The Chairperson noted that the Committee had urgently wanted to see the conclusion of Eskom’s funding model. However, the Minister and Department had asked for more time. The Chairperson having studied the presentation prior to the meeting said that it merely addressed the funding shortfalls and not the model itself; she demanded that the shareholder and Eskom brief the Committee in the near future on the model itself. Moreover, she appealed to Eskom for the public to be given an opportunity to participate in deciding on the funding model.
Eskom assured the Committee that it had been working on a funding model. There had also been discussions with the National Energy Regulator of South Africa and extensive discussions with the shareholding Ministry. Credit Suisse had agreed to work with Eskom to develop a suitable equity model for Kusile. Also J P Morgan had been appointed to assist Eskom find a solution to the totality of Eskom’s need for funding. Credit Suisse and J P Morgan had been given until June 2010 to report back.
Eskom estimated that between 2010 and 2017
A Member of the Independent Democrats advocated small-scale, decentralised production of electricity where it was needed rather than building huge plants and said that where Eskom raised its loan was irrelevant since it would still have to repay it. A Democratic Alliance Member asked if the National Treasury was guiding Eskom as to the projected rate of growth needed in the supply of electricity, and feared a recurrence of black-outs after 2017. Members also asked for explanations of acronyms and accounting terminology, about Eskom’s borrowing, National Energy Regulator of South Africa’s recommendations, Eskom’s cumulative cash requirement deficit, how Eskom compared with other utilities in developing countries in its remuneration packages, about Eskom’s unsecured funding, why Eskom’s first choice had been to look abroad for funding instead of seeking funds from within South Africa, argued that the beauty of borrowing money internally was that the money remained in the country, why Eskom was borrowing from overseas rather than from the Industrial Development Corporation which was a company funded by the state, and asked Eskom to report to the Committee on the possibility of borrowing from local financiers’. Members also said that Eskom should have a financial policy framework like that of any other company. So much of what Eskom had said had been based on assumptions. There was also considerable discussion on cleaner coal, the extent of coal reserves, and the need for an engagement on coal science and technology. The Committee would call Eskom and the Minister to report after the World Cup on further progress with the funding model.
The Chairperson welcomed Mr PM (Mpho) Makwana, Acting Chairman and Acting Chief Executive of Eskom Holdings, Mr Paul O’Flaherty, Finance Director, Eskom, Mr Nkosana Sibuyi, Stakeholder Centre, Eskom, and Ms Jacky Molisane, Chief Director, Energy and Broadband, Department of Public Enterprises.
The Chairperson said that on various occasions the Committee had indicated to the Minister and to the Department that it wished to engage them on Eskom’s funding model. The Minister and Department had repeatedly asked for grace and time. However, this was an issue that had become very urgent. Moreover, the Committee had agreed that there was a need for public hearings. The Committee could not be kept waiting by the Executive. She had studied Eskom’s presentation before the meeting and noted that it mainly addressed funding shortfalls: it had not addressed the overall funding model. Eskom, however, should not be blamed alone for that. The shareholder should take the responsibility for ensuring that the funding model for Eskom was concluded. Therefore, Members would that day receive a presentation on the funding shortfalls. If there were difficulties in concluding the funding model, then Parliament had a right to know, since Eskom’s role was central in supplying electricity in
The Chairperson reiterated her complaint about late receipt of documents. She had raised the matter with the Minister’s representative the previous day, and hoped that this would be the last such occasion. Late arrival of documents meant that Members were denied a fair chance to prepare themselves for the meeting. She noted that sometimes Members were not able to access their email the night before the meeting because of travelling from their constituencies.
The Chairperson demanded that the shareholder and Eskom must come and brief the Committee about the funding model itself, and the difficulties experienced in concluding it. ‘I don’t think it is correct to hold a Parliament at ransom’. The Committee did not even know why it was difficult to conclude the funding model. However, she appreciated Eskom’s presence to brief the Committee on the funding shortfalls.
Ms G Borman (ANC) endorsed the Chairperson’s observations. She appealed to Eskom to give the full meaning of acronyms when first mentioned.
The Chairperson asked Mr Makwana to introduce his delegation. She noted that Ms Molisane was alone in representing the Department.
