1. What is Development Policy Financing?
World Bank assistance can be provided through development policy financing (DPF), which provides non-earmarked funds for development policy operations (DPO).
The World Bank offers DPOs to help governments achieve sustainable development through a program of policy changes and institutional actions; for example, improving the investment climate, addressing bottlenecks to improve service delivery, diversifying the economy and strengthening public financial management. DPOs are complemented by a strong mix of analytical and technical assistance to underpin reforms, create a signaling effect to markets by endorsing a medium-term macro-framework for the country, and establish a framework for policy dialogue.
DPOs can be extended as one of the World Bank’s three financing tools: Development Policy Loans (DPLs), credits, or grants. DPLs are robust, flexible and quick-disbursing financing instruments that help countries achieve development results by supporting a program of policy and institutional reforms provided through general budget financing.
2. Why does South Africa need this support?
The Infrastructure Modernization for South Africa Development Policy Loan [add link], with US$1.5 billion in financing, is aimed at supporting critical structural reforms to enhance the efficiency, sustainability, and climate resilience of the country’s infrastructure services and thus contribute to inclusive growth and job creation.
South Africa faces a deepening jobs and growth crisis, with unemployment over 31 percent and average GDP growth below 1 percent over the past decade. Structural barriers—including weak governance, limited competition, and skills shortages—have slowed progress. Infrastructure services have declined: in 2023, power outages cut GDP by 2 percent and cost 500,000 jobs, while rail and port inefficiencies reduced exports by around 20 percent.
The government, with support from the World Bank and other partners, has begun key reforms. In energy, the 2022 Energy Action Plan opened the sector to private investment and improved regulation, supported by the 2023 US$1 billion Energy Transition Development Policy Loan. Eskom’s debt relief helped raise energy availability from 55 to 63 percent by late 2024. In transport, the World Bank-backed 2023 Freight Reform Roadmap aims to fix logistics, crowd in private capital, and stabilize Transnet’s finances.
The current operation will build on this progress and help deliver efficient, climate-resilient infrastructure for inclusive growth. The DPL is a standalone operation, which is part of the programmatic assistance provided by the World Bank to South Africa. It builds on the reforms and results of the South Africa COVID-19 Response Development Policy Loan approved in January 2022 which provided US$750 million to support the COVID-19 response and economic recovery efforts; and the South Africa Sustainable and Low-Carbon Energy Transition Development Policy Loan of US$1 billion approved in September 2023, which focused on energy sector reforms.
3. What are the objectives of the Infrastructure Modernization for South Africa Development Policy Loan?
The operation aims to support the government’s objective to create jobs and promote private sector growth by addressing infrastructure constraints. The constraints resulted in an estimated loss of 3 percent growth in 2023, and affected most South Africans, especially vulnerable households and small businesses that lack affordable alternatives. This operation covers three mutually reinforcing pillars (a.k.a. ‘objectives’) which are aligned with the focus areas and objectives of the World Bank Group Country Partnership Framework with the Republic of South Africa for period FY22 – FY26:
· Improve energy security by unlocking investments into transmission, easing access to the grid, and upgrading the performance of municipalities in distribution;
· Enhance the efficiency of freight transport services by establishing an independent transport economic regulator to ensure fair and open access for private operators and unbundling the state-owned company Transnet; and
· Contribute to the transition toward a low carbon economy by promoting the use of fiscal instruments and protecting people and communities affected by the energy transition.
4. What are the expected results from this DPO and how will they be monitored?
The operation targets measurable improvements in energy and transport to support inclusive growth and job creation.
· Energy sector:
The Government reforms ultimately aim to ensure reliable, affordable, and sustainable electricity supply for South Africans by making the power sector more efficient and competitive. The key goal is to move from a single, state-owned monopoly (Eskom) to a more open and competitive electricity market, where different providers can generate, transmit, and distribute power more efficiently. This transformation is critical after years of electricity shortages and loadshedding peaked in 2023 that severely affected the economy and people’s lives.
The Government has an extensive roadmap of reforms and is commencing a second phase of reforms in the sector, deepening and broadening them throughout the value chain. DPO-2 focused mainly on generation, including legal reforms to open the market and attract private investment. DPO-3 builds on that by focusing on three new areas: (i) strengthening the transmission system by helping the new National Transmission Company become financially and operationally independent, (ii) opening the grid to private investment in transmission lines, (iii) attracting more investments in distributed generation by enabling exporting households’ generated surpluses back into the grid, and (iv) initiating improvements in the performance of municipal electricity distribution by scaling up smart metering. These reforms are essential to unlock further private investment and ensure the power can be delivered where it’s needed.
The reforms will support bringing in 3,500 MW of new renewable capacity (equivalent to 8 percent of current capacity) by March 2027. Private investment in transmission could add 200 km of new lines, while a new municipal grant system aims to deploy 50,000 smart meters to improve revenue collection and enable consumers to feed excess power back into the grid.
· Freight Transport sector:
The objective of the freight transport sector reforms is to support the government’s efforts to transform the structure of the sector from a public monopoly to a competitive market. At the heart of the reform is unbundling of the State-Owned Enterprise – Transnet - which is responsible for ports, rail, and pipelines in South Africa.
To build the legal and institutional foundations required for transforming the sector, the authorities have focused their attention on: (i) establishing an independent transport economic regulator to ensure fair and open access to private operators, and (ii) unbundling Transnet to allow for train operators to enter the market.
These two reforms are required to create a level playing field between Transnet and potential private operators, paving the way for more efficient, affordable, and climate-resilient transport services.
The reforms aim to increase rail network capacity from 25 percent in 2023 to 65 percent by 2027 and enable the entry of at least four private operators. Just transition measures are expected to mobilize $750 million in grants and provide jobs for nearly 10,000 workers, including women, in communities affected by the energy transition.
Together, these reforms could boost short-term GDP growth by 1 percent and 2–3 percent over the medium term, with up to 250,000 jobs created by 2027 and 500,000 by the early 2030s. Progress will be tracked through results indicators, with a formal review in the Implementation Completion Report (ICR) comparing 2025 baselines to agreed targets.
5. How does the DPL relate to other World Bank Group work in South Africa?
This operation is part of a broader World Bank Group approach to support energy reforms in South Africa. It works alongside other tools — such as proposed financing and blended finance instruments from IBRD, IFC, and MIGA — to support public and private investment throughout the sector value chain (in generation, transmission, and distribution). It also complements a planned Program-for-Results operation aimed at improving electricity distribution performance in South Africa’s metropolitan municipalities.
6. How sustainable is South Africa’s debt?
South Africa’s macroeconomic framework is considered adequate for the operation. The government remains committed to prudent fiscal policies and structural reforms, including in energy and transport, to unlock private sector growth and job creation. Fiscal risks are moderated by strong public financial management and the government’s track record in containing spending pressures.
Debt sustainability risks are mitigated by a favorable debt composition (mostly in local currency and domestically held) reducing exposure to exchange rate and interest rate shocks. The country also benefits from a credible central bank, a flexible exchange rate, and deep local capital markets supported by high domestic savings.