Gordhan takes swipe at Eskom over tariff hikes

2016-02-24 14:57 - Matthew le Cordeur

Cape Town – Tariff increases should only be approved if they are necessary and not just to make things more comfortable, Finance Minister Pravin Gordhan told journalists ahead of his budget address on Wednesday.

His comments came a day before energy regulator Nersa announces possible electricity price increases through a tariff hike to fund Eskom’s shortfalls.

“Regarding tariff increases, are they necessary or just comfortable in a particular environment?" Gordhan asked. “We need to improve governance, financial management and state-owned entities’ contribution to the developmental agenda.”

In the Budget Review, Treasury said “further efficiency improvements are necessary at Eskom to ensure moderation in future tariff increases”.

“SOEs are not sacrosanct,” Gordhan said. “We are willing to take a tougher look at them.”

On top of this, it was revealed in the budget review that Gordhan “delayed the transfer of R5bn until Eskom complies with several conditions attached to the equity allocation”.

“These conditions relate to implementing cost reductions, improving maintenance and executing the capital expenditure programme,” the review says.

Asked about the delay, Gordhan told media ahead of his budget that he had approved R3bn of the R5bn, and the money should have been transferred by now. “They will wait until the end of March for the R2bn,” he added.

This comes after a press release by Treasury on Wednesday, in which it noted with concern reports in the Sunday Times that Treasury is targeting Eskom for an investigation into its coal contracts.

“The report was malicious and mischievous, based on unnamed and faceless sources purporting to be close to the National Treasury,” Treasury said.

It confirmed reports by Eskom that Treasury’s investigation had started in June 2015 and therefore did not commence under Gordhan’s watch.

Treasury added that the “Office of the Chief Procurement Officer has been reviewing contracts above R10m across government in its quest to ensure value for money and reduce wastage and irregularities in procurement.”

Treasury said in its budget that R15bn of government’s R23bn appropriation to Eskom had been transferred to the company. “Government has also converted its R60bn subordinated loan to equity to strengthen the utility’s balance sheet,” it said.

In November, Eskom submitted an application to Nersa to recover R22.8bn which the utility used to avert load shedding.

Nersa will evaluate the “regulatory clearing account” (RCA) balance for the first year (2013/14 period) of the third multi-year price determination (MYPD3) amounting to R22.8bn.

All cities in South Africa will face an electricity tariff increase of at least 16% in July if Eskom is granted a R22.8bn adjustment for the 2013/2014 financial year, according to Leslie Rencontre, director of electricity at the City of Cape Town.

Treasury on Wednesday warned about the effect the increase in food inflation and Eskom’s likely tariff hikes could have on consumers. “If these result in higher consumer price index inflation over the coming year, there will be upward pressure on inflation-linked expenditure, including compensation, social grants and free basic services,” it said.

“As a result of the 8% annual tariff increase approved by Nersa for the period up to 2017/18, the cost of providing free basic electricity is rising,” Treasury said. “Equitable share allocations compensate municipalities for this, but not for any additional increases in the bulk price of electricity approved after the budget is tabled.”

Treasury explained why government provides support in the form of guarantees to Eskom. “In the event that Eskom is unable to purchase power as stipulated, government must buy the power on Eskom’s behalf,” it said.

“The probability of default is low, since the regulator generally approves tariff increases that accommodate these agreements. However, significant deterioration in Eskom’s financial position may increase government’s risk exposure.”

Power-purchase agreements between Eskom and independent power producers providing renewable energy are now categorised as contingent liabilities, Treasury said in its budget.

“This change adds about R200bn to contingent liabilities in 2015/16. The agreements oblige Eskom to buy power from these producers over a 20-year period at a price agreed to by Nersa.”

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