Eskom presentation: electricity demand forecasts
Mr Makwana began by referring to the loan that Eskom had received from the World Bank. Secondly, in relation to the funding model, he clarified a few matters from Eskom’s perspective. He said that Eskom had been working on a funding model, and Mr O’Flaherty, on joining Eskom, had been assigned to assist in this task of major priority for Eskom. The Eskom board and the executive committee had since had several discussions on the model. There had also been discussions with the National Energy Regulator of South Africa (NERSA) and extensive discussions with the shareholding Ministry. There was also an Inter-Ministerial Committee (IMC) to examine electricity generation. On 01 April 2010 Credit Suisse had agreed to work with Eskom to develop a suitable equity model for Kusile. Also from 01 April 2010, J P Morgan had been appointed to assist Eskom find a solution to the totality of Eskom’s need for funding. Credit Suisse and J P Morgan had been given sixty days to report back. Eskom’s board’s finance and investment committee and the executive committee had prepared the selection process and the criteria. Thereafter there had been a tender process, as a result of which Eskom had appointed these two advisors – Credit Suisse and J P Morgan.
Mr Makwana assured the Committee that there was good work in progress and that Eskom was not taking the funding model lightly, and that in June 2010 it would be able to table the model. Eskom was, however, bound by its own processes, including ratification of proposals by the board and approval by the shareholder and Cabinet. If Eskom fell short of giving Members all the detail that they desired, it would be because Eskom wished to respect those processes.
The Chairperson appealed to Eskom for the public to be given an opportunity to participate in deciding on the funding model for Eskom. This was Parliament’s responsibility. It would not be useful for public participation to be delayed until the end of the process.
Mr O’Flaherty reaffirmed that Eskom did have a detailed model, to which he would allude in the presentation. He apologised on behalf of Eskom for Members’ late receipt of documents; however, he was not sure how that had happened. He explained how Eskom had constructed its model. He noted that
Mr O’Flaherty explained how the demand for electricity had decreased from 2008 to 2009 as the recession had hit. However, henceforth, Eskom expected a steep rise in demand. This was not a real growth but recovery to the previous position. Thereafter it would be difficult to forecast demand for electricity. The best indicator was expected growth in gross domestic product (GDP). Growth in demand for electricity had at certain times exceeded the growth in GDP and at other times been below the growth in GDP; however, over the past years it had become clear that growth in demand for electricity certainly tracked growth in GDP overall (slide 3).
Mr O’Flaherty said that the National Treasury expected the economy to grow by 2.3% in 2011, 3.2% in 2012, and 3.6% in 2013 (slide 4). Growth in GDP as forecast by the International Monetary Fund (IMF) was slightly faster, at 3.6% for 2011. Eskom had taken figures also from the Energy Users Group. Therefore Eskom had a good idea of the trend in demand for electricity until 2012/13, but was uncertain about trends beyond this year. This meant that the 41 000 megawatts currently in the grid needed to be expanded, since Eskom was at capacity at present. In order to match those demands,
Since 2006 Eskom had started to add megawatts to the grid. Between 2010 and 2017 based on the above forecasts and extending the GDP growth, Eskom estimated that
Mr O’Flaherty said that in the 1980s growth in electricity supply had exceeded the growth in GDP because of the strong growth in mining and manufacturing industries, which were heavy users of energy. He acknowledged that the Chairperson was right to point out the dangers of understating the potential demand for electricity. Eskom had in certain instances extended the life of some of its coal-fired power stations further than 40 years. Beyond that, Eskom would have to replace some 10 000 megawatts generating capacity. Thus Eskom’s plans included not only new capacity but replacement of old capacity.
Mr O’Flaherty said that the current life expectancy of the Koeberg nuclear power station was 40 years, roughly the same as that of the coal-fired power stations. It was looking at ways of extending this by new technology.
Mr Makwana added that Eskom itself could not unilaterally decide to extend the period of service of a power station, since this was determined by regulation. Secondly, Eskom was governed by accounting principles as to how long it could extend the lifespan of an asset.
Mr O’Flaherty said that Eskom’s funding model really took Eskom only as far as Kusile. Beyond that there would have to be different ways of funding new technology for the future. Current build plans included strengthening of transmission lines.
