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More questions than answers as dirty power ships drop anchor

10 May 2021 Gareth Stokes

The South African government and ruling party’s frequent promises to stamp out corruption and carry the country to new levels of economic prosperity are sounding increasingly hollow. Yes, there have been some hesitant actions from Luthuli House, which continues to entertain the public with its countless ‘suspend or not’ debates and ridiculous imposition of deadlines to effect the simplest of disciplinary steps. But the corrupt are so entrenched, and their practices so pervasive, that small victories on the fringes cannot stop the ooze from spreading. This writer is still wrestling with how the country’s soon-to-be notorious power ships deal was even considered in the context of an environmental, social and governance (ESG) world.

Dirty power at greater cost

There is so much wrong with the deal between the Department of Mineral Resources and Energy (DMRE) and Turkish-based Karpowership that even the power utility is unhappy with the arrangement. An article published by Bloomberg, 6 May 2021, alleges that Eskom is not impressed with the cost of the electricity or the duration of the contract. The contract, awarded in terms of government’s Risk Mitigation IPP Procurement Programme (RMIPPP), will see three gas-burning power ships anchored at South African ports for the next 20-years. Eskom will have no choice but to ‘accept’ the power from these ships at costs ranging between R1 468/MWh to R1 885/MWh. These tariffs, which will be adjusted higher for inflation and to accommodate imported gas prices, are already far in excess of the R700/MWh budgeted for recent renewable power projects. 

Assuming government foists the contract on the ailing state-owned enterprise (SOE), Eskom will be locked into purchasing 1 220 megawatts of electricity from three dirty gas-fuelled power stations at a cost of around R11 billion per year, for two decades. These costs will ultimately be clawed back from Eskom’s long-suffering commercial and household customers. An obvious question is why taxpayers should be locked into a decades-long contract with high annual escalations on government’s say so. Government and its SOEs have proven terrible at negotiating long-term contracts and one can only imagine what shocks a close reading of the Karpowership contract will reveal. Aside from unsustainable cost escalations this writer expects to find ill-thought risk transfer clauses with the potential to add billions to the bill. One uncomfortable scenario: who will pay for the clean-up following an environmental disaster? 

Echoes of the Billiton smelter deal

Karpowership’s shareholders will benefit handsomely and leave South Africa to tidy up carbon emissions and other environmental pollution without any long-term infrastructure benefits. The deal’s private sector bias smacks of the oft-reported 1990s arrangement between Eskom and private sector mining companies, including Anglo American and BHP Billiton. The secret commodity-linked price and supply arrangement came to light when Eskom was struggling to supply the domestic economy with electricity. The bottom line is that a handful of energy-intensive mining companies soaked up much of Eskom’s electricity at fractions of the consumer price. Around 2012 it was estimated that BHP was paying 8-12c/kWh for electricity compared to the R1/kWh paid by consumers. 

Analysts have pointed out that the Karpowership consortium’s bid failed on a number of important bid considerations. The bid did not meet the requirement to boost South Africa’s fixed capital formation and required an exemption from local content regulations, among other issues. Asset managers, environmentalists and opposition party politicians are also concerned over corruption; the offshoring of domestic consumption expenditure; the potential for significant annual cost escalations; spiralling carbon emission; and the likely impact on ocean ecosystems. 

“On the face of it, and based on the information available, we believe the power ships [deal] raises some critical questions which will require substantial explanation,” writes Paul Semple, a portfolio manager at Futuregrowth, in an article published on Daily Maverick. He raised red flags about the bidders’ ability to achieve the bid timelines given that environment assessments were outstanding and that permissions to berth the power ships at the shortlisted harbours had not yet been finalised. 

A suspect deal that reeks of corruption

Opposition politician, John Steenhuisen, is less diplomatic. In an opinion piece on Politcsweb.co.za he writes: “Like Zuma’s dodgy nuclear deal, Energy Minister Gwede Mantashe’s power ship deal is deeply suspect and frankly reeks of corruption”. One of the main issues with the deal is its lack of transparency, something that is common in government and SOE tenders, and central to an ongoing legal tussle between the Organisation for Undoing Tax Abuse (Outa) and the South African National Roads Agency (Sanral). Outa wants Sanral to produce information about the country’s apparently successful N3 Toll Road Concession; but Sanral is refusing. 

Advocate Stefanie Fick, executive director of Outa’s accountability division asks: “When will government and SOEs realise that they cannot be in a constant battle with citizens and civil society when it comes to transparency?” Good question… And we loved the ensuing reader comment on the matter, which we believe should apply to all state-funded infrastructure projects: “Road users are entitled to know what roads cost and whether that cost represents value for money. If Sanral [refuses to] tell us, it suggests they have something to hide. This is a fundamental problem with SOEs: they are undemocratic, because they move public functions into the private sphere, where confidentiality is claimed and democratic accountability excluded”. 

The accountability deficit

Returning to the issue of corruption and state capture it really galls to read headlines that the ruling party’s tough stance on corruption will give it an edge in the upcoming local municipal elections. A rational thinker will struggle to unpack why the electorate, after decades of abuse, still places their faith in the current political elite. And those putting their faith in the country’s incumbent President would do well to read the transcripts of his testimony to the Zondo Commission. Even better, immerse yourself in the President’s responses to questions in Parliament. We see no accountability and only half-hearted acknowledgement of government’s shortcomings despite mountains of evidence of serious wrongdoing. The President offers denial, counter accusation, misdirection and obfuscation while the country burns and crumbles. 

South Africa needs an accountable leadership of nation builders to replace the current crowd who perpetuate the us versus them battle at every opportunity. It is also time for South African voters to realise that the ‘us versus them’ is no longer a battle between ‘black and white’ or ‘poor and wealthy’; but rather one of ‘the political elite with vested interests versus the citizenry’.

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