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18 June 2008

Minister Alec Erwin: I think we've given out copies. The focus of the speech for the National Council of Provinces (NCOP) is a little bit more on some of the issues that affect the SOEs (State-Owned Enterprises), that impact a bit more on the provinces. So we haven't focused as much as we did in the NA (National Assembly) address on the overall propositions about governance etcetera for the state owned enterprises. We could have probably said a great deal more about the port build program, some of the rail programmes and other matters that would impact on the provinces. But the purpose of the speech was really to try and highlight some of those areas. Probably one of the biggest projects as you can see there is what's happening in Modupe in Limpopo province, Lepalale, where some very interesting developments are taking place, particularly what we find important and quite exciting is the work that's being done to work with the Further Education and Training (FET) College in the area to improve the training programmes for local people.

I think this is going to be an important pilot for a lot of the big bill programmes that will start taking place with the next big one being Bravo, the Ngula project in the Drakensberg, so you have significant projects occurring which we can through this kind of close working relationship with local further education and training colleges even universities I think make an impact on the skill base in the local community. The other fairly large project that we touch on there is the new multi product pipeline project, linking the oil terminal and the refineries in Durban on the coast to the hinterland into the Gauteng area. This is for us an important project, it's in order to ensure that we can move petroleum products to the much larger hinterland markets. That project is now moving. There too we are doing a lot of work in Transnet to try and improve the labour absorption capacity of that project, using labour based construction methods as far as it's possible.

With AlexCorp impacting on the Richtersveld area of the Northern Cape, a very complex settlement is starting to be implemented. Already some of the agricultural assets have been transferred across to the community, giving that community an economic base for the first time of some significance, and we're in the process of implementing the mining joint venture, and the complex processes of ensuring the transfer of the mineral rights to the community. In addition there's work being done to create a new township in Alexander Bay, within that township too the community will have significant residential assets and… in the area. So this too I think will have an important impact on the region, and we hope that we'll develop a successful economic base in that area for that very deserving community. One other company I'll touch on very quickly of course is South African Forestry Company Limited (SAFCOL).

You're aware that we did a review of the overall disposal process and took a decision that we should proceed with the disposal of the Komatiland Forests assets. Now these are mainly located in the eastern escarpment, in Limpopo and Mpumalanga provinces, some small pockets in KwaZulu-Natal. We were proceeding on that but we've had to stand back and deal with the complexity of the land claims on that area. This is an important asset both for the country in terms of saw logs, but also an important asset in that area. And it's very clear that we would have to now work very closely with the Department of Water Affairs and Land Affairs to deal with the complex land claims on that. It would be very difficult to process the transaction until we get some grain of certainty on that… on the land claims situation.

Finally I do mention very briefly the decision taken earlier today by NERSA (National Energy Regulator of South Africa) on the electricity tariff increase, as we've also… will issue a statement by government welcoming the decision. It gives us greater certainty. It also incorporates the smoothing proposal that the energy summit looked at. It deals with keeping the increase for poor households to the previous levels, and it makes some quite important propositions about how we go forward in the future. So we welcome the decision. It will require further work but this is work within government between public enterprise, Eskom and the treasury to draw down on the equity injection that the Minister of Finance announced in his budget speech. So all in all we believe that NERSA have in a very difficult situation done a good job in applying their mind to this. In will in order to, as they themselves indicate very clearly, to maintain the strength of Eskom's balance sheet which is crucial for our build program, it will require that we draw down the shareholder support facility that was agreed upon. Let me stop there and deal with… I'm sure there're probably one or two questions.

Journalist: Minister, I'm afraid I don't have a copy of the speech before me. You indicated that the government was fairly happy with the NERSA increase. What implications on government assistance… what implications would the increase which is far below the 53 percent that Eskom wanted, what implications for government's sort of financial funding to Eskom and its program going forward, please.

Journalist: The draw down, you know, there's obviously a lot of work has already been done on just how that's going to be managed. Can you just give us a bit more detail on how that's going to be or what you're looking at in terms because we… as far as I understand we you know, it's sort of unclear on what terms that draw down is going to be made.