Mr O’Flaherty said that it was important to bear in mind that the current life span of power stations was on average 25 years. Eskom was saying that between 2021 and 2028 it needed to replace at least 25% of its current power stations. In the theory of the regulatory model and in the theory of the pricing, Eskom should be given a tariff now that catered for the accumulation of surplus cash to replace those power stations that became due for replacement in 2020/21. The present tariff did not provide for such a cash accumulation. Eskom had to use its present cash accumulation, together with debt and equity to fund the extra 14 700 megawatts. Eskom could not assume that the future replacement of power stations would be with coal-fired plants.
Mr O’Flaherty emphasised that it was necessary to be committed to the completion of the coal-fired Kusile power station to ensure security of electricity supply in 2017. However, decisions needed to be made this year when the IRP2 was published on how the new funding model would work with the new technology that would be chosen.
Mr Makwana added that until the IRP2 was published and policy directives became clear Eskom could not be certain about how it would relate to other role players. It had to cut its cloth according to its means and not try to be all things to all people. So it had taken a conscious decision to secure the right funding to ensure continuity of supply at least in the present decade because what one also needed to appreciate was that to build a nuclear power station involved a planning process lasting 20 years. The actual building might take only seven years, but feasibility studies and other planning processes were needed. Thus, if one decided on opening a nuclear power station 20 years hence, the decision to do so would have to be taken today. A coal-fired power station took four or five years to build. Eskom had 27 power stations. 85% of these were coal-fired. The remainder were nuclear or based on other kinds of technology. Accounting principles in terms of valuation of assets were liable to change. Therefore to align with changes in the valuation of assets, the lifespan of certain power stations had been extended to 40 years. Equally NERSA reviewed every three years what it would allow and disallow.
Mr Makwana asked the Committee’s forgiveness if it thought that Eskom was merely presenting a small picture because Eskom could speak only according to its mandate.
The Chairperson acknowledged that Eskom could not be altogether blamed, and that there was a need for discussion with the shareholder. She was worried that the state was faltering in taking necessary policy decisions.
Mr L Greyling (ID) said that it was important to forecast future demand correctly. He did not want to see a repeat of a previous mistake where Eskom had overestimated future demand, built too many power stations, and then had to mothball some of these because demand for electricity had been less than forecast.
The Chairperson said that Eskom should verify its figures.
Dr S van Dyk (DA) asked if the National Treasury was guiding Eskom as to the projected rate of growth needed in the supply of electricity, or if Eskom was guiding the National Treasury. He feared a recurrence of black-outs after 2017.
The Chairperson said that it was important for Members to grapple with this issue at the beginning of the presentation.
Ms F Hajaig (ANC) said that Members needed to gain a holistic picture.
Mr O’Flaherty said that Eskom did not rely on the National Treasury to tell it what the annual growth rate of electricity supply should be; Eskom conducted its own estimate. He acknowledged Members’ other observations.
Eskom presentation: NERSA hearings
Mr O’Flaherty spoke about the NERSA hearings. On 30 September 2009, Eskom had submitted its Multi Year Price Determination (MYPD) 2 application, requesting a 45% annual tariff increase over the MYPD2 period to fund its capital expansion programme. On 30 November 2009, Eskom had submitted an amended application requesting a reduced annual tariff increase of 35% over the MYPD2 period. On 24 February 2010, NERSA announced that it had granted Eskom tariff increases of 24.8%, 25.8% and 25.9% respectively over the MYPD2 period. The sustainability and viability of the Eskom business as well as national security of electricity supply was fundamentally dependant on effective management of the funding requirements for the current and future build programme (slides 7-8).
Despite NERSA’s calculating the weighted average cost of capital (WACC) at 8.16% (a reasonable return in terms of section 15(1)(a)) of the NERSA decision document, NERSA only allowed a return of 0.8%, 2.8% and 4.2% on assets for the next few years. This ultimately meant that instead of being allowed a return on assets of R30.9 billion (using NERSA’s own valuation of the asset base) in 2010/11, NERSA allowed only R3 billion. In total over the MYPD 2 period, allowed revenue was R90 billion less than it would have been had NERSA used its own calculated WACC number. With either Eskom’s valuation or WACC the number would be more substantial. When one considered the difference this would make to the overall allowed revenue, one can see that it would have a material and significant impact on funding requirements/shortfalls (slide 9).
