This study presents inside informations on fiscal construction and the hazards associated in a undertaking which commenced in May 2008. Medupi coal power station is a dry-cooled coal fired power station being presently constructed by Eskom in Lephalale, Limpopo state, South Africa. After completion in 2015, it will be one of the largest dry-cooled power station in the universe bring forthing about 4800 MW of power from 800 MW turbines powered by six boilers. Eskom is a South African authorities owned electricity company headquartered in Johannesburg with its operations throughout South Africa. About 95 % of the electricity generated by Eskom is consumed by South Africa and the whole African continent utilizes around 45 % of the generated electricity.
The demand for electricity has gone by 40 % since 1994 due to the economic growing of the state. This has resulted in Eskom ‘s modesty border to fall from 25 % in 1994 to 8 % in 2008 which has necessarily resulted in burden sloughing. Due to this, Eskom was awarded the undertaking to construct two coal-burning power workss, i.e. Medupi and Kusile raising the modesty border to 15 % . This study concentrates wholly on the Medupi power station. The first unit is scheduled to get down production in mid-2012 with the last unit to be completed by 2015. Exxaro Grootegeluk coal mine will be the chief beginning for the power works undertaking providing 16.4 MT coal per twelvemonth for 40 old ages at the investing cost of R 9.5 billion which is about US $ 1.4 billion. The works would utilize the super-critical boiler engineering that would increase the efficiency, cut down coal ingestion and CO2 emanation.
With the aid of international consultancy houses, the undertaking is being managed by Eskom. The technology and the undertaking director is being supported by Parsons Brinckerhoff. The contracts for the boilers have been provided to Hitachi whereas the steam turbine contracts are given to Alstom. The estimated life of this undertaking is 40 old ages and the entire finance required is R 125.63 billion.
Based on the feasibleness survey conducted by the South African authorities and Eskom, it was found that the execution of Medupi undertaking would supply value addition for both Eskom and the South African economic system. It was projected that Medupi undertaking would hold a positive NPV of US $ 5 billion and an IRR of 13.0 % which is much more than Eskom ‘s leaden mean cost of capital of 7.4 % . ( this is an estimation performed by Eskom on the undertaking )
Funding the undertaking
The approved undertaking cost of Medupi power station as of March 2010 was about US $ 17 billion out of which Eskom has already spent US $ 4.3 billion. Since the fund required are immense in sum the undertaking had to be funded through a combination of:
Addition in duty ( grosss )
Issue of bonds
Government of Republic of South Africa support
Funding from the Multilateral Development Banks and
The adoption from the Export Credit Agencies.
In order to procure loans from the above fiscal establishments, the undertaking should determine the undermentioned demands:
Eskom has the appropriate capacity to implement undertaking on such a large graduated table
There is a strong authorities ownership of the undertaking and Eskom has the ability to prosecute the undertaking
Eskom has experienced and qualified advisers for the undertaking
Eskom has consulted with the involved stakeholders on precautions and taken all the issues related to project design into consideration
Eskom has secured adequate human resource for the execution
Eskom has besides equal fiscal resources to implement the undertaking
Eskom has identified hazards involved with the undertaking and have put in topographic point equal steps to minimize/mitigate them
The fiscal direction system apparatus by Eskom is acceptable to all the donees and the stakeholders
Finally the authorities is committed to set about such a large undertaking and supply with administration construction and efficient service bringing
From clip to clip, the bank would reexamine Medupi undertaking and would besides reexamine the fiscal undertaking used by Eskom.
Taking the above into history, Eskom decided on the following to finance the undertaking:
The duty for the electricity has been late increased by 16 %
Equity ( Eskom ) : 53 % ( US $ 8.9 billion )
Multilaterals: 36 % ( US $ 6.1 billion )
Fiscal establishments ( including ECAs ) : 11 % ( US $ 1.8 billion )
Eskom is authorities owned entity and a big portion of this undertaking would be funded by the South African authorities.
