ESKOM Audit Outcome

Meeting report

Opening remarks

The meeting began with apologies from the Chairperson and Ms V Mente (EFF) who could not attend the meeting on this day. In the absence of the Chairperson, the Committee elected Mr S Somyo (ANC) as the Acting Chairperson. However, he was facing connection problems and Mr B Hadebe (ANC) was appointed to fill in his position until he joined the meeting.

Mr Hadebe highlighted that the Committee was going to receive a briefing from the Office of the Auditor General (AGSA) on Eskom’s 2020/2021 annual report and financial statements. He then opened the floor to the AGSA and its team.

Ms Zolisa Zwakala, Head of Portfolio Regularity Audit, AGSA, greeted everyone and introduced Mr Siyakhula Vilakazi from the SNG-Grant Thornton (SNG) auditors (a partner at SNG).

Mr Hadebe welcomed the team and asked if Ms Zwakala was accompanied by anyone else from the AGSA.

She replied that she was the only representative from the AGSA. It was just her and Mr Vilakazi. She explained that the AGSA did not perform the audit itself and hired the services of the SNG auditors.

Mr Vilakazi greeted everyone and indicated that he was accompanied by his SNG colleague, Mr Dirk Fouche.  He said Mr Fouche was responsible for the audit around performance and contracts management and was available to provide better clarity on these issues.

Mr Hadebe welcomed the team and granted it permission to proceed with the report.

Briefing on ESKOM Audit outcome 2020/2021 by the SNG
Mr Vilakazi said that Eskom only secured R18.9 billion (2020: R50.9 billion) in terms of its borrowing programme for the current year. Delays in receiving government guarantees and limitation of foreign borrowing limit resulted in planned funding being postponed to 2022. Despite the postponement of funding, Eskom was able to navigate liquidity requirements through effective cost management and deferral of capital expenditure.

The committed and drawn-down funding against the government guarantee of R350 billion for 2021 was R304.5 billion (2020: R324.2 billion), with R45.5 billion available for further use. The debt repayment profile of existing debt is pressured over the short and medium term, with debt repayments of R152 billion and interest repayments of R125 billion over the next five years. These redemptions and interest payments can only be met with government support combined with cost-reflective tariffs. The primary focus of the borrowing programme over the next five years is to secure costeffective funding and reduce Eskom’s debt burden. The new five-year borrowing programme has decreased by R16.6 billion to R105.3 billion when compared to the previous five-year period, reflecting Eskom’s intention to limit growth in debt securities and borrowings as well as related debt service costs. The sustainability of Eskom’s liquidity position and medium-term ability to raise funds remains at risk.

The successful execution of the funding plan is contingent on fair regulatory tariffs, improved investor confidence, additional government support and the ability to improve the balance sheet by effectively reducing current debt levels. South Africa’s credit rating downgrade, the lack of diversification of funding sources and increased financing costs due to the current financial environment are constraints that pose a threat to the effective execution of the programme.

Eskom received a qualified audit opinion with findings for the fifth consecutive year. Financial statement submitted for audit contained material misstatements which were subsequently corrected with exception of irregular expenditure disclosure note. Effective and appropriate steps were not taken to prevent irregular expenditure and fruitless and wasteful expenditure.

Efforts to drive accountability and consequence managements were hampered by lack of audit evidence to support the steps taken to ensure consequence management.

Irregular expenditure incurred in prior year was restated by an increase of R3 billion to R14 billion. This was as a result of fuel oil contract that was inappropriately procured through the emergency procurement process in the prior year but was only confirmed as irregular expenditure in the current year. An additional R1 251 million was incurred relating to this matter in the current year.

Year-on-year comparison, there was a reduction on irregular expenditure reported. However, the disclosed irregular expenditure is not complete and accurate, as described in the basis of qualified opinion. The irregular expenditure was mostly as a result of contravention of supply chain management prescripts. The current year irregular expenditure consisted mostly of the following: use of sole source. (R2 billion), incorrect classification as emergency procurement (R1.3 billion), tender processes not adhered to and insufficient delegation of authority (R3.9 billion),  Preferential Procurement Framework Act (R1.3 billion)  and breach of more than one commercial requirement (R1.5 billion).

The accounting authority did not exercise adequate oversight responsibility regarding compliance with applicable legislation and related internal controls that resulted in the lack of proper procurement and contract management processes as well as effective consequence management practices. Action plans developed to address internal control deficiencies were not, in all instances, adequate.

(See Presentation)

Mr Hadebe welcomed the report and opened the floor for discussion.

Discussion

Mr M Dirks (ANC) commended the AG for presenting a concise report and pointed out that the issues he wanted to raise were best responded to directly by ESKOM.

Mr A Lees (DA) welcomed the report and everyone to the meeting. He expressed great appreciation for returning to Parliament after a lengthy break. Although he agreed that the main questions were best directed to ESKOM, the AGSA could still shed light on a few matters. He asked if delays in decision making were responsible for fruitless and wasteful expenditure. On average, it took 77 days for permission to be granted for procurement through the National Treasury (NT). What was the AGSA’s opinion on this because the entity was desperately trying to provide services yet, at the same time, unintentionally causing irregular expenditure?

