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Apr 17, 2009

Eskom's capex programme to peak at R104bn in 2010/11

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South African power utility Eskom would spend about R87-billion during 2009/10 and expects its capital spending to peak at nearly R104-billion in 2010/11, before retreating to around R84-billion in 2011/12.

Therefore, CEO Jacob Maroga argued recently that its build programme was effectively a ready-made stimulus package, which could help South Africa in militating against the worst effects of the global economic crisis.

In dollar terms, its programme to build two new coal-fired power stations, as well as a pumped-storage peaking plant in the Drakensberg, is worth $23-billion - only $2-billion short of what China spent on the giant Three Gorges Dam project, which was currently ramping up its hydroelectric capacity.

The three projects, Medupi, Kusile and Ingula, would not only add nearly 11 000-MW of generation capacity, but would also stimulate investment into related transport, mining and transmission infrastructure. Further, it would support the development of new communities as well as social facilities such as houses, hospitals and schools.

But speaking at the Gordon Institute of Business Science earlier this month, Maroga indicated that this expenditure programme would place strain on the company's financial ratios

Therefore, he hinted to the possibility that it might have to approach government for yet more support beyond the R60-billion subordinated loan and the R176-billion in guarantees already extended to help it finance its R385-billion, five-year capital programme.

"Government has given us a guarantee . . . but we may require more," he said.

He added that part of the reason for the delay in its formal tariff application, lay in its desire to present not only a request for a price adjustment, but also an integrated funding blueprint.

The delay in approaching the National Energy Regulator of South Africa (Nersa) was also a consequence of the "fundamentally" changed environment for infrastructure funding, in light of the economic meltdown.

Maroga that the application would be informed by an "integrated funding model" that ensured a sustainable business for both current operations and the build programme.

However, given the substantial delay in Eskom's submission, which was initially expected late last year, the tariff adjustment would also be delayed.

There was already concern about the prospect of a material spike beyond the nominal increase granted, should Nersa allow Eskom to recover the full increase in the remaining months once the determination is finally made.

Maroga also did not comment on whether the tariff request would be confined to covering rising operational costs as has been suggested, conceding only that these cost had increased considerably.

Short-term coal contracts, which were entered into last year to replenish depleted stockpiles, were the major contributors to surging costs. But Maroga said that maintenance; employee and other running costs had also escalated over the year.

He reported that the group had spent a record R46-billion on capital projects during its 2008/9 financial year, which ended on March 31.

Should the utility refrain from seeking to secure additional funding for its build programme from the consumer, the prospect of it turning to government for more support would certainly increase.

Resorting to either the consumer or the taxpayer for the additional capital was likely to lead to significant opposition either way.

South Africa's largest labour federation, the Congress of South African Trade Unions (Cosatu), had already stated that it would strongly oppose even an increase that was in line with Nersa's previously indicated price path of between 20% and 25%.

In fact, Cosatu warned that it would again call for a national protest action by its members if Nersa allowed an "excessive" increase.

Edited by: Martin Zhuwakinyu
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