Eskom presentation: funding model
An overview of Eskom’s funding model was given. Eskom had developed a cash flow, income statement and balance sheet forecast that considered the implication of the build program and capacity additions to the business. The key outcome of the financial forecast was the quantification of Eskom’s cash flow shortfall. The “Funding Gap” in the model was defined as the total cash shortfall resulting from capital expenditure that was not off-set by the profitability of Eskom and its secured funding agreements. Although Eskom was working on a 10 and 20 year model, it had prepared a seven year forecast starting from 01 April 2010. The seven year forecast was considered by Eskom to best reflect their current build plan with Kusile fully operational. The model consisted of : revenue calculated in terms of the NERSA MYPD2 price determination tariffs, namely 24.8%, 25.8% and 25.9%; all committed capital (Medupi, Ingula, Kusile) and uncommitted capital (Nuclear, Renewables); assumed the base operating expenditure as from 30 November 2009; assumed a 25% increase in the average tariff in Years 4 and 5, with 6% increases assumed thereafter; and aside from the tariff the model had not been adjusted for the NERSA MYPD2 decision (slide 11). Further details of the funding model were given in slides 12-16.
The Eskom financial model, committed Capex – Kusile included and uncommitted capital was indicated (slide 12). Unsigned and unidentified funding requirements amounted to a total funding gap of R190 billion in Eskom’s cumulative funding requirement (slide 13). At debt service levels below 1.0, Eskom was unable to effectively service its debt obligations (slide 14). A risk of the unsecured funding gap was a potential downgrading in Eskom’s credit rating. All the rating agencies had Eskom on a negative outlook due to uncertainties relating to the funding gap and the regulatory environment beyond the three years. A preliminary study by Eskom had been undertaken with respect to the financial impact of a fall in the rating. These preliminary indications calculated this impact to be between R4.3 billion and R15.9 billion based on a funding requirement of R150 billion (slide 15). Unapproved capital expenditure had an increasing impact on funding requirements over the long term (slide 16).
Mr O’Flaherty explained that the NERSA ruling had created this funding gap. He explained the basis of Eskom’s tariffs. These tariffs needed to include a return on assets. NERSA’s ruling over the three years was a difference of R55 billion from what Eskom had asked for. Immediately therefore there would be a funding shortfall over three years to a much greater extent than Eskom had previously expected. The greater part of that shortfall was in the asset values. NERSA had challenged Eskom to make savings such as capping wage increases, and Eskom had accepted these challenges. However, Eskom needed cash now to replace its current power stations when they became due for replacement, and the tariffs that NERSA had authorised were not enough for this purpose. If NERSA gave Eskom now funds based on the historical costs of building power stations, Eskom would never have enough. So in its application Eskom had used a special methodology to value its ‘asset fleet’. NERSA had acknowledged the need for a replacement value, but because of the difference between the historical costs said that NERSA needed more time to change its assessment. Eskom also had to provide for payment of interest. NERSA allowed for interest at 8%. Eskom had reckoned interest at 10%. Eskom acknowledged that a 25% increase in tariffs had a heavy impact on the South African economy.
Mr Makwana said that there was a public perception that the public would have to fund the future build. Hopefully it was clear now that the regulatory model did not fund future building. It funded existing activities and existing assets. Hence to be able to build, Eskom argued that it needed new equity injections if possible from the shareholder, or provision to raise equity from elsewhere. Hopefully, the model was now clear.
The Chairperson asked Mr Makwana to put the above point in writing for the Committee.
Eskom presentation: funding solutions
The funding solution must recognise the short run and long run sectoral and national context. The short term solution to the funding gap should maintain flexibility and position Eskom for longer term sustainability. Success would be to close the funding gap, address the generation gap whilst leaving Eskom and “SA Inc” with the flexibility to structure for the future. An extensive list of options was evaluated and ranked to ensure all options were considered for feasibility. Funding Advisors were then appointed to look at the options. J P Morgan was appointed overall strategic funding advisor and Credit Suisse was appointed as advisor on
potential Kusile Equity. Both mandates were be completed by the end of May 2010. Edward Nathan Sonnenberg was appointed as legal advisors. Best options would be presented to board and shareholder in June 2010. Afterwards financial partners would be selected to implement the best approved options. Eskom had agreed clear deliverables and timing under the J.P. Morgan mandate. The Credit Suisse approach under this mandate was summarised as follows: evaluation of project economics; structuring; preparation of market sounding materials; identification of potential equity investors; and identification of Debt financing (slides 18-27).
