Karpowership: ‘State capture on steroids’ deal unearthed

Karpowership: ‘State capture on steroids’ deal unearthed

In November 2022, with its R218 billion deal hanging by a thread, Turkish powership company Karadeniz decided to ditch its black empowerment partners Powergroup SA — a risky move that put the entire deal in jeopardy. 

Why? Seemingly, because Karadeniz believed powerful businesswoman Anna Mokgokong could help Karpowership secure the approvals it desperately needed from the government.

Karpowership SA — a joint venture between Karadeniz and Powergroup SA — won the majority of the Risk Mitigation Independent Power Producer Procurement Programme (RMI4P) tender to supply dispatchable (on demand) power to Eskom. 

The 20-year contract is conservatively estimated to be worth R218 billion.

But recently the partnership has soured. 

Karadeniz and its BEE partner clashed in the Johannesburg high court last month. Powergroup wanted the court to reinstate its 49% stake in the scandal-plagued deal after Karadeniz exercised a call option and kicked its empowerment partners out of the company.

Powergroup lost the urgent application — after Judge Shanaaz Mia ruled that the horse had bolted — but succeeded in exposing a secret agreement between Karadeniz and Mokgokong’s BHI Energy, which Powergroup’s advocate, Tembeka Ngcukaitobi, described as “state capture on steroids”.

Although counsel for Karadeniz told the judge this allegation was “reckless” and “without merit”, a closer look at the scheme of the agreement suggests Ngcukaitobi was not simply being dramatic.

The confidential memorandum of understanding (MOU), drafted in November last year, detailed how Karadeniz would help BHI Energy to acquire the 49% stake of the Karpowership deal held, at the time, by the unsuspecting Powergroup.

For her part, Mokgokong was asked to deliver three things: funding, a stake in a new liquified natural gas (LNG) terminal planned for the Port of Ngqura and help securing the outstanding permits Karpowership desperately needed from the government.

Mokgokong blasted Ngcukaitobi’s description of the deal as “state capture on steroids”, calling it “false, defamatory and … calculated to cause embarrassment to BHI, myself and the companies that I represent”.

“I categorically deny any inference of wrongdoing on the part of BHI, myself or any company that I represent,” she said in a written response this week. 

“I reject the false narrative that has been created by Powergroup and its advisors. The narrative created by them has clearly been designed to detract from the real issue between them and Karadeniz and is a calculated attempt by Powergroup to mislead the court, the press and the general public.” 

As more questions were asked, she got annoyed: “I still have to deal with exhausting emails from you like I’ve nothing to do all day,” she wrote on Tuesday. 

But the devil — as is so often the case — is in the detail. 

And what it suggests is that Mokgokong has been the beneficiary of a series of questionable decisions that will help realise energy minister Gwede Mantashe’s dream of making the Eastern Cape the “gas capital of the country”.

Outstanding permits

When the Sunday Times broke the story of Mokgokong’s attempt to move in on the Karpowership deal on 13 August, the paper reported she delivered a barefaced denial that she was interested in acquiring Powergroup’s 49% stake. 

Yet the draft MOU shows that as far back as November last year, Karadeniz and Mokgokong were working “to explore the legal, commercial and financial structures in order for BHI to hold 49% of the shares of Karpowership SA”. 

In terms of what Mokgokong would be expected to bring to table, the draft of the MOU reads: “BHI will organise necessary meetings with competent authorities … to obtain necessary licences and permits for the prompt implementation of the RMI4P Projects and Karpower will assist BHI and provide all necessary information to enable BHI to obtain the same.”

At the time, Karpowership needed two types of permits: environmental permits from the department of forestry, fisheries and the environment and a Section 79 directive from Fikile Mbalula, who was the minister of transport, granting access to build infrastructure in the ports.

Mokgokong should not have been in a position to help with either.

“Any suggestion that BHI would exercise any form of ‘influence’ is simply misleading,” Mokgokong said via email last week. 

“As [our company] has been involved in the gas space for more than a decade, it has relationships with many services providers, consultants etc whom all have dealt with regulatory matters. Any ‘assistance’ that could possibly be brought to the table is by way of existing relationships with these service providers and consultants.” 

Although the “competent authorities” clause was cut from the final MOU signed in February, she added: “There is also nothing wrong with assisting [Karpowership] by means of referring [them] to the suitable qualified experts to assist them with obtaining regulatory approvals.”

But the draft agreement does not say that Mokgokong would refer Karpowership to consultants and experts; it says she would organise meetings with “competent authorities”, that is government officials tasked with issuing the permits the company desperately needed.

Both the department of forestry, fisheries and the environment and Mbalula said no approaches were made by Mokgokong or her companies to discuss outstanding Karpowership permits.

