Lifting bar on power self-generation a poser for infrastructure scheme
Programme will be inadequate to meet demand as it also has to fund many other projects25 JULY 2021 - 16:16
President Cyril Ramaphosa’s announcement in June that the ceiling on electricity self-generation would be lifted from 10MW to 100MW was widely welcomed by industry, but there is a hidden drawback.
Many firms in mining and manufacturing are expected to jump at the chance of securing their own generation capability, not least because of the systemic inability of the state power utility to provide a cheap and reliable service. In addition, there is a department of trade, industry & competition scheme known as the critical infrastructure programme to which they can apply, which supports the installation of alternative power infrastructure.
The snag is that if investment in self-generation escalates as it is likely to, the critical infrastructure programme will prove to be inadequate to meet demand as its purpose is not just to fund power infrastructure but also many other eligible infrastructure projects that facilitate additional private sector investments, such as the development of roads and bulk water supply.
Ideally, SA businesses should expect to enjoy efficient and modern infrastructure provided by Eskom and their local municipalities, in terms of roads, water, sewerage and electricity. However, Eskom and many municipalities are struggling to provide and maintain this basic infrastructure, without which it is difficult, if not impossible, to run a mine or industrial plant.
The critical infrastructure programme can come to the rescue as its grants can help a company make its own partially subsidised investment in critical infrastructure. As well as industrial and mining operations being eligible, the programme extends even as far as supporting distribution centres. It funds 10%-30% of qualifying infrastructure spend, up to a maximum cash grant of R50m. It was set up partly to encourage private sector spending on clean and green energy such as solar, wind or other alternative power solutions.
An eligible electricity or water project could take a company off the grid, thus relieving the burden on Eskom and municipalities. Previously, the department would have wanted privately owned infrastructure that had been supported by the critical infrastructure programme to be handed over to Eskom or the local municipality. However, due to recent changes to the eligibility criteria this is no longer required.
Due to these changes municipalities can also apply for such support. Those that are in distress can get 100% of the cost of infrastructure projects, capped at R50m, and those not considered to be in distress between 15%-50%, also with a R50m cap.
State-owned industrial parks can apply for 100% funding for an infrastructure project, again capped at R50m. Feasibility studies can also be funded, with support differentiated between studies inside or outside a special economic zone. Companies inside special economic zones can tap into the scheme to secure support for their infrastructure spend.
There is also a new focus on the film and television industry, with up to 30% funding for eligible projects, mainly covering construction and refurbishment.
In the past, only infrastructure projects that led to an increase in investment and output were eligible, but this is no longer essential. As the programme is reimbursive and cost-sharing, a firm will need to spend the money first and then claim back a portion of it. In addition, investors need to apply before they break ground on the infrastructure.
The scheme used to have a strict Broad-Based BEE (BBBEE requirement; applicants had to be at level 4 BBBEE. As this has now been eased to level 6 the critical infrastructure programme has been opened up to a lot more companies.
A consequence of all these changes is that more projects are eligible, but the concern is that the critical infrastructure programme budget is uncertain and limited, and funding may soon be depleted. Companies should take advantage of the president’s recent announcement, which will allow many larger alternative energy projects to be launched.
Given continued concerns about inflationary Eskom costs and persistent bouts of load-shedding, few companies are not looking at solar or other alternative power. With a 100MW solar plant costing almost R1bn, these types of projects could well deplete the whole critical infrastructure programme budget. The programme needs to be revised to take account of larger solar projects and prevent them from draining the entire fund.
With the increase to 100MW there will undoubtedly be many solar applications, so the president has opened the floodgates. There is surely a case for the department to revisit the critical infrastructure programme budget or to cap the amount that can be claimed for each solar project, to avoid a situation in which other worthy infrastructure projects are unable to secure funding.
With the best intentions, the president may have opened another can of worms.
• Wagener is a manager in Cova Advisory’s incentives team.