/ 16 April 2010

The shabby economy

The Shabby Economy

If there was a contest to win the prize for Jo’burg’s worst building, Chancellor House would be a serious contender. The City of Johannesburg recently gave notice that it will expropriate the site, once home to the legal offices of Nelson Mandela and Walter Sisulu, for about R350 000.

This after the owners of the building held out for years for a better price, rumoured to be as much as R3,5-million.

When the ANC was looking to name its no-profile investment arm, it chose Chancellor House. The company was first brought to public attention by the Mail & Guardian, which also subsequently exposed the fact that Chancellor House was a major beneficiary in the awarding of tenders to supply boilers for the giant Medupi and Kusile power stations.

The involvement of the ruling party in these tenders has come under intense scrutiny in recent weeks as part of an application by Eskom to secure tens of billions of rands in funding from the World Bank.

The application was controversial: Medupi will be the world’s fourth-largest coal-fired power station and the World Bank’s procurement rules are seen to have been violated because of the involvement of the ruling party in the deal.

The loan was agreed by the board — one has to think mostly because the prospect of South Africa running short of electricity will be bad for the whole region — but not without five countries — the United States, the United Kingdom, the Netherlands, Norway and Italy — abstaining from the vote.

The United States said it would abstain because the project will produce significant greenhouse gas emissions and uncertainty remains about future mitigation efforts. “We also remain concerned about other facets of the project, including the inconsistency of Eskom’s procurement process with the World Bank’s procurement guidelines,” the US government said in a statement.

The South African government appeared to acknowledge the bad odour surrounding the involvement of Chancellor House. In a statement released before the loan was approved it said it was “mindful of some of the concerns raised in this regard” and would “continue to engage with all concerned stakeholders … We will ensure that we have a transparent framework to deal with matters such as these.”

Both the World Bank and the department of public enterprises have done their best to emphasise that none of the bank’s money is going to Chancellor House. The line is that this part of the deal is already funded. But critics disagree: it is like saying we are not financing a car or its engine, just the wheels.

ANC treasurer general Mathews Phosa is on record saying that the ANC will dispose of its 25% interest in Hitachi Power Africa, the company that won the Eskom tenders. He repeated the statement after the World Bank announcement, this time saying that the disposal would take place within six weeks.

Chancellor House probably paid nothing to be part of the deal. With a fat contract in place, its exit price could be pretty indeed.

How much could the deal be worth? The combined value of the contracts when they were awarded to Hitachi Power Africa was R38-billion. It is reasonable to speculate that the actual price paid, after escalations, was higher.

The Democratic Alliance reckons that Chancellor House profited by R1-billion from the deal. Business Day has editorialised that this makes the ANC the world’s richest political party, while Moneyweb readers have weighed in on what should be done with the ANC’s profits, suggestions ranging from cutting R1-billion off the cost of building Medupi to giving the money to charity.

But Chancellor House, which is 100% owned by a trust and does not discuss its affairs with outsiders, said the Hitachi stake was not for sale. ANC secretary general Gwede Mantashe shot down Phosa, saying the sale of the stake had never been discussed by the ANC, while Finance Minister Pravin Gordhan called for the ANC to do the right thing and deal with any conflict of interest arising from its involvement with the Eskom tenders.

The ruling party profiteering from its involvement in projects under the control of state entities is clearly a problem, but the issue here goes much further.

Policy, as demanded by law, is controlled by something known as the Integrated Resource Plan (IRP). This is meant to guide energy policy, after extensive and transparent stakeholder engagement.

But in reality the latest IRP, gazetted quietly in the dying hours of last year, is a scrappy one-and-a-half-page document that reflects neither stakeholder engagement nor transparency. It extends Eskom’s monopoly position, ignores private players who want to get involved and pays, at best, lip service to energy efficiency and the introduction of renewables.

There are critics who hate coal and are prepared to let Medupi happen on the basis that it is too far down the line, but see Kusile as unnecessary to our needs and too damaging to the environment.

