Will the announced nuclear program energize South Africa’s manufacturing and construction?
My background is power engineering. Building power plants across Africa generates as many stories as they do electricity. It is ironic that, in Africa’s most electrified economy, there are tales of powerless people and an economy running out of juice.
Eskom, South Africa’s national power generator, is cooking with gas (turbines) – at the cost of around $78 million a month – while grinding away at the late completion of the new 9,000MW Kusile and Medupi coal power plants. Medupi’s first 800MW unit is generating power and will be on commercial load in September, with up to 1,600MW coming onto the grid each year for the next five years.
Keep your gas cylinders full and your camping lights charged – there’s more to this story!
South Africa has a 40GW-headache to cure in the next 20 years. The first 10GW is merely to match current demand. Generation capacity is 40GW with only about 30GW available due to the UCLF (unplanned capacity loss factor) being high. The national demand is over 40GW as mines and smelters have shut down to help Eskom. Medupi and Kusile will merely tick this box.
The second 10GW is needed to replace the old coal plants before 2025. They have been run hard well beyond their time. The third 10GW is needed to attract investment for growth and the fourth 10GW is for reserve capacity to allow for maintenance.
Coal may be easier and cheaper, but it’s dirty stuff and our economy has to be environmentally attractive to foreign investment. Few investors will stump up if it will worsen their carbon footprint.
So, 40GW in the next 20 years! Simply put, double Eskom. It has to be greener than ever before too – no dirty coal. That means nuclear topped up with clean coal IPPs. Wind and solar may be very sexy but they don’t deliver the big base load power that we need.
Like it or not, nuclear is the leading renewable energy source and South Africa is in play on the global nuclear stage to procure 9,600MW of nuclear power.
Contrary to the naysayers, nuclear energy’s lifetime cost is lower than most technologies, it’s expensive at the start, but cheaper to run.
South Africa’s nuclear regulatory body has defined that only the safest technology will meet the environmental and safety specifications for any new build program.
Russia, France and China are likely frontrunners, but who has the better and safest kit and who can offer a compelling financial deal? That’s where technology, money, politics and common sense meet in a witches brew.
The International Atomic Energy Authority (IAEA) Integrated Nuclear Infrastructure Review (INIR) sets the readiness criteria for building nuclear plants. A nuclear power plant is split into three main sections: The Nuclear Island, The Conventional Island (Turbine) and the Balance of Plant. South Africa is ready to manufacture and construct on the last two sections, which are similar to the local content on Medupi and Kusile, with some nuclear safety alignment.
The nuclear codes and quality standards take a quantum leap in the Nuclear Island and that is where the nuclear certified contractors like Group Five, Lesedi Nuclear Services and the South African Nuclear Energy Corporation (NECSA) are qualified. The country’s industry will have to partner with the successful vendors to hone those skills, train a workforce and learn from the build program in Europe, China and Russia.
There’s a buzz again. Nuclear vendors expected a request for proposals in August with a preferred Nuclear Vendor Country announced by March. Next year will see tendering for the local manufacturing and construction sector, with contracts signed in 2017 and construction starting in 2018.
The capital expenditure for 9,600MW will be approximately $40 to $50 billion, plus government costs and interest on capital. All this leads to trillions being spent over 15 years. That’s a big number that will reignite local industry and a knowledge economy after the last seven years of misery.
Perhaps it will be “boom” again?
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Additional reporting from Des Muller, head of Group Five Nuclear Construction Services.

Double or quit?

South Africa has a history of underperforming state-owned enterprises, including the ‘big four’: Denel, Transnet, Telkom and Eskom. According to the National Planning Committee on the National Development Plan, these companies account for approximately 77% of employees in state-owned enterprises and make up about 91% of the asset base of the top 30 state-owned entities.
These entities have evoked discontent from the public, Eskom in particular. They have accumulated large losses, always ready to ask for a helping hand from the government. Like an absentee father who spoils his son to make up for the time he does not spend with him, our national treasury is only too pleased to support these enterprises in the form of bailout packages.
This has led to a call from certain factions for these state-owned enterprises to be privatized. A paper titled Privatisation and Nationalisation Cycles by Roberto Chang and others looks at a model built around a basic trade-off between equality and efficiency. It argues that greater equality is attained under public ownership of a natural resource or state assets, while more efficiency is achieved when the ownership and administration of the resource or company are in private hands.
The connection between ownership and the equality-efficiency trade-off is given by the set of incentives for the efforts that each regime provides to economic agents. However, it should be noted that greater equality does not necessarily translate into greater welfare. Imagine a situation where national income would be distributed equally among all South Africans. Equality would leave many worse off. Greater efficiency is required. The reality is that there are greater sets of incentives at play which drive efficiency when operating a privately-owned company, among them maximizing the profits and equity of the shareholders. The sets of incentives are not as strong in state-owned enterprises.
One source, who asked to be unnamed, says that during her time as HR Manager at the state parastatal, South African Airways (SAA), she had to deal with numerous high-level government officials dumping their family and friends résumés on her desk and instructing her to find positions for them within the organization. She says that most did not have the required skills and qualifications. It comes as no surprise that SAA is one of the most inefficient state-owned enterprises. Unfortunately for South Africans who pay taxes on their hard earned incomes, the government continues to bail out the airline with no regard for its dismal performance. These are some of the pressing issues that make privatization of state-owned enterprises attractive.
On the other hand, the breaking up of the Soviet Union led to the emergence of Russian oligarchs in the late 1980s and early 1990s, when state firms were privatized particularly in the oil, gas and mining sectors. These oligarchs emerged under Mikhail Gorbachev’s political movement for the reformation of communism, which is widely thought to be the proponent that led to the dissolution of the Soviet Union. Today, post-Soviet oligarchs usually include relatives and close associates of government officials and are among some of the wealthiest people in the world. David Satter, author of Darkness at Dawn, asserts that “what drove the process was not the determination to create a system based on universal values but rather the will to introduce a system of private ownership, which, in the absence of law, opened the way for the criminal pursuit of money and power.”
Privatization has challenges and opportunities, which if implemented properly would go a long way to correcting the inefficient operation of state-owned enterprises.
There needs to be a conversation surrounding the viability of privatizing state-owned enterprises and possible partnerships with privately-owned companies. If privatization is proven to be viable, it will go a long way to optimizing productivity and reducing costs, but perhaps more importantly it could reduce government bailouts and save taxpayers money.

