/ 18 December 2015

Nuclear price tag set Nene against Jacob Zuma

Finance Minister Nhlanhla Nene has proposed what appears to be an unpopular UIF tax break.
Finance Minister Nhlanhla Nene has proposed what appears to be an unpopular UIF tax break.

The treasury’s reluctance to sanction the procurement of nuclear power stations was central to Nhlanhla Nene’s sacking as finance minister, sources say.

Just how wide the gulf is between the treasury and the nuclear lobby is evident from their different calculations of what the nuclear power stations would cost.

The treasury estimates the cost would be $4?900 per kilowatt of installed capacity – and, realistically, even double that, amaBhungane can reveal. Using that figure to calculate the 9.6 gigawatts being considered, the procurement would come to between R700-billion and R1.4-trillion at current exchange rates.

It is way above the $4 200 per kilo-watt, or about R600-billion total now, that the department of energy has put forward. Both sides’ estimates are “overnight”, meaning they exclude financing costs, which will be substatial.

President Jacob Zuma backs the nuclear build and is seen as being supportive of a Russian bid.

The media has reported that friction over the nuclear programme and SAA precipitated Nene’s downfall. Sources with access to senior ANC and state officials confirmed this, saying tensions went back several months.

The magnitude of the vaunted procurement – the largest in South African history – and the attendant opportunity for patronage may help explain what is at stake politically.

Despite treasury’s concerns, the Cabinet meeting preceding Nene’s dismissal last week Wednesday approved the commencement of the nuclear procurement process.

While the post-Cabinet statement was silent on it, Business Day quoted new Finance Minister Pravin Gordhan this week as confirming the decision. But Gordhan cautioned: “We can’t spend money that we don’t have and we can’t make commitments when we know we are not going to get the money that is required to be spent …”

Indications that Cabinet has not made a financial commitment suggest the decision was a sop to Zuma, the nuclear lobby in government and potential vendor countries. A request for ­proposals may be issued, but contracting will not take place until the money is found.

How hard that will be, and at what risk to the economy if funds are committed for it regardless, is apparent from the financial modelling

that the treasury has done based on studies commissioned from the consultants Deloitte, KPMG and Ingerop.

Low growth and government borrowing to finance capital and current expenditure have left the treasury between the rock of further spending demands and the hard place of credit ratings.

Credit rating downgrades raise the cost of servicing debt and a junk rating could spur a debt spiral.

Ratings agency Moody’s justified changing its outlook for South Africa to negative this week by saying: “Even without considering the cost of expensive new programmes such as nuclear power or national health insurance, political pressures were growing, calling into question the government’s continued ability to maintain spending restraint.”

This political pressure, it seems, claimed Nene’s scalp.

Nene said he was not talking to the media. – Additional reporting by Tabelo Timse

The overall costs are staggering

The department of finance has said the reports on the cost of the planned nuclear build were “classified”, but a treasury source outlined some of its findings. These include:

  • The minimum overnight cost for the first reactors would be about $4 900 per kilowatt. Although economies of scale might see later plants coming in more cheaply, factors such as site-specific complexity and localisation would militate against that.
  • The actual cost could be double the minimum, given the likelihood of cost overruns. New-generation reactors worldwide face average cost overruns of about 70%. South African coal plants Medupi and Kusile are approaching 100% overruns. 
  • These costs – the total of as much as R1.4-trillion – exclude complementary elements of the nuclear programme such as establishing a local fuel supply, building waste facilities and decommissioning plants, all of which entail significant expense. 
  • South Africans will pay for it through electricity tariffs and possibly tax subsidies. While vendors may provide financing, they won’t assume much risk for overruns, which will lead to consumers paying for these over the plants’ lifetimes. 
  • The procurement is extremely large relative to the economy. R1.4-trillion is roughly equal to this year’s total budget and a third of gross domestic product. Few if any other countries are investing in nuclear to this extent. By comparison, the overnight cost of the arms deal announced in 1999 was only about 13% of that year’s budget. – Stefaans Brümmer

* Got a tip-off for us about this story? Click here.

The M&G Centre for Investigative Journalism (amaBhungane) produced this story. All views are ours. See www.amabhungane.co.za for our stories, activities and funding sources.