US to abstain from Eskom World Bank loan vote - Hogan

12th March 2010 By: Terence Creamer - Creamer Media Editor

The US government has reportedly indicated to the South African government that it would abstain from the Eskom World Bank loan vote in early April, Public Enterprises Minister Barbara Hogan said on Friday - the vote was expected to take place on either April 7 or April 8, 2010.

The US had initially objected to the $3,75-billion finance package, owing to the fact that some of the capital would go to the R120-billion Medupi coal-fired power station, which, it said, could conflict with the World Bank's climate-change policy guidelines.

The decision to abstain appeared to open the way for the loan, while demonstrating the perceived responsiveness of the US to South African, international and US environmental pressure groups, which oppose the loan.

Further, the US government's neutrality was also perceived as important to relieving pressure from the powerful fossil-fuel lobby, which is uneasy with the prospect of the imposition of a cap-and-trade policy at home, while the US was still willing to support the financing of coal projects, through the World Bank, abroad.

UNDER PRESSURE

"The Americans are under more pressure [from lobby groups], but they have indicated to us that they won't vote against, but that they will abstain from voting," Hogan said.

In a statement released by the US Mission to South Africa on Friday it was indicated that the US Treasury was leading a review of the Eskom proposal currently before the World Bank. It said that a position consistent with administration policy, and with the facts surrounding the project, would be developed.

"The US government has heard from several civil society groups, in both South Africa and Washington, who have raised concerns about this project, as well as from Eskom and South African government representatives who have argued its merits," the mission said in a statement.

It also noted that the Eskom loan proposal would go before the World Bank's board of executive directors, where the US was one of 24 members.

South Africa has consistently said that the loan is essential for closing the remaining funding gaps on the 4 800-MW project, which is being built in Limpopo province.

In fact, Energy Minister Dipuo Peters, who hosted a joint media briefing with Hogan on Friday, stressed that the South African supply/demand situation "requires that a base-load power station be commissioned by 2013".

"This will be done in order to avoid black-outs and the consequent negative economic impact," Peters averred.

The South African government has also argued that the loan is in line with agreements reached in Copenhagen, Denmark, in December, where it was acknowledged that developing countries had the right to continue with coal-fired projects while seeking to transition to longer-term low-carbon growth paths.

Some $3,5-billion of the loan package would be directed towards the financing of Medupi, with $260-million earmarked for a 100-MW wind farm and a 50-MW concentrated solar power project. A further $485-million would be directed towards support for energy efficiency and low-carbon projects, such as moving coal transport from road to rail, improving power plant efficiency and stimulating the introduction of energy-efficiency technologies within South African industry.

South Africa was "determined" to secure the loan and was "optimistic" of a favourable outcome, with Hogan indicating that the UK government was unlikely to oppose the package, while France had indicated its support of the loan.

World Bank officials had also reportedly been "impressed" by the application, with one senior official having indicated to Hogan in a recent telephonic conversation that the bank was highly supportive of the application.

In fact, World Bank vice-president for Africa Obiageli Ezekwesili was quoted recently as saying that South Africa's urgent need for an energy infusion made the Medupi project necessary, while noting that the South African government had committed to a long-term plan to move toward more investments in renewable sources of energy.

"There is no viable alternative to safeguard South Africa's energy security at this particular time," Ezekwesili said. South Africa's Eskom, he said, provided 95% of the country's power but also 45% of Africa's needs.

FAILURE NOT AN OPTION

Hogan stated that a failure to secure the loan would have devastating consequences for Eskom's build programme and for South Africa's already tight electricity supply/demand balance.

"If there is a vote against, it will be the most unfortunate thing that has probably happened to this country in terms of its economy and in terms of developmental needs.

"We can't stress how important it is that we all stand together and actually support this initiative, because this isn't just playing around with little ideas about having nice clean energy, it's really about gearing this country for moving forward," Hogan argued.

Failure to secure the loan would push up the cost of the Medupi project, as Eskom would have to resort to further fundraising on commercial terms. The World Bank loan, by contrast, was said to contain very favourable terms for Eskom.

Hogan also noted that Eskom would probably need to raise R150-billion over the next three years to finance its R460-billion-plus new build programme, with this capital having to be secured from a combination of domestic, foreign and development-finance debt.

The balance would have to be covered by the average 25%-a-year tariff increases to be implemented between 2010 and 2013, with government having indicated that it could not provide further injections beyond the already approved R60-billion subordinated loan and the R176-billion in guarantees.

ALIGNED WITH CLIMATE PLANS

Meanwhile, Hogan and Peters said that the Medupi and Kusile coal-fired power stations were "completely" factored into South Africa's long-term aspirations to begin reducing its relative carbon emissions.

The Ministers pointed out that opposition to the loan was based on incorrect assumptions about the loan, and its conditions, as well as the country's climate mitigation commitments.

The coal investments were aligned to South Africa's aspiration to peak its carbon emissions between 2020 and 2025 and begin reducing these by 2035.

Peters, meanwhile, indicated that South Africa's future energy mix would lean more heavily on renewables, as well as base-load nuclear power.

On the conditions that could be attached to the finance package, Hogan stressed that these were project specific and would not lead to the imposition of macroeconomic structural adjustment-type constraints.

For instance, the World Bank would have to be informed should Eskom's corporate structure be changed and would probably insist on further air-pollution and carbon-capture safeguards being factored into the eventual plant design.