PETER ATTARD MONTALTO: Where action is at odds with rhetoric

Posted in: Economics, i-Blog, Politics, SOEs, South Africa on October 7, 2019

This column was first published in Business Day

Some deep questions are raised by the ANC’s national executive committee statement last week and rotate on the difference between rhetoric and action and the link between the two.

The statement was a rhetoric victory for the reformist forces on the committee with its focus on the microeconomic reforms required, rather than the macroeconomic bulldozering the left would want. True, large parts were already contained in budget speeches but the language around energy was welcome and actually new.

This raised the question — given the huge hold the coal and developmental state lobbies have in parts of the ANC — of whether the committee members knew what they were agreeing to. Or is the statement separate from the discussions and so not reflective? It seems likely that the need to show face to ratings agencies and business allowed all sides to keep disagreements on lockdown.

The messy mix of ideology and vested interests around WOAN that are delaying the huge investment potential by the major telecoms firms is being watched by a broader section of investors and business than just this sector.

Hence, business and ratings agencies will remain sceptical of the post-national executive committee rhetoric until action is seen.

When it comes to action, we need to think about the effect rhetoric has on how implementation occurs.

This can be seen in different ways, with spectrum and renewable independent power producer price purchase agreements contract renegotiation attempts.

With spectrum there is a continual disappointment in the pushing out of likely spectrum auction dates. Yet the rhetoric from the government is totally at odds with this and remains upbeat. There seems to be a desire to promote the idea that a policy path that leads to auctions has been published, yet this is not the case.

A wireless open area network (WOAN) policy framework has been published, but this is open to contestation as well as a lengthy public consultation. Expected dates for spectrum auctions for the large telecoms companies have moved well into the first half of 2021.

The messy mix of ideology and vested interests around WOAN that are delaying the huge investment potential by the major telecoms firms is being watched by a broader section of investors and business than just this sector.

It is an example of where, despite a notional path being laid out, it is unnecessarily long and rhetoric won’t be able to be maintained for such a long period and can actually damage sentiment.

The issue of independent power producer price purchase agreements is more toxic but equally a messy mix.

There are a variety of political considerations. There is a broad political consensus that independent power producers are “screwing” Eskom, which leads to demands for action. Some political actors know the savings will be small but need to save face against vested interests; others want to pummel the independent power producers for ideological reasons.

Eskom has perpetuated the myth, now taken up by the government, that renewable independent power producers made up about 22% of energy costs in SA in the financial year to March yet produced only 4.8% of the electricity.

This is untrue and rests on the odd way Eskom shows its accounts.

It ignores all the rest of Eskom’s costs for debt service, its wage bill and depreciation; these amounted to R30bn, R33bn and R30bn respectively for the last fiscal year. This compares to a cost of R22bn for renewable independent power producers to Eskom. Non-independent power producer primary energy costs (primarily coal) were R77bn in the last fiscal year.

The associated myth is that this independent power producer cost is a drain on Eskom. With the right demand forecasting there is a total pass-through of independent power producer costs to the consumer. Forecast errors may only make a R1bn or R2bn difference which can be recovered the following year from the tariff.

We can see the folly of trying to renegotiate price purchase agreements — it will generate no savings at all for Eskom because it will be passed straight through via a reduction in tariff revenues. Given the small share of total costs within the tariff, it will generate only a cent or two per kilowatt hour savings for the consumer. This is hardly going to rescue the economy as the exercise is positioned. By contrast, cutting Eskom’s wage bill would.

Add to this the faff of renegotiating individual contracts which all sit on different project and funding structures, with the downside of locking in costly independent power producers for longer rather than averaging them out by procuring cheaper new rounds of renewables.

All this leads to a lack of decent benefit/cost trade-off analysis and an attempt to social compact with a group of investors that simply cannot socially compact in any meaningful way. This will be equally as true with disparate coal interests where pricing lowering is also being attempted. As such, the tone of the debate damages sentiment.

All this is happening at the same time as the integrated resource plan is due. This will be a real test of the credibility of a least-cost generation mix promoted in the national executive committee statement. Indeed, assuming the plan is unchanged from the March draft, it will be dead on arrival and require an update straight away.

Last week showed how victories can occur, but maintaining rhetorical momentum is going to be hard without action to back it up or where action is at odds with the rhetoric.

• Attard Montalto is head of Capital Markets Research at Intellidex.

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