Possible Impact of the Special Appropriations Bill for Eskom on the Economy

Meeting report

The Chairperson stated the agenda of the meeting was for a briefing by the Western Cape Provincial Treasury on the possible impact of the Special Appropriations Bill for Eskom on the economy of the Western Cape. The Bill was due to be adopted in National Assembly on October 22, 2019 at 14h00.

Three letters were contained in the pack of documents which were handed out to Members. Due to non-response to the letters, the context of the meeting was urgent. The Chairperson stated that she had written a first letter to the Chairperson of the Select Committee on Appropriations on September 2, 2019, which requested public hearings in all respective provinces. The second letter was addressed to the Chairperson of the Standing Committee on Appropriations and CC’ ed the Speaker of the NA. This letter contained a list of questions on the procedures in the NA for joint hearings to be held. Neither of the first two letters had been answered. In a third letter, recommendation had been made for the week of October 21, 2019 to be used to conduct hearings in the NCOP.

The Chairperson cited Section 17 (2b) of NCOP rules, Section 72 (1a), the NCOP’s mandate for public involvement, and Section 13 (2) of the Money Bills procedure.  The Chairperson requested that a self-imposed urgency not be placed on passing this Bill as neither the provincial treasury nor provincial legislature has been allowed input in the program. The Chairperson concluded by thanking the committee for attending on such short notice.

Mr David Maynier, Western Cape MEC for Finance and Economic Opportunities, led the delegation from the Provincial Treasury. He stated that the Bill will have a negative impact on the provincial economy as transfer payments and service delivery would be affected in the Western Cape.  

Ms Julinda Gantana, Head of Department, Western Cape Provincial Treasury, took the liberty of revisiting the request from the committee and extended the invitation to the Western Cape Department on Economic Development and Tourism (DEDAT), as the Department was mandated to speak on the Western Cape economy.  

Dr Ndodana Nleya, Head of Fiscal Policy, Western Cape Provincial Treasury, provided a brief background of the challenges Eskom faced since 2007. It was noted that Eskom’s financial position has deteriorated since then. This was based on costs of operations in the Income Statement. Owing to Eskom’s funding plan being largely dependent on its inability to raise additional funds from financial markets, funding was required from government. As the main beneficiary of government guarantees, Eskom represented 15% of the sovereign debt.

He referred to the Special Appropriations Bill which was tabled by the Minister of Finance on 23 July 2019 which sought to provide additional financial support to Eskom. This was for the current and upcoming financial year which proposed an additional support of R59 billion. The Bill also imposes conditions to be met by Eskom before and after the transfers are made. He pointed out that the impact of load shedding in the province would be the greatest for the manufacturing sector. In contrast, the impact on financial, business, government and transport services were minimal due to the ability to rely on alternative power. The total cost of load shedding per a stage per a day in South Africa was estimated at an average cost of R500 million. The impact of load shedding on consumers of electricity varied depending on income bracket and types of businesses. Households and firms managed to cope without electricity due to investment in alternative sources of power. Entities such as Eskom, which received transfers, affects the vertical and horizontal transfers of funds cross different spheres of the economy. Government intervention in Eskom was important for inclusive economic growth and the maintenance of sovereign investment grade rating in South Africa. Failure to strengthen Eskom’s balance sheet, while government is working on long term sustainable solutions, would most likely have a negative, systematic impact. This was because a default in payment by Eskom will result in crisis for the government and South African banks.

Overall the implications of the Special Appropriations Bill for Eskom are erosion in the credibility and sustainability of the national fiscal frameworks which adversely impacts national transfers, equitable share and conditional grants to the provincial government thus impacting service delivery implementation to the province. The House needed to consider this.  

Ms Gantana added that even after considering the information provided by Dr Nleya, it is still difficult to ultimately quantify the impact of the Bill as there is still uncertainty around the Medium Term Expenditure Framework for 2020.

The Chairperson invited comment from a representative on behalf of the DEDAT.  

Mr Nezaam Joseph, Director: Economic Policy and Planning, DEDAT, thanked the Chairperson. He recognised the importance of Eskom saying that should Eskom fail, the country would fail too. By extending R59 billion to Eskom, government continues to extend the road in which the can is being kicked. According to Eskom’s financial statements, it is incurring a loss of R20 billion a year having non-current debt securities of R387 billion. The current debt to be paid within the next 12 months is estimated at R53 billion. It made more sense to use the R59 billion for infrastructure and/or Independent Power Producers (IPPs) and/or renewable energy. Should Eskom use the R59 billion to only support its current financial liabilities, it shall come to this stage again.

South Africa’s debt is underpinned by the Rand. In the case of currency being underpinned by the Dollar or Euro and should the debt increase, or the currency fluctuate, the cost of debt would increase proportionately. In the case of South America, a decline in confidence of sustainable fiscal management may lead to perpetual failure in monetary and fiscal policy. This was because debt was underpinned by foreign-denominated currency. South Africa’s currency is one of the most volatile currencies in the world and issuing debt underpinned by the Rand is risky in the future. Developments show countries that rely on its ability to extend its debt in the international markets are bound to fail. Should Eskom continue to rely on annual government guarantees, there is no evidence to suggest this will not happen again. The Bill is silent on what the money is being used for. If it is being used to repay current liabilities or current debt, then the stop-gap is a concern.

