The biggest piece of good news for load shedding that no one is talking about
While the 2023 Budget Speech has been widely deemed “adequate”, given the many crises South Africa is facing, one of the most significant moves by National Treasury to end load shedding in the country is largely being ignored, says Intellidex analysts Peter Attard Montalto.
According to the analyst, finance minister Enoch Godongwana and his department “buried” at least two sizeable nuggets within the Budget that will likely have huge implications for South Africa’s energy crisis going forward.
The first – which Attard Montalto says is the single most important thing that the majority of people have glossed over – is Treasury’s push to establish a public-private partnership (PPP) mechanism for energy transmission.
“Transmission is the biggest constraint on the transition to the future, load-shedding-free energy system,” he said.
“Putting such a PPP system in place will require solving all the outstanding delays in unbundling, a board and CEO for the National Transmission Company of SA and getting an independent entity doing whatever it takes to get new – mainly green- electrons on grid.”
The second nugget not gaining much attention is that National Treasury is planning legislation to remove regulation 16 of the Public Finance Management Act that governs PPPs, and it is seeking to replace this with a risk-based framework depending on deal size.
“It could be transformative in the face of capacity problems at all levels of government. It could also start to unlock the ability to move infrastructure forward much faster, and is long overdue,” Attard Montalto said.
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However, both these measures are unlikely to pass by and come into effect without pushback from the Department of Public Enterprises (DPE) and the Department of Mineral Resources and Energy (DMRE), he said.
“The Department of Public Enterprises has been a key blockage against private participation in the transmission build-out until now, so this will be an interesting political and practical fight.”
“If this is done successfully, however, it can bridge the gap between the current less than R1 billion of greenfield transmission investment per year and the R14.5 billion a year that Eskom says that it needs to undertake,” he said.
Attard Montalto also warned that the energy space is about to become a big battleground, with National Treasury effectively launching the first sneak attack.
This came through Eskom’s R254 billion debt relief, which comes with steep and strict conditions. According to Attard Montalto, the conditionality attached to the bailout is a huge positive for the deal – and something markets have responded well to – but creates a lot of friction and tension between departments.
“The most significant political push by National Treasury is on Eskom conditionality, which seems to act unilaterally over DMRE and DPE,” he said. “Yet, we understand received cabinet signoff.”
“We find the conditionality quite transformational for the industry as a whole and is in some sense more important than the relief of R254 billion itself.”
The conditionality is as follows:
- Eskom cannot undertake capital expenditure in generation – only transmission and distribution. “This upsets DMRE plans for Eskom to undertake new coal and gas and forces it to do such plans through IPPs in a transparent and public manner,” the analyst said.
- Eskom cannot utilise non-core asset sales for capital or operation needs – it must go to reducing debt;
- No new borrowing is allowed for the three years of the relief. “We find this somewhat problematic given the need to borrow for transmission and for decommissioning costs as part of the Just Energy Transition. Eskom can apply to the minister of finance for exemptions, but this seems cumbersome. Overall, we think NT is being very sceptical on the ability of Eskom to raise JET
financing,” he said.
- Eskom guarantees will decline as the relief is rolled out and guaranteed debt matures. The intention is for new debt after the relief period to be guaranteed;
- Gaming the system with derivatives isn’t allowed;
- The debt relief can only be used for principal and interest payments. “This is as expected but reinforces that it cannot be utilised for diesel costs and that the large tariff increases are still required to keep underlying operations expenditure in balance,” he said.
- There are restraints put on remuneration adjustments. “This will lead to large fights in future we see given the history of large wage increase awards sometimes under political pressure we have seen in the past,” the analyst said.
- Further conditions will come after a team of experts deployed by National Treasury to plants reports back.
According to Attard Montalto, these terms and conditions for the bailout are akin to National Treasury driving “heavy artillery onto the rest of the government’s lawn”.
“While the broad framework has been signed off by the cabinet, the detail may well come as a shock to the department of mineral resources & energy, the department of public enterprises and others — both for what it implies (a fundamental altering of the electricity supply industry at far faster a pace than ever previously conceived) and for their loss of control,” he said.
As such there is a big risk that these departments “counterattack” and try to send Treasury packing. An opportune time for such an attack would be prime while Eskom is vulnerable – with any current or future CEO distracted by mafias, corruption, unbundling processes and government and market obsessions with the energy availability factor.
However, if this ends up being the case, Attard Montalto said the risks to South Africa’s sovereign credit ratings and markets at large would send shocks last seen with the firing of former finance minister Nhlanhla Nene in 2015 or the almost-resignation of president Cyril Ramaphosa in 2022.
“In the present fraught political environment, the Treasury’s clear stance, as evidenced by the abovementioned two nuggets, is likely to face a counterreaction. Still, the inevitability of change on both fronts when facilities are available means we are likely to get there in the end,” he said.
Read: South Africa’s 2023 budget in a nutshell