Eskom and Transnet need to borrow billions more than anticipated in 2016, National Treasury revealed in its 2017 Budget Review on Wednesday.
Even as Eskom’s financial performance improved in 2015/16 as a result of a 12.7% tariff hike and a revenue increase by R10.5-billion to R161-billion, it still required borrowings for its new build and electrification projects.
In addition, Transnet grew revenues by 1.7% to R62.2-billion in 2015/16. While it has spent R122.4-billion on capital expenditure in the last five years, it plans capital investments of R273-billion in the next seven years, Treasury said.
These massive expenditure projects mean the entities take up the biggest share of government’s borrowings.
“In 2016/17 it (borrowing) will amount to R254.4-billion, or 5.8% of GDP,” it said. “This is R32.8-billion more than was projected in the 2016 Budget, reflecting a larger consolidated budget deficit and higher borrowing estimates by State-owned companies – primarily Eskom and Transnet.”
In 2015/16, borrowing by the six largest State-owned companies – the Airports Company of South Africa, Eskom, Sanral, SAA, the Trans-Caledon Tunnel Authority and Transnet – reached R128-billion.
Eskom and Transnet accounted for 74% of the total, Treasury explained.
Eskom increased planned borrowings in 2016/17 increased from R46.8-billion to R68.5-billion. “The increase results from Eskom’s revised assumptions of cost savings and lower-than anticipated tariffs during the current price determination period,” it said.
Over the next seven years, Transnet plans capital investments of R273-billion, to be funded by earnings and borrowings against its balance sheet, it said.
Foreign debt funding was lower than estimated, reaching R29.5-billion compared with an expected R42.6-billion.
“The six companies project aggregate borrowing of R102.6-billion in 2016/17 and R307.1-billion between 2017/18 and 2019/20.
“Gross foreign borrowings are expected to account for the majority of total funding over the medium term, largely as a result of Eskom’s efforts to obtain more developmental funding from multilateral lenders.”
In 2016, Eskom concluded a deal with the China Development Bank to get a $500-million loan facility.
However, Eskom is likely to need additional equity injections in the coming three to four years, according to Nomura emerging market economist Peter Montalto. “Its last equity injections stabilised ratios at very low levels, but are still a constraint,” he said in December. “Nuclear generation would severely leverage Eskom’s balance sheet without additional equity injections.”
Referring to the “injection”, Treasury said the R23-billion equity injection and the conversion of the R60-billion subordinated loan to equity helped shored up Eskom’s balance sheet.
“State-owned companies are responsible for much of the infrastructure on which the economy relies,” Treasury said. “Eskom, Transnet and … Sanral account for about 42% of public-sector capital formation.”
“Over the past year, Eskom continued its capital investment programme – bringing new generating capacity to the electricity grid – and maintained steady power supply. Transnet continued to invest in getting more freight from road to rail.”
Meanwhile, contingent liability exposure to independent power producers (IPPs) is expected to decrease in 2019/20.
“Government has committed to procure up to R200-billion in renewable energy from IPPs,” Treasury said. “As at March 2017, exposure to IPPs – which represents the value of signed projects – is expected to amount to R125.8-billion. Exposure is expected to decline to R104.1 billion in 2019/20.”
Government began to categorise power-purchase agreements between Eskom and IPPs as contingent liabilities in 2016.
“These liabilities can materialise in two ways. If Eskom runs short of cash and is unable to buy power as stipulated in the power-purchase agreement, government will have to loan the utility money to honour its obligations.
“If government terminates power-purchase agreements because it is unable to fund Eskom, or there is a change in legislation or policy, government would also be liable. Both outcomes are unlikely.”
It said Eskom is expected to use R43.6-billion of its guarantee in 2016/17 and R22-billion annually over the medium term.
It said SAA has used R3.5-billion of a R4.7-billion going-concern guarantee, with the remainder likely to be used in 2017/18.
Startups looking for funding can now apply to the Design Innovation Seed Fund (DISF) for a share of R6.5m. The fund is looking for pre-revenue and innovative technologies in the agri-processing, health and bio-tech, and manufacturing sectors, says VentureBurn.
The fund is open to Western Cape-based early-stage companies and SMEs, businesses in incubation, entrepreneurs and researchers. Students at tertiary institutions in the Western Cape may also apply as long as the institution does not already have intellectual property claims to the product or service.
Preference will be given to businesses with at least a 25% black ownership and job creation potential.
The chosen applicants will be able to apply for up to R500,000 in funding. Entrepreneurs must also be able to match 20% of the funding in cash or in-kind contributions.
