Exclusive interview with Ahmed Jaffer, Chairman of KPMG in South Africa and Head of Power and Utilities. He explains more about the KPMG IPP Conference taking place on 18 May during the upcoming African Utility Week at the CTICC.
Can we start with some background on your role at KPMG?
I am the head of power and utilities at KPMG. I specialise in both power and utilities as well as renewable energy. The projects that we are involved in include due diligence and the financial close process as well as IFRS, taxation, sustainability issues and CSI. I am the lead partner on Eskom when it comes to advisory as well as audit. Whatever the client requires, we assist and some of the issues are quite complex.
It’s understandable that there are client confidentiality issues at play here, but what is the most exciting aspect of your work at the moment?
Definitely renewable energy, both solar and wind, with concentrated solar power and hydro. It will make life easier in South Africa. It is also critical that we have enough energy and energy security.
Eskom is taking some time to complete the Medupi and Ingula sites, but it is putting a strain on our GDP as well as the economy as such. With this in mind, I believe it is so important if everybody can start working together and come up with a solution.
Medupi and Khusile’s capacity will be about 5000 MW, and Ingula will be about 1150 MW. The Department of Energy approved 79 IPP projects amounting to 5243 MW, with a capital cost of approximately R170 billion. If you compare that to what the Medupi, Khusile and Ingula power stations are costing, then it looks like this is a ballpark figure. So many EPC contractors and other companies are involved in delivering the 79 IPP projects. Comparing this to Medupi, if they can bring the 5000MW onstream, it would mean a lot to South Africa.
Tell us more about the IPP conference that KPMG is organising as a side event at African Utility Week in May.
What we are trying to do with the IPP conference is basically to look at all the issues facing the IPPs as such. And the way the conference will be structured, is that we will look at the different issues, including IFRS issue and any tax issues related to it.
In the past this was a half day conference, and most of the participants came back saying that a half day is too short. So the whole idea this time is to make it slightly longer and to try to make it more interactive. We have also tried to present more issues to get a better appreciation of the issues such as IFRS, financial statements, as well as tax implications.
When the EPCs were doing their feasibility studies, the way they were looking at their income streams, compared to now when they are looking at their IFRS statements, the type of revenue is completely different. So for the cash flows they can say X, but when they are doing their IFRS statements, some of the revenue actually gets knocked off against the cost of the plant. So these are the various challenges they are facing and each issue really is different.
Right now many of the IPPs are sitting with a PPA agreement of 15-20 years. However, when it comes to the useful life of a plant, according to what is it appreciated? According to the PPA of 20 years, is that what a plant should be appreciated against, or do they look at the useful life of the plant? We basically have differences of opinion on how to go about doing it, because as far as I’m concerned, if it is a 20 year PPA, you write your plant off for all the 20 years. Unless you can convince us that in the following 5 to 10 years you will have some sort of a contract with Eskom or another company that will take your off-take. But if there isn’t, then the plant has to be written off over their PPA period. These are some of the challenges.
Even some of the costs, they are not getting as a tax-deductible expenditure. So it depends on how they look at their costs and how they have allocated it. And that is what we will be looking at during the IPP conference.
Some of the issues that come up, the EPCs may not have thought about, but when they submit their tax return it becomes real and they may not have allowed for extra tax in the planning.
How many of these IPP contractors will be attending?
This is our third IPP conference and during the first two it was packed. Last year we had 150 attendees. I expect many of them to attend again. Many of them find it very useful to have such gatherings as they face the same issues. Some are further ahead and can help other companies with challenges that may still come up. Both Eskom and the IPPs are our clients. It is especially a great value for the IPPs that are coming onstream.
Bringing so many IPPs together also helps them to share information. We have our technical team of experts on site to assist with questions from tax, IFRS, hedging, financial risk to community development.
Apart from myself, our team at the IPP conference will include:
– Tara Smith, Partner | KPMG Reporting Accounting and Advisory Solutions
Specialist in IFRS and providing accounting advice on a broad range of issues to potential and current IPPs.
Topic: Challenges and accounting issues faced by IPPs during the phases of an IPP Programme including pre-financial close, financial close, development/construction and operation.
– Tanya Engels, Partner | KPMG Tax Services
Corporate tax specialist with a specific focus on inbound investment in the renewable energy industry. Advises a portfolio of multinational clients on the structuring of such investments into South Africa and ways to maximize the tax efficiencies of the projects.
Topic: The unique tax issues that the industry faces, including when to start claiming tax deductions, the non-tax deductible capital costs and the accelerated tax allowances available for the project.
– Kevin Hoff, Partner | KPMG Financial Services
Partner-in-charge of the Financial Engineering Group at KPMG: the centre of excellence for financial instrument valuation, hedge accounting and treasury risk management.
Topic: Insights into basic derivative financial instruments that may be used by IPP’s to hedge against the economic market risks (e.g. interest rate, foreign exchange, commodity risks) inherent in the funding and operation of the projects throughout the respective phases. In conjunction with this, insights into hedge accounting, the accounting tool necessary to achieve the accounting results that reflect the economic objectives of hedging these risks and remove any associated volatility in the income statement.
– Neil Morris, Partner | KPMG Climate Change and Sustainability Services
Thirteen years’ experience in the accounting profession both in South Africa and the United Kingdom. Work experience includes Climate Change and Sustainability, audit, and assurance technical support.
Topic: Environmental Rehabilitation Provisions
This is a dynamic and growing industry. If you look at what South Africa is doing, it has the legislation that has enabled IPPs to be successfully implemented which has not happened anywhere else in the world. We are basically the leaders in this field and having these kinds of IPP conferences is definitely very unique.
This article was first published on www.african-utility-week.com.
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