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IMF points to Eskom/IPP ‘equal footing’ as key to cut costs

Dec 14 2016 09:11
Matthew le Cordeur

Cape Town – The private sector should be able to compete on a more equal footing with South Africa’s state-owned entities (SOEs), the International Monetary Fund (IMF) said after an official visit to the country.

“To foster economic growth and job creation, the cost of crucial inputs for businesses and of services for workers - such as electrical power, telecommunications, and transportation - needs to be brought down,” it said in a statement on Tuesday following the visit earlier this month.

“To that end, private companies - for example, in electricity generation - should be allowed to compete on a more equal footing with parastatals,” it said. “Barriers to entry, including those resulting from multiple and occasionally conflicting regulations, need to be reduced.”

The statement comes as Eskom refuses to sign power purchase agreements for private companies that have been mandated by the Department of Energy (DoE) to develop renewable energy solutions like wind and solar photovoltaic.

The refusal to implement the agreements has halted the implementation of 37 independent power producer (IPP) projects worth R58bn.

Former Eskom CEO Brian Molefe and current acting CEO Matshela Koko have been adamant in their assessment that the IPP projects – while approved by the DoE – will have a negative impact on the power utility’s balance sheet.

Koko said he wants Treasury to activate the R200bn contingent liability of the IPP programme and take over paying for the expensive first waves of renewable projects. “Ring-fence it and let Treasury fund it separately,” he told City Press in October.

A Forbes story published on Tuesday criticised Eskom's stance on renewable energy.

"(Eskom's) refusal to purchase 250 megawatts of power from wind and solar projects has left its Irish and Saudi Arabian suppliers fuming and in limbo. More than scuppering the deals, Eskom’s actions, critically, threaten to undermine the gains made by the country’s green energy program, which many have come to hail as the shining beacon of a renewables-based future .

"On the Fieldstone Africa Renewable Index or Far, South Africa’s ranking has plummeted off the charts entirely, prompting concerns among investors over green energy’s future in the country," it said. "Its decline is ironic given the rainbow nation had topped the continent-wide list just four months ago.

"With a cluster of over 100 solar and wind projects South Africa is still currently home to the world’s fastest growing renewables program, generating 2.2 gigawatts of energy. According to Far the country’s programme has delivered enormous economic value for South Africa, attracting R196.4bn in investments and created 20 000 jobs."

Time to break up Eskom

Countering Koko's argument is energy policy expert Professor Anton Eberhard, who has often called for the vertical unbundling of Eskom.

“Eskom needs to be unbundled precisely to avoid the situation we face now, where Eskom is being the arbiter of whether it builds the next big chunk of power or whether the private sector comes in with IPPs and renewables,” Eberhard told Fin24. “It shouldn’t be Eskom’s decision; that is a broader policy decision.”

The broader policy decision is where the Integrated Energy Plan and Integrated Resource Plan comes in. The DoE is currently holding public engagement sessions around their 2016 draft update, which will be finalised and implemented as the new energy policy in March 2017. It could see the requirement for renewables either increasing or decreasing, with its major competitor being the introduction of large-scale, government-controlled nuclear energy.

Eberhard believes that for true competition to occur, Eskom should be turned into three separate entities. “We have an Eskom Holding Company. As a first step, we can place a subsidiary generation company under that holdings company that is separate from the transmission and system operator companies. You ring fence these business. Then you eventually move that subsidiary out as a separate company to remove the conflict of interest.”

The Independent System and Market Operator (Ismo) Bill, which was thrown off the table by the ANC NEC in 2015, would have proposed a slightly different solution – by leaving Eskom largely intact but creating a new institution with the system operator and a buying or contracting function. However, government was not happy with the bill and wanted time to come up with a new plan, something it has yet to do.

The call for Eskom’s unbundling could form part of government’s plan to reform state-owned entities.

Political noise

The IMF also said that “trade liberalisation to promote regional integration would reduce input costs and facilitate gaining economies of scale”.

“By undertaking reforms that spur growth, thereby slowing the rise in the public debt ratio, there is an opportunity to reduce the pace of fiscal adjustment,” it said.

It also called for “greater consistency in statements about policies by different public sector representatives and implementation of centralised evaluation of all policy proposals prior to their approval would be warranted”.

Hampering efforts of low-growth in South Africa was political noise, according to the IMF.

“Despite the strength of South Africa’s institutions, perceptions of weakening governance and of rising uncertainty regarding the direction of policies have been associated with low investment and consumer confidence,” it said.

“Weak economic growth impedes the economy’s ability to curb unemployment and inequality,” it said. “Should the slowdown be prolonged, the state of the public finances would face greater risks from declining investor confidence.

“If a sudden stop in capital inflows were to ensue, South Africa’s floating exchange rate, deep investor base, small share of foreign-currency-denominated government debt and reasonably well-hedged private-sector balance sheets would help to cushion the blow.

“Nevertheless, imports of consumer and investment goods and services would contract abruptly, and a vicious circle of falling growth and rising debt could not be ruled out.”

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matshela koko  |  anton eberhard

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