Godongwana receives praise for energy incentives, but rising debt a concern

23rd February 2023 By: Schalk Burger - Creamer Media Senior Deputy Editor

Godongwana receives praise for energy incentives, but rising debt a concern

In response to the Budget speech delivered by Finance Minister Enoch Godongwana on February 22, a number of organisations have lauded the incentives that were announced to help businesses and households install renewable energy systems.

However, many also flagged rising debt, with government taking over R254-billion of State-owned Eskom’s debt to help it restructure, as well as uncertainty and volatility, as key risks.

North-West University Business School professor Raymond Parsons said the Budget speech was a pragmatic and credible response to a challenging set of global and domestic economic circumstances.

He added that South Africa’s public debt remains high and set to stabilise at 73.6% of gross domestic product (GDP) in the 2025/26 financial year. This is at a higher level than projected in the 2022 Medium-term Budget Policy Statement presented in October 2022.

Fiscal risks, therefore, still exist over the next few years, he noted.

The inevitable substantial debt-relief arrangement for Eskom must be implemented in a way that overcomes the causes of the current malaise and supports the rapid development of the power sector as a whole to meet the critical supply and environmental problems being faced, he emphasised.

Additionally, the National Treasury assumption of an average GDP growth rate of 1.4% over the next three years underpinning the budget strategy may be too optimistic, compared with the South African Reserve Bank (SARB) and other recent forecasts of about 0.7% over the same period, he said.

The tax incentives to business and households to install solar panelling are welcome, although the threshold for households appears to be quite conservative, he added.

“South Africa’s future growth prospects are now less dependent on fiscal policy than on the ability of the rest of the Cabinet to implement the economic and energy reforms needed to give South Africa much higher, job-rich growth,” Parsons stated.

Assurance, tax and transaction services firm EY Africa chief economist Angelika Goliger noted that there were no new tax increases, and relief for households and businesses across the board.

Better tax collection and improvements in tax buoyancy are anticipated to support a small increase in tax revenue going forward, she added.

However, debt is also increasing and the cause for the change in the debt outlook is Eskom, with the Treasury providing support of R254-billion over the next three years to fund the electricity producer’s debt and interest payments, she highlighted.

On the inflation front, Treasury sees inflation moderating at 5.3% in 2023, from 6.9% in 2022, but also lingering, averaging 4.7% over the medium term, above the SARB’s mid-point target of 4.5%.

“Despite any potential reprieve that could occur from global economic conditions, South Africa’s biggest economic challenge remains the electricity supply constraint, which shifted from a ceiling on the economy to a stranglehold over the past couple of months,” she said.

Meanwhile, business lobby Business Leadership South Africa (BLSA) had expected South Africa's fiscal trajectory to weaken given the Eskom debt transfer and, while South Africa's high debt level is a concern, BLSA believes this was necessary to help address the crippling effects of loadshedding.

Significantly, the conditions of the Eskom debt transfer are something the markets were watching closely, and the first condition was that Eskom was required to prioritise capital expenditure in transmission and distribution during the debt-relief period, it highlighted.

“BLSA believes this is a highly positive move towards increasing the country’s generation capacity because the lack of transmission capacity has resulted in fewer renewable energy plants than planned being approved in Bid Window 6 of the Renewable Energy Independent Power Producer Procurement Programme.”

Meanwhile, industry organisation Consulting Engineers South Africa (CESA) welcomed the planned infrastructure spending of R903-billion over the medium term, but emphasised the importance of implementation.

“Without proper implementation and oversight that is driven by a value-for-money ethos, none of these bold plans will come to fruition,” said CESA CEO Chris Campbell.

Additionally, CESA is pleased that the allocations to State-owned enterprises will be accompanied by strict conditions to ensure sustainability, accountability and transparency.

Meanwhile, agricultural industry organisation Agbiz was particularly encouraged by Godongwana's focus on Eskom's debt and the debt-relief arrangement, which will help Eskom to have the flexibility to prioritise capital expenditure in transmission and invest in the maintenance of the existing generation fleet to improve the availability of electricity.

Further, the implementation of the refund on the Road Accident Fund levy for diesel used in the manufacturing process, such as for generators from April 1, 2023, for two years, is a laudable intervention in an environment where agribusinesses and farmers face rising input costs and higher interest rates, the organisation said.

Additionally, industry organisation the Steel and Engineering Industries Federation of Southern Africa (Seifsa), meanwhile, said the Budget maintained fiscal prudency by achieving a primary surplus in an uncertain macroeconomic environment, without resorting to unsustainable borrowing and punitive tax proposals.

The metals and engineering sector's performance is driven by infrastructure spend, and the medium-term infrastructure spend is a highlight.

“However, we note with concern that National Treasury anticipates only tabling the Public Procurement Bill through the parliamentary process in March.

“In the continued absence of finalising this Bill, there is considerable uncertainty around procurement by State organs, and particularly around aspects of preference for local companies. Seifsa continues to call for an urgent and accelerated finalisation of the Public Procurement Bill to limit the opportunity being lost to domestic industrialisation,” it emphasised.

Meanwhile, tax and advisory services firm PwC South Africa highlighted the R9-billion of incentives for businesses and households to invest in renewable energy, including solar power generation.

However, the 25% rebate for households on the cost of solar photovoltaic is only available for panels, which are mostly imported, and not on inverters or batteries, some of which are manufactured locally, it pointed out.

“This is likely aimed at encouraging solar power generation for feeding into the national grid instead of being exclusively used for household consumption via battery storage,” said PwC South Africa chief economist and environmental, social and governance Africa lead Lullu Krugel.

Additionally, with the right regulations in place, the ideal scenario would be for municipalities to buy electricity from different suppliers in a competitive market at competitive prices, allowing resale at a surplus and transmission to households and businesses at a lower cost to consumers.

These suppliers include, for example, households and businesses with installed surplus solar generation capacity.

“There is a need to create an enabling regulatory environment for the deployment of renewable energy at a larger scale. The key regulatory measures are promulgation of the Electricity Regulation Amendment Bill and clarity on municipal energy procurement,” PwC South Africa said.

Meanwhile, renewable energy tax deduction investment fund Twelve B Green Energy Fund said the increase in the Tax Act Section 12B tax allowance from 100% to 125% means businesses will definitely look to invest in solar, which will assist with the energy crisis and give the fund's investors an increased return from 14% to 18% for a moderate risk investment.

The allowance for homeowners for up to 25% of the value of solar kits to a maximum of R15 000 means homeowners can invest up to R60 000 in a solar kit to get the maximum tax benefit of R15 000.

“These incentives bode well for South Africa, for the Twelve B Green Energy Fund and the acquisition of renewable energy,” said Twelve B Green Energy Fund founder Jeff Miller.

Industry organisation the South African Photovoltaic Industry Association (SAPVIA) said the incentive allowances for household solar panels are limited and do not address those households that can't access instruments for the purchase of solar systems.

A solar system of R60 000, or 6 kW to 7 kW, will not make a meaningful impact for the average household without storage.

“We also need more clarity as the rebate seems to incentivise higher tax rate paying people,” said SAPVIA CEO Dr Rethabile Melamu.