Eskom presentation: World Bank loan details (one of Eskom’s solutions)
This amounted to US$ 3.75 billion guaranteed by the South African Government if Eskom defaulted, with 28.5 years final maturity (weighted average life 18 years), and a seven year grace period before any repayments were to be made (thereafter payable semi-annually). The loan was obtained from the International Bank for Reconstruction and Development (IBRD) section of World Bank and was therefore project specific, and in the case of Medupi related to 16 packages within Medupi. There were procurement waivers for 13 of the 16 packages already awarded. The condition of loan was to ensure that Medupi was retrofitted with flue gas desulphurisation (FGD) technology – this was aligned to Eskom’s environmental sustainability commitments. US$ 410 million of loan was to fund Majuba Rail. US$ 110 million and US$ 150 million were to fund wind and solar power respectively (slide 29).
Eskom referred Members to the World Bank website for more details.
Ms Borman asked for explanation of acronyms.
Mr O’Flaherty explained ‘weighted average cost of capital’ (WACC) - the rate that a company was expected to pay on average to all its security holders to finance its assets; and ‘return on assets’ (ROA) - an indicator of how profitable a company was relative to its total assets.
Mr Makwana said that the NERSA model strengthened or weakened Eskom’s balance sheet. Eskom had based its application to NERSA on the need to maintain a good balance sheet in order to seek capital without having to submit to stringent conditions. Therefore Eskom’s being authorised a smaller tariff weakened its position. However, Eskom would put this in writing.
Mr O’Flaherty explained that Eskom had assumed in its funding model, in years four and five, that it would continue to receive a 25% increase in tariff. NERSA had recognised that it would be more realistic to stretch the increase over five years. However, there was no guarantee that Eskom would receive 25% in years four and five. If Eskom did not receive that increase, it would make Eskom’s funding gap even worse.
Mr O’Flaherty explained primary energy costs and operating costs (slides 8, 9, and 12). He said that it was very important to maintain facilities adequately to avoid future additional expenses.
Mr O’Flaherty explained that Eskom had committed itself to making savings; even small savings were significant and better enabled it to present its case. 70% of operating costs were made up of human resource costs. NERSA had challenged Eskom to save up to R6 billion on manpower costs. Eskom had assumed 5.6% inflation, but expected a higher growth in manpower. NERSA had refused such an increase in manpower.
Eskom had estimated capital expenditure of R693 billion over the next seven years. However it was necessary to point out that in years four, five and six there was R93 billion of expenditure that was not committed by Eskom; this was money that was to be put aside for the longer term view. For the time being, Eskom had provisionally designated this money for nuclear power generation, but this could be changed. The actual committed expenditure at this point was R600 billion. This was more than the capital programme amounts of which Members had heard, but there was a good reason for this. Beyond the capital programme, there were such items as transmission and distribution networks. The R600 billion was an accurate figure, Eskom maintained, but the R93 billion was approximate.
Mr O’Flaherty explained the line item for repayment of interest on loans, assuming Eskom received all these loans. Eskom had signed documentation for loans to the extent of R87 billion; this included the loan from Government, the loan from the World Bank, and the loan from African Development Bank, and some export credits. Traditionally Eskom had never had a problem in raising money on the local bonds market, and believed that there would not be a problem in the future. However, its present problem was in Eskom’s unsecured money. Eskom had given much thought over the past few months to closing its short term gap.
Dr Van Dyk said that Mr O’Flaherty had progressed too quickly in his explanation and asked for clarification.
Mr O’Flaherty explained further about the R93 billion of uncommitted capital. If one did not look beyond Kusile, one could remove the need for R93 billion. However, it was necessary to look to the future.
Mr A Mokoena (ANC) asked about positive and negative items.
Mr O’Flaherty explained that positive items represented revenue, while negative items represented expenditure. This was a cash flow statement not an income statement. It represented movements in working capital. These were all outflows at the top level.
The Chairperson asked for an explanation in laymen’s terms.
Mr O’Flaherty explained further. The only figure that was cumulative was the net shortfall each year. He acknowledged the confusion.
Ms Molisane said that the Department was quite comfortable with the figures that Eskom had presented.
Ms Borman asked if the R93 billion was uncommitted.
Mr O’Flaherty responded that it was uncommitted. If Eskom was to ensure its status as a going concern and remain solvent, with such a large shortfall, it needed to find another method by which to fund new technology.
