7 minute read
Identifying weaknesses
Bureaucratic impediments
Bureaucracy and overregulation are considered as structural impediments that make it difficult for South Africa to achieve meaningful economic growth. Officials are sometimes fixated on compliance requirements, instead of seeing the ‘bigger picture’. More rules and regulations are therefore not seen as the answer to subvert fraud and corruption, instead inhibiting delivery. Concern about the level of compliance necessary in undertaking the procurement involved in systemic power system maintenance has recently been expressed by top management of Eskom.
Advertisement
Central planning shortcomings
The energy sector lacks a centralised, coordinated approach to synergies in the value chain. For example, a lack of coordination in the energy value chain, made worse by security weaknesses, led to a situation where the Richards Bay Coal Terminal’s export volumes in 2021 dropped to the lowest level since 1996. That, at a time when global coal prices were at record levels, resulting in a missed opportunity for the country.
Education, training and skills development
The quality of South Africa’s education and training system has been highlighted as an area of concern. The basic education system is considered flawed, with poorly performing teachers, poor work ethic, a lack of community and parental support, and poor control by education authorities, all exacerbated by low levels of accountability. The result is learners that lack discipline, high levels of absenteeism and poor performance in essential areas of mathematics and literacy (Mouton et al, 2012). As the basic education system informs the tertiary sector, its shortcomings are widely felt.
While there is an opportunity to draw South Africa’s unemployed youth into the energy sector, there is a risk that the country may not be able to fully transition into a new technological model and sophisticated value chains, if it does not have the requisite domestic capabilities. There is a view that South Africa is not imparting its youth with the correct skills for the transitioning energy sector.
Energy pricing and regulation
The entire regulatory regime needs to be rethought to consider the purpose it serves, the value that it adds and the capabilities it unleashes. The point was made that the National Energy Regulator of South Africa (Nersa), which sets and approves tariffs, must review its
Identifying weaknesses
policies. Nersa’s determinations and tariff approvals could potentially have major implications for the fiscus and mispricing has been a major cause of Eskom’s unsustainable debt problem. Nersa released a consultation paper in September 2021 to develop a new price determination methodology, arguing that the revenue-based methodology has fallen short in providing stable prices.
Infrastructure backlog
There is a significant backlog in infrastructure investment, which is vital to economic recovery and growth (World Bank, 2022). The deficit cuts across many different sectors, including energy, water and sanitation, transport, digital infrastructure and housing, among others. The National Development Plan envisions the ratio of gross fixed-capital formation to gross domestic product to be between 25% and 30%. Currently, the ratio is estimated at 14% to 16%.
While the deficit can be attributed to a shortage of funding, participants have noted that the issues run deeper. It is argued that, often funding, in a variety of forms, is available, but projects are not well planned, implemented or completed.
Tenders are another area of concern, mirroring an issue that was raised by the construction sector during a previous ISI workshop. It is argued that the time that it takes to award a tender is too long and that the ratio of tenders that are awarded is too low. The tender process has been described as onerous and complicated, while political influence also plays a role. There is also a lack of people with the required skills and competency, especially at municipal level, to handle tenders effectively and to manage infrastructure throughout its life cycle. At municipal level, many people with valuable skills and experience are either leaving municipalities or are not in the right positions to make critical decisions that are needed for economic development.
Restricted local opportunities
South Africa does not focus enough on creating local opportunities and developing local supply chains. Too much work is outsourced to foreign contractors or companies, instead of using local expertise or accumulating the required skills and expertise. Eskom’s flagship Battery Energy Storage Systems project, which involves the development of a 360 MW storage system at a substation in Vredendal, in the Western Cape, has been cited as an example of a missed opportunity to develop the local supply chain. According to a participant in the ISI discussion, project criteria, in many instances, were not conducive to South African companies taking part.
Identifying weaknesses
Competitiveness is a serious constraint to local manufacturing, with the country struggling to compete, for instance, with the cost of solar panel manufacturing in China, or other Asian manufacturing hubs. Powering up a competitive manufacturing landscape in which products that are used not only domestically, but also have export potential, are produced will be key to establishing local supply chains.
Stagnant refining sector
The crude oil refining industry has for years struggled with financial viability, ageing infrastructure, power interruptions and the need for massive capital investment to produce cleaner fuel. Many refineries have closed in recent years, including the Engen refinery in eThekwini, in December 2020, and the Astron Energy refinery in Milnerton, in mid-2020. The Engen refinery will now reopen as a fuel-storage facility, while the Astron refinery may restart “at some point” this year (Business Report, 2022). Sapref, South Africa’s biggest crude oil refinery, jointly owned and operated by BP South Africa and Shell Refining South Africa, is the latest to announce that it will “pause” refinery operations from the end of March 2022, for an “indefinite period”. Concerns have been raised about the refining industry’s preparedness for the future, especially in preparation for the roll-out of more electric vehicles in the country.
Sustainability of IPP model
The sustainability of the IPP model has been questioned, given that it is predicated on insulating the investor, to a large extent, by providing guarantees. Although it may be politically attractive, as private-sector funding is mobilised to shift green infrastructure investment off the national balance sheet, it has been argued that guarantees create mounting financial risks to the fiscus. The National Treasury contends that contingent liability risks for IPPs represent a low risk to the fiscus, although it is considering a reduction or elimination of guarantees to
Identifying weaknesses
reduce the stock of contingent liabilities. Treasury states in the 2022 Budget Review that a government study is under way to explore alternative support for the REIPPPP. The value of signed IPP projects, which represents government’s exposure, is expected to amount to R177-billion by the end of March 2022, decreasing to R156.60-billion in 2022/23, R137.80-billion in 2023/24 and R120.80-billion in 2024/25 (National Treasury, 2022).
Electricity produced by REIPPPP projects is bought by Eskom, which is the designated single buyer, after government has entered into power purchase agreements with the IPPs. The purchases are funded through a revenue allocation in the Eskom tariff, which is determined by Nersa.
The IPP model is also considered to offer limited participation for local entities, because foreign investors tend to be selective about with whom they work, an industry participant argued, stating that the programme’s true impact on broad-based black economic empowerment must be further interrogated.
REIPPPP Bid Window 5 economic development targets
As with all the independent power producer (IPP) procurement programmes to date, Bid Window 5 set out a number of key economic development targets to be achieved by the bidders. In this regard, the 25 preferred bidder projects:
• achieved South African entity participation of 49.20%;
• achieved a total of 34.70% shareholding by black people in IPPs;
• committed to 25% black participation in companies building the projects; and
• undertook to spend 41% of their committed budgets on purchasing locally produced products that meet the requirement local content.
Source: Department of Mineral Resources and Energy, 2021
Uncertainty about end-state of energy
There is too much uncertainty about the vision for the end-state of the electricity sector, with political, economic, technical and regulatory challenges reported. For instance, South Africa previously pursued a now-abandoned model to separate the distribution division from Eskom and to merge it with the electricity departments of municipalities to form a number of financially viable regional electricity distributors. Instead, Eskom is now being restructured, set to be split into three divisions – generation, transmission and distribution. The legal separation of the transmission unit along these lines has started and will help open the grid to private suppliers.
