Peeling back the skin of 'blood' resources (Part 2)

Continued from: http://hir.harvard.edu/blog/khadija-sharife/peeling-back-the-skin-of-blo...

Take South Africa's coal industry, the primary source of the country's electricity generation. On the surface, South Africa is governed by '"one-man, one-vote" electoral democracy --by the people, for the people.

But dig a little deeper and the nature of agreements reveal much that goes against the public interest, unveiling a web of multinationals aligned with the state.

Eskom, the State's electricity parastatal, provides multinationals with arguably the world's cheapest electricity via iron-clad 'sweetheart' deals negotiated during the apartheid regime, and endorsed by the liberation government. Known then as cost-plus contracts, the terms of long-term supply contracts were solely drawn up by mining houses (on whom the apartheid state had become dependent) for the purposes of attracting investors to capital-intensive extractive industries. The broader system, described by apartheid-era Prime Minister John Vorster as “bricks in the walls” of the regime's “continued existence,” was located at the center of the military-industrial complex, pillared by multinationals such as Anglo American, one of the world's largest mining companies.

A confidential memo written by former Eskom head Jacob Maroga in 2007 states, “For reasons unknown, however, few of these documents required performance on the part of the mining houses to deliver coal of the quality for which the associated plants were designed. Nor did these documents make provisions to fuel stations at 100 percent load if the station was so required. More troubling is that Eskom's Generation Primary Energy (GPE) has historically and consistently failed to enforce what little performance the contracts required.” Apartheid's downfall brought with it a renegotiation of contracts between Eskom and various multinationals, with the mining companies demanding Eskom convert “cost-plus” contracts to iron-clad “fixed price” contracts at “low prices fixed for the remaining (or renegotiated) contract terms.”

Simultaneously, the removal of pariah status from South Africa enabled mining houses producing saleable product (chiefly Anglo-Coal, BHP Billiton, Kumba, and Xstrata) to begin exporting large amounts of high quality coal at Eskom's expense. Contracts allowed for multinationals to recover 100 percent of capital investments, coupled with significant returns, irrespective of supply or performance.
These days, Anglo-Coal, a wholly owned subsidiary of Anglo American, supplies as much as 30 percent of its coal to Eskom.

Maroga even admitted that buying back power from BHP Billiton, another multinational coal supplier, would be too cost prohibitive at almost R6 trillion. This is in spite of the country's rolling blackouts and crippling energy shortages, much of which is caused by the export of coal resources and the use of energy by foreign companies for foreign interests at highly cheapened costs.
South Africa has been applauded by many developed countries and corporations for providing the cheapest electricity in the world to multinationals. It is an entirely different story for the country's citizens, however. They are required to subsidize corporate exemptions and tax holidays through increasing tariffs and burdensome costs. Within Africa, Eskom's footprint is enormous, rendering such exploitation a pan-African problem too: South Africa is the world's third largest coal exporter, exporting 25 percent of production which is estimated at over 220 million tons annually. It is also the world's fifth largest coal producing country and the seventh largest electricity generator in the world. Eskom also supplies approximately 45 percent of Africa's energy consumption.

This should be good news as the continent, chiefly dependent on mega-dams, desperately requires energy. But like the situation in South Africa, much of the electricity 'exported' to client states such as Mozambique, is earmarked for use by foreign multinationals, completely bypassing citizens. As with mega-dams, transmission lines are much too costly to consider.

The government claims that Eskom's current R400 billion coal-focused expansion mega-project, is worth the immense debt that will be imposed on South African citizens. But as Eskom admitted to local media, it has “struggled to find all the funds needed.” Eskom's Medupi plan the first pillar of the expansion programme, requiring a $3.75 billion hard currency loan from the World Bank, was justified by Finance Minister Pravin Gordhan who framed the expansion plan as designed to supply the “strong new demand for electricity” owing to the “millions of previously marginalized South Africans…now on the grid.” His opinion editorial failed to mention the wide-ranging economic and environmental impacts of the R125 billion 4800 MW Medupi plant. This includes acid mine drainage and pollution from mining responsible for 75% of water contamination and toxicity in South Africa, one of the world's most water scarce countries. which coupled with other water issues - including the increased strain on the three water catchment systems from 40 new coal mines, will cost the country R360 billion in mitigation during the next two decades. He also glossed over the the loan's impact on citizens, via unaffordable rising tariffs projected at 35 percent annually for a cumulative 127 percent increase , even as he evaded the issue of just how--and who--coal-fired electricity production would benefit.

For South African citizens, living in one of the world's most unequal societies with a gini coefficient of 0.67, basic services have been commodified in a 'cost recovery' context. This means that while free basic electricity (FBE) is supplied to citizens, the amount of electricity (50 kWh - equivalent to boiling a kettle every day for 17 days) is scarcely enough to make a tangible impact. Known as the 'disconnection epidemic', SA citizens now have access to electricity meters they cannot afford to use.

Had he delved into the issue of “For whose beneft?”, he would have come across the very same mining houses that appear to have arrested development and democracy in South Africa. The enormous debt acquired by Eskom cannot be justified as existing coal resources have been downsized from 50 billion rendering extraction of coal too costly to be feasible in 40 years, according to scientists and geologists such as Dr Chris Hartnady. Paradoxically, as the government shoulders the massive costs of Eskom coal expansion, the R150 billion Uppington solar project, capable of generating one tenth of the country's energy needs, has been packaged by the government as “for private investors” only.
But the holes in the pockets of citizens appears to also match the holes in the pockets of the country's wallet - the tax base. Each year, African countries like South Africa experience mass capital flight. In 2007, for instance, the country lost 27% of GDP or R450 billion to capital flight, chiefly through illicit but technically legal corporate mispricing. The bulk of multinationals operating in SA are resource-seeking entities generating wealth from electricity, water and other resources provided to them as artificially cheapened costs. And while South Africa has become the 'protest capital' of the world, with as many as 10 000 annually until 2007 chiefly related to issues around basic services - namely that of the costs of water and electricity, little changes as the State claims the budget cannot accommodate greater volumes of free basic electricity.
Just as South African citizens have limited influence over the way in which their resources are used, irrespective of the ability to vote, so too are they unable to penetrate the corporate veil and demand 'capital flight recovery'.
A lack of both multilateral automatic information exchange (as opposed to “on request” voluntary Tax Information Exchange Agreements) and mandatory corporate country-by-country disclosures, ranging from pre-tax profits to intra-group sales, creates an opaque environment.

Thanks to the global corporate system facilitating secretive transfer and payment of capital and resources - known as supply-side conflict vehicles, demand-side corruption - or the local political forces seeking foreign players for mega-projects or resource exploitation, find themselves in perfectly legal but illicit operating environments. The government's opaque 'sweatheart' electricity deals, negotiated in secrecy, coupled with the lack of financial regulation disclosing capital flight, is yet another example of how political systems legitimise conflict 'exploitation' of minerals in the name of the people, and at their expense.

Starving masses of David to feed a few giants Goliaths?