Category Archives: Treasury

An alarming picture emerges as Eskom’s liquidity dries up

The reports states that without any further funding, Eskom will have approximately R1,2-billion of liquid assets at the end November 2017 against a target of R20-billion, and will move into a negative liquidity position of approximately R5-billion by end of January 2018. This figure assumes the successful draw-down of R2,2-billion from development finance institution (DFI) loans and R1,3-billion export credit agency (ECA) facilities.

The report further states that the qualified audit opinion in Eskom’s 2016/17 annual financial statements relating to irregular expenditure, governance issues and changes in leadership has had a negative impact on investor sentiment, which is affecting the volume of future funding, current drawdowns and liquidity position of Eskom…

Eskom’s financial position

The report indicates that at 30 September 2017 Eskom Group revenue of R95,5-billion was R3,75-billion lower than budget.

This was attributed to lower than budgeted electricity sales volumes, the capitalisation of pre-commissioning revenue at Medupi and Kusile, and revenue of R2,64-billion deemed uncollectible at the date of sale.

Eskom indicates that average demand from key industrial customers remains low, with no recovery in demand or sales. Average demand for these customers has declined further to approximately 8200 MW during the past quarter, from an average of 8500 MW in the first quarter of the financial year, mainly due to customers’ response to higher winter electricity tariffs.

Primary energy costs were underspent by R3,87-billion across all main categories of coal, OCGTs, IPPs and international purchases.

The group’s operating expenditure (excluding depreciation and amortisation) of R25,3-billion was R4,7-billion below budget, as a result of underspend on employee benefit costs and other operating expenses.

Group capital expenditure amounted to R24,2-billion for the period, which is substantially lower than the budget of R31,8-billion due to underspend mainly at Kusile, Medupi and other power delivery projects, partially due to phasing of expenditure. Much of the capital spend shortfall is however expected to be incurred by year end.

Poor governance – a core issue highlighted in the report

The report highlights that the audit qualification in Eskom’s 2016/17 financial statements relating to irregular expenditure, governance related issues and continuous changes in executive management has had a severe impact on Eskom’s ability to raise funding in the domestic and foreign markets and has also resulted in delays in drawdowns on existing facilities.

Eskom says this will have a negative impact on financial sustainability and its status as a going concern.

The report identifies that in order to improve both liquidity and execution of funding initiatives, it is critical that governance related issues and investigations are resolved, and that stability returns within Eskom’s board and executive management.

Investors indicate that they are heavily reliant on these issues being resolved before any firm commitments on funding will be made.

Rating agencies have also indicated their deep concerns regarding governance and leadership at Eskom, and are closely monitoring the execution of the funding initiatives. Any further downgrades would exacerbate the current situation and put at risk the execution of Eskom’s funding plan.

Note: This article is a collaboration between EE Publishers and Fin24.

Here is the link to the article

Zuma’s last ditch effort to ram through a nuclear power deal

M&G, Hartmut Winkler, 9 November, 2017

President Jacob Zuma’s term of office has been characterised by an absence of vision and associated initiatives. Zuma is instead known for his inaction and overt stalling tactics. Examples include delays in setting up the State Capture Commission of Inquiry, announcing a new board for the state broadcaster, and delaying the release of a report on the future of university fees.

His recent dramatic push to fast-track an expensive and highly controversial nuclear power station build is therefore very much out of character. But Zuma’s advocacy of the nuclear build needs to be understood in terms of another hallmark of his presidency – state capture. This expression refers to the systematic takeover of state institutions by presidential allies and the resulting exploitation of institutions for commercial advantage and profit by his benefactors.

It’s already become clear who is likely to benefit from South Africa pursuing the option to build nuclear power stations. The list includes the Gupta brothers and Zuma’s son Duduzane through their links to the Shiva uranium mine.

And then there’s Zuma himself. Speculation about why the president appears to be favouring a deal with Russian company Rosatom ranges from allegations of grand scale individual kickbacks to alleged commitments linked to funding for the African National Congress.

The controversy around the nuclear power option was precipitated three years ago when it emerged that the government had signed an agreement with Russia that paved the way for the use of Russian technology in planned new nuclear power stations. The problem was that there’d been a complete lack of due process – no costing, no public consultation, no proper proclamation and no competitive bidding. It was no surprise that the courts declared the awarding of the nuclear build to Russia illegal.

On top of this a very strong case has been mounted against South Africa pursuing nuclear power. Reasons include the fact that it can’t afford it, and doesn’t need nuclear in its energy mix.

Despite all of these developments, and the growing controversy and mounting opposition to the deal, Zuma appears determined to get it done before his term as president of the ANC ends in December. In the last of the reshuffles he appointed one of his closest allies, David Mahlobo, to the energy portfolio. This is generally seen as a last ditch attempt to roll out the nuclear build in the face of now massive opposition.

Reports suggest that this reshuffle was occasioned by Russian displeasure over what they see as a broken promise to award the building contract to Rosatom.

The energy minister’s next steps

Mahlobo appears to have devoted his first few weeks in office entirely to furthering the nuclear project. He has been active in the media declaring the nuclear build as a given – and necessary.