Initially Eskom was to have US $ 1.2 billion per twelvemonth for five old ages for the Medupi power works undertaking but it shortly became apparent that the works would hold a deficit in the support, hence the authorities was forced to supply shorter period loan. Due to this, in 2009, the authorities committed a loan of US $ 6.2 billion for the support of Medupi power works out of which the 2/3 of the loan ( i.e. a US $ 4.1 billion ) has already been provided as of March 2010.
The authorities besides provided warrant of US $ 18.1 billion to Eskom to be able to raise external debt
Eskom besides used portion of its ain capital modesty to fund the Medupi undertaking
Furthermore, the company besides listed itself in BESA ( Bond Exchange of South Africa ) to supply with the following bonds in March of 2006.
ES26 bond with 7.85 % and maturing in 2026
ES33 bond with 7.50 % and maturing in 2033
Two Floating Rate Notes maturating in 2026 and 2033
The following 36 % ( US $ 6.1 billion ) of the support was provided by the undermentioned multilaterals:
In November 2008, Eskom secured US $ 500 million from AfDB ( African Development Bank ) as a non-sovereign loan to back up its capital outgo plan
In November 2009, Eskom was awarded a corporate loan of US $ 1.86 billion from AfDB to be used to fund the purchasing and installing of turbo-generators and boilers
In April 2010, World Bank ( IBRD, IDA ) approved a corporate loan of US $ 3.05 billion with autonomous warrant for the completion of the Medupi undertaking
In add-on, the World Bank besides approved US $ 260 million for puting in reclamation energy and US $ 485 million for road-to-rail coal transit
Through these multilaterals, Eskom has been able to procure US $ 5.16 billion which is about 30.4 % of the entire undertaking costs.
Several foreign fiscal establishments and export recognition bureaus ( ECA ) were involved in the funding of the Medupi power works which was 11 % ( US $ 1.8 billion ) of the entire cost.
In September 2008, German authorities owned development bank KfW signed US $ 342 million export recognition trade with Eskom. It is a 12-year loan which is to be used to partly finance the six boilers that are supplied by Hitachi
In May 2009, a secure loan of US $ 740 million from a mob of European Bankss was secured. This was used to happen portion of the boiler contract with Hitachi. The Bankss involved are the undermentioned:
BFH Bank, portion of Sasl. Oppenheim Group, Germany
BNP Paribas, France
Calyon Credit Agricole, France
In December 2009, ECA-covered loan of US $ 1.7 billion was secured by Eskom to fund the turbine contracts with Alstom. Following are the names of the French establishments and Bankss that participated in the loan. COFACE ( Gallic export recognition bureau ) was supplying the screen for the loan which was to be repaid by Eskom within 12 old ages from the commissioning of the installation.
BNP Paribas, France
Soci & A ; eacute ; t & A ; eacute ; G & A ; eacute ; n & A ; eacute ; rale, France
In August 2010, Eskom was granted US $ 89.9 million from Credit Agricole ( France ) . The loan was covered by ECA and would be used for the instrumentality and control of the contract by Alstom. This has term of office of 17 old ages with 5 old ages of drawdown.
Through these fiscal establishments, Eskom was able to procure US $ 2.02 billion or 11.9 % of the entire undertaking cost. The support and funding that Eskom has secured would merely be used for building and installing of boiler and turbines. It will non be used to fund any import responsibility, revenue enhancements, cost of screen and involvement.
The tenor was for 20 old ages with involvement rate spread of Bankss cost of funding plus 40bp and the undertaking was given 5 old ages for grace period. The last payment for the loan is February 2030.
JPMorgan Chase was appointed in April 2010 by Eskom for its consultative services related to support options.
In May 2012, South Africa ‘s biggest investing fund, Public Investment Corporation ( PIC ) planned to put US $ 1.2 billion in the undertaking but as of now no recent information is available sing this.
The first operational unit would be around 40 % of the entire undertaking cost. The other two units would be 10 % of the entire cost each and while the 4th unit would necessitate about 20 % of the cost with go forthing 10 % for the last units committee.