DISF is a product of the Cape Craft and Design Institute (CCDI). It receives investment and management funds from the Technology Innovation Agency (TIA) and the Western Cape Department of Economic Development and Tourism.
The first round of the project, which launched in 2014, targeted 12 startups in the Western Cape out of 151 applicants. The applicants were able to move onto the next stages in their businesses and have collectively created 18 new jobs and a turnover of R2.4m in the past six months.
“The Seed Fund has given these innovators and entrepreneurs a little bit of breathing space and an opportunity to flex their muscles — which is all they really needed to take their next steps,” says executive director of the CCDI, Erica Elk, in a press release to Ventureburn.
“More importantly though, we didn’t just give them the money. We walked beside them every step of the way over the two years, providing support, advice and access to additional expertise when they needed it.”
According to Elk, the DISF has allowed the CCDI to create other investments, such as the Jobs Fund project, which is investing R14.5m into 45 companies over three years. These businesses have created over 464 new jobs as well as doubling in size and turnover.
Another creation is CCDI Capital, which is an SMME investment vehicle, which will manage the second round of DISF funding and another Jobs Fund programme.
According to the Western Cape provincial minister of economic opportunities, Alan Winde, the initiative is supported due to the global potential of businesses going through DISF.
“We have an ecosystem taking shape here at the southern tip of Africa because of programmes like this, because of the environment we are in, and because of the mindset of young people coming into the system. I encourage every person with an innovative idea in the focus areas to apply. This is an excellent platform to take your idea or business to a new level.”
Applications close on 4 November. Those wishing to enter can visit the CCDI Capital website.
LAST year was a watershed year in the higher education sector, as students at most South African universities protested under the #FeesMustFall banner. Some were calling for free tertiary education.
Chapter 2 sub-section 29 (1) (b) of the Constitution states, “Everyone has a right to higher education which the state, through reasonable measures, must make progressively available and accessible.” It is quite clear that this does not create an obligation on the state to provide free higher education.
The question that must be asked is whether the state has made advances since 1994 in making higher education available and accessible. The answer is a resounding yes when considering the growth in the number of students enrolled in South African higher education institutions including technical and vocational education and training (TVET) colleges, community colleges and universities.
The participation rate in higher education for youth in the 20-24 age group increased from 15.4% in 2003 to 19.5% in 2013.
The state has also made TVET colleges and universities accessible to thousands of poor students through the National Student Financial Aid Scheme (NSFAS). The NSFAS Act was promulgated in December 1999 to give real effect to the government’s commitment to redress the inequities of the past and tackle the growing student debt problem in higher education institutions.
NSFAS and its predecessors awarded R50.5bn to about 1.5-million students in the form of loans and bursaries between 1991 and 2014 at 25 public higher education institutions and 50 TVET colleges.
Despite the increase in the number of students who now have access to higher education, when we consider the state budget allocated to universities from 2000 to 2014, it is clear that universities have become less affordable to students coming from poor and middle-income families.
The proportion of university income coming from the Department of Higher Education and Training’s budget vote declined in real terms from R15.93bn (which constituted 49% of total university income) in 2000 to R22.9bn (40.9%) in 2014. Universities raised student fees to offset the decline in state funding. The contribution of student fees to university income rose from R7.8bn (24%) in 2000 to R19.6bn (35%) in 2014.
SA’s spending on universities is comparatively low by world standards. In 2011, the state budget for universities including funding for the NSFAS, as a percentage of gross domestic product (GDP) was 0.75%, just less than Africa as a whole (0.78%).
The budget for the 2015-16 fiscal year is 0.72% of GDP, lower than it was in 2011. This is also significantly lower when compared with the 2011 figures of African countries (0.78%), Organisation for Economic Co-operation and Development countries (1.21%) and the rest of the world (0.84%).
The National Development Plan’s vision for 2030 is a post-school system that produces graduates who have skills to meet the current and future needs of the economy and society. The different parts of the education system should work together to allow students to take different pathways that offer high-quality learning opportunities.
There should be clear linkages between schools, further education and training colleges, universities of technology, universities and other providers of education and training. There should also be clear linkages between education and training and the world of work.
In spite of the progress SA has made to improve access to higher education, many challenges remain. Some of these are:
• The funding challenges and deteriorating affordability of higher education to students from poor and middle-income households;
• Students who do not qualify for NSFAS funding but are also financially constrained — the so-called “missing middle”;
• The high drop-out rate from higher education that particularly affects students from poor households;
• High youth unemployment. This particularly affects young people from poor families and graduates from historically disadvantaged universities; and
• NSFAS challenges, including ineffective administration and poor loan recovery.