Will Privatization  save us money?

If South Africans had more electricity, they could see him on TV. Chris Yelland, the electrical engineer turned energy journalist entrepreneur, is the scourge of Eskom, South Africa’s nationalized power utility. His voice is critical, outspoken and more consistent than the electricity supply from Eskom.
“When I started Energize magazine [1997], a lot of doomsayers said to me ‘what the hell do you want to start a new magazine for?’ they also said ‘what more can you say before you run out of hot stories?’. Energy at that time was a boring subject. There was not a lot of interest. People just assumed when you switched on the plug and flicked the switch, electricity would come out the wall. Fortunately for us, and by chance, energy has become a hot topic. It actually affects everybody. Not just industry, not just commerce, but the man or woman in the street. We’ve had to learn that behind the plug lies a multi-billion-rand industry,” says Yelland.
Yelland has had a lot to talk about over the last 10 years. Eskom has the capacity to provide 41,194 megawatts (MW). Its aging fleet of power stations, many built 30 years ago, runs at 33,000MW, and cannot match the current demands of 38,000MW.
For many years South Africans have been smug towards electricity. A common joke told locally was: What did Zimbabweans use before candles? Electricity. Now, that joke, and the smugness, has come home to roost.
The short term solution is ‘load shedding’; in English, this means scheduled power cuts. They are words that mean shops close, mines shut down and computer nerds cringe at losing their unsaved data. According to Yelland, load shedding is a vicious circle; as the power utility pleads with the country to use less energy, it hampers its operations.
“Electricity consumption at this moment is at a seven-year low. Ever since 2008, [when load shedding first was implemented], it’s been going down. This means Eskom’s sales are going down. Their revenue is going down but their costs are going up. In the last six months of 2014, Eskom declared a profit of R9.3 billion (around $800 million), but that was over the winter period, when their prices are nearly double the summer period because demand for electricity is high. In the second six months of 2015, their projected profit is going to see a loss of R9 billion ($780 million). It’s going to wipe out the entire profit for the first six months of the year. Why? “Because they haven’t got enough electricity to sell. They are throttling the economy telling people to use less,” says Yelland.
A four-year delay in coal power plant projects Medupi and Kusile has made matters worse. The projects which were due to be completed in 2013 and 2014 were expected to bring around 10,000MW to alleviate the grid. The delays mean their price tags, estimated at R69.1 billion ($6 billion) and R80.6 billion ($7 billion) in 2007, have now nearly doubled to R154.2 billion ($13.3 billion) and R172.2 billion ($14.9 billion). Alone, they amount to an annual loss of R30 billion ($2.6 billion) in electricity sales.
“All 12 units will be online by 2020 at the earliest, if nothing further goes wrong. They are not a short term solution to South Africa’s needs,” says Yelland.
The power crisis has also meant Eskom spends around R1 billion ($86.7 billion) on diesel every month to run open-cycle gas turbines. Ironically, the country doesn’t have the infrastructure to run on gas, which the turbines are designed for and which would be a cheaper, cleaner alternative to diesel, says Yelland.
There is light in the gloom. A thousand megawatts is generated by renewable energy projects, built by private companies and then sold back to Eskom at set tariffs.
“The success stories are not government success stories, they are private: private capital; private technology; built, owned and operated privately; and then generated into the grid,” says Yelland.
What’s more, a study by the Council for Scientific and Industrial Research (CSIR) in South Africa, found that the cost of the renewable energy projects was less than the cost of the blackouts, and didn’t cost the tax payer a cent.
“In fact, it’s contributed towards reducing costs, meaning we had to spend less on diesel. Of course that’s only valid on shortages like the wave we have had at the moment. If we weren’t using diesel, if it was a normal country with a surplus of energy, [renewables] would cost us,” says Yelland.
Renewables do have a downside and are not the solution to Eskom’s crisis. The sun and wind are not constant. At any given time the 1,000MW of energy supplied will most likely produce 250MW.
“This is rated output, that is what is expected when the sun is blowing full blast and when the wind is blowing full ball. For every 100MW of renewable energy of capacity, you have to build an equal amount of conventional, mid-merit plants, to back up and provide power when the wind is not blowing or the sun is not shining. If you are trying to deliver 100MW and the sun goes behind a cloud, you can’t just switch off half of your customers,” says Yelland.
In the short term, Eskom’s crisis is further threatened by a R3-billion ($260 million) bailout to enable it to purchase diesel for the next month. Yelland believes Eskom needs to restructure.
“Eskom’s structure is the same structure as when it was set up 80 years ago. The world has changed since then. Other organizations like Sasol are not state-owned enterprises any longer. I believe if Eskom took on strategic equity partners, and listed on the stock exchange, it would raise significant capital resources without the need to raise tariffs. We need to inject new blood into something that is currently something akin to that of a dinosaur. [Eskom] is slow moving, ponderous and unable to adapt to the changing environment. If things carry on like this, it will go extinct just like the dinosaur did,” says Yelland.
You could argue that dinosaurs, when they were around, had more power.