Yet, on 26 February, in one of his last acts as minister, Mbalula issued a Section 79 to Karpowership and Mulilo Total, another of the RMI4P projects.

“The granting of the ministerial direction was based on the application lodged by Karpowership and Mulilo Total Coega … The evaluation conducted on the applications was solely based on what is provided for in law and no third-party interests had any bearing on the decision,” he said over WhatsApp.

But a closer inspection shows the Section 79 contains a caveat: “The direction for the Port of Ngqura is subject to the use of the LNG facility which the Strategic Fuel Fund will build.”

Why is this important? Because Mokgokong’s company stands to benefit.

The Ngqura-Coega LNG Terminal 

The second part of the deal outlined in the “confidential” draft MOU was an offer for Karpowership to participate in a new LNG terminal planned for the Port of Ngqura.

Mokgokong has spent years pursuing this deal through her company Tamasa Investment Holdings. 

Tamasa’s proposal is to build an onshore regasification terminal, where concentrated LNG can be converted back into natural gas that can be burned to produce electricity.

In a 2015 presentation, her company wrote that it believed that South Africa “strategically and politically needed a LNG regasification terminal. With the energy crisis we find ourselves in … our LNG project is not only VITAL but IMPERATIVE.”

But to land the imported LNG, which would arrive by ship, Tamasa needed permission to build infrastructure in the Port of Ngqura, outside Gqeberha.

Enter Mbalula

Port access rights are granted in one of two ways: through a competitive tender process (in terms of section 56 of the National Ports Act) or through a direct appeal to the minister of transport to issue a directive in terms of Section 79.

There is debate about the extent of the minister’s powers under Section 79. One interpretation is that he can only instruct Transnet National Ports Authority (TNPA) to run a competitive bidding process. The other is that he can instruct TNPA to issue port access rights to a specific company if it is deemed to be in the national interest — a situation fraught with potential for abuse.

And Tamasa was not the only company that wanted access.

In 2020, PetroSA, a subsidiary of the state-owned Central Energy Fund, had signed its own memorandum with Russia’s Gazprombank to explore the possibility of jointly building an onshore regasification hub in the Port of Ngqura, then estimated to cost R7 billion. 

The agreement did not guarantee Gazprom the contract but did say that the two state-owned companies would “co-operate with each other and jointly evaluate the development, construction and operation of the … project”.

And there had been interest from other international players after the Central Energy Fund issued a request for information, a precursor to a tender, in November 2021.

In January 2022, Mbalula announced he would grant port access rights to another subsidiary of the Central Energy Fund: “The Strategic Fuel Fund will construct an onshore liquid natural gas (LNG) regasification facility at the Port of Ngqura. This investment is of national importance as it responds to energy policy and energy security of the country. The total project value is estimated at US$1.5 billion [R30 billion],” he said.

“State Capture on steroids”

The reason Ngcukaitobi referred to the Karadeniz’ draft MOU as “state capture on steroids” was that Mokgokong appeared to be offering to “exchange a state asset”, that is a stake in SFF’s planned LNG terminal in Ngqura, “for a private interest” — shares in Karpowership.

“All these exchanges and quid pro quo concerning state assets were done without the knowledge, nevermind the consent, of the state,” Powergroup alleged in its heads of argument.

Mokgokong tells a very different story. 

“Tamasa was required to apply for a Section 79 directive” — in order to realise its long-held dream of building an onshore regasification terminal,” she said.

“The Strategic Fuel Fund applied for its own Section 79 directive after Tamasa’s application resulting in the minister of transport granting the Section 79 directive to the SFF with the understanding that the project will be a collaborative project between Tamasa and the SFF.”

Mbalula confirmed this but said it was more official than a mere “understanding”: “The direction was issued to both Tamasa and SFF based on the agreement they concluded and duly informed the department that the project would be executed by both parties.”

But Mbalula stressed that he had not played matchmaker: “The process of engagement between Tamasa and SFF was not an initiation of the minister, it was an initiative that was started by both parties (Tamasa and SFF), and it was only after their agreement that the department was informed of the intention to withdraw individual applications and be replaced by one application by both parties.”

One problem with this — and there are many — is that Mbalula had handed Tamasa, a private company, coveted port access rights and, with it, the right to develop an LNG terminal without any competitive tender process.

In Karpowership’s case, Mbalula had granted the Section 79 only after the company was awarded the lion’s share of the RMI4P tender and after it was designated a “strategic integrated project” of national importance. 

Tamasa had neither of these but would now hold the keys to the gas industry in the Eastern Cape for the next 20 years.

“Tamasa will build, operate, own and then, in due course, transfer the asset to the SFF,” Mokgokong told us. Until that happens, Ngcukaitobi’s suggestion that the proposed deal with Karadeniz involved “the ‘exchange of a state asset’ is simply false”.

