WASTE ESCALATOR

The Grand Inga Dam Project poses fiscal risks similar to the controversial arms deal

By Anneline R Turpin 13 December 2019
Caption
Inga-1 Hydroelectric Dam (Wikimedia Commons)

Before the South African taxpayer can underwrite any aspect of the development of the Grand Inga Dam Project, Parliament must ensure that a transparent and participatory process is undertaken to interrogate its feasibility and to ensure that any budget allocation to the project is constitutionally compliant.

Civil society has not forgotten the lessons of the arms deal and its cost is still being felt by our society to this day. The Select Committee on Public Accounts (SCOPA) in its October 2000 report reviewing the Strategic Arms Purchases concluded that when Cabinet entered into the arms procurement contract, it had not fully taken into account all the implicated costs of the contract. The contract was initially supposed to cost an amount of R30.3-billion, but this had escalated to R43.8-billion a year after it was entered into. Importantly, SCOPA expressed doubts as to the suggested positive economic benefits of entry into this contract and suggested that the estimated benefits were not properly verified before being accepted.

In 2019, civil society organisations Womin African Alliance (Womin) and International Rivers referred to this SCOPA report when challenging South Africa’s intention to act as the anchor off-taker for the Grand Inga Dam Hydroelectric Power Project (The Grand Inga Dam Project), which would see South Africa, through Eskom, be the first to commit to financing the project.

In 2013, South Africa and the Democratic Republic of Congo (DRC) entered into a treaty committing South Africa to obtaining 2,500MW of energy from the Inga Dam, in the form of hydropower. The Memorandum of Understanding (MOU) that was signed in November 2011, indicates that the DRC had invited South Africa to consider its participation in the development, with the expectation that Eskom and SNEL (the DRC national electricity company), would be the primary participants in the project and entitled to a portion of the output from the project pursuant to power purchase agreements, and if so agreed, with additional power output being sold to other parties.

In terms of the responsibilities of the parties under the MOU, South Africa would undertake to facilitate the mobilisation of financial resources for the Inga Dam from its financial institutions or third parties, and take reasonable measures to procure 2500MW of electricity at a tariff that will cover at least all costs, the return and fees as may be imposed by the DRC. The 2019 Integrated Resource Plan commits South Africa to this project, recognising that there is a need to finalise the technical solution for the evacuation of this power from the Inga Dam across the transit countries of DRC, Zambia, Zimbabwe and/or Botswana into South Africa.

It is certain that electricity transmitted over such a long distance will sustain transmission losses and the amount arriving in South Africa will be less than what was generated at the source. At the time of the publishing of the IRP, the necessary transmission lines and border-related agreements had not yet been concluded, with the costs estimated at an amount of US$4-billion, which South Africa will be responsible for.

Concerned by the potential fiscal risks that this project poses for our highly indebted country, Womin and International Rivers, assisted by the Legal Resources Centre, made a joint submission to the standing and select committees on finance as well as appropriations regarding proposed energy infrastructure investments in the medium-term budget policy statement 2019. The focus of the submission was that specific cost allocations towards the Inga Dam were not clear despite government’s ratification of the treaty coupled with the 2019 IRP commitment to the project.

On 19 November 2019, the Department of Minerals and Energy in response to the joint submission informed the Portfolio Committee on Minerals and Energy that South Africa does not carry any project development risks, but only acts as buyer, if the power is supplied. The department indicated that the feasibility study and social impact assessment are for the DRC to undertake.

This view was strongly challenged by the two civil organisations in further submissions to the appropriations committee made on 29 November 2019, by Rudo Sanyanga (International Rivers) and Trusha Reddy (Womin). They reminded Parliament of its constitutional duty to ensure transparent and cost-effective budgeting and appropriations and submitted that Parliamentary and Treasury oversight of the review of the DRC feasibility study is necessary given that its acceptability is key to South Africa fulfilling its financial obligations in terms of the Inga Dam Treaty.

