LUNGILE MASHELE: Socioeconomic spending by IPPs needs a revamp

In 2011 Eskom launched its supplier development and localisation unit. The purpose was for Eskom to use its vast procurement spend at the height of the new build programme to entrench local economic development, local manufacturing, black ownership, and the participation of women, youth and people living with disabilities in procurement value chains. What began with a noble and justified intention went awry as suppliers inflated prices and corruption entrenched itself.

Independent power producers (IPPs), as part of the Renewable Energy IPP Programme (REIPPP), must spend 1% of annual revenue on socioeconomic development (SED) initiatives. Most IPPs manage to spend 2%-3% easily. This has resulted in R3bn being spent on SED and enterprise development initiatives since the inception of REIPPP, and funds were allocated to education and skills development, social welfare, healthcare and agriculture.

This spend was localised within a 50km radius of the project sites, in line with programme design. Due to the number of projects in the Northern Cape, the province benefited immensely from REIPPP, with half of the total SED spend. REIPPP spending has become so entrenched in those host municipalities that they attempt to leverage more than they should, confusing their mandate and that of the IPP.

Some of the first REIPPP plants are halfway through their contractual lifespans. What happens when these projects reach end of life and their obligations come to an end? This introduces a dilemma for local communities and municipalities that have come to rely on these IPPs to build schools and healthcare facilities; educate children to university level; staff crèches; employ locals to secure, clean and operate the plants; fund feeding schemes and establish vegetable gardens. What happens where development programmes have not been set up sustainably to outlive their founding and funding IPPs?

This handout model for local economic development may have been sufficient when the REIPPP was conceptualised, but presents a risk if it is not reconfigured. The geographic spread of IPPs is changing, SA’s economic fundamentals have deteriorated since 2013 and the burden of development has shifted to the private sector.

A rethink is needed on how SED spend can be used to unlock real economic growth and transformation and not used for scorecards. Industry has long called for a redesign of this limited REIPPP approach. While some IPPs are applying themselves and exploring well-thought-out programmes, collaboration and funds leveraging, this needs to be programmatised beyond an individual IPP’s performance and level the ecosystem of development partners that already play in rural and remote SA, where most IPPs find themselves.

We need to go beyond compliance and look at real economic transformation and value creation. While ownership and representation by gender is commendable, real value is in having SA-owned IPPs that create jobs and encourage local manufacturing. It is when South Africans own the entire value chain and export components and electrons to the region that we can claim success.   

Since 2013, R3bn has been spent on SED and enterprise development initiatives by IPPs. A portion of this money could have provided development funding for more than 50 local IPPs with real returns for investors. This funding would have enabled the participation of local IPPs in REIPPP and ensured that more than R130bn stays and circulates in the SA economy.

A total of R3bn could have been pooled provincially and funded a battery park to store energy for the evening peak, reducing the economic cost of load-shedding. The R3bn could have funded the expansion of existing solar PV manufacturing plants to meet growing demand. This is a concept the SA Renewable Energy Masterplan, now under development, should seriously consider in addressing the need for increased industrialisation.

As the geographic location of IPPs spreads and their spend becomes desirable and contested, the strategic ring-fencing of this revenue will be essential for long-term investment for economic development — not squandered on corruption or inefficiency.

• Mashele is an independent energy economist.