Mahlobo’s next steps are likely to be:

  • He is reported to be planning to release – in record time – a new energy plan. This, some suspect, will be biased towards nuclear.
  • Heightened public lobbying. This could include verbal attacks on nuclear critics as already initiated by the President.
  • The issuing of a request for proposals to build the nuclear plants to potential developers like Rosatom. Most observers expect the evaluation to favour Rosatom regardless of the merits of the other bidders.
  • Signing an agreement with Rosatom. This could mirror the USD$30 billion deal Russia signed with Egypt which, on the surface, will appear attractive because it would offer favourable terms such as annual interest of only 3% and the commencement of repayments after 13 years. But when scaling the 4.8 GW Egyptian agreement up to the 9.6 GW envisioned for South Africa, the total cost then already exceeds R1 trillion. Annual repayments from year 14 to year 35 then amount to about 5% of South Africa’s annual fiscus. Any cost overruns, which are common in many other nuclear builds, would vastly increase the debt further.

What’s changed

The global energy landscape has changed dramatically since South Africa first mooted the idea of supplementing its power mix with more nuclear. Major developments and changes include:

Not even government’s own recent energy plans have promoted nuclear.

A 2013 draft energy plan argued against immediate nuclear growth. (The plan was never formally adopted).

The last draft plan released in 2016 went as far as declaring new nuclear unnecessary until 2037.

Will it happen?

Nuclear plants are major long term investments, and these projects will not survive lengthy construction and operation periods without broad public support. There is definitely a lack of public support in South Africa.

The Zuma-Mahlobo work plan will face major opposition by other parties, civil society and even critics within the ruling party. Lengthy court challenges will query the validity of the energy plan process, the public consultation, the regulatory aspects, the site selection and the constitutionality of the entire process. Public protests highly effective in other spheres would now be directed against the nuclear build. The ruling party would probably abandon the scheme if it proves politically costly.

The danger is, however, that huge funds will have been wasted in coming to this realisation.

The stakes are high. Zuma’s efforts to promote this unpopular nuclear project are weakening him politically. Even party comrades perceived to be in his inner circle – like newly appointed Finance Minister Malusi Gigaba – recognise that going ahead with the programme at this stage would cripple the country economically. Repeated ministerial reshuffles to sideline his critics has further damaged Zuma’s standing in the ruling party and in broader society.

Hartmut Winkler, Professor of Physics, University of Johannesburg

This article was originally published on The Conversation. Read the original article.

Mahlobo rushes nuclear deal

News24, 5 November, 2017.

(Ed. note: Let’s hope that the DOE remember to take the public submissions into account – especially that of the CSIR, and they must use an unconstrained model to set the base case.)

As Energy Minister David Mahlobo forces his nuclear power plans into action, officials at his department are working weekends to finalise the country’s reviewed integrated energy resource plan – four months ahead of schedule.

The plan to determine the energy mix the country needs was expected to be finalised in February next year, but will now be finished in the next two weeks.

“We would have been talking February, but now we are talking November 14,” said an insider, vouching for the level of hard work the minister was putting into his job.

This would enable Mahlobo to make projections of the country’s future energy demands based on “empirical evidence”.

Last week, Finance Minister Malusi Gigaba told City Press that nuclear energy was neither affordable for the sluggish economy, nor immediately necessary.

Mahlobo, who has been in his new job for just more than two weeks after three years as state security minister, is now on a collision course with Gigaba and Treasury.

The nuclear energy plan is expected to cost South Africa about R1 trillion, an amount that economists and politicians from across the spectrum – including the ANC – say the country’s struggling economy cannot afford.

Mahlobo told City Press yesterday morning that government should not be “reckless”, but energy was central to the country’s security and shouldn’t only be treated as an economic issue.

In the opposite room, a group of senior managers waited for Mahlobo to join them for a meeting on the integrated energy resource plan.

“People who say we should not invest do not understand that, each and every day, more companies are closing down and more young people are getting out of employment and even more out of the education system. We are creating soldiers of unemployment,” Mahlobo said.

“Any responsible government will plan well because it is becoming a national security issue. One day these people would have nothing to lose and they will take this government out. The ANC must never be deterred in the face of political parties who want to stop us from implementing our programme.”

Mahlobo said much of the criticism against the nuclear project was based on an “unfounded narrative” about “who is going to win the tender”, which was none of his concern because, “if there is any procurement that is going to be done, the South African laws are going to be followed”.

The countries with the leading technology are France, Russia, the US, South Korea and China. Companies from these countries as well as their governments have been aggressively wooing South Africa’s decision-makers and working to sway public opinion their way. But many believe that President Jacob Zuma’s cosy relationship with his Russian counterpart Vladimir Putin, as well as Mahlobo’s own close ties to the Kremlin and its security establishment, has already tilted the scales in that country’s favour.

When Mahlobo’s predecessor Mmamoloko Kubayi was moved out of the department in the Cabinet reshuffle last month, there was widespread speculation that it was because she was not moving with haste on the nuclear programme.

