There's been a lot of media coverage of the pending World Bank loan of US$3,75-billion for Eskom. According to analysts, it is unlikely that the loan will not be granted. But who is the World Bank, how does it make its decisions, and what are the stakes?... (more) In its MYPD2 application of 30 November 2009 for electricity price increases of 35% per annum for the next three years, Eskom indicated that its new-build capital expansion programme (estimated at some R400-billion over the next five years) would be funded through: a R60-billion subordinated government loan (quasi-equity); plus debt leveraged off government guarantees of R176-billion; plus its own capital reserves; plus private equity funding of R20- to R40-billion resulting from the sale of a 30% to 49% stake in Kusile power station; leaving further additional borrowings of R8,5-billion and cash shortfalls of R14-billion in the 2011/12 and R7,9-billion in the 2012/13 financial years still to be plugged.
Many may have assumed that the $3,75-billion (R27-billion) World Bank loan was to meet the R8,5-billion additional borrowing and R14-billion and R7,9-billion cash shortfalls detailed in Eskom's MYPD2 application. However it has been established that in the Eskom's MYPD2 application, the World Bank loan had been already factored into the funding in hand, with the cash and addition borrowing shortfalls being additional funding requirements still to be raised i.e. in addition to the $3,75-billion (R27-billion)World Bank loan.
Since then, activists lobbying in the US and UK have opposed the Eskom loan application on environmental grounds. The US has recently indicated that it will abstain from voting for approval of the loan when it is presented to the World Bank board, while the UK has reserved its position for the time being. Although the department of Public Enterprises has indicated that it is confident the loan will be approved, the outcome is only expected in the first week of April 2010, and the minister of Public Enterprises, Barbara Hogan has been quoted as saying that if Eskom does not secure the World Bank loan, the implications for the South African economy are dire (Business Day, 12 March 2010).
The World Bank is owned by 186 member governments. Each member government is a shareholder of the bank, and the number of shares a country has is based roughly on the size of its economy.This "one-dollar-one-vote" structure affords richer countries greater power in decision-making processes at the bank than poor, borrowing countries.
The US is the largest single shareholder (16,41%), followed by Japan (7,87%), Germany (4,49%), the UK (4,31%) and France (4,31%). The remaining shares are divided among the other member countries.All developing country borrowers combined have 39% of the shares.The 47 sub-Saharan African nations command less than 6% of the shares.
Executive directors oversee the day-to-day operations of the World Bank, approving all lending operations, policies and strategies, institutional budgets and audits. They also hold discussions on operations, evaluations, development trends and strategic directions for the bank. The executive directors also formally appoint (although the US government selects and nominates) the president of the World Bank, who serves as chair of the board of directors.
The board of directors is made up of 24 executive directors, representing all member countries of the World Bank. The five largest shareholders (US, Germany, France, Japan, and the UK) are entitled to appoint their own representatives. Three "single constituency" board chairs also have their own seat, namely China, Russia and Saudi Arabia. Sixteen board chairs are divided among the remaining member governments. All 47 sub-Saharan Africa countries are represented by just two executive directors.
The board operates largely behind closed doors, without public access to its deliberations or details aboutits decisions.Full board meetings are held at least twicea week to approve all World Bank financing and to monitor the bank's day-to-day work. Smaller board committees meet almost daily.
Eskom has indicated that in order to meet the World Bank's environmental requirements to obtain World Bank funding, flue-gas desulphurisation (FGD) plant that had not initially been included for Medupi power station would be required. It has previously been reported (Energize, December 2009, page 8) that this will increase the current R125-billion price tag of Medupi to R142-billion, and the FGD plant would be installed around 2018, after commissioning of all six generator units.
It is thus clear that the current funding shortfall for Eskom's new build programme (Medupi, Kusile and Ingula) will only partially be met by the World Bank loan, and one must not lose sight of what funding is still to be secured, namely: the $3,75-billion (R27-billion) World Bank loan itself; the R8,5-billion additional borrowings required as per MYPD2; the cash shortfalls of R14-billion and R7,9-billion as per MYPD2; a price increase of some R17-billion for Medupi in coming years; and R20- to R40-billion private equity funding for Kusile.
This gives a total current funding shortfall of R94- to R114-billion!
And this excludes any further capital funding shortfall that may result from the February 2010 electricity price determination by the National Energy Regulator (NERSA), which only granted Eskom a 25% per annum electricity price increase for 3 years, rather than the 35% per annum increase that Eskom had applied for.
One may therefore begin to understand the reason why the DPE and Eskom are so desperate to secure the World Bank loan. In the current economic climate, and with Eskom's downgraded and likely future credit ratings, other independent commercially assessed loans are not only going to be difficult to secure, but they will also be significantly more expensive to service, not to mention the exchange rate risk of foreign debt.
But for Minister Barbara Hogan to refer to the possibility of failure to secure the World Bank loan as "the most unfortunate thing that could happen to this country in terms of its economy and in terms of developmental needs" (Fin24, 12 March 2010), raises even more concerns on the financial management of Eskom. Should the failure by a major, well managed, state-owned enterprise to secure a low-interest loan from just one funding source, needed to meet just a part of the total funding shortfall, precipitate some kind of national economic crisis? This seems to be acknowledging that other funding sources are not available to Eskom, or that alternative or backup funding plans are not in place, and that the World Bank is seen as the source of some kind of soft loan for a desperate and underdeveloped country. Is this really what Eskom and South Africa has come to?
Energy analyst Marc Goldstein of Frost & Sullivan comments as follows:
"The South African government has made it abundantly clear that it cannot fund any further portion of the new build programmes over and above the R60-billion subordinated loan it has already committed and its various other loan guarantees. This has left Eskom with little choice other than to approach the World Bank for access to affordable funding.
"Looking forward however, the South African government may have to commit the entire R60-billion in a shorter period then the R12-billion over five years that had originally been anticipated. There is still a significant funding shortfall for the Medupi plant, which end-user tariff increases will only partly cover in the short term.
"The government has also recently reported that the next base-load power plant to be built will be a nuclear plant. Capital development costs for nuclear plants have historically been significantly higher than coal-fired plants. Given that government wishes to build 20 000 MW of nuclear plant over the period to 2030, it is unclear how they propose to fund these projects. One possibility would be the introduction of IPPs into the nuclear space in the form of a Build-Own-Operate-Transfer model. The global nuclear renaissance is well under way and South Africa will need to address these issues in the IRP2 if it doesn't want to miss an important opportunity".
But still without a coherent national energy policy and a properly developed 20-year national energy integrated resource plan (IRP) in place, it is hard to see how a meaningful funding plan can be put in place to address the pressing energy issues confronting South Africa.
To comment and respond to this article, and/or to any of the views and positions expressed, visit EE Publishers' blog: "The best from EE Publishers...", click on the title of the article of interest, and respond.