The Scourge  Of The Dinosaur  In The Dark

Coal mines are the rock upon which South Africa’s power parastatal, Eskom, has been built. They mine 120-130 million tons for Eskom to burn every year. In 2015, the rock that supports 83% of South Africa’s power is crumbling.
The power utility is facing a dim future, through a decline in coal investment.
A senior coal analyst at XMP Consulting, Xavier Prevost, says at least six big coal mines could close down or decrease production by 2020.
“A decline in coal production calls for creation of more mines and failure to do so means all coal-fired power stations will have to close down which will affect electricity output,” said Prevost.
Prevost, who has more than 30 years experience in the coal sector, says too much coal in the market has driven down the prices as demand has fallen.
Countries, like the United States, exporting coal into the international market has also brought down prices, he adds.
Some of the big coal companies in South Africa include: BHP Billiton; Xstrata Coal; Glencore; Anglo American Thermal Coal; Sasol Mining and Exxaro Resources. Their costs rise as coal prices fall.
They supply Eskom with low-quality coal known as middlings, a by-product of the coal washing and beneficiation process. This coal contains about 35% of ash, resulting in low energy output.
Last year, South Africa’s Minister of Mineral Resources, Ngoako Ramatlhodi, said there was coal for export and coal of a lesser quality, which stays in the country.
“[The low-quality coal] we would want to keep for our power stations,” said Ramatlhodi.
Ramatlhodi, however, does not seem to acknowledge that cheap coal means lower electricity output.
To make matters worse, new mines are scarce. In the past six years, there have been fears over mining legislation, the decline in prices, increased competition from the United States, Indonesia, Australia and India and also lingering political rhetoric around nationalization.
Prevost says it’s not too late for South Africa to avert the coal crisis.
“Government has a 90 percent chance to make this better or worse through collaborative efforts between the departments of energy, finance and mines,” he says.
Addressing the media at the Eskom offices in Johannesburg in January, the new Chief Executive Officer, Tshediso Matona, painted a bleak picture saying the power utility can’t cope.
“New generating capacity and other levers are needed in order to ease the pressure on the system,” he said.
Matona says Eskom is like a car running on empty.
“We have arrived at a point that does not allow us to ignore the health of our plants. Our reserve margin is so thin, that every incident creates a major systems issue and could also have safety implications for the plant.”
According to Matona, the problem with Eskom is delayed maintenance and he says most of its ageing power stations face breakdowns.
“We know the problem and we know the solution,” he says.
The big question can be put in one word: When?