“An energy solution”

Mahlobo confirmed his close ties with “the leadership of the Russian federation”, adding that not many people have access to the Kremlin, but he does because in his previous job they worked closely together on intelligence operations. However, he denied taking convicts-turned-businessmen Kenny Kunene and Gayton Mackenzie to the Kremlin during a recent trip to Moscow.

Mahlobo said his starting point was that “everyone in the country agreed that, for the economy to work and in order to reduce unemployment, you need to have an energy solution”.

“In our case, we say we want to ensure security of energy and it must be sustainable. That is, you do not want to have disturbances that one day you wake up you do not have sufficient energy or you cannot be able to drive investment.”

He said that although the affordability of the project was a “big issue”, the need for extra energy was genuine and legitimate.

South Africa uses both renewable and nonrenewable energy sources, and the sector contributes directly and indirectly more than 33% of gross domestic product. Other energy sources in the mix include coal, gas, water, solar and wind.

Mahlobo said “the principle of pace, scale and affordability applies to the entire energy mix”.

“The starting point is that we do not have energy that we can guarantee for future generations because it is finite. Whatever source you choose, you must be able to say at what scale, which is the volume you want or the demand met,” he said.

He said that projecting future energy demand for economic growth was “a function of saying who is going to take this energy up like industries, private sector and domestic usage”.

Mahlobo said building nuclear power stations created new industries because it was capital intensive and would take more than 10 years to build.

“Yes, it is expensive when you are building, but immediately [after] a nuclear plant has been built and [has started] to operate, it produces the cheapest electricity than any source. It is actually less than 35c per kilowatt hour, which is very cheap. The renewables are on average around 80c per kilowatt hour, and some are around R1.”

He said the technology in nuclear reactors had also improved and would reduce emissions. “Plus we have a good track record because we have never had reports that Koeberg [Nuclear Power Station in Cape Town] has caused problems in terms of safety and issues of environment,” he said.

Mahlobo said his approach would be informed by a “build, operate, train and transfer” model whereby if government did not have the funds to build it, it would go to the market seeking an investor who would build at their own risk.

“When operations start then government comes in. The investor will want to recoup the investment and make gains. Government then operates on the principle that the cost should not be passed to the end user, and it does so by setting the tariff.”

Mahlobo said it was critical to get the projection figures right to avoid costly mistakes, and the margin of error must be less than 15%.

“The growth of the economy must be our preoccupation and areas of growth must be chosen very well,” he said.
“We will always work with experts because I do not possess all the wisdom. There are people who have been there and they have seen it working.”

Mahlobo said he had no desire to see the country borrow money to fund the nuclear project.

“My first intention is to say who has the appetite to put the structure on the ground and they take the risk,” he said.

Eskom spokesperson Khulu Phasiwe said if the integrated energy resource plan showed the nuclear programme could go ahead, they would begin the tender process immediately.

Here is the link to the article

Eskom a ‘risk to entire economy’, Gigaba says as he reaffirms unaffordability of nuclear

Engineering News, 25 October, 2017.

As guarantor over a significant portion of Eskom’s debt, the prevailing governance problems at the State-owned utility were of “grave concern” and had become an “enormous risk” to government and the entire economy, Finance Minister Malusi Gigaba said on Wednesday.

Delivering his first Medium-Term Budget Policy Statement (MTBPS) address in Parliament, the Minister said failures of governance, leadership and financial management had displaced previous concerns over electricity shortages as a major concern of government.

“Eskom is simply too important to the country to fail, and we will not allow it to. National Treasury will work closely with the Department of Public Enterprises to strengthen governance and financial management at Eskom.”

Gigaba announced that a new Eskom board would be appointed before the end of November. “Working with the new board, we will ensure a credible executive management team is in place.”

Gigaba also reiterated his earlier statement that government and the country could not currently afford to pursue a new nuclear build programme, but stressed that the position could change should the country begin growing again.

(Ed. note: Perhaps Gigaba should tell that to Eskom, NECSA, the Guptas, Russia and all?)

 

Here is the link to the article

Eskom tops list of procurement deviations with R31.3bn

fin24, 11 October, 2017.

Cape Town – Acting chief procurement officer Willie Mathebula told Parliament on Wednesday that he is concerned about the deviations of state departments and institutions from procurement regulations.

The Office of the Chief Procurement Officer briefed the standing committee on finance on its performance in the past financial year.

In its presentation to the committee, the office said it approved deviations from public procurement processes to the value of R37.6bn in the 2016/17 financial year.

Eskom tops the list of deviations with R31.3bn, followed by the South African Revenue Service with R1.2bn.

In terms of applications to deviate from or expand existing contracts, Eskom again ranks highest with an amount of R33.3bn.

(Ed. note: No, that’s not a mistype, it IS billions, not just millions, and we thought the Arms Deal was a big deal!)

Treasury regulations allow for the deviation from procurement regulations in terms of the Public Finance Management Act in certain circumstances.

Mathebula, however, said he is concerned about the requests for deviation and expansion of the scope of specific contracts.

Here is the full article.