He alluded to how strange it was that an appropriations Bill of this nature was going to be passed so quickly. Progress on IPPs and renewable energy has taken years and was forced to close despite international investment in the Western Cape region. This was owing to national counterparts who failed to support these initiatives for green technology and the green industry. In future it will be hard for the NA and Wesgro to grow the green sector following the previous failed attempt. There was no indication given as to what the money was going to be used for - he suspected that it would be used to support current liabilities and in doing so there would be no infrastructure for any degree of sustainability.

Discussion

Mr A van der Westhuizen (DA) believed there was no choice as Eskom had to be bailed out. Eskom was not to blame but rather the decision-makers during the Thabo Mbeki administration. During that period, the question of an energy mix featured on the agenda as to the question of whether private energy should be pursued or continued investment in Eskom. The delay in construction of the Medupi power plan increased the cost of the project and the engineering design was hastened. He stated that shoddy workmanship was used to hasten completion and this contributed to the country experiencing black-outs again.

Mr van der Westhuizen commented on the use of the phrase ‘electricity intensive’ saying the tragic South African economy was built on cheap electricity. In his opinion, this should have been used to the country’s competitive advantage. The economy would have been worse off should it not have recovered from the 2007/2008 financial crisis the way it did.

Mr van der Westhuizen added that IPPs represent one area which can generate additional electricity capacity without tax payer investment. He also stated that the speed at which the Appropriations Bill was sought to pass needs to be used in favour of private energy producers. If these IPPs should run at capacity, then this would save the country from experiencing phase three load-shedding. The initial cost of renewable energy agreements would be insignificant in the long run. There is a need to bail Eskom out, a need to adsorb increases in the cost of electricity and a need for additional capacity by the private sector.

The Chairperson urged Members to keep input brief as DEDAT and community members were still required to reply and provide input.

Ms N Nkondlo (ANC) said that under the circumstances of an emergency meeting, there is no certainty about resolutions to be made. Eskom agreed to present on the matter of IPPs and it would only be fair to wait to hear about this. The agenda of the meeting was to quantify the implication of the Bill. There was no need to continue.

In response to the Chairperson, Ms Nkondlo said she recognises that process has not been followed and thus guidance is required.

The Chairperson referred to the meeting with the Standing Committee on Public Accounts (SCOPA) which estimated that a 5% budget cut in the provincial health sector would approximate to R1.3 billion. This would affect the Karl Bremer, Mitchells Plain and Khayelitsha hospital. A 5% budget cut in the provincial education sector would approximate to R1.2 billion of its entiree infrastructural budget. These presented two of the biggest departments in the Western Cape economy. It helped Provincial Treasury to consider impact scenarios should the budget be cut. According to the Chairperson’s knowledge, no amendments had been made to the Bill thus far. She asked what conditions the Department would have liked included in the Bill. She recommended that the National Minister report to Parliament within three months of promulgating the Bill so to give feedback on the matter. Conditions should be placed on the main divisions such as current payments, transfers and subsidiaries, capital assets and payment of financial assets. Procurement contracts should be reviewed and those which are wasteful, irregular and of poor value, be reported. Within 12 months of the Bill, Eskom should separate the generation, distribution and transmission entities as indicated by the President previously. She would also like a White Paper on the future of Eskom to be presented by the National Executive within three months and that no bonuses be paid to Eskom executive members until the debt be resolved. She then asked for guidance from DEDAT as according to Section 104 (5) of the national constitution, if the provincial legislature chooses to recommend matters to the National Assembly concerning that which is outside the legislature, or on an Act of Parliament which is affecting provincial law, the legislature may do so.

Mr Nleya said that according to the wording of the Bill, the Minister may impose conditions before and/or after it is made. Extensive power was given to the Minister as conditionality is not limited to specified actions.

The Chairperson responded that is it not about giving the Minister power but rather that Parliament should be able to hold the Minister accountable.

An official from DEDAT replied that she would have liked to have National Treasury assess the asset book of Eskom to provide a true reflection of the asset base. This affects the price of electricity and would require a reevaluation of the current electricity model of Eskom. There is a need to increase the capacity of IPPs and the private sector so to generate and sell electricity directly to the public. Efforts need to be made to assist municipalities in absorbing the distribution function of electricity which may benefit the sustainable management of municipalities in terms of the funding model and assist Eskom so to allow Eskom to focus on its transmission responsibility, as envisioned by the Electricity Regulations Act of 2006.

Ms Nkondlo (ANC) said that to her knowledge, there have been meetings held for Public Enterprises in Parliament. There is the challenge of coordinating the legislatures as the concerns raised in Parliament are similar to those raised in the provincial legislature. There needs to be a process through which the views expressed within this meeting can become a part of those which is held in Parliament.

The Chairperson stated that she would have liked the Committee to put the Bill out for public comment. She recommended the Committee deal with resolutions internally and adoptions thereof via e-mail. This will then be submitted in a report addressed to the NA and NCOP. She will table the resolutions on October, 22 2019 at a NCOP Committee meeting. Given the deadline, the programme for the Bill and the non-response to the letters, the Chairperson believed there is not going to be a request for input.

She thanked DEDAT and the Western Cape Provincial Treasury for attending on such short notice.

The meeting was adjourned.