The engagement of these entities to fund the undertaking for Eskom is of import for the undermentioned grounds:
It provides with more funding options to fund the undertaking hence cut downing any fiscal spread
It gives assurance to other fiscal establishments to supply with extra support
The bank loans are normally of longer tenor which provides Eskom with an extra purchase for refunds
Through these funding options, Eskom expects to heighten its production capacity which would supply South Africa with a competitory economic system. It would besides hold a positive impact on employment, and would greatly assist in the GDP growing of the state.
The power works involved 38 contract bundles for the building and securing of turbines and boilers. Here are some of the major contracts:
Steam turbine generator contract with Alstom
Generator transformers contract with Siemens Limited
Boiler, bag filter and subsidiary bay contract with Hitachi
Electrical power installing contact with Alstom
Coal stockyard equipment contract with Thyssen Krupp
UPC with Standby Systems
Low electromotive force switch cogwheel with GE
There have been several labour protests and work stoppages from 2010 to 2012 which halted the development of the undertaking for rather a long clip largely due to labour differences. To extenuate the hazard of frequent work stoppages and farther holds in the undertaking, Eskom form a undertaking squad that would supply recommendations on covering with frequent work stoppages and unrest.
There is a high corruptness hazard involved in this undertaking as the African National Congress holds 25 % of the portions in Hitachi, the company providing the boilers. And since the undertaking is funded by the authorities, this hazard of corruptnesss is two creases.
Eskom ‘s recognition evaluation is extremely dependent on the South African authorities ‘s recognition evaluation. Any negative alteration in the authorities ‘s evaluation would besides negatively affect the evaluation of Eskom in which instance, Eskom ‘s ability to raise and procure financess would be affected every bit good as the rate/cost of borrowing would besides hold an impact
If there are signification sum of environmental revenue enhancements ( C revenue enhancements ) , Eskom would lose a batch of money which would be difficult to retrieve from any of the fiscal establishments
Medupi ‘s committee agenda has been delayed because of the public presentation of the boiler contracts. Since the boiler contracts were awarded to Hitachi Power Africa, these providers failed to move adequately and violated the footings of contract which resulted in monolithic hold in agendas and cost overproductions, therefore endangering and enlargement of the substructure that could back up the economic growing. Additionally, there were jobs with the design which resulted in erroneous building and the logistics of the boilers.
Since this country is extremely privy and is in a low development country, Eskom needs to hold higher security so as to cover with larceny jobs. There is a high hazard for larceny of distribution overseas telegrams and equipments which is impacting the overall building of the works. Besides this, electricity larceny or illegal electricity connexions is really common in African companies due to which the company loses a good sum of gross. This hazard is nevertheless mitigated by a run called Operation Khenyisa, launched in 2010 that promotes the legal usage of power and theft direction plan
They have been unable to cover up for the support spread that was unearthed in 2010. As of now, they have increased the monetary value of electricity duty, the money of which is traveling towards the development of Medupi power undertaking
Since this country is extremely distant and contains a batch of vegetations and zoologies, it poses an utmost hazard to the hereafter of works variegation of the country, due to which there is batch of resistance over this undertaking from the conservationists of the part ensuing in several environmental and NGO protests
Even though it is a dry coal undertaking, the H2O would still be needed for the undertaking to win. The lone river running in this part is the beginning of H2O for non merely the northern part of South Africa but the full South African states. If this undertaking is to travel in front, there would be a high hazard of H2O deficit for the remainder of the South African states which are confronting critical H2O crisis
The C emanation would be 25 million metric tons per twelvemonth since coal is used which would do Medupi the 4th most C intensive undertaking in the universe
If this undertaking is to travel in front, so the company ‘s advisers have anticipated that several new coalmines would be required to back up the undertaking which would do terrible environmental impact
Extenuation: Eskom is guaranting that it can cut down the environment impact for both the C emanation and the sum of H2O used to bring forth 1 unit of electricity
If the environmental hazard like pollution and H2O scarceness is non dealt in a proper manner, so Eskom could incur heavy punishments or lose their operating licence. This would, in-turn, dampen Eksom ‘s repute which might do jobs for Eskom to raise financess, secure land and licenses for farther enlargement.
