While countries vying for South Africa’s 9,6GW nuclear procurement programme talk shop at a conference outside Pretoria, events down the road could put President Jacob Zuma’s dream of nuclear in a precarious position.
Deputy finance minister Mcebisi Jonas said on Wednesday that the Gupta family had offered him Nhlanhla Nene’s job, which he declined. Weeks later, Nene was replaced by unknown ANC MP Des van Rooyen, who was then quickly dumped for Pravin Gordhan due to political pressure.
What Jonas didn’t clarify was whether the Guptas’ offer came with a condition to authorise the nuclear procurement plan, which Nene had been stalling on. The Democratic Alliance and Congress of the People are pressing charges against the Guptas on Thursday, in which they seek to uncover allegations of more Gupta-linked appointments.
The allegations point to so-called state capture by the Gupta family, with key presidential appointments being earmarked to promote private business interests. The family denies this.
Reformist Gordhan has resumed Nene’s stance on nuclear, with the message that nuclear energy will proceed at scale and pace that the country can afford. Zuma pointed this out too in his State of the Nation address.
Treasury economists have apparently done their sums and believe the nuclear programme will tip the country into a fiscal danger zone.
The reason why treasury is likely against nuclear is because it will have to come up with guarantee of R800bn, EE Publishers MD Chris Yelland said on Thursday. “The debt to GDP ratio is on the edge,” he said. “Another R800bn will take it over the edge.”
In its budget review, treasury said guarantees for state-owned entities stood at R467bn at 31 March 2016, with 75% of this being issued to Eskom. Independent power producers were the biggest contributor to Eskom, adding R200bn to this level.
“Only the portion of the guarantees that these companies have borrowed against — known as the exposure amount — is a contingent liability to government,” treasury explained. “Creditors can call on government to service or pay off the guaranteed debt on which an entity has defaulted.”
The debt to GDP ratio is on the edge. Another R800bn will take it over the edge
Emerging markets economist Peter Attard Montalto of Nomura said in December that “there needs to be more transparency on what advice national treasury has provided and the sequencing of their advice versus the process of moving to tender”.
“I still believe no formal sign-off on affordability under any financing option has been provided by national treasury and indeed that it remains totally unaffordable under any financing model including vendor financing.”
The department of energy said the purpose of its request for proposals (RFPs), which will be issued by the end of March, is to test the market.
“The RFPs will test the markets, determine the state of readiness of the country’s nuclear institutions and develop a funding model that will still have to win cabinet approval,” energy department director general Thabane Zulu told Bloomberg this month. “Depending on the responses, the government will then decide whether or not to issue a tender for the building programme.”
Yelland, who attended the Nuclear Africa conference on Wednesday, said he was alarmed at the lack of debate around this issue. “The nuclear industry is having a conference and not dealing with the elephant in the room,” he said.
‘Alarming’ lack of debate
Yelland explained that rating agencies wanted South Africa to shelve nuclear, not due to safety or environmental issues, but the financing and debt issues. “It’s about the money,” he said. “If we went on a railway new build on R800bn it would be exactly the same.
“I have listened to very serious economists who tell me that there is no way this can happen in current financial circumstances,” he said. “If they do go ahead with it, we will be immediately downgraded.
“These are the financial realities at this time,” he said. “There will be major international reaction against the financial situation of South Africa as its debt obligations go beyond all normal prudence.
“It’s not me who sets the prudence rules, or Gordhan, it’s the response of the market. It will affect the rate of exchange and the cost of borrowing.”
Yelland said the nuclear programme is “uniquely at risk at the moment”.
“The political circumstances right now with the Guptas, treasury and Zuma make the possibility of a R800bn new build quite remote,” he said.
Yelland explained that the current financial situation is driven by local and international factors, such as the low commodities cycle and the slowdown in China.
“If GDP stays constant and debt increases, then it’s a problem,” he said. “If GDP increases then it’s not a problem. If your sales go down and costs go up, it’s a problem.”
He said that whatever business model South Africa chooses, the country still lacks a funding plan. “We don’t know what size we need because we haven’t finished the latest integrated resource plan [that determines the country’s energy mix].”
“It’s a fishing expedition,” he said.
Failing test on every front
Montalto said on Thursday that he agreed with Yelland. “There is no problem with nuclear technologically or environmentally if it can be done in a transparent and rent extraction free manner with containment of building costs and time scales.
“South Africa quite blatantly fails that test on every front,” he said.
The political circumstances right now with the Guptas, treasury and Zuma make the possibility of a R800bn new build quite remote
“Taking on the contingent liabilities under the department of energy’s and ANC’s preferred vendor financing model would confirm South Africa in junk for all the agencies,” he added. “This is because of its size more than the Zuma connection.
“South Africa should be building rapid deployment small flat pack gas power stations while encouraging offshore drilling and fracking and building a pipeline from Mozambique,” he said. “Plus more renewables.
“It can then wait until the next generation of smaller-scale flat pack nuclear is available to deploy at much lower cost in South Africa.”