Minister Alec Erwin: Let me deal with… I think it's important to understand that the original Eskom increase request was to achieve the increased prices we needed to cover those costs in one large jump with a smaller one in the second year. As you know after the energy summit there was general agreement that we should try and support NERSA in finding a way of smoothing it. So that's the first reason why there's a significant difference between the two. What NERSA have done is deal with what's technically called a claw back provision, which they have not allowed in this increase. And that of course has a major impact on the amount and that's the reason why there would have to be an equity injection to stabilise the balance sheet. So we're comfortable with the NERSA decision, they've made those this is what they've achieved. The difference in figures is… really would depend on what NERSA allowed and did not allow. So I think there's no major dispute on the magnitudes.

There's one figure there that NERSA was unhappy with, as they indicate they would not allow that 900 million. But by and large it's not been the figures in dispute; it's the structure of the increase that was dealt with. And I think NERSA have operated in the spirit of the energy summit, and we're comfortable with it. And it's always been acknowledged that if you're going to smooth the increase over a period of years there would have to be equity injection and that is why the Minister of Finance made provision for that over a five year period. Detail we would only announce at a later stage because there's technical homework to be done. No matter how much we've done up to now the precise figures given, the structure if you look closely at NERSA's announcement you'll see they also structure the increases by a type of tariff and they make proposals and guidelines for the municipalities. So there is further technical work to be done. And that would only be announced at a later stage when we've completed that.

Journalist: I understood the 60 billion rand allocated in the budget was specifically for the build program rather than an equity injection as such. Is there such a distinction or is it going to be managed as a contribution to the infrastructure builds? Thanks.

Journalist: A follow-up, please, minister. Do you foresee that government will have to invest more than the 60 billion that has been allocated? And I don't want to sort of tie your hands but I mean if you could just give me an indication, given the fact that this is the increase isn't what was motivated for, do you foresee that government would significantly have to increase its 60 billion rand… million… billion contribution? Also what effect if any could this have on the credit rating of Eskom, and then by extension on its ability to raise capital in the international markets? Thanks.

Minister Alec Erwin: The 60 billion was not earmarked for any specific, it's a shareholder support. As was announced by the Minister of Finance, it's a range of factors contribute, the rise in primary energy prices, the fact that there needed to be some certainty prior to any price increase, and also that we do have to support the balance sheet in order to continue the build programmes. So the 60 billion was defined as shareholder support, to be given in various ways. We're now in a position to ascertain what would be best done, and NERSA in its statement makes a very useful point, that they would want the strength of Eskom's balance sheet to be retained in order that we can continue to borrow for the build program, and that's the purpose of the credit rating. So I think that we are on track with regard to the credit rating, we've achieved the sort of profile of price increases over a number of years that take us to a stable point in the future.

There is shareholder support in the interim. NERSA also makes the important point that proposals will be developed for how you deal with rapid rises in primary energy costs in term in the price increases. So I think that we are in a position where the balance sheet and Eskom's build program are secure. There's more technical work that Eskom itself has to do because there are a number of technical implications of the tariff allowances and they need to look at that more carefully, and I'm sure would also make a more considered response at some point.

With regard the Eskom board would not get a bonus, I think you meant the management. We don't give bonuses to the board members. And that question is a board matter; they have to make that decision. And it's within contractually stipulated provisions. They then have to come to government after they've made that decision. Now that would only be done once financial statements are concluded and they would look at that. But quite clearly this has been a very, very difficult year for Eskom. And as we've explained before the contractual obligations have various provisions in them, some of which we call gatekeeper provisions, so if you haven't met that provision no matter what else may happen you may not get a bonus. But this is not a matter for us to decide as government, it's a board decision and we would look at it once they make that decision.

Journalist: Just to clarify sorry. Does that mean the six billion then are you saying are okay, is enough? Or is more needed?

