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When Eskom falls off its 'coal cliff', will it fall on Botswana?

In Gaborone, it is considered quite one thing to build a 100km rail spur from the Mmambula coal deposits across the border to the Waterberg. But the idea of co-funding a major rail and port infrastructure project with South Africa, which would certainly cost tens of billions of pula, is about as appetizing as some week old-seswaa, writes *PROFESSOR ROMAN GRYNBERG


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The last few months have been unkind to Eskom, the company that, at least until the end of July, remains Botswana's power supplier until the thermal plant at Moropule B gets up to full capacity. First, in March NERSA, the South African Energy regulator, put a lid on the requested 16% power price increase by Eskom. It only agreed to an eight percent increase. The South African consumer breathed a sigh of relief from what had been years of double digit cost increases. For the past six years, South African energy users were confronted by average power-price increases of 25% to help fund Eskom's R500 billion spending through 2017 to overcome an electricity shortage.
For Eskom, this was a major blow to its expansion plans which required the continuation of double digit price increases in order to assure that it had sufficient revenue not to expand the South African national debt. At present, Eskom is approximately R195 million in debt and the NERSA announcement can only mean that if South Africa wishes to avoid continuing power shortages which have constrained economic growth, it will have to allow and underwrite more of Eskom's debt.The price increases in South Africa have been softened in Botswana by the government's substantial subsidies to power generation.
Otherwise, the South African price increases that occurred over the last four years, along with the very high cost of generating power from diesel at Orapa, would have been passed on fully to Botswana consumers. While electricity appears expensive now, the average Botswana consumer will certainly have to pay substantially higher prices once Moropule B is in full operation and BPC is operating as a producer rather than simply a transmitter of what has for decades been Eskom's subsidised power to Botswana's consumers. But once Moropule B is finally completed at the end of the month, Botswana's relationship with South Africa and Eskom and South Africa's rail parastatal, Transnet, will enter a new and far more complex stage.
The South African 'coal cliff'
If Eskom's problems with power generation were not difficult enough with NERSA refusing its tariff increases, a new problem with its coal dependent business model emerged over the last week. The megawatt munchers of South African heavy industry, the so-called Energy Intensive Users Group, announced what many have known for a while - that even with the building of giant but delayed power stations like Medupi with its estimated 4,800MW of power or the equivalent of eight Moropule B power stations, South Africa would not have enough coal by 2015 and the country would fall off what they called a 'coal cliff'. So not enough power stations and now not enough coal. But this is not because South Africa is running out of coal, at least not immediately, but rather because there has been no new coal mines developed in the last few years and there is insufficient rail infrastructure to move the coal from the new Waterberg coal fields to the old power stations around Witbank.
Enter Botswana! South Africa, at least for the immediate future, does not require Botswana's coal if it can get its mines operating and develop its rail infrastructure. But it will probably need Botswana's coal within a decade. The South African National Planning Commission, in one of those Anglo-Saxon understatements, said that South Africa has 'heavily under-invested in infrastructure' over the last two decades. Indeed in the area of coal transport and export infrastructure, South Africa, because it did not develop sufficient railroads and expand port facilities at Richards Bay and elsewhere, missed the great coal boom of the last decade that peaked in 2007 and it thereby allowed other countries to enter the Chinese and Indian coal markets. South Africa desperately needs an expansion of the heavy haul line from the rich coal deposits in the Waterberg through to Witbank. But of course, Botswana's richest and best quality coal deposits are at Mmamabula, just 80-100km as the crow flies from the Waterberg.
So the emerging game plan is for capital-starved Transnet to supply coal to equally capital-starved Eskom to get Botswana to help co-fund a heavy haul line all the way from at least Mmambula through to Witbank and extend the existing heavy haul line through Gauteng to Richards Bay or even another port. In Gaborone, it is considered quite one thing to build a 100km rail spur from the Mmambula coal deposits across the border to the Waterberg, but the idea of co-funding a major rail and port infrastructure project with South Africa, which would certainly cost tens of billions of rand, is about as appetising as a week-old seswaa. It is probably even less appetising than building a railway through Zimbabwe to the Mozambique coast and having Botswana's future export sector become dependent upon Zimbabwe's goodwill to continue transit rights.
However, this risk is probably overplayed because so much of Botswana's copper exports and diesel imports go through Zimbabwe. At present, Botswana and Namibia seem to be determined to proceed with building a railroad to Walvis Bay in Namibia because both consider each other stable and reliable partners.The problem is that the distance is much longer as almost all the coal deposits are located on the eastern border and it is the wrong ocean as the markets for coal are largely in India.Privately, the miners, who do not wish to offend government, are not at all convinced by the commercial viability of the Trans-Kalahari route. To be viable, it requires the Trans-Kalahari Railway to ramp up exports of 50MT at a fairly rapid pace. While both Windhoek and Gaborone seem committed to it, they are going to have to convince very sceptical miners and even more sceptical bankers that the Trans-Kalahari railroad makes commercial sense.
Botswana Exports Coal - Turkey via South Africa
Botswana has already started to export coal, at least in trial shipments. It is understood that Moropule Coal Mine, owned by Debswana (Anglo and the Government of Botswana) and the only existing coal mine in the country now has started to export to Turkey through South Africa. The existing rail network can carry about 10MT annum from Botswana and with some improvement could possibly be increased to 20MT. But Cecil Rhodes' railroad from Mafeking to Bulawayo is simply not up to the task of shipping up to 90MT of coal per annum. A new railroad must be built if Botswana is to achieve its coal export dream. As more and more of the increasingly financially desperate junior miners that have discovered commercial coal deposits in Botswana look to evacuate their coal, the direction they will be taking will be based on existing railways to South Africa, at least initially.But in 2012, presidents Jacob Zuma and Ian Khama signed a Memorandum of Agreement for the export of Botswana's coal to South Africa and this will add further impetus to the South African route. In Gaborone and Windhoek, the political heart may say Walvis Bay but the pocket is likely to say Richards Bay. Which route wins will depend in no small part on how much investment Transnet will seek to get out of Botswana.