18 Dec 2015 – Stefaans Brümmer
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 a gulf opened between the treasury and the nuclear lobby in government is evident from their different calculations of what nuclear would cost.
AmaBhungane can reveal that the treasury’s estimate is a minimum of $4 900 per kilowatt of installed capacity – and realistically up to double that. If applied across the 9.6 gigawatt being considered, the procurement would total R700-billion to R1.4-trillion at current exchange rates.
This is way over the $4 200 per kilowatt, or about R600-billion total now, that the department of energy has punted.
Both sides’ estimates are “overnight”, meaning they exclude financing costs, which will be very substantial.
President Jacob Zuma is a key proponent of the nuclear build and regarded as particularly supportive of a Russian bid.
“We can’t spend money that we don’t have”
A variety of media has reported that friction over nuclear and South African Airways precipitated Nene’s downfall.
AmaBhungane sources with access to senior ANC and state officials confirm this, saying tension went back some months.
The magnitude of the vaunted procurement – the largest in South African history – explains what is at stake for the economy, which was already teetering as ratings agencies warned of a downgrade to “junk” if government did not reign in its borrowing. The attendant opportunity for patronage may help explain what is at stake politically.
Despite the treasury’s concerns, the Cabinet meeting preceeding Nene’s axing last week Wednesday approved the commencement of the nuclear procurement. While the post-cabinet statement was silent on it, Business Day this week quoted new Finance Minister Pravin Gordhan 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 …”
ANC deputy secretary-general Jesse Duarte reportedly echoed the sentiment, saying the party felt the procurement should go ahead only if affordable. “That’s the message we’re relating to the ANC government.”
Intra-government contestation is apparent from the slippage of the procurement schedule to date.
In mid-July – shortly after Zuma, Nene and Minister of Energy Tina Joemat-Pettersson returned from a Brics summit in Russia – the energy department announced that the procurement would start that same month and that the vendor would be selected by the end of the financial year in March 2016.
The slippage and indications that Cabinet made no financial commitment suggest the decision was partly a sop to Zuma, the nuclear lobby in government and potential vendor countries. A request for proposals may be issued, but actual contracting will not take place until money is found.
How hard that will be – and at what risk to the economy if funds are committed regardless – is apparent from financial modelling that the treasury has done at the hand of expert studies the energy department commissioned from consultants Deloitte, KPMG and Ingerop. The department has turned down requests for these reports, saying they 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.
By comparison, the overnight cost of the controversial arms deal announced in 1999 was only about 13% of that year’s budget.
“Political pressures were growing, calling into question the government’s continued ability to maintain spending restraint”
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. All three major rating agencies drove the message home in the past two weeks by downgrading South Africa or changing their outlook to “negative”, leaving the country hovering above “junk” status. Downgrades raise the cost of servicing debt and a junk rating may spur an unmanageable debt spiral.
In response, the treasury has committed to an expenditure ceiling that should stabilise government debt at just under 50% of gross domestic product. But that is not the full picture. If the R470-billion that the treasury has extended in guarantees to state-owned companies such as SAA and Eskom is included, the gross liability pushes over 60% already.
If the nuclear procurement goes ahead, the figure is likely to go through the roof given the guarantees the treasury will have to extend even if vendors provide finance.
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.”
It is this political pressure, it seems, that claimed Nene’s scalp.
Nene said he was not talking to the media. – Additional reporting by Tabelo Timse