The Coal Hole

There were fewer miners at the Mining Indaba this year and more mining service companies to make up the numbers among 7,000 delegates. Everyone is trying to cut costs as commodity prices tumble.
“It’s been a lot quieter this year,” admits one of the organizers.
“The investors are there, but the group is getting smaller and smaller,” says one delegate who asked not to be named.
“I think the opportunities are like the gold rush of 1849 in America,” says Robin Saunders, the head of Clearbrook Capital, an investment company looking to sink billions into African mining on behalf of rich families in Europe and the Middle East.
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There were plenty of strident young mining nations from across Africa selling their minerals. This optimism couldn’t disguise the pain of the hosts; decades of battering and disinvestment leaves South Africa, where once 40% of the world’s mining was carried out, struggling to cling onto 5%, according to KPMG.
Investors are fighting shy of South Africa because of three big problems: power, rather the lack of it, strikes and fears over regulation.
The power shortages that have plagued most mines in South Africa has cost Harmony – the country’s third largest producer – 50 kilograms of gold in the last quarter to December 31,  worth around $1.87 million, according to CEO Graham Briggs. It meant production at Harmony fell 10%, in the last quarter of 2014, to 271,963 oz.
“What happens is we have communication from Eskom that we have to cut our consumption by 10% or sometimes as much as 20%. This means we have to stop milling and hoisting, which impacts on our production,” says Briggs.
Like most large South African mines, Harmony is in a cleft stick. It consumes 2,600MW at its South African operations – enough to power a city and more than half the output of a large coal-fired power station. This means, like most mines in South Africa, it can’t risk the capital to build a generator or power plant large enough for its needs.
South African mining minister, Ngoako Ramatlhodi, just over a year into the job, sees himself as riding to the rescue. Even so, he brushed over the glaring power problem; merely talking about private power producers and getting power from the Grand Inga dam, in the Democratic Republic of Congo, in 2023. It could have been 2093 for all the difference it makes to the mines.
Ramatlhodi’s speech was full of reassuring words for foreign investors: the rule of law was to be respected; the government was prepared to get tough on violent wildcat strikes and the country was open for business.
He wasn’t so clear cut on the regulation front. There was plenty of confusion over the amendments to the Minerals and Petroleum and Resources Development Act – the law that governs mining that is going back and forth through Parliament. President Jacob Zuma sent the amendments back saying they were unconstitutional.
One of the bones of contention is the proposal of so called developmental pricing – that is, lower prices for commodities like iron ore and coal to help stimulate the South African economy. A year ago the miners negotiated so called ‘mine gate prices’ similar to import parity pricing, where transport costs are taken into consideration, leaving the producer with a fair profit margin.
The problem is there is a strong voice within the ruling party for developmental pricing to be written into law. If so, the minister could be handed the power to declare minerals strategic; meaning miners would have to accept government prices and have to ask state permission to export. It could bring down the price of coal for Eskom, with it the cost of electricity, which is likely to be popular with voters.
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But among foreign investors it is likely to go down like a lead balloon laden with ten tons of coal. They are likely to see it as the state tinkering with the economy, laced with uncertainty, at a time when investors are looking for long term stability.
“It doesn’t feel like we are getting clarity,” says Wickus Botha, a mining analyst with EY.
“How long is it going to take to get these regulations through Parliament? It is not going to happen overnight. For the next two years it is going to be very difficult.”
In many other countries in Africa, these fears are far away. Many miners are making hay from Abidjan to Maputo as the hunt for investors overcomes shortcomings in infrastructure and financial systems.
One of them is Mark Bristow, the CEO of Randgold Resources, who has spent 20 years building mines everywhere from Mali to the Democratic Republic of Congo. His company’s results, released at the Mining Indaba, shows this penchant for the byways of African mining is paying off. In its Q4 figures, the company recorded record year-on-year production, up 26%, to 1,147,414oz in a company that is debt free and has paid a dividend at a time when the gold price is falling and most mining companies have forgotten what a dividend is. Bristow says his company is making a 20% real return on investment and is looking to invest in South Sudan and Kenya.
“Risk is in the eye of the beholder, as long as you have a good relationship with the stakeholders it is fine,” he says.
Elsewhere, Côte d’Ivoire, famous for agriculture, has a golden dream. The West African nation plans to open a gold mine every year for the next five years as part of its economic diversification, according to mining minister Jean-Claude Brou.
Gold mining in Cote d’Ivoire has grown rapidly in five years. In 2009, the country produced seven tons of gold; in 2014, it mined 18.6 tons. The country plans to increase production to 30 tons in the next five years.
“That is a very conservative target,” says Brou.
One last cautionary tale for African mining; there was a lot of talk about the increased mining royalties in Zambia and Zimbabwe and the threat they pose to investment.
From the gloom came a voice of sweet moderation from Ghana. The West African nation mined 4.4 million oz of gold in 2014 earning 40% of the country’s foreign currency.
In 2006, Ghana imposed a 5% royalty and mining minister Nii Osah Mills says his country plans to keep it at that rate for at least another 10 years.
“We were thinking recently of increasing the royalty, but we decided against it because we felt it would be disruptive to mining. So, no one is fleeing Ghana and that is a vote for us,” says Mills.
A dash of pragmatism that could help Ghana keep its place as the world’s 9th largest gold producer.

Four Frantic Days  Full Of Fear

The beginning of summer in South Africa brings warm rains, scorching hot temperatures, longer days and brighter nights. And thanks to Eskom it also brings rolling blackouts. That spells bad news from the suburbs to the mines.
On November 1, a silo which housed over 10,000 tons of coal collapsed at Majuba power station, all personnel at the site were evacuated in time and according to Utility’s Chief Executive Tshediso Matona.The collapse caused a shortage of 3,600MW. It meant people were going to work carrying irons to press their clothes and mines lived in fear of powercuts.
According to the African Development Bank, Africa’s chronic power problems are hurting 30 countries, cutting economic growth and productivity. In sub-Saharan Africa, only one in five have electricity. If the current power situation continues, less than 40% of African countries will reach universal access to electricity (when everyone in the country has electricity) in the next 35 years.
“South Africa will reach universal access to power, the time it gets will depend on budget,” says Eskom spokesman Andrew Etzinger.
Power shortages can cost up to 2% of gross domestic product, according to the African Development Bank.
One African country that struggles more than most is Nigeria, Africa’s most populous country. Half of the country’s 160 million people go without electricity. South Africa consumes 55 times more energy per head and the United States (US) 100 times more than Nigeria.
The failure to provide adequate electricity by the country’s state owned monopoly PHCN, the Power Holding Company of Nigeria, nicknamed as ‘Please Have Candles Nearby’, has left the land in distress for decades.
At the end of 2013, Nigeria’s government decided to privatize most of its power sector and fortunes could change.
“Because power development is so difficult and requires a serious amount of political will, the reforms were stalled for years because of a face-off with labor unions. This is really a success story, in terms of the structure of the sector in Nigeria; it is now more advanced then South Africa. That is pretty remarkable, when you look at a country like Nigeria you would of not thought it was possible 10 years ago,” says Lai Yahaya, team leader to the Senior Advisors Group of Power Africa.
In June 2013, US President Barack Obama launched Power Africa, an initiative aimed at doubling electricity in sub-Saharan Africa, where more than 600 million people are without. Power Africa set an ambitious goal of more than 10,000MW of electricity to 20 million households and businesses.
This year, Obama announced a $300-million investment to connect 30,000MW to 60 million households and businesses.
Obama says that this initiative is to help Africa grow. His critics say this is merely the US trying to stay in the game as China makes inroads into Africa. Despite what the cynics say, Yahaya believes that the future of Africa’s electricity is in good hands.
“You can be fairly certain that Power Africa will succeed.”
Millions of Africans hope so.

