South African Opposition Lobbies World Bank to Block Loan to Energy Firm

South Africa's main opposition party, the Democratic Alliance, is seeking to block a proposed US$3.75-billion loan by the World Bank to the state-owned utility company Eskom, citing potential corruption involving the ruling African National Congress party.

IHS Global Insight Perspective
Significance
South Africa is currently experiencing a severe energy crisis, which state-owned utility company Eskom is seeking to address by embarking on an infrastructure expansion programme. This includes the construction of a new power station in the Limpopo province that will be financed by a World Bank loan.

Implications
The Democratic Alliance is objecting to the loan on the grounds of possible corruption by accusing the African National Congress of having a vested interest in the Limpopo province, as one of the companies involved is partly owned by the ruling party.

Outlook
Despite strong reservations, the World Bank is more likely than not to approve Eskom's loan request when it makes its decision today, as a rejection would have negative implications on the country's energy provisions as well as that of its neighbours, which also depend on it for their electricity needs. The World Bank is, however, likely to attach strict conditions to the loan to ensure that the allegations of corruption involving it will not come to pass.

The opposition Democratic Alliance (DA) party has stepped up its efforts to have the proposed US$3.75-billion loan from the World Bank to Eskom Holdings, South Africa's state-owned power generator, blocked, as the U.S.-based multilateral agency is set to make its decision. According to reports, DA leader Helen Zille has been lobbying both the U.S. and U.K. governments, leading shareholders at the bank, asking them not to back the loan request, by claiming that it would fuel corruption.

Eskom has been seeking the loan from the World Bank as part of its effort to boost the country's power-generating capacity and complete its capacity expansion from conventional and clean energy sources. The three projects that are to be covered under the programme (see here) are

1. the construction of a 4,800MW Medupi coal-fired plant in Medupi, in the Limpopo province, which will cost an estimated US$3.05 billion;

2. US$260 million for 200MW of concentrated solar power and wind plants, and

3. US$485 million for efficiency initiatives.

But the DA's objection to the loan is focused on the Medupi project, particularly the involvement of one of the contractors, Hitachi Power Africa. A subsidiary of Germany's Hitachi Power Europe, Hitachi Power Africa was established in late 2005 and counts African National Congress (ANC) holding company Chancellor House as its owner. This, according to the DA, amounts to a clear conflict of interest. "It is completely corrupt for a political party to make billions of rands out of state tenders, when that political party is in control of the state," Zille said. "If the loan is granted under these circumstances, the ANC's power will be corruptly entrenched and South Africa will become a criminal state," she added, according to Agence France-Presse. "We are asking them to use their leverage and say they will not grant the loan unless the ANC completely withdraws its 25 percent stake in Hitachi Africa," Zille said following a meeting with the U.S. and U.K ambassadors to South Africa.

Outlook and Implications

South Africa is currently suffering from a severe energy shortage due to growing electricity demands and years of disinvestment by Eskom. To curb the problem, Eskom has embarked on a 385-billion-rand (US$52-billion) funding programme for new capacity. The World Bank funding is seen as an important component in the implementation of this programme, which includes building new power plants or upgrade existing ones. Although the Medupi project has already secured some funding from other multilateral bodies, such as the African Development Bank, it has faced strong opposition from environmental groups on the grounds that the Bank should be promoting cleaner and renewable energy sources and that the project will not be benefitting poor South Africans as both the government and Eskom have been claiming. According to Reuters, a group of 125 environmental organisations have written the World Bank claiming that the project will not bring electricity to the poor but will benefit large mining houses and smelters.

The World Bank, which is expected to give a favourable decision on Eskom's application today, has a highly controversial record in its power-sector operations, one of the factors cited by those who do not want to see the Bretton Woods institutions at the heart of global efforts to tackle climate change. Its focus has tended to be on large-scale projects-including major dams and hydroelectric plants-which have made a difference to overall capacity in host countries, but have also had significant environmental and sometimes social costs.

But in this particular case, the involvement of the ANC-affiliated Hitachi Africa in the Medupi project will sit uncomfortably with many, as the ANC stands to make a significant amount of profit from the World Bank-backed project. Even if the ANC insists that Eskom has awarded the contract without any political pressure, it is difficult to avoid the accusations of a conflict of interest, which could bring the government into disrepute.