News in South Africa 29th November:

1. Infrastructure growth not a reality:

The South African government has put a spin on infrastructure projects worth billions of rands as a way to drag the economy out of stagnation – but the PR belies the reality that not much has been done over the last few years to get anything done.

Infrastructure growth not a reality
Photo by Daniel Frese

This is according to Intellidex analyst Peter Attard Montalto, who warned that parts of the country are at risk of becoming ‘uninvestable’ if the government doesn’t get to grips with its crumbling infrastructure.

“Several years have been wasted on the promotion of infrastructure PR over reality,” Attard Montalto said.

In a note published this week, Attard Montalto said that parts of South Africa have got visibly worse, and the country as a whole is likely to start seeing the gap between provinces start to widen as more people emigrate or semigrate to areas that can deliver services.

“Internal migration as well as emigration are accelerating based on the latest Stats SA data and forecasts, as well as anecdotally, and will create a shift in productive skills availability between provinces,” he said.

While this may not reflect in data on a country level, the analyst warned that the widening inequality between provinces would create increasingly challenging social and political risks.

Infrastructure push

Even before the economic turmoil presented by the Covid-19 pandemic, president Cyril Ramaphosa promoted and pushed various infrastructure projects as core to the country’s route out of stagnating economic growth.

The government’s infrastructure spending is set to increase from R66.7 billion during the 2022/23 fiscal year to R112.5 billion by 2025/26. But despite this rising investment, many of the projects are yet to even materialise.

The Department of Public Works has published its draft development plans through to 2050 – and while many of the lofty goals come with short-term targets to hit over the next three years, the documents do not give much in the way of realisable targets.

Whether it plans to establish more municipal electricity distributors, reimagine the country’s public transport networks or build more schools – the government’s plans require years of more planning, more talking, and developing more policies and frameworks to get anything off the ground.

Meanwhile, infrastructure in South Africa continues to decline.

2. A decade of load shedding ahead:

Wartsila Oyj, a Finnish company that makes power plants, expects South Africa to face electricity outages for at least another decade unless it installs as much as $8 billion worth of gas-fired generation capacity.

The outages stem from state power utility Eskom’s failure to adequately invest in new capacity and the maintenance of 14 operating coal-fired power plants. The energy shortages have been exacerbated by the slow ramp up of its two newest plants.

Wartsila’s modeling shows South Africa’s plans to add wind and solar capacity to the grid will be implemented too slowly to prevent outages, Wayne Glossop, the company’s senior business development manager for southern Africa, said in an interview. “You do need the gas” to make the renewable energy roll-out work, he said, referring to the fact that plants using the fuel can generate power quickly on demand.

While Eskom and the government have said that gas-fired plants will be needed as the country transitions away from coal, environmental rights groups oppose prolonging the country’s reliance on fossil fuels. Renewable energy companies say the country could use batteries that store power generated from wind or sun instead, but there are questions about the feasibility of using that technology.

Power cuts are set to increase markedly until 2026, before ameliorating for several years as Eskom’s Medupi and Kusile coal-fired power plants come fully on stream, according to the Wartsila study. It foresees the energy crisis intensifying again in 2032 as older plants close.

3. Repeal of beneficial interest deduction:

There is the letter of the law and there is the spirit – or practice – of the law, and an announcement by the South African Revenue Service (Sars) that it intends to withdraw a practice note covering interest deductions when corporate taxpayers borrow and then on-lend money is causing consternation among these taxpayers.

Tax experts believe the proposed withdrawal could have a severe impact and ‘scupper’ the economics of funding structures.

Several of the larger tax and advisory firms say they will be engaging with Sars on the matter.

Regan van Rooy (RvR), an international tax and structuring firm that focuses on Africa, says in its latest newsletter the announcement is worrisome for a lot of people: “Particularly those who have recently implemented financing or holding structures that rely on an intermediary holding company being able to claim an interest deduction where it on-lends funds.”

Practice Note 31 covers interest deductions in certain instances and has been in existence since 1994.

It essentially says that although interest must in theory be incurred in the course of trade to be deductible, in practice Sars would allow the deduction of interest incurred purely for the purpose of earning interest, RvR explains.

Craig Miller, director at law firm Webber Wentzel, says the proposed withdrawal is to curb perceived abuse of the concession, although Sars does not articulate what the perceived abuse is.

He suggests that Sars use its general anti-avoidance rules in the Income Tax Act, which is already available to the tax authority, if it perceives there to be abuse. “This may very well be an isolated case,” he adds.

RvR is also sceptical about the perception that the practice is being abused by “naughty structures and naughty taxpayers who created transactions with the intention of obtaining a deduction that would otherwise not be permitted”.

The firm believes the practice has been eminently sensible in facilitating normal commercial intra-group funding transactions.

Miller says the purpose of the practice note was to create certainty where a taxpayer borrows to on-lend. The application of the practice note ensures that a taxpayer can deduct interest incurred on the amount borrowed to the extent that the taxpayer accrues or receives interest on the amount which it on-lent.

The note established the practice that where money was borrowed and then on-lent, Sars has been happy to concede that the taxpayer is ‘trading’ even though the company may do nothing else other than borrow to on-lend, says Miller.

4. PPE corruption threatens investments:

Several experts have warned that Covid PPE-style corruption threatens the R1.5-trillion purse attached to South Africa’s Just Energy Transition-Investment Plan (JET-IP) plan, and it will need very tight governing.

$8.5 billion has already been mobilised by international partners in the first phase of the programme.

In light of these concerns, the Presidency has said that it will adopt a hybrid governance structure for the programme so that decision-making on the funds is shared.

5. Britain at risk of load shedding:

Britain may as early as Tuesday for the first time implement a new emergency electricity scheme, known as the demand flexibility service (DFS), in order to avoid the kind of electricity rationing South Africa knows so well.

The activation of the DFS would see many households and smaller businesses offered money in return for not using electricity, at a rate equal to about R60 for every kilowatt-hour saved during pre-defined peak times, as measured against historical usage.

That, the publicly-listed utility company National Grid hopes, will incentivise sufficient savings to avoid load shedding through such simple means as people postponing turning on their washing machines.

If not, load shedding is on the table; the United Kingdom started planning in earnest in August for the possibility of planned blackouts for a couple of days in January, when it expects the greatest shortfall in electricity rationing.

Britain has seen winter cold set in while wind speeds – critical to the turbines that become more important as days grow shorter – have stayed low. The wind is expected to pick up on Tuesday, but electricity imported from France is expected to fall short of requirements.

France has struggled with maintenance on its large fleet of nuclear reactors, just as the reduction of gas imported from Russia hit many of the inter-connected electricity systems in Europe. 

Just about half of the UK’s electricity imports come from France.

On Monday afternoon, the National Grid’s Electricity System Operator issued a “capacity warning” about low anticipated reserve margins on Monday night, but later cancelled that warning after it secured additional supplies for the evening peak.

An announcement about demand-reduction on Tuesday is expected soon.

All information sourced from articles posted by: BusinessTech, Fin24, Moneyweb, TimesLive, and Business Insider.

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