The Problem With Power

Entering the site of the 4,800MW coal-fired Kusile power station in the northeast South African province of Mpumalanga, one has to clear the security checkpoint and forget about taking any unauthorized pictures. The site is large, covering 1,355 hectares, and buzzing with activity.
Abram Masango, the general manager of Kusile with a mechanical engineering background, started out at steel company Columbus Stainless before moving to state-owned power utility Eskom, working on the company’s Hendrina power station, one of the country’s oldest and the only one with 10 units, to establish the $2.4 billion Mpumalanga project. This included refurbishing power stations and constructing the Majuba Rail – running between Ermelo and the Majuba power station.
In 2004, a five-year, $13.1-billion investment plan in the country’s electricity infrastructure was approved by cabinet. This was changed to $22.2 billion for the five years to 2011/2012. Generation projects absorbed around 70% of the funds.
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More recently, state-owned enterprises were allocated $39.1 billion of the public capital expenditure for the next three fiscal years. The public sector’s energy infrastructure will get $18.2 billion of this.
Eskom’s major energy source is coal, but it hopes to bring down its share in the primary energy mix to 70%, from its original 88%, while increasing its nuclear energy portion to between 17 and 25%, all by 2025.
Masango was brought in to run the Kusile project in late 2007. A decision was made to build it in eight years, instead of the standard 10. The team went with a multiple contract approach, divided into 62 packages.
Eskom didn’t feel it had a choice in the fast-tracking of Kusile because of the power shortage the country is experiencing. As for elements falling through the cracks, the team is adamant that managing the project as a world-class one, as well as placing the necessary skills in place, has prevented quality being compromised.
The Unit 2 TG block had to be destroyed and redone because of a quality problem.
“As much as we are fast-tracking, we are not taking a shortcut. We do sometimes have some quality challenges, and we pick them up and then solve them,” says Masango.
“If we compromise on quality, we will kill people.”
Another Eskom project currently underway is the 4,400MW, $10-billion Medupi power station. It is the fourth largest coal plant in the southern hemisphere and the biggest dry-cooled power plant in the world. It was originally slated to start generating electricity in 2011 but there have been numerous delays, ranging from faulty welding to strikes. French company Alstom was contracted to develop the Boiler Protection System (BPS) and Balance of Plant (BOP) control systems which repeatedly failed testing. Siemens was then brought in to work on the BPS for Unit 5 and 6 with Alstom. Alstom’s BOP has since passed the factory acceptance test.
Masango says that Kusile also experienced strikes but managed them better than Medupi.
Both Kusile and Medupi are important due to the power shortage problem in South Africa. It was in 2007 that the country first faced countrywide load shedding. More power emergencies came this year, with load shedding and blackouts.
In 2010, Eskom encountered a funding problem and Kusile could only continue on a skeleton base, while long term commitments continued. Funds were also redirected from Medupi, while Eskom tried to find a solution. In April 2010, the Development Bank of Southern Africa announced a $2 billion loan to Eskom. The World Bank approved another for $3.75 billion.
“The loan is provided to South Africa’s power utility, Eskom, and was brought about by unique circumstances including South Africa’s energy crisis of 2007 and early 2008, and the global financial crisis that exposed the country’s vulnerability to an energy shock and severe economic consequences,” the World Bank said in a statement.
Three billion dollars of the loan was earmarked for Medupi.
The funding plan took two years. It was in 2012 that construction on Kusile resumed at full steam, but not all the components were ready due to contracts having been put on hold. This came with some engineering integration challenges.
Eskom had to take on some of the design elements of the project, while waiting to give out contracts, in order to get part of the project &#8211; mainly the foundation &#8211; to continue. Some contractors had been given limited notice to proceed &#8211; for example placing a contract on the design of a component so that the specs could be given to another company that is responsible for that part of the project.
Kusile faced what Masango calls political, stability and unemployment challenges. It established a contractor academy providing eight months of intensive training for emerging companies in order to equip them with the skills needed to participate in the project.
Black Economic Empowerment (BEE) was a big component to consider. Kusile had an agreement with contractors to only bring their core people and then employ 60% from the surrounding communities. With time the team realized a new strategy with procurement conditions, forming joint ventures between large and emerging companies. To date, 409 companies have, in some way, participated in the project at a cost of close to $6.2 billion.
The two weeks of heavy rainfall during March set the project back a month. At the end of April it was almost 60% complete and the working goal is to get the entire plant operational by 2018. Unit 1 will be commissioned the second half of 2015. As of the end of March, construction on Medupi sat at 61%, with $7.4 million of the budget spent. Unit 6 is expected to be synchronized in the second half of 2014.
Due to growth, infrastructure is needed for capacity regardless of whether it’s coal, nuclear or otherwise. Last year a reported $130-million loan from France was granted to Eskom, to help finance its solar power projects. The trick, according to Masango, is trying to have a balanced mix – while bearing in mind that South Africa is still reliant on coal-fired plants.
According to Masango, Kusile has tried to ensure it is environmentally friendly &#8211; incorporating flue gas desulphurization, fabric filter plant, and supercritical design boilers which all decrease the air pollution that the plant emits. Medupi, and possibly some of the other plants, will in the future get these technologies as well.
A lot of the criticism of Eskom is about how the company has been managed.
“I think it’s also time that we [Eskom] go out and tell the public that they have to trust us because we’re doing our utmost best to deliver and make sure we keep the lights on,” says Masango.
Eskom has a lot to prove and only time will tell whether they can truly deliver this time.

