Inquiry into Eskom is an unnecessary distraction

THE CHIEF executive of Eskom, Tshediso Matona, and three other executives of Eskom have been “suspended” to allow for an external investigation of the parastatal. This news comes at a most difficult time for an important company in crisis and will not in our view highlight any information that the government does not know already.

Load shedding continues intermittently, with its impact evident in mining and

- manufacturing data released yesterday.

This news adds further negativity to the Eskom bond story and sovereign credit, though local rates and the currency are unlikely to be affected.

The board of Eskom has set up an independent, external inquiry to assess:

The poor performance of the generation plant.

Delays in bringing the new generation plant onstream. High costs of primary energy. Cash flow challenges. The inquiry is set to last around three months. The chairman of the board of Eskom has said there is no suspected wrongdoing, but the executives have been suspended to allow “transparency” and full access for the inquiry. The inquiry has government backing.

We do not believe an inquiry is necessary. We think it does not indicate that a crisis is being sorted out or dealt with, but the exact opposite – it is an unnecessary distraction at a time when Eskom needs de- cisive, stable and strong leadership.

The cabinet “war room” on Eskom, the National Treasury, Department for Public Enterprises and unions are aware of all the technical details of the four issues above and the policy options to correct them.

The problems at Eskom have been building with policy choices made since 1994 or more specifically since underin- vestment started from around 2001. While there have been technical questions on some of the choices made with delivering Medupi in the last six months, since “new” chief executive Matona has arrived these pale into insignificance compared to the backlog of issues. Even if an inquiry is needed it is unclear why senior leadership has to be removed. We think it suggests they would obstruct something if they were to remain in place.

Instead, we believe there are complex political currents at work involving Cosatu-aligned unions that have been increasingly unhappy at the leadership of Matona and also his criticisms of previous government action with respect to the parastatal.

Indeed, we think it was odd that the unions were made aware of the announcement yesterday morning before the media or any internal announcement was made. In addition, there are a whole host of parastatals and government agencies that do not have permanent chief executives in place. Eskom is now basically taking a threemonth gap of leadership in which time difficult decisions are unlikely to be made.

We think it is highly unlikely that the inquiry will throw up any policy suggestions about the entity restructuring of Eskom (splitting out generation, setting up an independent electricity buyer). After the ANC’s recent lekgotla ruling out any such move we think those policies are firmly off the table.

Overall, we still do not believe the government fully understands the crisis that is occurring on energy security – as evidenced by the delays in providing an equity injection and yesterday morning’s announcement. Indeed, the recent synchronisation of Medupi to the energy grid, while only providing a tiny amount of electricity – and not averting load shedding incidents since – is still what we think the government is clinging to, to prevent more difficult decisions being taken. Peter Attard Montalto is an executive director and emerging markets economist at Nomura

SOUTH Africa’s energy challenge has dominated news headlines for months and was top of the agenda at this year’s State of the Nation address – and rightfully so, given that our country is in the midst of its worst energy crisis in recent time, underpinned by the ailing state of power utility Eskom.

However, the debates have given no particular attention to the petroleum sector, which faces important policy decisions in order to avoid long-term catastrophes in the local manufacturing sector, particularly among local refineries.

In December 2014, the National Energy Regulator awarded Burgan Cape Terminals a licence to develop a liquid fuels storage and distribution facility in the Port of Cape Town.

Chevron South Africa, which trades under the Caltex brand in the country, objected through due process, and still challenges this facility in an Environmental Impact Assessment process soon to be decided upon. This has come at a time when policy around clean fuels has been deferred, thus limiting local refineries’ ability to produce a product that can now be imported ahead of local investment and jobs.

The primary challenge with a facility such as Burgan is that it will ultimately render local refineries economically unviable by facilitating the ability to import an unlimited amount of clean fuels at the expense of local production – much like the country’s textile industry has adversely witnessed over the past decade with imported product.

Burgan has stated that the proposed facility is an Operation Phakisa project. Chevron commends initiatives such as Operation Phakisa as it aims to address poverty, inequality and unemployment, among other challenges. However in order to unlock South Africa’s oil and gas potential as targeted by the initiative, a robust local refining capability is required, to capture the maximised value for the country.

Conversely, the unrestricted importation of clean fuels will destroy thousands of refinery jobs in this case.

Increasing storage facilities for strategic stocks and to facilitate fair competition, as well as employment makes sense in the current environment. However, the devastating effect of developments with large import capabilities is a threat to jobs in the refining industry nationally – ultimately a threat, which the economy simply cannot afford.

Jobs

According to South African Petroleum Industry Association’s annual report for 2013, it is estimated that more than 100 000 people are supported by the local petroleum industry (direct and indirect).

If clean fuels were to be imported on a large scale prior to investing in local manufacturing, it could have a significant adverse economic and socio-economic impact on the local economy, including negatively impacting the security of supply for petrol, diesel, jet fuel, liquid petroleum gas and bitumen, among others. This in turn has a far-reaching impact on various other industries that rely on the petroleum products that are locally produced, and have no import infrastructure.

The local oil refining industry has a long track record as a reliable supplier of energy, refined products and feedstocks to a wide range of sectors. It is a valuable asset that keeps the nation moving, helping to create wealth and supporting employment.

With oil continuing to be an important energy source in the future, an indigenous oil refining industry will remain a valuable asset to South Africa. Despite the challenges the industry faces, it can continue to play a pivotal role in the future.

I would like to emphasise that the local refineries, such as Chevron’s make a significant contribution to the economy. The Chevron refinery in Cape Town spends R1 billion annually and contributes more than R18bn, or 0.6 percent, of total local gross domestic product. The refinery provides direct and indirect employment to roughly 13 500 people and supports a number of industries.

In shaping its future energy strategy, the government has to consider South Africa’s requirements for a robust and resilient energy sector and formulate policy that will help deliver this objective.

It is my firm belief that oil refining will continue to be a vital part of South Africa’s energy mix – something worth fighting for.

The inquiry is set to last around three months. The chairman of the board of Eskom has said there is no suspected wrongdoing.