South Africa’s duty to finance the project flows from acceptance of the feasibility study. Without a rigorous and comprehensive feasibility assessment, South Africa’s bargaining power regarding the financing arrangement and tariffs could be adversely affected.

It was argued that feasibility should also include an assessment of the financial viability of Eskom given that the MOU expects that Eskom will be a primary participant in the project. Similarly, the mobilisation of financial resources after feasibility has been assessed and needs to be overseen by Parliament and the Treasury in order to ensure compliance with the constitutional duty of Parliament to promote transparent and efficient public expenditure.

The failure to undertake these functions could result in South Africa being “locked” into a tariff for electricity over which it has very little control, being based on costs incurred by the DRC in the building of the project. South Africa cannot mala fide refuse to agree to a tariff, the basis of which it has agreed to in an international treaty, nor refuse to purchase the electricity, if it has not exercised due diligence in terms of its treaty obligations.

Womin and International Rivers also submitted that the project does indeed pose a risk to South Africa’s fiscus. For a start, the undertaking that Eskom will enter into power purchase agreements to procure energy from the project is a concern as this creates potential contingent liability for the state. Eskom’s budgets do not get tabled in the Estimates of National Expenditure as it is a state-owned entity and not a national department.

South Africa’s energy security and generation is vulnerable with Eskom’s current debt being over R450-billion. Yet despite escalating debt, continuous load shedding and government’s bailout in the sum of R26-billion in 2019 and R33-billion in 2020, it is not clear how Eskom and South Africa will raise the necessary financing or absorb the risks of importing power from the DRC.

The gravest concern is that South Africa has committed to this project without having undertaken an independent South African project appraisal and risk assessment. In terms of the treaty, the DRC undertook to conduct a feasibility study, which is “a report regarding the technical, financial, legal and regulatory aspects of the project to facilitate decision-making regarding the optimal options to be undertaken by the development”.

At this stage, the feasibility study has not been made available in the public domain despite request, nor has the public been told whether government has agreed to the DRC’s feasibility study as being acceptable.

Before the South African taxpayer can underwrite any aspect of the development of the Grand Inga Dam Project, Parliament must ensure that a transparent and participatory process is undertaken in order to interrogate such feasibility and to ensure that any budget allocation to the project is constitutionally compliant.

The Inga Dam also carries significant other associated risks such as project delays, cost overruns, political instability, maintenance of transmission lines located in some countries that are vulnerable to rebel groups, violence and conflict. All of these risks would need to be assessed by South Africa in determining if its involvement in this development is in our best interest.

At the appropriation committee meeting, civil society organisations once again urged the committee to stop funding this project until Eskom is financially sustainable. The appropriation committee, in response, stated that “A follow up is needed and we cannot gloss over the Grand Inga issue, it must be taken further …”

While celebrating this response, the two organisations hope to continually remind Parliament of the lessons of the arms deal and the need for South Africans to be informed before we commit to such a large and expensive project. Parliament has a constitutional obligation to not only scrutinise and oversee executive action, but to also ensure that the proposed financial budgets are diligently examined with due regard to the national interest.

Notwithstanding the findings of SCOPA regarding the arms deal, wasteful expenditure has continued to be poured into mega projects such as the Medupi and Kusile power stations, before feasibility was demonstrated. As far back as 2016, cost overruns for these two power stations were already being estimated at over 25%.

Notwithstanding their vast cost, there are concerns being expressed that the continued underperformance of the Medupi and Kusile power stations will exacerbate the country’s load shedding risk. Parliament needs to keep a continued watch on the Grand Inga Dam Project and South Africa’s involvement going forward, and to ensure that Eskom’s financial sustainability and the project’s feasibility is a pre-condition to going any further with the project to ensure that history does not repeat itself.

The Grand Inga Dam Project is not expected to come online before 2030. Eleven years is too long of a wait for electricity, and now is the time for the Department of Minerals and Energy to seriously heed calls for local investment in solar and wind-powered energy projects, rather than committing to yet another megaproject with the potential to undermine our fiscal and energy security. DM

Anneline R Turpin is an attorney at the Legal Resources Centre.

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