Sunday, August 26, 2007

Bad time for government to get coy about its vision for energy

Bad time for government to get coy about its vision for energy
Hilary Joffe

IN THE space of a week, the trade and industry department released an industrial policy framework promising a stronger role for competition policy, the national treasury supported a partnership between Sasol and the government to build a new synthetic fuel plant, and the cabinet approved an energy security strategy that appeared to rule out a private-sector bid to build a new fuel pipeline from Durban to Gauteng.

The events seem unrelated. But, taken together, they seem to suggest that while the government professes enthusiasm for competition and partnerships with the private sector, its support for these in practice is selective, at best.

Take competition. The pipeline is a test case because it’s one of the rare instances in which a private sector consortium (iPayipi) has put in a bid in direct competition with a state-owned monopoly (Transnet) to build and operate infrastructure the government deems to be strategic. It’s a test, too, because new legislation gives the power to an independent regulator, not the government, to decide whose bid shall prevail. Or so it appeared, until a minerals and energy department press statement last week announced that the cabinet had approved a policy that included “the development of the Transnet Pipelines’ new multiproduct pipeline which is necessary to alleviate the identified constraints in the petroleum supply chain by 2010”.

It certainly looked as if the cabinet had made up its mind , and comments from a senior department official in yesterday’s Business Report seemed to confirm the department’s dismissive attitude towards both Nersa and iPayipi. But department director-general Sandile Nogxina hotly denied yesterday that this was the case. He said the cabinet decision had been misinterpreted and that its approval of Transnet’s bid in no way excluded private participation, nor did it stop Nersa evaluating the application.

The objectives of the pipeline legislation included promoting competition and investment in the sector, Nogxina said, and the law said anyone who wanted to build a pipeline must go to the regulator to get a licence.

Whether the official was out of line or the department realised the implications of his comments and sprang into damage-control mode was unclear. And it remains unclear why the cabinet had to endorse Transnet’s R9,5bn application to build the pipeline: it doesn’t approve every parastatal project in this way. Importantly, though, the department has gone on the record as having no intention of excluding private sector participation .

But speak to officials privately, and it’s clear there’s ambivalence about the idea of the private sector operating such crucial infrastructure. The concern is the private players might walk away from the project because tariffs aren’t set high enough and it doesn’t prove profitable enough, leaving SA without the pipeline come 2010. And to some extent the concerns are legitimate: though there are many examples internationally of fuel pipelines privately owned and operated, building a pipeline is a risky business. And private pipelines have no precedent in SA, so government officials are understandably anxious.

But contrast that with the kind of risk government cheerfully contemplates taking on another, far bigger private sector fuel project — a new Sasol. Government has, in effect, committed to the building of a new synfuels plant, expressing its support for Sasol’s Mafutha project last week when Finance Minister Trevor Manuel rejected the proposed windfall tax on synfuels, in part because of security-of-supply concerns. But Sasol hasn’t committed to Mafutha yet. Indeed, it has yet to start the prefeasibility study for the project, which is likely to cost well over R100bn and will need heavy subsidies to make it viable. So whatever form the partnership between the government and Sasol takes, it could cost taxpayers a great deal.

Not that the government shouldn’t be working with Sasol. But its early enthusiasm for this project is quite a contrast to the slow pace of public-private partnerships more generally. Apart from the Gautrain, there’s not much on the drawing board of any size, and little sign of private players being cut in on any big infrastructure projects, except as contractors.

Sasol, of course, is not just any private sector company. Apart from its history under state ownership, it is also a dominant player in the inland market for fuel. Which is where there is a link with the pipeline and with competition. One of the reasons the new Durban-Gauteng pipeline is important is that as long as there is a shortage of pipeline capacity feeding SA’s economic heartland, the other oil companies are at a disadvantage in that market and Sasol can maintain its dominance. The new pipeline will open up the inland market to greater competition. But Mafutha could entrench Sasol’s position again.

Either way, this is no time for the government to be coy or secretive about how it sees the security-of-supply story playing out. We need to know what role it sees itself playing and how much it might cost us, as taxpayers and at the petrol pump.


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