The farce

The Central Energy Fund did eventually release a tender for the Ngqura-Coega LNG Terminal Project, but only in August 2022, after Tamasa had already secured the “understanding” that it would develop the terminal with SFF.

The request for proposals called for a private company to “develop, finance, construct, operate and maintain LNG and gas midstream infrastructure to enable the importation of LNG into the Port of Ngqura” for 15 to 20 years before finally transferring ownership to the Central Energy Fund. 

Until then, the state would hold a minority stake — “currently anticipated to be between 5% and 10%”. The Central Energy Fund would also “invest” an undisclosed amount in the project, the document reads.

One of the assets the new terminal developer would be given was the Section 79 awarded to SFF and — although the document did not say it out loud — Tamasa.

Tamasa submitted a bid and, by the time the tender closed in November 2022, Mokgokong was already confidently offering to swop a stake in the LNG terminal for a stake in the Karpowership project. 

Unsurprisingly, Tamasa was awarded the contract.

On Friday, Eastern Cape premier Oscar Mabuyane announced that the Central Energy Fund and Tamasa would build an LNG terminal in the Port of Ngqura, now estimated to cost R13.6 billion.

How Karpowership fits in

Mokgokong had what she wanted. So why get embroiled in the controversial, albeit lucrative, Karpowership deal?

The problem with building a R13.6 billion LNG terminal in the relative backwaters of the Eastern Cape is someone needs to be willing to buy the gas. If Karpowership gets the go-ahead, its 450 megawatts floating powerplant in the Port of Ngqura will need gas for the next 20 years. 

In its bid for the RMI4P project, Karpowership said Shell would provide LNG which would be pumped through a floating storage regasification unit moored in the harbour. But the caveat in Mbalula’s Section 79 means that Karpowership will be forced to source gas from Tamasa’s onshore LNG terminal.

There is logic to this decision. The port can only accommodate one regasification unit — granting port access rights to Karpowership risked sterilising the port for any other gas users. 

But it was also the second time that Mbalula had bestowed a significant benefit on Mokgokong’s company — first, by all but ensuring Tamasa would build the terminal then, when he issued the second Section 79 tying Karpowership’s port access to Tamasa, guaranteeing it a major customer for 15 to 20 years.

Mbalula reiterated that “due process was followed” in issuing the two Section 79 directives, while Mokgokong downplayed the benefit Tamasa would receive: “It would appear that Karpowership’s involvement in South Africa is likely to be shorter than the [20-year] term … If that transpires, then there will be almost no benefit from the Section 79 directive as the SFF terminal will only be completed in four to five years’ time.”

Electricity Minister Kgosientso Ramakgopa has floated the idea of reducing Karpowership’s contract from 20 years to five, given that the “emergency” power contract is hugely expensive. 

But there appears to be little political backing for such a renegotiation and even Karpowership acknowledged, in an interview with eTV’s Annika Larsen in July, that the government is yet to make any formal proposal.

The gas capital of the country

On the contrary, if the Eastern Cape is to become the “gas capital of the country”, as Mantashe has suggested, Karpowership needs to get its power project over the line.

The LNG terminal, which will feed Karpowership’s project, could eventually be supplied with gas from the Paddavissie offshore gas field being developed by TotalEnergies. 

But the terminal risks becoming a white elephant if there is no one to buy its product.

Karpowership declined to respond to questions, including whether being forced to use the SFF/Tamasa LNG terminal will alter the cost of the electricity it plans to generate. 

When Karpowership responded to the RMI4P tender, LNG prices were at a record low of $2/MMBTU, which allowed it to offer electricity to Eskom at R1.47 a kilowatt-hour. More recently though, Karpowership has said it believes $10/MMBTU is more realistic. 

In terms of the rules of the RMI4P tender, the price of gas gets passed on to Eskom and, increasingly, to electricity users who cannot afford to install solar panels and batteries.

The Central Energy Fund also ignored questions. 

The only person who did respond was Mokgokong, although she became defensive: “We have been pioneers in the LNG space second to Sasol that has enjoyed a monopoly in the country without any eyebrow raising by the media,” she wrote in one of her last free-wheeling emails. “I’m saddened as to why my great work is being questioned. As a black woman … is that why I’m tortured by the media … Kindly advise.”

She was assured that no one was trying to torture her, but that projects that benefitted from lucrative concessions from the state had to be able to withstand public scrutiny. 

“You can arrive at your own conclusions,” she wrote in her final email. “It certainly appears you’ve got your own agenda.”

Source: https://mg.co.za/news/2023-10-06-karpowership-state-capture-on-steroids-deal-unearthed/