SA has adequate resources and capacity to solve the challenges we face. The solutions lie in driving better co-ordination of government programmes in education generally, as well as driving better co-ordination and collaboration between the government on the one hand and the private sector and institutions of higher learning on the other.
A process has been started to accelerate the building of a sustainable public-private partnership model. This model plans to raise enough funding to offer comprehensive financial support to students from poor and middle-income households, as well as academic, psychosocial and life-skills support.
The key objective is to improve access, success and employment of poor and “missing middle” students as they enter, progress through and exit higher education institutions. Through this model, I believe it is possible to offer fully subsidised university education to the poorest students in exchange for some community service after graduation.
The model seeks to give effect to the constitutional requirement to improve access and success of students. Financial support would include a combination of grants, bursaries and loans regulated by various criteria, but with the guiding principles of reducing the financial burden on poor, means-tested households and the promotion of skills production of occupations in high demand. The loans-grants ratio will increase as the household income increases up to a determined middle-income threshold.
The key success conditions for the model to be sustainable include:
• The creation of a robust public-private partnership based on a shared vision encapsulated in the National Development Plan that requires a post-school system that produces skills to meet the current and future needs of the economy and society;
• The development of innovative funding mechanisms to increase available funds substantially;
• Centralised objective control of all granting and disbursement decisions to optimise the production of graduates in occupations in high demand;
• Implementation of best of breed and “fit-for-purpose” student identification, household means-testing, grants and loans approval, loans collection and graduate employment placement. Social contracts with students together with comprehensive psychosocial and life skills support structures are also a priority; and
• Comprehensive data structures as well as auditing and monitoring systems in line with key goals.
SA has shown its resilience and ability to solve its challenges, and the challenges in higher education will be attended to if all stakeholders work together driven by a common vision.
The Human Resource Development Council (HRDC) — a multistakeholder forum made up of social partners including organised labour, private sector and higher education institutions, among others — has taken up the issue of the funding of post-schooling education and will be hosting a summit at the Gallagher Estate convention centre in Gauteng with the theme: Partnerships for Skills — A Call to Action.
• Nxasana is a council member of the HRDC and chairman of NSFAS
Despite expectations that it would begin operating in early 2016, the New Development Bank (NDB, or BRICS bank), a new lending institution set up by member countries Brazil, Russia, India, China and South Africa, remains something of a mystery.
Founded with the aim of developing infrastructure, the bank has no official website or even a contact email address and no one seems to knows which projects the bank will allocate funding to.
Perhaps even more concerning is the fact that there is no clue as to whether the bank will establish environmental, social, labour, or human rights safeguards to protect against the impacts of the projects that its loans support.
Announced with great pomp at the 6th BRICS Summit in Fortaleza, Brazil, in July 2014, the NDB currently only has one office in Shanghai, where representatives from each country are located. Yet the bank’s initial US$50 billion of subscribed capital should make it a major new player in development finance.
There are great expectations from member countries that this new source of financing can help develop sectors crucial for their growth, such as energy, telecommunications, and logistics.
However, trying to get definitive answers from representatives of the NDB is a fruitless exercise. Even the private sector, represented through the BRICS Business Council, does not seem to have a clear idea of how the bank will be governed.
Wishing to remain anonymous, an important Brazilian business figure made it clear to Diálogo Chino that negotiations on how the bank will be run are taking place on a government-to-government basis, with little transparency or participation by civil society. “It is very tightly closed. Nobody knows anything,” said the high-ranking source.
In November of last year, the Brazilian NGO Conectas held an event in São Paulo which was intended to discuss the NDB and associated human rights and sustainability issues arising from the granting of loans.
The NGO’s lawyer, Caio Borges, who has met several times with representatives from the Brazilian Ministry of Finance to discuss such matters, says that despite the openness of government technicians in welcoming him to participate in meetings, there is still nothing concrete with respect to environmental policy.
Borges adds his voice to that of Diálogo Chino’s source in suggesting that, unlike the World Bank, the NDB does not have a proper set of rules and guidelines and he expects it to examine social and environmental risks on a ‘case-by-case’ basis. “The tendency is for each project to come to the bank with the environmental and social issues contained within the project itself,” he says.
The private sector representative to the BRICS Business Council says that there is a big discrepancy between founding countries’ attitudes to environmental impacts in infrastructure projects. “Brazil has environmental and social legislation that is globally unsurpassed.
