Construction industry needs regulatory certainty

By Eric le Grange, Edward Nathan Sonnenbergs
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Regulatory certainty is fundamental to the development of the construction industry in any jurisdiction. The construction industry depends on the willingness of companies to invest in capital projects, and the willingness of financial institutions to advance debt. They will only do so if they know that their investment is secure. Recent regulatory developments in the electricity and mining sectors in South Africa may affect the development of the construction industry in these sectors in the immediate future.

Security of supply

Over the last decade, the South African construction industry has been driven by a housing boom, major construction works in rail and road infrastructure (particularly with the development of the high-speed rail transport system known as the Gautrain and road upgrades undertaken by the South African National Roads Agency) and the construction of the stadia for the football world cup last year.

Eric De Grange, Edward Nathan Sonnenbergs
Eric De Grange
Director of projects department
Edward Nathan
Sonnenbergs

Rolling electricity blackouts that occurred in early 2008 have brought the South African electricity sector, and the need for security of supply, into sharp focus. The manner in which the shortage of capacity is addressed will have a direct impact on the South African construction industry and project financing. A draft of the Integrated Resource Plan 2010, as required under the Electricity Regulation Act 2006, was recently published and maps out electricity requirements and the desired energy mix up to 2030. It anticipates the coming on line of some 38 gigawatts of electrical capacity over the period, with 8.7 gigawatts in the next decade alone. Of this, 5 gigawatts is planned to be from renewable energy sources, 1.15 gigawatts from combined cycle gas turbine plants, and 1.3 gigawatts from co-generation.

These developments are dependent on, among other things, the success of the renewable energy feed-in tariff (REFIT) programme. REFIT is a new electricity generation capacity programme aimed at the procurement of renewable energy on the basis of a feed-in tariff. Draft regulations giving effect to the REFIT programme have been the subject of a public consultation exercise, and the publication of the regulations appears imminent. Regulations relating to the exact licensing processes are a missing piece of the puzzle, but it is understood that these are currently being considered and drafts for public participation will be published in the foreseeable future.

There is significant interest from developers in the REFIT programme, but signs that the regulatory environment might develop to provide sufficient certainty to satisfy equity and debt investors remain elusive. It is hoped that the recent publication (for public comment and participation) of amended REFIT tariffs by the National Energy Regulator of South Africa will not spell an early end to the REFIT programme. The amendments envisage a significant reduction in the tariffs and introduce changes to the way tariffs are calculated. In their current form, many REFIT projects may not be financeable.

Other aspects that may impede progress in renewable energy include regulatory difficulties associated with the subdivision of farm land (where the majority of the renewable projects, particularly wind and solar projects, will be developed), the costs of strengthening the national electricity grid to accommodate such projects, and the absence of reliable long-term weather data.

Constraints

A reliable supply of electricity is a primary ingredient for the development and sustainability of the South African manufacturing and mining sector. Development in this respect is being constrained by the fact that the South African electricity utility Eskom’s reserve margin is under severe pressure and will remain so until the first units of its 4.8 gigawatt Medupi power station comes on line. A recent accident at its Duvha power station in the Mpumalanga province has removed 600 megawatts from the grid and has caused delays in much needed maintenance at other power plants already operating at maximum capacity. The consequence of these unanticipated constraints is that some intensive electricity users, particularly in the mining and manufacturing sector, are looking to generate their own electricity and transmit it via the national grid to where it is required. This is an important development and is forcing the regulatory changes needed to allow the development of a market in power generation to supersede the old model of a single supplier. If the first of these projects are successful, further development in this regard can be anticipated and may well boost both the construction industry and project financing.

One step behind

The mining industry remains a constant feeder for the construction industry. Recent developments around the granting of prospecting and mining rights have highlighted the difficulties associated with a fundamental change to mining laws in any jurisdiction, such as that which occurred in South Africa with the introduction of new mining legislation in 2002 (which was implemented in 2004). The granting of discretionary powers to government officials to award or refuse prospecting and mining rights has, predictably, proven problematic. Inconsistencies between the mining laws and, for example, environmental laws are at the same time creating uncertainty in application and compliance. This has slowed the development of new mines. The state of flux in this sector, primarily as a consequence of regulatory uncertainty, is proving to be a major problem.

It appears as if the regulatory environment is constantly one step behind the requirements of the market.

The authorities, however, are aware of the need for certainty, and some progress has been made in creating the certainty required for invEric le Grange, estment. Only time will tell whether the progress made is sufficient to convince investors and financiers.

Eric le Grange is a director in the projects department at Edward Nathan Sonnenbergs

Johannesburg

150 West Street

Sandton

Johannesburg

South Africa

2196

Tel: +27 11 269 7400

Fax: +27 11 269 7899

E-mail: info@ens.co.za

www.ens.co.za

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