The ever on and off Morupule B Power Station is, according to latest research and statistical reports, almost short circuiting this country’s economy as its operational woes are infecting the country’s GDP, coal production and Botswana Power Corporation(BPC) credit rating.
Recently, when assigning a rating to power utility BPC, internationally respected credited rating agency, Moody's Investors Service gave the corporation a Baa2 rating but not without taking out from the good credit. What dented BPC’s good marks was Morupule B, which is said to be delayed in construction and will not be fully available to supply this country’s growing electricity demand. Botswana will remain less electricity sufficient until 2023, as it is the year which the works of Morupule B is expected to fully complete. Morupule B is currently undergoing remediation programme on its boilers.
“Moody's assessment of very high support for the company were revised downwards. In addition, severe delays or uncertainty around the remediation programme of Morupule B plant could also put downward pressure on the rating,” said Moody’s recent report on BPC highlighting operational challenges facing BPC.
Because of Morupule B woes, Moody’s expects upward rating pressure is unlikely to be in the medium term. According to Moody’s, its rating also reflects the company's significant asset concentration and poor asset quality, with multiple design and construction issues affecting output from BPC's coal fired plants. The poor reliability of its power plants increases Botswana's reliance on electricity imports reducing visibility over the company's internally generated cash flows, says Moody’s.
“While the Morupule A power plant (132 megawatt (MW) is expected to come back fully online this year, the remediation programme for the larger Morupule B power plant (600 MW), has only started and there is uncertainty around the improvement in the plant's availability once the works have been completed in 2023, as per the current schedule,” said Moody’s.
Moody’s assessment comes after the third quarter of 2019, when the 600MW Morupule B was said to be “fully operational” and this was for the first time since its seven years of woes. There was much hope after BPC injected a P1.2 billion overhaul on Morupule B. Since its inception in 2012, as an expansionary projection to Morupule A, Morupule B lived on four years and had a documented exposure of it failing to launch due to poor design.
After coming with much fanfare from as an answer to Botswana’s growing power demand, this country was left to go back to the drawing board of reliance on its insufficient 120MW, Morupule A plant and two emergency diesel plants with output of 195MW. Botswana was left to starve for electricity as South Africa’s Eskom became increasingly unreliable and was slowly pulling out the socket that supplies Botswana.
Adding to depression of BPC crediting by Moody’s pointing a finger towards Morupule B, is the latest Statistics Botswana Gross Domestic Product (GDP) report for the quarter under review (Q3) released in December which says the plant was not operating at full capacity. The report showed a decrease in the Electricity real value added which attributed to a decline in the local electricity production by 39.6 percent. Furthermore, imports of Electricity went up by 119.6 percent during the quarter under review (Q3).
Statistics Botswana said the significant decrease in local Electricity production were largely due to reduced performance of the Morupule B Power Station which was not operating at full capacity. Another report which shows Morupule B to be hampering Botswana’s economy is the Index of the Physical Volume of Mining Production by Statistics Botswana, which also lays all the blame on the same plant for sabotaging coal production. The report says the decline in coal production is mainly as a result of low uptake by Morupule B Power station.
“Coal production dropped by 28.6 percent during the third quarter of 2019, compared to production registered during the same quarter of the previous year, the decline is mainly as a result of low uptake by Morupule B Power station which has resumed remedial works on the boilers. Although production fell, it is important to note that there was no shortfall in supply of coal due to stockpiling undertaken during the previous months. The quarter-on-quarter comparison, likewise, reflects a decrease of 23.5 percent when compared to the preceding quarter,” said the Index of the Physical Volume of Mining Production.
However, a report contradicting assessment and statistical information which paints a gloomy picture and far-fetched hope on Morupule B progress was also released recently. The recent Electricity Generation and Distribution Q3 2019 report which acknowledges the plant’s major contribution on domestic electricity production saying it eases Botswana’s over-reliance on electricity imports.
According to the Electricity Generation and Distribution Q3, when looking at the quarter-on-quarter comparison being Q2 versus Q3, it shows an increase of 16.0 percent, from 96.0 during the second quarter of 2019 to 111.3 during the current quarter. According to Statistics Botswana, the Index of Electricity Generation stood at 111.3 during the third quarter of 2019, reflecting a year-on-year decrease of 39.6 percent compared to 184.3 recorded during the corresponding quarter in 2018.
According to the national statistics, the quarter-on-quarter perspective shows that local electricity generation increased by 16.0 percent from 403, 576 MWH during the second quarter of 2019 to 467, 974 MWH during the period under review. The 16.0 percent increase is said to emanate from improved performance of power generators at the Morupule B power station during the current quarter.
When comparing the corresponding quarters, the Q3 of 2018 and 2019, the physical volume of electricity generated decreased by 39.6 percent, from 774,822 MWH during the third quarter of 2018 to 467,974 MWH during the current quarter. Morupule B also became the MVP of the quarter under review as it helped Botswana to import less electricity from South Africa’s less sufficient Eskom. In Q3 of 2019 Eskom was the main source of imported electricity at 58.5 percent of total electricity imports.
After a new power deal signed last year, Electricidade de Mozambique supplied 20.7 percent while 14.9 percent, 4.5 percent and 1.4 percent were sourced from the Southern African Power Pool (SAPP), Cross-border markets and Namibia’s Nampower respectively. When looking at the quarter-on-quarter comparison, there is a decrease of 3.4 percent (17,906 MWH), from 522,021 MWH during the second quarter of 2019 to 504,115 MWH during the period under review.
This decrease in imported electricity is attributed to improvement in local generation, jumpstarted by improvement of Morupule B. However the physical volume of imported electricity increased by 119.7 percent (274,688 MWH), from 229,427 MWH during the third quarter of 2018 to 504,115 MWH during the current quarter.Contribution of Electricity Generation to Distribution
According to Statistics Botswana electricity generated locally contributed 48.1 percent to electricity distributed during the third quarter of 2019, compared to a contribution of 77.2 percent during the same quarter in 2018. This gives a decrease of 29.1 percentage points. On the other hand, said the National Electricity Statistics, a quarter-on-quarter comparison shows that the contribution of electricity generated to electricity distributed during the current quarter increased by 4.5 percentage points compared to the 43.6 percent contribution of locally generated electricity during the second quarter of 2019.
Most of Botswana’s electricity has been imported from South Africa’s power utility, Eskom, but in 2008 South Africa’s electricity demand started to exceed its supply resulting in the country restricting power exports. For more than a decade Botswana has been struggling with electricity imported from South Africa, as dependency on the country’s electricity import became increasingly unreliable, hence government efforts to increase local generation of electricity at Morupule Power Station. The Morupule Power A plant has a capacity of 132 MWH and was augmented with Morupule Power B, which is to have a capacity of 600 MWH upon completion. but has been dogged with scandals and lack of or slow progress.
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Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively, since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.