Alas, though, you cannot disaggregate the two. They are a double act — at least in part, observers believe, because cancelling contracts would bring such severe penalties, perhaps as much as R50-billion in the case of Kusile, that it has to be built no matter what.

Energy policy is so dominated by Medupi and Kusile that just about nothing else gets a look-in. Private players are keen to supply electricity to the grid, but cannot get agreements with Eskom, the incumbent, to do so. You have to think that Eskom does not want power from private players as this will delay or postpone the need for Kusile — meaning that the prohibitive penalties will kick in.

But paying for Kusile is another matter. Even after getting the World Bank loan Eskom faces a shortfall of R45-billion in year three, according to its own figures, while Kim Silberman of financial services company Cadiz estimates that the total funding shortfall will rise to R183-billion in the next five years.

Eskom maintains that its power stations are built cost-competitively at about $2 500 a kilowatt, but they could be much cheaper, according to Xstrata chief Mick Davis, a former Eskom finance chief. Davis contended last week in a speech at the Wits Business School that Eskom’s costs are $3 500 a kilowatt, while private companies can provide their own coal power at between $1 500 and $2 000 a kilowatt.

Who benefits? Clearly Eskom management. Jacob Maroga’s job, where he famously was unable to take decisions, was worth R85-million to him, based on the claim he is bringing for loss of earnings. The cost to the company just to chauffeur him around was R1-million a year.

It is hard not to draw the conclusion that electricity policy is a joint venture between Eskom management and the state in the form of Chancellor House.

Eskom and the ANC committed to building Medupi and Kusile without knowing how they were going to fund the build or where the funds would come from. Government could have halved its risk by signing off on only one of the two projects, but instead we appear committed to both at great expense and so to continuing our reliance both on a state monopoly and coal as the only real source of electrical energy.

What could be different? You have to think that, if Chancellor House had somehow ended up as a beneficiary of concentrated solar projects that turn the sun’s energy cleanly into electricity, we’d have several of these now under construction across the country.

Likewise, if the department of energy could match the combined team of Eskom and Chancellor House for capacity and political will, we’d already have an independent buyer to buy electricity from co-generators, such as some of our larger corporates, and from independent power producers.

Refit, the system used internationally to encourage the development of renewable energy, would be in place with any number of small and medium players supplying clean energy to the grid.

We could also have regulations that, for instance, would ban the sale of incandescent light bulbs and new electric geysers for buildings above a certain value. Banning is usually not a preferred option but systems such as these use energy so inefficiently that leading countries are banning their use.

Eskom has failed dismally to roll out solar water heaters. Its critics think this is because its real job is not to save electricity but to sell it. With political will and the right implementing agency we could have already had a massive rollout of solar heaters.

Eskom has had some success in swapping energy-saving light bulbs for incandescents, saving 1 000 megawatts in power demand. This, based on the costs of building Medupi/Kusile, obviates the need to build R30-billion in capacity.

It suggests that with an equal focus on building new capacity and using what we have more wisely, much more could be done.
Business organisation Busa, noting that we are likely to face electricity shortfalls in the coming years, says that savings of 5 000 megawatts can be achieved by making better use of what we have.

It seems to be an entirely reasonable goal, the only pity being that this plan was not implemented, with government in the driving seat, several years ago.

There is now a major row, with the ANC’s most senior officials in disarray over Chancellor House, while opposition parties, which are demanding greater transparency on the issue, want the ANC to both divest the stake and make the profits available to the public good.

Mantashe has justified the ANC’s involvement by saying that political parties are not required to disclose their sources of funding. But the cost here has been far greater than what Chancellor House has pulled for itself.

Where energy policy could have been driven by efficiencies, the introduction of renewables, increasing energy diversity and private competition for Eskom, we have instead increased our reliance on coal and Eskom and are unsure how the bill will be met. It looks very shabby indeed.