Dear Money Morning Reader,

South Africa’s official opposition (the Democratic Alliance) and various international ‘green’ movements failed in their attempts to scupper Eskom’s World Bank loan last week. Their request for a ‘conditional’ loan fell on deaf ears and the bank granted the state power utility $3.75bn to part-finance its Medupi coal-fired plant. Eskom will now trawl the capital markets to meet the balance of its funding obligations.

Local concerns about the finance package centre on the 25% stake Chancellor House – an African National Congress (ANC) investment vehicle – has in Hitachi Power. Hitachi won the R38.5bn tender to install boilers at Medupi, despite obvious conflict of interest concerns. The ANC’s 25% stake
should yield revenues of R4.62bn and given the risky nature of the project we doubt their share of net profit will be less than 10% of that! Over the week-end ANC treasurer Matthews Phosa told Business Times his party would divest itself from the project in the next six weeks. “We’re definitely not interested in getting involved in shady deals and taking advantage of the taxpayer to raise money!”

MoneyWeek has three concerns...

The first is whether Phosa’s undertaking is genuine. The ruling party’s initial promise to extricate itself from the deal failed to materialise. Business Times also reveals that neither Chancellor House nor Hitachi is aware of the ANC plan to sell its stake. Our second concern is whether the ANC addresses the conflict of interest issue by simply selling its investment. The line between party and state is totally blurred – and the ANC will still benefit by way of capital gains. To us there’s no difference in the ANC earning its profit when the contract completes or banking its reward by selling out of the project today. Finally, we cannot envisage a complex financial transaction of this nature completing in just six weeks.

And – for the pessimists – we observe there’s nothing preventing the party from on-selling its investment (for minimal profit) to another linked investment vehicle – probably a private company loaded with dedicated cadres. Politics aside, the World Bank loan is good for South Africa. We need the 4800MW of additional power Medupi will contribute to the national power grid. This additional capacity will ensure the country can meet its long-term growth objectives. Without growth we cannot address critical issues such as unemployment and poverty alleviation.

Although market commentators have repeatedly revised the country’s 2010 growth prospects higher, there are some worrying statistics. One of these is the widening disconnect between the purchasing managers index (PMI) and SA manufacturing production. Stanlib economist Kevin Lings explains: “The relationship between the domestic PMI and manufacturing activity appears to have broken-down somewhat in the past couple of months.” The positive PMI number (which topped 60 index points in
February) contradicted the 1.5% month-onmonth decline in manufacturing production. The economy must demonstrate “a more robust and sustained increase in domestic final demand/fixed investment spending to provide the basis for a sustained and more significant expansion of manufacturing output,” said Lings.

If you’re tired of the local mix of left-leaning politics and capitalism, you might find an outlet for your investment cash in Asia. In this week’s feature article, Cris Sholto Heaton looks at where you should put your money to make the most of the Asian consumer boom. Sign up here to discover the best brands in the Far East.

Turning to the markets...

The JSE all share index slumped 1.73% on Friday. The gold mining index slipped 2.5%. Resources fell 2.59%. Banks and financials weakened 1.35% and 1.04% respectively. Industrials pulled back 0.33% and the platinum mining index decreased 2.43%.

London's FTSE100 shed 1.39%. The Dow Jones slipped 1.13% and the Nasdaq fell 1.37%.

Tokyo's Nikkei closed down 1.64%. Hong Kong's Hang Seng lost 1.6%.

Brent crude is currently trading at $86.29 per barrel.

Spot gold's trading at $1,136.37 and platinum was last quoted at $1,717.50.

And here's how the rand is performing against the major currencies:
R/$7.44
R/₤11.35
R/€10.02