Eskom coal supply agreements with Tegeta: hearing with Minister

Meeting report

Opening remarks
The Chairperson welcomed the Minister of Public Enterprise and requested that she stay as long as possible. As she had to leave before 13:00, he requested that she make a few comments before she left. Accountability at the end of the chain was political. He commented that the Chairman of the Eskom Board, Mr Ben Ngubane, had probably seen SCOPA’s engagement with National Treasury two weeks previously which had been an information-sharing session to prepare the Committee for the engagement with Eskom and therefore Eskom was not called to that meeting. Their primary engagement was with Eskom to get an understanding and clarity about why certain things happened and certain things did not. The reason they were there were the two reports by PriceWaterhouseCoopers that Eskom itself had commissioned to seek clarity on areas of deficiency so to be able to respond to those deficiencies. The Committee was aware of issues twirling around Eskom, but the focus was on those two reports. The Committee wanted to know what had happened and what had not happened. Eskom had to remain focused on the matters at hand. The Chairperson appreciated the presentation sent by Eskom but the basis of the engagement would be on a number of items identified by the Committee members. Mr Kekana would be leading the questions in SCOPA’s usual question and answer hearing session.

Mr Kekana asked why Eskom had commissioned the report. The Board Chairman stated that Eskom commissioned reports from time to time as part of its internal audit as the internal audit unit did not have the capacity to do such a huge audit of the organisation. Coal price was the largest cost driver for Eskom and driver of the electricity price increases. Having a view to processes and procedures compliance, how were the prices arrived at? What was the process of procuring, for instance, adherence to Eskom’s procurement policy 1034, when they did the review?

Mr Molefe petitioned the Chairperson for three minutes to give an overview so that Eskom would be answering in context. They had received National Treasury’s questions and had prepared a slide. Perhaps if they presented the information, it would answer some questions.

The Chairperson indicated that they would not be asking Treasury’s questions, but their own questions.

Mr C Ross (DA) stated that the Committee wanted to establish accountability of contract management and the matters raised by the Auditor-General. That was the scope of the Committee. To ensure that there was consequence management and accountability and they did not want a technical explanation of coal prices as it was not called for. He was well briefed on the role of the National Energy Regulator of South Africa (NERSA). He did not think a presentation was necessary.

Mr M Hlengwa (IFP) understood that it was a hearing and not a briefing so the modus operandi was to pose questions and ask for answers. Mr Molefe should not present but Mr Kekana should continue with his questions.

Mr M Booi (ANC) believed that Eskom should be given the opportunity. Ms N Kunou (ANC) agreed with a presentation like Mr Booi. The Committee should bear with them. Ms T Chiloane (ANC) agreed that Eskom should take the Committee through the presentation.

The Chairperson asked which slide in the presentation Eskom wanted to present and warned Mr Molefe to limit himself to three minutes.

Slide 7, an overview of coal contracts review by Eskom and National Treasury, was presented by Mr Molefe. He wished to correct the erroneous view that the PWC review was about Tegeta. It was about the control environment at Eskom. PWC had selected a few companies as a sample to review control around the contracts and had then made observations about the control environment He indicated that they undertook a control review of contracts. Tegeta Mine was one of four mines selected. Engagement with Tegeta Mine on the Brakfontein colliery began in May 2013 and the contract was finally signed in March 2015. Mr Molefe stated that despite views to the contrary, he had had no involvement in the Tegeta contract as it was signed the month before he joined Eskom. In July 2015, Eskom commissioned an internal audit report from PWC on four companies. At same time, National Treasury announced that they were reviewing the control environment around coal contracts. In November 2015, PWC reported on 48 control problems. In December 2015, Eskom considered the findings and implemented measures to correct findings. In Sept 2016, 39 of the 48 findings had been addressed and PWC was to check that they been adequately addressed. Presently three findings remained. The National Treasury report was not yet complete. Eskom gave Treasury the PWC report that they had commissioned. They address the issues raised by National Treasury in their draft report but Eskom did not agree with Treasury findings as they had misunderstood the processes.

Mr Kekana stated that National Treasury believed that Eskom was not being cooperative and would not provide documentation and information. In the PWC report, there had been 48 recommendations and Eskom had addressed most of them but a few were not dealt with. In which areas did Eskom not cooperate with National Treasury? National Treasury could not provide the Committee with a report. It was unable to do that because Eskom was not cooperating and was withholding information.

The Chairperson interrupted, stating that he had not wanted an Eskom versus National Treasury discussion. They were there to speak about the PWC Report. He preferred Mr Kekana to restrict his question to which three recommendations had not been addressed – what were they?

Mr Booi agreed but he asked for clarity regarding the areas of difference between National Treasury and Eskom. If the National Treasury report was Eskom’s report, it complicated matters. There was a matter of principle.

The Chairperson indicated that National Treasury had presented the PWC report, and not their own draft report, and that was why they wanted to discuss the PWC report.

Mr Hlengwa commented that his sense of intuition never failed him and that was the reason he had asked that Mr Kekana continue with the question and answer session. He had not wanted the briefing by Eskom as the Committee did not want to join the fray between National Treasury and Eskom. It was not about National Treasury’s report but about the important matters in the PWC report. The meeting was a hearing.