The Acting Chairperson greeted everyone and welcomed the presentation. He said the report was ‘a bit clear’ although he was worried by the AGSA’s indication on performance. The effects of power outages on the ordinary people and Small to Medium Enterprises (SMEs) were not clearly stated in the audit outcome. Their sources of income were severely affected by ESKOM’s performance. How was this reflected in the report that indicated good in terms of performance?

Ms B Swarts (ANC) welcomed everyone and asked if there was more information on the companies that were involved in the overpayment of R1.3 billion fruitless and wasteful expenditure. She also pointed out that in the Committee’s previous interaction with ESKOM, it was disclosed that the CPO was suspended for irregularities on Consequence Management. Which other employees besides the CPO had been suspended or were under investigation?

Mr Vilakazi replied that delays in approvals by the NT were partly the cause of irregularities although the audit did not investigate why the NT was not approving some of the requests. However, he emphasised again that ESKOM had an issue with documentation and record keeping, and that this may have been another contributing factor. It was possible that this made it difficult for the NT to approve requests because ESKOM could not justify its past irregularities with evidence. He also clarified that the performance report in the presentation simply clarified that the information disclosed, whether positive or negative, was reliable and accurate. He explained that if there were many unmet Key Performance Indicators (KPIs), the auditors did not repeat what had already been done. This is simply because it was assumed that the user of the financial statements or reader of the report would specifically consult the KPIs that dealt with the challenges. Therefore, although he understood Mr Somyo’s concerns that the effects of power shortages were not being reflected in the report, it was beyond the scope of the audit report at the present stage.

Mr Vilakazi responded that Econ Oil was the company involved with irregularities in the entity. He mentioned that findings also revealed that besides irregularities, there was evidence of overpayment to, and overcharging by, Econ Oil. With this evidence it was concluded that such payments fell in the fruitless and wasteful expenditure category. He confirmed that apart from the CPO there were other employees that were facing disciplinary processes. These cases, however, had varying outcomes as some employees had been dismissed and others given warning letters. He added that more disciplinary action was to be expected because during the audit irregularities were found but without clear evidence to explain why they occurred.

Mr Hadebe requested more clarity on the record keeping matter. He asked whether this was a problem with the current board and leadership, an unresolved challenge for the year under review, or a continuing problem that now demanded the Committee’s oversight. He asked when the contract that resulted in the overpayment was signed, and if anyone after investigations had been held accountable for it? Finally, he asked if anyone was held accountable for the matter concerning the extension of the contract to two terms. Although it was claimed that it was a critical skill being acquired, it was still in contravention of ESKOM’s Human Resources (HR) Procurement Policy.

Mr Vilakazi replied that poor record keeping was still a problem. When the auditors was selecting its samples it focused on both old and current transactions. As a result, the audit under report still found issues that did not get documentation on very recent procurement activities. This was, therefore, evidence of the recurring problem of poor record keeping. The extent to which the seriousness of this problem could be compared with the previous years was a question only to be answered by the management. However, from the SNG audit, ESKOM was still not yet ‘out of the woods’ as the recurrence of this issue was evidence that it had not addressed the matter adequately. He asked his colleague to clarify when the contract that resulted in the overpayment was signed.

Mr Hadebe interjected and requested additional information on the value of the contract in question.

M Fouche was no longer present in the meeting.

Mr Vilakazi requested permission to gather this information, put it in writing, and send it to the Committee.

Mr Hadebe welcomed the suggestion and asked Mr Vilakazi to include more information on the litigation processes surrounding the contract in question.

Mr Vilakazi said that the ESKOM HR Procurement Policy was clear that a contractor could only extend its term for two years. However, the contract in question had been renewed for at least three times. A visible weakness about this policy was that it did not stipulate the procedures that needed to be done if there was a need to extend a contract beyond the designated term. He explained that the auditors did not have information about who was held accountable for this matter, and the measures that were taken against them. It only received the resolution taken by the board that it had ratified non-compliance. However, from his personal observation, no disciplinary action was taken. In fact, an investigation concluded that there was no irregularity. Based on this investigation, the board decided that there was no disciplinary action needed. However, after realising that there was indeed non-compliance, it ratified this matter and shared the resolution with the auditors.

Mr Hadebe asked the auditors if the board was correct in their analysis that there were no irregularities.

Mr Vilakazi replied that as far as extending the contract beyond the stipulated term, there was an irregularity.

Mr Hadebe thanked the AGSA and its team for the insightful report and said they were going to meet again in the Committee’s next meeting with ESKOM. He then handed the meeting over to the Acting Chairperson.

The Acting Chairperson thanked the Committee and the AGSA team for attending the meeting. Once again he raised the question about how ESKOM’s performance had affected the people. He expressed deep concern about this matter but pointed out that the Committee was going to direct many of its questions to ESKOM at its next meeting.

The meeting was adjourned.