably, 10 years into the implementation of REIPPPP, the result is no different to mining – it is habitually expressed that these trusts are not delivering optimally.

The 8% of shareholding by community trusts, on average, in REIPPPP power plants, does not necessarily equate to effective community ownership in these plants. If community ownership is not shareholding, then what does real community ownership require?

Part of the answer to this question is understanding what the 8% shareholding translates into.

If we take into account that this shareholding is not given to the communities for free (free carry), but that in most cases these shares were purchased by the community trust through a loan, the repayment of this loan is required with each dividend payment.

Many project companies have structured the finance for the community trust shareholding with a large percentage of dividends – typically 95% of the dividend paid – directed towards the repayment of this loan (known as percentage cash sweep).

The result is that until the loan is paid up, there is, in most trusts, hardly sufficient dividends to be enjoyed by the community, or to be invested impactfully in social development projects.

Even after the loan is repaid, the average energy tariffs in rounds 4 onward of the REIPPPP are much lower than earlier rounds resulting in tight profit margins and as a result, very little dividend benefit flows to the community.

While this is true for all shareholders proportional to their percentage of shareholding, most investors have clearly defined investment objectives, apart from percentage returns. Such as attracting better ESG ratings or lower (yet more secure) returns as part of a portfolio that makes other higher return, yet riskier investment options more feasible.

For most investors sets, shareholding agreements are made from an informed base regarding risk, liabilities and returns. For communities, however, this is very different. Communities are very rarely acting intentionally as investors, making informed decisions on the liability of the loan arranged on their behalf.

In reality, communities are introduced to the shareholding benefit quite superficially as part of the business development and feasibility stage of the project – when the viability is being assessed and local stakeholders are engaged to explain what it would mean to be a host community and shareholders in the project.

Most of the decisions regarding the shareholder loan, cash sweep, dividend repayments, whether there will be community beneficiary trustees, how much of the dividends will be available to spend, when the loan will be repaid, and so forth are made on behalf of the community, and in most instances not covered in these engagements with them.

Communities’ imaginations are most likely captured by the fact that they will have ownership in the power plant, receive dividends and have a say on broader issues that affect benefits – such as jobs for locals and access to procurement opportunities. Overall, they might imagine that they will be better off by virtue of being the host community of the planned power plant and a shareholder.

The brunt of this wide chasm between the initial excitement and what ownership actually means in practice is borne by the social performance practitioners – either at the start of construction or when the plant has reached commercial operation and communities start demanding financial benefits, both based on what they understand ownership and shareholding to mean.

The enthusiasm of the community might centre around having some decision-making power to determine their own destiny, take charge of their socioeconomic advancement and have the community trust dividend stream to support the co-creation of programmes and initiatives.

From a regulation perspective, community shareholding is a sub-element of the ownership element of the BBBEE scorecard, solving for not only black and women ownership, but also localised ownership.

As with all laws drafted and gazetted in South Africa since democracy, there is the letter and spirit of the law. Similarly, there is the letter and spirit of the BBBEE scorecard as it relates to local ownership. While the letter has been followed in REIPPPP as companies are structured to comply with local ownership requirements, the spirit has not necessarily been achieved.

The true spirit of local ownership

Our assertion is that the spirit is far more than simply shareholding. It could relate to communities feeling some sense of ownership of the power plant that has been built on their land, or being able to benefit from sharing a resource available in their part of the world. It can also be achieved by dividend flow that will allow communities to actively invest in their socio-economic development.

The reality on the other side of the chasm falls far short of this spirit.

Communities own part of the power plant on paper. However, they are essentially removed from this ownership because ownership is through a trust that they might not even have representation on.

While some trusts have community trustees that are elected or selected via a transparent process to serve on the communities’ behalf, other trusts (often for what are deemed to be justifiable reasons from the perspective of the project company) do not allow for community representation.

Trustees make decisions on the community’s behalf and even though this is beneficial – the ideal and the aspirational goal would be for communities to be empowered as part of this shareholding process and to be involved in the decision-making, planning, co-creating and implementation of socio-economic development. This would be true to the spirit of local ownership.

We recognise, though, that this chasm is not as a result of a deliberate underperformance by trustees, trust administrators or their founders.
Rather, it is a result of working within a rather challenging set-up of legal and financial arrangements, which are less than ideal to enable or drive community development impact. Additionally, the community trust support system is under-resourced in some cases, and under-capacitated in others to play the ideal role that that has been envisioned in the spirit of community ownership. 

Fortunately, the Industrial Development Corporation (IDC) – which has provided equity finance for a significant number of community trusts – is supporting a project that will explore possibilities for how trusts can be capacitated to realise the expectations for spirit, while fighting the slow disillusionment with the letter (which prevails even amongst policymakers).

The project is being implemented by INSPIRE, a non-profit company established to focus on improving social performance in the renewable energy industry.

In addition to the capacity building of trustees, INSPIRE’s Trust Matters project seeks to create a platform where community trusts can connect, learn, and collaborate to maximise the benefits of renewable energy projects for their communities. All in support of mobilising community leadership and driving developmental impact.

INSPIRE has started to develop a model for understanding the various dimensions of trust support. The model (illustrated below) is a matrix of: 

Role Players in and recipients of trust support, and

  1. Factors affecting the efficacy of trusts.

After nine months of interacting with community trust role players and trusts themselves, we have found that while regulatory factors and governance, operations and processes are critically important – this would not shift the needle on host community prosperity unless more serious capacity and empowerment issues are addressed: capacity both of the sector, primarily, and then, as an outcome of that, facilitating enhanced participation at community level. 

This would require that communities be seen as key role players. Raising the importance of community members as a group and providing support to them is key to unblocking a foundational constraint that shackles the ability of trusts to ensure community empowerment and development. 

This, as opposed to regulatory I’s dotting and T’s crossing, is a prerequisite to get closer to the spirit intended in the initial conceptualisation of community trusts as an entity of transforming our nation. 

Benefit Sharing

The issue of community ownership is vital in the context of the Just Energy Transition, especially since many emerging economies, grappling with the energy transition are looking to South Africa’s much-lauded REIPPPP model for solutions. 

All of this commentary might attract the retort that communities are receiving shares that they otherwise would not have received and that they are getting at least some benefit. 

The point of SA’s REIPPPP is not the trickle of benefits – it is benefit sharing: it is about the progress towards socio-economic justice while the country supports an energy transition. This is what a just energy transition asks of private sector investors, including foreign investors benefitting from this energy transition opportunity. 

A just energy transition asks that there is win:win:win in three ways.

Not just for government:business through energy transition: profit, but rather for government: business: society in the form of energy transition: profit: socio-economic advancement. We cannot forget about the last vitally important part. 

INSPIRE’s Trust Matters project will proceed to create opportunities for this conversation on community trusts in REIPPPP to continue, importantly not just about them, but actually with and amongst them. It is our view that this kind of initiative speaks to the spirit of community ownership and renews the vision and role of community trusts in JET. 

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