The Chairperson asked if Eskom would not, in that case, have to depend on NERSA.
Mr O’Flaherty responded that this was correct.
Mr M Sonto (ANC) asked if the shortfall was cumulated.
Mr O’Flaherty responded that what needed to be emphasised was the unsecured funding of R172 billion at present. Year by year this resulted in a cumulative shortfall. The cumulative shortfall over seven years was R190 billion.
Mr Mokoena asked about Eskom’s borrowing.
Mr O’Flaherty replied that this was the biggest loan ever provided by the World Bank to a single entity. The World Bank would have had to ask itself where it would have its biggest concentration of risk. The negotiations with the World Bank had started more than 18 months previously. The NERSA ruling was not even on the table at that stage.
Mr Mokoena referred to the economic problems of
Dr Van Dyk asked about Eskom’s cumulative cash requirement deficit (slide 12).
Mr Greyling said that the World Bank loan was ‘a red herring’. What Eskom was saying was that its projected tariff increases would not be enough to fund its projected capital expenditure. Where Eskom raised the money was irrelevant because it would still have to pay it back.
Mr O’Flaherty said that this showed that at the time when Eskom did the model, once the NERSA hearings had been completed, it ran its model. Once the World Bank loan was assured, Eskom re-ran the model. This showed the R190 billion shortfall. This formed the basis of all the exercises that Mr Makwana had spoken about and the consultations with Credit Suisse and JP Morgan. Obviously, the way to fund long term assets was through long term debt. So if one could obtain debt over 25 to 30 years, but have a continued revenue stream, then you could repay it. That was the model towards which Eskom was working. One could repay it, but one should not commit oneself, as with the R93 billion, without having financed the projects up front from the beginning. Eskom had learned that lesson.
Mr O’Flaherty explained the reconciliation of the R440 billion (slide 12). R87 billion and R163 billion would be deducted, leaving R172 billion plus R17 billion as the shortfall of R190 billion. This was the reconciliation.
The Chairperson asked about NERSA’s recommendations. She also asked how Eskom compared to other utilities in developing countries such as
Mr O’Flaherty replied that
The Chairperson asked further about Eskom’s unsecured funding and the World Bank scenario. She asked why Eskom’s first choice had been to look abroad for funding instead of seeking funds from within
Mr O’Flaherty replied that there was an active local bond market, provided that State Owned Enterprises (SOEs) and Government did not saturate the market. Eskom was examining local funding either through equity or debt. However, the interest on the World Bank loan was, on account of the exchange rate, cheaper currently than borrowing locally.
The Chairperson argued that the beauty of borrowing money internally was that the money remained in the country. She requested Eskom please to inform the Committee in the next three months that Eskom had asked the Government pension funds.
Mr O’Flaherty said Eskom would in co-operation with the shareholder, the Department of Public Enterprises, confer with the Government pension funds.
Dr Van Dyk said that Eskom should have a financial policy framework like that of any other company. So much of what Eskom had said had been based on assumptions: there was nothing concrete. It was a highly artificial policy framework.
Mr O’Flaherty explained that if Eskom were to place its own security above the security of the energy supply for South Africa, then it would immediately exclude the R93 billion, because it did not have a funding plan for it. Its funding gap would decrease, and there would be a very concrete plan to bridge that gap but this would not be the solution. It was very important for the Committee to realise the problem with which Eskom had been faced. The one thing that Eskom’s board and management would not do was to run the Company into insolvency. It would make sure that it lived within its means.
Mr C Gololo (ANC) followed up the Chairperson’s question about borrowing from abroad. Since Eskom alleged that it was cheaper to borrow internationally, he would be interested to know the figures.
Mr O’Flaherty explained the competitiveness of the current interest rate on the World Bank loan. He said that in terms of accounting it was necessary to capitalise into the cost of your asset any interest that a company incurred while building the asset from an accounting perspective. It did not affect the cash flow.
The Chairperson said that it was desirable to have a special discussion on Kusile.
Mr Sonto said that 9% of a dollar was more than 27% of the South African rand.
Mr O’Flaherty replied that the 9% was in rand amounts. He referred to the ‘
Ms Molisane said that there was a grace period of seven years in which to repay the World Bank loan. It was necessary to view this loan holistically.
