Why SA procurement regulations spell a death sentence for Eskom generation in a liberalised electricity market
By Hügo Krüger and Sdumo Hlope
While the South African government maintains an official position that the unbundling of Eskom into three entities, transmission, distribution, and generation, won’t lead to privatisation, the assertion that the move is “reckless” and would result in Eskom’s eventual death spiral could prove to be valid.
In the current regulatory environment that Schedule 2 state-owned enterprises (SOEs) like Eskom are compelled to operate under, there is no possibility in the world that Eskom Generation state-owned company would be able to sell electricity through the National Transmission Company and still be competitive against independent “subcontracting” power producers (IPPs).
Eskom Generation will, under an unbundled framework and with the burden of all the red tape, without a shadow of doubt, be the most expensive producer of electricity in South Africa. The policies that hamstring Eskom are a consequence of the strict transformation agenda, mandatory localisation laws and the Preferential Procurement Policy Framework Act (PPPFA), as well as the so called “Treasury Instructions”.
Contrary to public misperception, an SOE does not operate like an ordinary company. One simply cannot pick up the phone and call the best-suited company to solve the problem at hand, as doing so would “exclude potential new players in the market”, because the SOE is forced to acquire services through a competitive bidding process.
Ignoring competitive bidding even for an emergency task would automatically be classified as fruitless and wasteful, or irregular expenditure as per the regulations. In contrast with the private sector, where there is more discretion, it sometimes does not matter to pay a small premium to get operations up and running fast, because any downtime is deemed wasteful expenditure that affects the private company’s bottom line.
Government regulations do not allow such business thinking and current procurement policies do not factor in the important consideration of opportunity cost into the strategies.
With the current procurement systems imposed on SOEs, even a straightforward task such as securing a contractor for emergency repairs can extend to weeks instead of hours, as is the case for private power producers. Despite being labelled an “emergency”, the process is not expedited according to the scope of “emergency” regulations.
As outlined in Treasury Note 3 of 2016/17, emergency procurement is only limited to situations where there is a serious and unexpected threat to health, life, property, or the environment, necessitating immediate action and lacking sufficient time for competitive bids.
An operational emergency, such as a critical component failure in a power station, does not trigger emergency procurement under the current framework, and any acquisition of components or subcontractors to address the issue must undergo a competitive bidding process.
Incidentally, the issue of “emergency” procurement came up in early 2021 when Eskom’s former CEO André de Ruyter requested the South African Treasury to amend the regulations and allow Eskom to use original equipment manufacturers (OEMs) instead of the politically connected black economic empowerment (BEE) middlemen.
They amended the regulation and introduced Instructions 3 of 2021/22, which outlines the concept of “urgent procurement”. Urgent cases involve critical early delivery where inviting competitive bids is either impossible or impractical, not due to improper planning. While it may seem like a reprieve from Treasury, even this approach comes with specific conditions and therefore an admin burden, because urgent procurement must:
– clearly define in its procurement policy cases in which urgent procurement may be invoked
– the process to be followed in identifying suppliers for urgent procurement
– draw up plans to curtail such procurement
– carry out an assessment of all instances that give rise to such procurement.
Therefore, even a task such as straightforward as an urgent procurement will necessitate administrative activities and increase procurement costs, especially as per the regulations the auditor-general must conduct an audit of these cases.
As the upcoming articles in this series will demonstrate, Eskom is being hindered by a set of impractical policies and regulations such as the above-mentioned emergency and urgent procurement regulations as per Treasury Note 3.
Reforming these policies is in our view one of the prerequisites for unbundling Eskom; otherwise, South Africa may end up with a compromised electricity system, leading to either the de facto demise of Eskom Generation or a South African led government effort to wield control over electricity supply as the privatisation process commences.
Amid growing political pressure from unions in the Mpumalanga region, we anticipate that the South African government might deviate from the path of unbundling by leveraging the influence it still holds over the institutions under its control.
The government could still obstruct the process through the selective application of tenders or licensing laws via the Department of Mineral Resources and Energy (DMRE) or by asserting political pressure on the the National Electricity Regulator of South Africa (Nersa).
In the scenario of backtracking on the commitment to unbundling, Eskom Generation retains a de facto monopoly over South Africa’s electricity supply, resulting in a more rapid decline in energy availability, an increase in the price of electricity, and a surge in fuel poverty among South Africa’s most vulnerable communities.
*This is Part 1 of an upcoming articles in a series.
Hügo Krüger is a YouTube podcaster, writer and civil nuclear engineer who has worked on a variety of energy-related infrastructure projects, ranging from Nuclear Power, LNG and Renewable Technologies. He holds BEng Civil Engineering, MSc Nuclear Civil Engineering.
Sdumo Hlope is an Electronic Engineer and the CEO of the Economic Intervention Forum of South Africa. He holds a BSc (Physics and Chemistry) and a Master’s in Engineering Management.
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