Part two | Zondo’s nuclear deal revelations
In the second of this two-part series, evidence before the state capture inquiry makes it clear that South Africans will shoulder the real cost of adding nuclear generation to the energy mix.
Author:
14 May 2021
In stark contrast to the Department of Energy’s abundant optimism and can-do attitude, the provisional modelling the National Treasury undertook in 2015 drew attention to the many serious financial risks involved in the Zuma government’s procurement of 9.6GW of nuclear power generation.
Made public for the first time before the Zondo commission that is investigating allegations of state capture, the treasury’s report said the procurement of 9.6GW would be one of the largest infrastructure investments ever undertaken by a country relative to gross domestic product (GDP).
It would have “material consequences for the country’s international financial position and balance of payments, the balance sheet of the South African government, as well as the finances of all South Africans for decades to come … Ultimately, South African taxpayers and electricity consumers will pay the full cost of the programme,” said the treasury.
Related article:
The treasury’s financial modelling, which it presented to the Cabinet, said nuclear power would do little to address “pressing energy security requirements” over the short or medium terms. And it warned that the procurement could lead to “an unwarranted build-up of sovereign debt” that would likely lead to a downgrading of South Africa’s credit rating.
The report highlighted the very real risks of delays, deviations and cost overruns during construction, and the potentially “catastrophic” financial consequences of a serious accident. Significantly, it drew attention to the “crowding out of resources for other critical government priorities”. The treasury said it would be necessary to “restrain government consumption throughout the build programme” and warned that the government would have to abandon specific policy objectives such as the National Health Insurance scheme, post-school education innovations and social security reforms. It also warned that public sector wages would be negatively affected.
Financial discrepancies
The treasury disputed the energy department’s cost estimates, saying that calculations should be based on figures between $5 000/kW and $10 000/kW, saying that “the possibility of cost escalation of at least 50% should be assumed”. It described the $5 000/kW that the department accepted as an “optimistic assumption” and said that in pursuing nuclear, the government was “putting all its eggs in one basket”, threatening energy security if the procurement failed.
The treasury report said that “whatever contracting model or financing structure is chosen, significant increases in tariffs will be impossible to avoid … steep upfront increases will be required”, suggesting that tariffs may well have had to increase before the first nuclear power station was complete.
Related article:
If tariffs were not to increase, said the treasury, the government would have to provide financing through tax increases and debt, which would have a negative impact on the economy. Lastly, it drew attention to additional “very large costs” that had yet to be considered, including upgrades to transmission infrastructure, skills development, interim and long-term waste disposal, plant decommissioning and insurance. Excluding all these additional costs, the treasury priced the procurement between R336 billion in a “best-case scenario” and R1.56 trillion in a “worst-case scenario”.
The treasury said that even if all the best-case assumptions were met, “there remain significant risks associated with an upfront fiscal commitment to a 9.6GW procurement which cannot be mitigated”. It called on the government to do more research before committing to the project and recommended that it do a “full feasibility study” and make it “available for public scrutiny”. The report also recommended that the Department of Planning, Monitoring and Evaluation undertake a “thorough social and economic impact assessment study of the project before the conclusion of any binding contractual commitments”.
Lastly, if the procurement of this nuclear generation capacity were to go ahead, the treasury strongly recommended that the government procure only 2.4GW as a provisional first step.
A nation’s finances
At the Cabinet meeting that included the presentation of the energy department’s recommendations and the treasury’s concerns – which resulted in former president Jacob Zuma firing then minister of finance Nhlanhla Nene – it was agreed that South Africa would procure 9.6GW of nuclear power generation. Taking its figures directly from the department’s presentation, the overall cost was estimated to be between R240 billion and R624 billion.
The Cabinet-meeting minutes say it was the government’s “intention” to keep costs between R240 billion and R624 billion. Quite how this “intention” was to be met in the real world is unknown. The minutes state under the subheading “Communications implications” that “the worst-case programme cost scenario should not be part of our communication strategy”.
The Cabinet’s decision to go ahead with the nuclear deal reveals deeply troubling issues with South Africa’s fragile democracy. It demonstrates how a determined, if not rogue, president with support from sycophantic ministers can not only ignore the advice of the treasury but can, through the president’s right to appoint ministers, exercise complete control over the nation’s finances.
That this was briefly possible illustrates how ineffective parliamentary oversight is in holding the executive to account. The limitations of Parliament are revealed when party discipline and loyalty – so-called democratic centralism – is prized above democratic and accountable decision-making.
Related article:
That Zuma’s nuclear deal was thwarted was ultimately not because of the actions of treasury officials such as Nene and then treasury director general Lungisa Fuzile, who openly opposed the deal, but because of the existence of vibrant civil organisations and an independent judiciary.
As we stare down the barrel of yet another nuclear drive – the government wants to add 2.5GW of nuclear power generation to South Africa’s energy mix – it is worth remembering the importance of such institutions. It is also worth remembering what the treasury had to say about the procurement of 2.4GW in 2015.
‘Significant’ risks
While it said that a limited procurement was preferable to 9.6GW, it stated that such an investment “would still add significantly to government debt and take new risks on to the public balance sheet, which could result in a sovereign downgrade, particularly if investors and rating agencies view guarantees as equivalent to debt”. It added that the financial risks associated with this smaller commitment were still “significant”.
Public debt has ballooned since 2015, rising to more than 80% of GDP today from 43% of GDP in 2015, and sovereign downgrades have become commonplace, forcing the government to turn to the International Monetary Fund for a financial bailout. So, the question must be asked: How does the government propose paying for its nuclear ambitions?
Related article:
The energy department did not provide an answer in its February “update” on the “nuclear new build” to the portfolio committee on mineral resources and energy in Parliament. It simply repeated that various funding options are available and failed to respond to questions from committee members as to how the state or Eskom could afford such procurement given the parlous financial state of both entities.
Neither was the answer provided by the nuclear power supporters, including the current energy department, that appeared before the National Energy Regulator of South Africa’s (Nersa) “concurrence hearings” on the procurement of the 2.5GW, also held in February. Instead, they hauled out the same old and tired arguments from 2015. In a rerun of the rush to procure in 2015, these arguments were countered by representatives from the government-funded Council for Scientific and Industrial Research, private think-tank Meridian Economics, the Energy Research Centre at the University of Cape Town and a host of other expert energy entities, all of which informed Nersa that South Africa should reject nuclear. We can only hope that someone in 2021 is prepared to listen to their overwhelming argument against nuclear.
There is a growing school of thought, however, that says this entire procurement exercise is nothing more than a performance by the department. Given its absurd cost at a time when South Africa and Eskom are effectively bankrupt, perhaps it is less about the procurement and more about the tenders that could be won in preparation for an eventuality that nobody really believes will occur.
This is a road down which we have travelled before. It emerged in 2016 that Shantan Reddy, a known associate of Zuma’s, had scored a R171 million contract to provide a “programme management system” for that nuclear build. And information surfaced last year about a contract relating to the current nuclear procurement when the auditor general drew attention to R8.5 million worth of irregular expenditure relating to an information technology tender for the nuclear new build programme.
Only time will show the real cost to South Africa of the government’s continued foolhardy insistence on pursuing its nuclear fantasies.