Minister Alec Erwin: The 60 billion over a five year period we believe is adequate. Its purpose was to deal with these very rapid increases in primary energy costs. Otherwise Eskom… now that we have a clearer picture of what the price profile will be over a number of years it also helps tremendously in planning what the likely gearing ratio will be between borrowing and internal earnings. And we have I think NERSA… it's an important point for everybody… we have to find a way of more effectively dealing with very rapid price rises. Hopefully these will not carry on forever, but given the current global situation it's quite likely that primary energy prices will continue to rise. I mean, we've seen price increases in the oil sector which are massive and unprecedented.

Journalist: Just a bottom line sort of question, minister. Who's going to be paying the 60 billion rand? Where's it going to come from? I mean, is it… you know… is it… I mean, are the consumers going to be ending up footing the bill for that? You know, what is the bottom line on that?

Minister Alec Erwin: Any others? The 60 billion comes from the National Revenue Fund. So it would be a combination like any other expenditure from the National Revenue Fund of taxation and borrowing. The consumer… direct consumers of electricity do pay for the build program and for the rising costs in the form of the price increases that have been allowed for now. But as was indicated by the Minister of Finance, by everyone in government, if Eskom is unable to borrow funds in the capital market, and retain earnings to finance this build programme, we would have a very severe energy crisis in one or two years time, so its absolutely imperative that we continue the build programme at the speed that we now are to avoid a really serious energy crisis. At the moment our crisis mainly deals with the peak demands, but if we were to not be able to increase the supply of new energy, electricity would have a very serious problem indeed.

Journalist: Minister, this morning someone from minerals and energy briefed the Minerals and Energy Committee on the shortage of storage capacity and the pressure on the transport of fuel from Durban to Gauteng until the pipeline are finally finished. Could you maybe pronounce on your concerns or your reading on that situation? He talked about; if it wasn't managed properly we could be seeing tankers leaving every six minutes along the road to get supplies up.

Minister Alec Erwin: There is a task team dealing with that issue, of which we are part and quite clearly the pipeline is a key factor. That's why we have to move on it very quickly. But Transnet and the port authorities would also contribute to try and alleviate that problem. But yes – I'm not familiar with exactly what was said – but there is a tight period that has to be very well managed, prior to the advent of the pipeline.

Journalist: Are we looking at the possibility of a fuel shortage in Gauteng?

Minister Alec Erwin: I don't believe so. I think we've got the time to take the measures. Minerals and energy are specifically dealing with that. That's not something that falls under this ministry. We are a supportive ministry through Transnet and the ports. But clearly, everything has been done to avoid that, and I think it's achievable that we can do that. The pipeline is associated with a very significant new set of storage capacities, at both ends of the pipeline there's a whole range of infrastructure in the Gauteng area that would facilitate the flow of petroleum products throughout the hinterland.

Journalist: Just about the PPMR. There's some talk that it's too expensive and not viable. Can you comment on that? When will we have some more concrete plans?

Alec Erwin: The concrete will be poured soon, rather than the concrete plans. We have full confidence. The programmes are on track, the regulatory issues that we were dealing with are behind us, equipment is now under manufacture and the project is moving ahead. The test facility is operational both at North-West University and also at Pelindaba, so the project is certainly moving ahead very well. The next step is our outline and this speech is a conclusion of a wider shareholder agreement with our partners which would also inject further funding into the project from our partners.

I think it's a very important technology. It's got two critical components to it. One is it would provide safe nuclear energy which, given the effects of greenhouse gas emissions is crucial. Secondly, it's a high temperature reactor, so the heat transfer processes can be used for a very wide range of industrial processes. So it's a major new development as a nuclear technology. The technologies – we are part of a multi-lateral group of countries that are involved in one or other way of what I call 'high temperature reactors' and the pebble-bed technology is already being shown to work.

In Germany the pebble-bed reactors operated, two of them. What we're doing is to take that to a large scale. So it's not a new untested technology. It's a tested technology, it's a known technology. What we're doing is to industrialise it and take it to a higher scale, South Africa and China being the two countries that have invested in this technology. There's no major miracle there. It's a known process that we're working on, very, very interesting and important technology.

Issued by: Department of Public Enterprise
18 June 2008