The Long Crawl  To Electricity

With its fifth round of democratic elections slated for next year, South Africa has much to be proud of as it looks back on the achievements of the past 20 years. Thanks to reconciliation efforts, the Rainbow Nation navigated a difficult political and social transition with poise—something many countries have attempted, but rarely with such success.
Its films have won Oscars, its stadiums have hosted World Cups and its leaders have won Nobel prizes. Since 1994, the economy has transformed dramatically, absorbing 3.5 million new jobs and with a quarter of the continent’s GDP, it has successfully held the crown as the largest, and arguably most sophisticated and open, market in Africa.
However, the country still has one of the highest gini coefficients in the world, at above 0.63, indicative of the lack of inclusive growth. Unemployment is high and infrastructure is beginning to grapple with increasing demand. With South Africa’s GDP growth projected at roughly 2% for 2013, it is only a matter of years before Nigeria, expanding at rates of 7%, overtakes it as the continent’s economic heavyweight.
As a result, assessing the current state of the country and its performance requires a nuanced understanding of both the strengths that provide it with such potential and the weaknesses that threaten to undermine its progress.
The country’s fundamentals are in rude health. South Africa has a number of key competitive advantages. With more than $2.5 trillion worth of mineral reserves and the potential for commercial shale gas production, it boasts enormous natural wealth. Its business environment is among the strongest on the continent, with low interest rates, clear investor rights and a comparatively streamlined bureaucracy.
South Africa’s political system is fairly robust, and while the successive victories of the African National Congress (ANC) have caused complications of their own, the levels of voter turnout regularly exceed 75%, which is up to 10 percentage points higher than Britain.
The relative quality of infrastructure also provides an excellent base for expansion—South Africa’s national utility provider Eskom, which does nonetheless grapple with high demand, still accounts for just under half of all the electricity consumed in Africa.
Similarly, the penetration rate for financial services—an indicator of both consumption and potential for leveraged growth—in terms of the percentage of the population that has access to formal credit products is nearly three times the continental average. South Africa’s regulatory frameworks for its banks—which include the four largest in Africa—are among the most robust of any Organization of Economic Co-operation and Development (OECD) countries, and were rated third globally by the World Economic Forum (WEF) in terms of soundness for 2013-2014.
However, in spite of all these attributes, South Africa’s long-held position as the gateway into Africa is increasingly under challenge. The country’s sophistication is in part responsible for this. It is among the most-globally integrated markets in Africa, which has left it highly exposed to the continuingly depressed levels of export demand in key markets like the European Union, as well as to portfolio outflows which have left the rand vulnerable.
While the benchmark interest rate, unchanged at 5% for several consecutive quarters, is being kept at historical lows in an effort to stimulate lending, it still exceeds the average repo rates available in much of Europe, North America, and Japan; in turn attracting yield chasers.
But there are also stubborn challenges. Much of the country’s physical and social infrastructure is aging and in need of revamping. South Africa’s electrification rate—at 75% nationally—is the highest on the continent but a narrowing gap between supply and demand has led to load-shedding, which has constrained output and emphasized the need for new base load capacity. High levels of youth unemployment have led to social unrest. Wealth inequality is still high, but with a debt-to-GDP ratio that rises to 60% with off-budget commitments, the ability of the government to pay for social grants and benefits to the current 16 million recipients is becoming increasingly strained.
These challenges are taking their toll.
South Africa’s overall growth is expected to increase modestly in 2014, but still remain below 3%. The expected changes to poverty and unemployment levels are expected to remain minimal.
In the latest WEF Global Competitiveness Report, South Africa fell one spot from 52nd to 53rd out of 148 nations surveyed. The change in ranking reveals a mixed bag of both positives and negatives. With the overall score bolstered by top-five ratings in areas such as financial market development (3rd); auditing and reporting standards (1st); and accountability of its private institutions (2nd), but dragged down by an educational system (146th); labor market efficiency (116th); and burden of government regulation (116) that are rated poorly and place in the bottom 50.
A glance at the some of the country’s key sectors helps illustrate both the country’s potential and its weaknesses. With minerals accounting for around 60% of exports, the sector serves as a barometer and proxy for how the performance of the wider economy. South Africa is the largest producer of platinum group metals in the world, and in the top five for a host of other minerals and metals, including coal and gold. However, labor unrest, rising costs and slowing demand have contributed to more constrained output and concerns over mine closures.
The automotive sector provides a similar example. Constituting around 6% of GDP and 12% of exports, and hosting manufacturing and assembly plants for major international car makers like BMW, Mercedes, Toyota, General Motors and Volkswagen, automotives is often cited as an industrial success story and referenced as an example of what the country can achieve through targeted and proactive legislation and cooperative engagement between government, business and labor. Yet, the automotives industry is coming off a month-long strike during which exports fell 75%, costing manufacturers $2 billion.
For South Africa to unlock its potential, structural reforms are needed. Key to this will be the effective implementation of the National Development Plan (NDP) which is intended to form the strategic base for policymaking until 2030. The initiative seeks to rein in further rises in recurrent spending, while channelling more funds towards specific capital expenditures.
Alongside the New Growth Path (NGP), an economic policy focused on job creation, and sectoral policies such as the Industrial Policy Action Plan (IPAP), the NDP offers significant scope for mitigating the country’s weaknesses and encouraging a significant increase in secondary and tertiary activity. It will not be easy, but it offers a clear road map to strengthening South Africa’s comparative advantages in a more inclusive and sustainable manner.
Ultimately, assessing South Africa is all about context. Both its potential and accomplishments are vast, and many developed economies in the world would happily swap balance sheets. Over the past two decades, South Africa has seen its share of up and downs, although the pros have outweighed the cons. The outlook for the coming years may be murkier, and the obstacles more intransigent and complex, but the country’s healthy fundamentals and past performance provide reason for optimism.

