1. Power: Capex push missing

Power: Capex push missing

Onus of capital expenditure slowly shifting towards private sector

Published: March 4, 2015 12:43 AM

UNLIKE expectations on higher expenditure on transmission & distribution (T&D) infrastructure development, budgetary provision for FY16 reduced it by 21% to R14.63 billion,compared with FY15. Actual expenditure this fiscal was 10% lower than budgetary expectations. In fact, the capex for FY15 is now 4% lower than that spent in FY14, given the limited fiscal room and below par execution—largely by PSUs. Overall capital expenditure is expected to increase by 11% year-on-year (y-o-y) to R614 bn in the power sector.

Lower T&D capex doesn’t entail that investments are slowing. In fact, the onus of capex is shifting towards the private sector, with the government unveiling $6 bn projects later last year for competitive bidding.

* In alternate energy, a focus area of the new government, the overall target has been iterated as 175 GW by 2022. Renewable Energy allocations are expected to increase by 34% to R25 bn, however, FY15 achievement has been below par (53% lower than the budgeted capex). Higher surcharge on tax and dividends, imposed in the Budget, will leave less money with the companies, even as the proposed cut in corporate tax rate is likely to have a limited impact on the power sector, which enjoys 80IA tax benefits.

* Issues in the power sector are more strategic than pecuniary at this juncture. Hence, decision at the policy level on fuel supply issues, contractual resolution for stalled projects and reviving state sector reforms will be required—many of which the government has already initiated, but will take time to implement.

* The announcement of a Regulatory Reform Law for Infrastructure and Public Contracts Resolution Bill for PPP contracts—single authority for dispute resolution mechanism—is a right step, as most contracts in the power sector are under some kind of litigation, and need quick resolution.

* The rural electrification scheme was subsumed under the Deen Dayal Upadhyaya Gram Jyoti Yojana feeder separation scheme with an allocation of R42.3 bn, is lower than last year’s allocation of R48.5 bn–but higher than actual spend of R27.4 bn. The Integrated Power Development Scheme (IPDS) subsumes the Restructured Accelerated Power Development & Reforms Programme (APDRP) —but overall allocation is higher by 2% to R5.75 bn—the achievement last year was 53% lower than the budgeted expense.

* Out of R1.25 bn provided, only R0.01 bn was spent for financial assistance to facilitate discoms’ debt recast package (Financial Restructuring Package), and allocation for FY16 also seems meek at R0.74 bn–indicating no success in the FRP programme to restructure debt and reduce losses for the state distribution companies.

* Fuel cost will become higher as the clean energy cess on coal doubled to R200/tonne (2% or R0.07/kWh impact on tariffs), and the limit is increased to R300/tonne–implying intent to increase it via an executive order in the future.

* Budgeted Plan expenditure for the power sector is expected to be higher by 11% (vs -4% in FY15) largely due to higher projected capex by PSUs.

—Deutsche Bank

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