The Brazilian Development Bank (BNDES) has very advanced practices in this regard and is one of the largest development banks in the world,” the source said, adding; “Russia and China, however, want nothing to do with it. They are not interested in having complex environmental criteria.”
Part of the problem lies in creating a coordinated environmental policy framework that accounts for different regulations in each country. For example, a hydroelectric project in China may not follow the same rules as a similar venture carried out in Brazil, and either could be financed by the BRICS bank.
Projects co-financed by Brazil and Russia could breakdown because Brazilian companies would not back down on environmental problems caused by ventures in Latin American or sub-Saharan African countries where environmental standards are less stringent.
Paulina Garzón, director of the China-Latin America Sustainable Investment Initiative also met with representatives of the Brazilian Ministry of Finance. She said that technicians admit that there is great concern about the costs of preparing projects. It is possible that the bank could include a special fund for project planning, which would factor in socio-environmental risks.
According to these officials, Garzón said, the costs that the World Bank imposes on loan recipients to calculate these risks are presently too high. Garzón also said that Brazil pressured the NDB to use Brazilian environmental standards, which have been highly praised around the world despite problems with local communitiesand environmental infractions committed by big infrastructure projects.
Former director general of the Asian Development Bank (ADB), Rajat Nag, said recently that the NDB will establish environmental criteria for the projects it finances. “As far as I know, the NDB is working on social and environmental safeguards, and some people from the ADB are helping,” he said.
“I would be very surprised if they ran contrary to some fundamental social and environmental principles. I think they will be much more pragmatic. How they will do this, I don’t know, but it is exactly this that we have to monitor,” Nag added.
The National Energy Regulator of South Africa (Nersa) will start its public hearings on Monday as part of Eskom’s application to recover an additional R22.8bn through an electricity tariff increase.
The Nersa public hearings will start in Cape Town and end in Midrand on 5 February.
Nersa approves electricity tariff increases for Eskom based on a number of assumptions on factors such as electricity demand and cost of primary energy. Depending on how those assumptions pan out, Eskom is either owed money or owes the public.
The methodology used to determine Eskom’s tariffs allows the utility, after the financial year-end, to submit its so-called Regulatory Clearing Account (RCA) application based on the financial statements. This is meant to reconcile the assumptions and projections used to determine the tariffs and the actual revenue costs incurred.
Eskom submitted an application for the 2013/14 financial year in November. An approval of the application could result in future tariff hikes. Eskom last week said an approval of the application would improve its ability to meet financial commitments and enhance its balance sheet.
In its application to Nersa, Eskom wants to recoup, among others, R11.7bn for a shortfall in revenue, R8bn in costs associated with the utility’s peaking open cycle gas turbine (OCGT) plants and R2.4bn for primary energy costs.
Eskom said the shortfall in revenue was primarily due to lower than anticipated electricity demand. The power utility said it had not included any revenue lost because of load shedding in 2013/14.
“Investors are seeking certainty and stability from the regulatory process,” Eskom said in a statement on Sunday. “Eskom has recently been downgraded by rating agencies and they note inadequate tariff increases as part of the reason for the downgrade.
“A favourable RCA process will improve investor confidence, which impacts our credit rating and funding security,” it said. “Funding security ensures that the build programme remains on course for completion.
“Sufficient revenue allows Eskom to continue with the generation performance improvement programme to the benefit of all customers. A financially sustainable Eskom will support our country’s broader economic objectives.
“Eskom’s 2013/14 RCA submission of R22.8bn is driven substantially by revenue under recoveries, higher expenditure on coal burn, independent power producers, open cycle gas turbines and other primary energy costs.”
EE publishers MD Chris Yelland, who was vocal at the previous public hearings in 2015, said this new application was problematic in the current economic situation.
Writing before the crisis stemming from former finance minister Nhlanhla Nene’s removal from Treasury, Yelland said: “Claw-backs via the tariffs will add significantly to the electricity price trajectory, over and above the 8% per annum granted by Nersa over the five-year MYPD3 period.
“A compounding problem arises from the elasticity of electricity demand in the face of steeply rising electricity prices significantly above the inflation rate, which further reduces electricity sales volumes and increases claw-back claims, in a vicious circle.
“With constrained supply and declining sales volumes, rising electricity prices reaching the limits of affordability, and the tipping point to grid defection in sight, Eskom’s future ability to finance its own generation, transmission and distribution activities comes into question.”