Is There Still Gold At The End Of The Rainbow?

It’s a sunny day in the judicial capital of South Africa, Mangaung—formerly known as Bloemfontein—but inside the country’s highest court of appeal, the temperature is rising. Media conglomerate Media24, with one of its specialist journalists, Jan de Lange, are first respondents to a case against one of the biggest mining companies in the world, BHP Billiton.
The London Stock Exchange-listed company is appealing a decision by the Gauteng High Court, which declared that they should divulge the details of their contract with Eskom. The contract might reveal that BHP Billiton is actually paying very little for electricity and that the public is subsidizing their consumption.
It is big money. In his application to the High Court, de Lange mentioned, among other things: “It appears that the contracts are responsible for at least part of Eskom’s R3.2 billion ($368 million) operating loss for the year ended March 31, 2009 and the whole of its projected loss on embedded derivates of R9.5 billion ($1.1 billion) going forward.”.
It all started in 1995 after de Lange joined Media24 as a specialist reporter in the business division, Sake24.
“It was the first story I went out to when we made the trip to Eshowe for the opening of a power station; it was here that they announced that Hillside and Gencor were to become Eskom’s biggest private client. When it came to the question and answer section of the presentation, we wanted to know how much Gencor was paying for electricity. We were not given an answer. I then started following this issue closely because you could feel that something was not right,” de Lange says.
Gencor was, at the time, one of South Africa’s biggest mining companies. Under its control it had, amongst others, Impala Platinum, Goldfields and Billiton. The company was unbundled and Billiton changed its focus to non-precious metals under the leadership of former Gencor head, Brian Gilbertson.
“At that time Gencor was one of South Africa’s major companies. We were looking for growth opportunities and we identified this aluminum opportunity arising from the country’s surplus electricity at the time,” Gilbertson says from London, where he runs a resources company.
“In order for us to invest $1 billion in South Africa and over $1.5 billion into Mozambique we needed to be confident about the power supply. As part of our risk mitigation, we wanted to know that if the price of aluminum collapsed we [wouldn’t] lose all our money invested in the project and so we did something new in South Africa, which was to link the power price from Eskom to the price of aluminum in the market.”
“This meant that if the aluminum price went down, the cost of our power would go down; if the aluminum price went up, the price would go up. In this way our project would be more viable. Even President Mandela was backing the deal because we were using it to showcase to the world that South Africa would be able to build projects of this size and nature.”
In those days Eskom had a surplus of cheap electricity but this was soon to change when economic and population growth surpassed anticipated figures. BHP Billiton was purportedly doing well as a result of the cheaper tariffs they were charged.
De Lange’s investigations revealed that while the general public was hit hard by tariff increases subsequent to blackouts, BHP Billiton might have been gaining benefit through lower electricity prices.
In 2009, he went to court to try to obtain the details of the contract between Eskom and BHP Billiton.
In August last year, de Lange finally won a ruling in the Gauteng High Court in Johannesburg, which obliged Eskom to release the contract details. Eskom was willing to abide by the ruling. BHP Billiton was not and appealed.
“We have contracts with our customers and those contracts are confidential. The reason Eskom originally contested Jan de Lange’s case was that the contracts were confidential. When we lost the case we agreed to the courts findings,” says Eskom spokesperson, Hilary Joffe.
Eskom has since gone to the National Energy Regulator of South Africa (Nersa) to seek a renegotiation of the electricity supply contract for the Hillside and Bayside smelters after the Mozal Smelter (in Mozambique) deal was successfully renegotiated along with Scorpion Zinc in Namibia.
In the Mangaung courtroom, the two opposing advocates are exploring legal issues and the technical loopholes of each other’s cases.
Advocate Frank Snyckers, on behalf of BHP Billiton, states that his client is unwilling to reveal the details of the case.
“Aluminum pricing information is crucial to keep away from competitors,” he says.
It was revealed that BHP Billiton employs around 1,600 people between the two smelters. Each smelter uses at least 500MW of electricity per year. A large city like Mangaung only uses 400MW. BHP Billiton also uses around 6% of the country’s total electricity consumption.
After four hours of legal sparring, Justice Mthiyane reserved judgment for a later date.
Managing director of EE Publishers, Chris Yelland, was one of only five people in the court’s public gallery today and he is a worried man.
“An Appeal Court is looking at obscure technical issues of a legal nature, which are being used to try and overturn a judgment of the High Court. For me, as a non-lawyer, I find this frustrating. Issues of the rights of South African public are being ignored. It is conceivable that Media24 will lose their case and if so, I hope they will take it to the Constitutional Court,” he says.
I ask de Lange if he will indeed continue fighting if he loses this round. “Of course,” he says, with a smile.