The Chairperson accepted these arguments with ‘a pinch of salt’ and asserted that there was more value in lending from local sources than from the World Bank, which should be a last resort. It was crucial to borrow locally since the money would remain in the country.
Mr Makwana responded that Eskom had consulted local financiers, but no single bank could lend any client more than R20 million.
The Chairperson asked Eskom to report to the Committee on the possibility of borrowing from local financiers.
Mr O’Flaherty agreed.
Mr Mokoena asked about comparisons with other utilities which faced similar challenges.
Dr Van Dyk asked if there was a possibility of a second World Bank loan, and if Eskom would be willing to disclose this information on its website.
Mr Gololo asked why Eskom was borrowing from overseas rather than from the Industrial Development Corporation (IDC) which was a company funded by the state.
The Chairperson asked why Eskom could not borrow from Transnet which she alleged was a rich company.
Mr O’Flaherty said that the World Bank loan (slide 29) had been assigned in three components, beginning with International Bank for Reconstruction and Development (IBRD) support for the financing of the Medupi coal-fired power plant. The loan would further provide for renewables, a wind farm, concentrated solar power technology, and a road to rail project to reduce the use of trucks.
Ms Hajaig asked about nuclear energy, and Eskom’s views on the use of coal.
Mr O’Flaherty replied there existed a clean technology.
Mr Makwana said that Eskom envisaged that it would scale down to 70% of electricity produced by coal-burning plants. The Ministry of Energy would have to be consulted. It was important for the Committee to remember that Eskom was a regulated business. Moreover, it was the tenth largest utility in the world. Above it in size were largely the utilities of developed countries.
The Chairperson asked about the World Bank website and said that Eskom should take the responsibility to communicate the information as much as possible since many South Africans might be unable to access a website. She asked Eskom to simplify it and communicate it.
Mr Makwana replied that it was also best to obtain the information from a third source. Eskom had to spread the risk for company and country.
Ms Molisane referred to the Department of Public Enterprises website.
Ms Borman asked about cleaner coal, and the option of continuing to depend on coal.
Mr O’Flaherty said that coal was
Mr Makwana said that it was not for Eskom to choose. However, affordability dictated coal.
Ms Hajaig asked the extent of
Mr O’Flaherty replied that
The Chairperson called for a presentation on coal science since Members obtained different and mixed signals on coal supply.
Mr Gololo also asked for a discussion on the technology of burning coal.
Mr Makwana referred to a previous meeting, in which the representatives of the coal mines had been present [Public Enterprises Portfolio Committee. 28 January 2010]. He possessed an official document according to which coal could be mined in
The Chairperson said that there were alternative non-polluting ways of extracting energy from coal, and asked for some discussion of Kusile (slide 27).
Mr O’Flaherty said that Eskom had appointed Credit Suisse but had received no feedback as yet.
Eskom presentation: overall conclusions
Eskom explained potential solutions to closing the funding gap (slide 31), and noted that R60 billion of Government guarantee was not yet committed. What was uncertain was the R93 billion mentioned in the table on the right hand side. Eskom believed that it had double options.
The Chairperson had serious qualms about preoccupation with an equity investment.
Mr Makwana said that Eskom was looking for partners in Kusile. It was a decision by the board and by Cabinet.
Dr Van Dyk asked about the security of supplies.
The Chairperson said that Members as intermediaries had to obtain information from Eskom. She was grateful for Eskom’s clarification of various matters, and asked Eskom please to assist the Committee to assist it. What could Eskom do to improve its credit rating?
Mr Makwana said that Eskom’s situation was a tough but simple one, as Mr O’Flaherty had indicated. If Eskom management and directors behaved strictly according to the Companies Act, King III and the Public Management Finance Act (PFMA), the choice would be very clear. So Eskom had factored Kusile into the plans. Eskom agreed with the Chairperson on the need to engage the public.
The Chairperson said that the Committee needed a discussion on Kusile. It would call upon Eskom and the Minister to report on further progress on the funding model after the World Cup.
The Chairperson said that she had been informed of the resignation of Dr M Mangena (AZAPO) on account of his retirement. She proposed holding a lunch in honour of Dr Mangena.
The Chairperson asked if the journalist Mr Brendan Boyle was present, since she wished to challenge him on his reporting about her.
The Committee discussed its programme for the immediate future.
The meeting was adjourned.
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