Jacob Zuma and Vladimir Putin are both small men with large appetites. Whereas Putin’s bare-chested nationalism threatens to consume Ukraine piece by piece and has brought on Western economic sanctions, his quest for a place in history does not yet threaten the solvency of Mother Russia.
Zuma, of course, has Nkandla and excessive security, though galling, these will not break the national budget. Yet Zuma’s nuclear ambitions, which are becoming clearer and clearer, formed an obvious backdrop to his mysterious visit to Moscow last month and definitely have the potential to impose a burden under which the South African economy could buckle.
The warning signs are flashing that Zuma intends to push ahead with plans to purchase a fleet of nuclear power stations to generate 9 600MW of electricity. He included the promise in his opening address to Parliament in June, reiterating what he had said in his State of the Nation speech in February.
He brought in the pliant Tina Joemat-Pettersson to head the department of energy. Business Day confirmed this week that the government has decided to sidestep Eskom as the owner and operator of the nuclear fleet. Instead, the process will be led by the Cabinet’s energy security subcommittee – chaired by Zuma himself; the lead department appears to be Joemat-Pettersson’s.
This neatly sidesteps the technical and financial oversight Eskom might have exerted, neutralises a new and more sceptical minister of public enterprises, Lynne Brown, and sets the stage for an opaque “country-to-country” negotiation process.
Meanwhile, several sources have told the Mail & Guardian that Zuma regards the nuclear power project as part of his legacy. A businessperson with historically close ties to Zuma told the M&G that the matter has been decided: Russia will get the deal.
He noted that the Russians had taken assurances provided to them by previous energy minister Ben Martins as a solemn undertaking, and did not generally take kindly to such promises not being fulfilled.
It would be a mistake to write off the French company Areva, which is competing for the nuclear contract – and government officials have provided nods in the direction of having more than one supplier – but the identity of the eventual contractors is actually beside the point.
Since 2011, the M&G has been warning that the likely price tag will be in the region of R1?trillion – or R100?billion more than the country’s entire tax revenue for 2013-2014. The estimated cost of the Hinkley Point power station under construction in Britain is close to R150-billion per reactor, which would equate to R900-billion for the six units needed to deliver 9?600MW of power to South Africa.
Neither Eskom nor, indeed, South Africa can afford to take on this much debt. Eskom is already struggling to avoid having its debt rating downgraded to “junk” status.
On Sunday the government moved to prop up the parastatal’s balance sheet by announcing an unspecified capital injection and a guarantee for some R250-billion in Eskom debt, meaning the taxpayer will stand as backstop for the increased borrowing needed to get Eskom out of its current hole. In any case, lending institutions by and large now refuse to finance nuclear projects because of the very high costs, long repayment periods and significant risks of cost and time overruns.
How, then, is the Zuma administration planning to fund this nuclear extravaganza? Through vendor financing, supposedly.
In other words, the Russian or French governments would put up the money. The catch is that payment would then be secured through a cast-iron commitment from Eskom to purchase power for 15 to 20 years at a price that would secure the investment, necessarily at a much higher tariff than currently applies. At Hinkley Point, for instance, the guaranteed price is about R1.70 per kilowatt hour, or more than double Eskom’s current average electricity tariff.
South African consumers and industry are already groaning under the weight of tariff increases driven by the need to fund Eskom’s existing build programme – with more hikes in the pipeline because of the failure to deliver the new Medupi and Kusile coal-fired stations on time and on budget. At the start of construction, Eskom estimated Medupi would cost R34-billion. Reports now suggest the latest estimates are that it will cost more than R100-billion.
Nuclear power plants are notoriously more complicated and prone to cost and time overruns. Trying to transfer all that risk to a vendor is futile. As Medupi has shown, what is written in an initial contract may be worthless – and very large strategic projects offer relatively little leverage for the buyer to enforce terms.
Indeed, vendor financing offers a perverse incentive to the project company to cut corners – an especially dangerous scenario for nuclear power – because cost and time overruns can be financially catastrophic.
What, then, is to be done?
Renewable energy sources, including solar, wind and hydro – backed by the baseload capacity coming on stream from Medupi and Kusile – offer the potential for incremental solutions that distribute risk.
Simply put, South Africa must repudiate the siren song of ego-driven mega-projects that have the potential to bankrupt us.