Operating/Input Supply Risks
Since Medupi power works is a coal fired undertaking, it requires changeless supply of coal hence if there to be a deficit of coal or increase in monetary value, the full undertaking would confront immense operating hazards. There is high international competition for South Africa ‘s coal market which might act upon the monetary value and handiness of the coal. To extenuate this hazard, Eskom has signed a long term contract with the coal mineworkers.
The monetary value of coal rose by 17 % and the consumer rising prices is averaged at 5.3 % . To battle this, they increased the monetary value of electricity by the same border.
The company had already increased the electricity duties by 25 % and they were to increase it any farther, it might ensue in the non-payment of the electricity measures which would once more impact the equity raising status of Eskom.
If the undertaking is non kept on agenda, and if the power system crises addition, it might ensue in the loss of investor assurance holding a negative reverberation on Eskom
If the planetary fiscal crisis continue to be, it might be difficult for Eskom to raise any farther financess for the undertaking.
If the South African current Rand depreciates, the cost of imported equipments that are purchased by Eskom would travel up which would so hold an impact on the value of Rand every bit good as the cost of foreign loans
This undertaking would hold great societal impact on:
the GDP of South Africa
the GDP of South Africa would increase by 0.34 % as the ingestion of electricity would turn ensuing in positive economic growing
debut of new industries
with the addition in power coevals, many more new industries would be able to setup in South Africa which is good for a state in long tally
cut downing poorness through coevals of employment
This undertaking will bring forth occupations in the value concatenation for unskilled workers during building and execution stages. However, the work force in South Africa will non be able to cover with proficient and functional facets of the undertaking as that would necessitate extremely skilled and trained workers
The occupations would besides be created in the coal mines and assembly of the boiler and turbines. Besides this, there would be occupations in footings of security, care, lodging and substructure development
Since the undertaking is in distant countries, major substructure development work would be required which would besides include enlisting centres, fire Stationss, schools and societal nines
Medupi power undertaking will stabilise the electric power supply in the Southern Africa Region.
Besides the positive effects, it will besides hold certain negative effects.
Because of the undertaking, the South Africans would stop up paying more for energy ( 25 % addition from 2008 – 2012 )
The undertaking is chiefly focused on profiting the industry instead that the people at big. Besides, the industry duty is about 1/7 of that paid by the occupants of South Africa hence there is no societal benefit in this undertaking
Evaluation of the undertaking
FNPV = Financial Net Present Value
FIRR = Financial Internal Rate of Return
ENPV = Economic Net Present Value
EIRR = Economic Internal Rate of Return
Several surveies and sensitiveness analysis were done on this undertaking to understand the overall impact that each variable of would hold on the NPV and IRR. The tabular array above illustrates the sensitiveness analysis of variables like outgo, cost of coal, burden factor, fuel cost and exchange rate.
Based on this tabular array, we can reason that the result of this undertaking is sensitive to be overproduction, that is capital outgo. Since the initial investing is high and occurs in the beginning of the undertaking, the patrons have to be excess careful in restricting cost overproductions. The analysis besides revealed that any decrease in fuel monetary values or increase in the cost of coal would halter the undertaking financially. Besides the decrease in burden and depreciation of exchange rate would impact the undertaking, as Eskom has taken a batch of loan from foreign Bankss.
The economic analysis of the undertaking showed the undertaking to be robust but extremely sensitive to cost of fuel and grasp of exchange rate. Although, the overall undertaking does seems good for the company every bit good as the South African GDP/economy.
There have been some holds in the undertaking due to the political tenseness and labour work stoppages during the building of the works. The holds were besides added by the jobs in the contract of the boilers, but those things have been sorted out and a program has been put together to look into the labour work stoppages that have been the major job for the undertaking. To day of the month, the undertaking has been come oning good and the first works would now be commissioned in the mid of 2013.