On the Threshold Of The Truth

“It’s an ill wind that blows nobody any good,” runs the proverb and the accuracy of that callous observation can be seen in the current labor mayhem trashing South Africa’s platinum sector.
Through their actions, the illegally-striking workers are doing exactly what is needed to bring a positive correction to the fundamentals of the platinum business.
On the downside, they are likely to pay a heavy price in permanently lost jobs because of it. In fact, all South Africans will suffer because of the knock-on consequences to the nation such as the recent cut in the country’s sovereign credit rating. That hits Eskom’s ability to raise funds which affects every electricity consumer in terms of future higher power tariffs and possible future power shortages.
The platinum price collapsed from around $1,750 in March because it became clear the global slowdown combined with the previous expansion in South African supply meant there was a surplus of metal in the markets, which analysts estimated at up to 500,000oz.
Economics 101 lays out a simple solution: cut the supply and the price will recover—but the South African producers would not, or could not,
do so.
Would not—because all miners are optimists at heart and believe the good times will return sooner rather than later. Therefore they did not want to incur the costs of closing shafts only to re-open them in a year’s time while at the same time handing commercial benefits to competitors who did not cut back.
Could not—because the platinum miners are under extreme political pressure from government to preserve jobs and that pressure can be applied in a variety of unpleasant ways.
The strikers have now done management’s work for it. Estimates of the amount of platinum production that could be lost this year, so far, sit around 300,000oz.
Surprise, surprise—the platinum price has jumped more than 20% since the beginning of August from around $1,400/oz to around $1,725 in early October.
The platinum industry’s marginal projects—some of which should probably never have been started in the first place because they are only viable at sky-high prices—are now being squeezed out of business.
That’s likely to be permanent. Labor accounts for around 50% of total cash operating costs so steep hikes in wages have a huge impact on the financial viability of the mines.
What’s more, foreign investors—who put up the money previously for all the new platinum projects—are seriously unimpressed.
“The government needs to take control of the situation and solidify practice and protocol with regard to wage negotiations before the nation’s mining sector becomes uninvestable,” says Fairfax Securities analyst John Meyer.
Impala Platinum marketing executive Derek Engelbrecht recently stated, “The days of South Africa as a five million ounce platinum producer are long gone. The country could settle at output of between 4.25 million oz and 4.5 million oz. The challenges being thrown at the industry make the attainment of 5 million oz very, very difficult.”
Remember—this was the sector of South Africa’s mining industry with the best growth prospects. Not only has that growth been, at best, considerably delayed but there will be a heavy price in lost jobs from the present work force.
Estimates on the jobs that could be lost range from 10,000 to 30,000. That results from a trend that has been obvious on the gold mines for the past 20 years. Time and time again, the unions have pushed for, and received, annual pay increases running well above ruling domestic inflation rates and the mines have coped by cutting out the higher-cost production assets that were no longer viable.
The one ray of light, is the agreement just reached between Gold Fields and the National Union of Mineworkers (NUM) over the new operating model for the mechanized South Deep mine.
I find it significant that Gold Fields management, after exhausting normal negotiation procedures, took a hard line stance issuing a Section 189 notice putting all the jobs at this mine on the line.
Being a nice guy clearly does not work. In December, Kumba Iron Ore paid out R345,000 ($39,800), after tax, to each of more than 6,000 of its employees, in terms of a free five-year share incentive scheme.
As of early October production from Kumba’s Sishen mine was suspended after 300 workers went on strike and blocked access to the pit.

Tag: Eskom

FORBES AFRICA SOCIAL MEDIA

Double or quit?

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The Scourge Of The Dinosaur In The Dark

The Coal Hole

Four Frantic Days Full Of Fear

The Problem With Power

The Long Crawl To Electricity

Is There Still Gold At The End Of The Rainbow?

On the Threshold Of The Truth

Unintended Consequences