Mr Booi interjected complaining that Mr Hlengwa must manage his words. They were raising a matter of principle and were not involved with intuition or suspicion.

Mr Ross said that he was taken by surprise by the Eskom briefing as he had thought he was going to talk about coal pricing. Mr Kekana should restructure his questions and engage thoroughly with the steps taken and whether there was non-compliance.

The Chairperson asked Eskom to talk to the three findings that they had yet to address.

Mr Molefe attempted to respond to the allegation that Eskom had not cooperated with National Treasury but the Chairperson stopped him.

Eskom CFO, Mr Anoj Singh, stated that the one finding was to change the technical standards associated with the laboratories engaged to conduct coal sampling for Eskom. They could only be addressed when the laboratory contract expired on 31 March 2017. When the new Request for Proposals (RFP) was issued, they could attend to that finding. The RFP had been issued according to the new technical standards but the finding could only be closed when laboratories were appointed under the new standards. Making internal training mandatory for certain staff was the second finding and training was ongoing and would be complete by 30 September. The third issue related to the RFP process.

Mr Kekana addressed the PWC report findings alleging that Eskom did not follow supply chain management, particularly on the Tegeta Mine and the Brakfontein Colliery.

Mr Singh agreed that PWC had highlighted certain contract management issues associated with the award of the contract to Tegeta, which they had addressed. Something to note was that given the PWC Report and the Draft Report from National Treasury, Eskom had looked at the PFMA supply chain requirements as well as Treasury’s supply chain management framework from a legal perspective and legal opinion stated they were comfortably within National Treasury and PFMA requirements.

Mr Kekana clarified that he was asking about compliance with Eskom’s own supply chain management.

Mr Singh stated that they had to comply with the Eskom 1034 supply chain document. The non-compliance found by PWC and Treasury would refer to 1034 as well.

Mr Kekana asked whether there was a declaration of interest from members on 1034. Compliance meant compliance with everything and not just certain things. The report stated that was not complied with.

Ms Ayanda Nteta, Acting General Manager for Fuel Sourcing at Eskom, explained that the formal declaration of interest referred to by PWC was at the beginning of all negotiations. A declaration of interest was not an Eskom requirement at the time but they had put a mechanism in place to ensure that there was formal declaration of interest prior to engagements.

Mr Kekana not happy with answer but accepted it. If there was compliance and there was no declaration of interest, the evaluation team did not check. The PWC Report stated that there was no evidence of Eskom's Code of Ethics and its Cardinal Rules of Safety.

Mr Molefe stated that those concerns related to 2013 and March 2015 when the contract was signed but at that time, it was not required, but PWC report pointed out those things. They agreed but those things had been addressed and Eskom now had a policy to prevent those conflicts of interest from happening again. Eskom recognised all of the shortcomings identified in the PWC report but Tegeta and all problems were prior to the PWC report.

Mr Kekana referred to the two reports commissioned by Eskom. He asked whether all findings had been addressed. The shortcomings had been identified by management’s action of requesting the PWC reports but all this happened during 2013 to 2015. The PWC report stated that Tegeta was not referred to the supply development and localisation unit for pre-qualification and supply registration. Was that correct?

Ms Nteta answered that it was correct as Eskom had decided to do a full pre-qualification of all the suppliers and once they were in a position to award a contract, they would advise the supply development and localisation unit to place the supplier on the database. She assured Mr Kekana that it was applicable to all their suppliers. The full technical evaluation was done before a company was put on the supplier database.

Mr Kekana asked whether that process was communicated to other suppliers.

Ms Nteta informed him that the technical evaluation was conducted internally and when the company was acceptable, it was communicated internally in Eskom to the supply development and localisation unit.

Mr Kekana still needed clarity on its cooperation with National Treasury as five state-owned enterprises (SoEs) had been identified as not cooperating with Treasury. Eskom was one of them. It was a burning issue and the SCOPA Chairperson had been instructed to write a letter to each of the SOEs about the non-cooperation. The Committee wanted to finalise the matter as it was the Committee’s resolution to the House.

The Chairperson asked if Mr Kekana had other questions, in which case he requested to have that question answered later.

Mr Molefe stated that he wanted it recorded that Eskom wanted to answer that question now as it was a serious allegation.

The Chairperson told him that he could only answer it if the question was allowed.

Ms N Mente (EFF) asked the Chairperson to help with a smooth process. A state-owned entity could not answer when not asked a question. A SoE could only answer when guided to do so.

Mr Booi told Mr Molefe to respect the Chairperson.

Mr Hlengwa noted that the Chairperson of the Board was responsible for answering to SCOPA according to parliament protocol and requested that the Board Chairman respond, not Mr Molefe.

Mr Kekana spoke of the technical testing process where multiple tests were performed. He referred to three in particular. The last two tests were dated after the contract had been signed. Why was that so?

Ms Nteta replied that as part of their technical evaluation, they conducted combustion tests on the coal, checking the suitability of the coal and whether it was a blended product. It was their prerogative in terms of the number of tests that they selected to do, and depending on the results of the tests, Eskom could do additional combustion tests even after awarding the contract.

Mr Kekana asked if it was normal to test after signing a contract.

Ms Nteta replied that combustion tests were conducted before the signing of a contract and also afterwards.

Mr Kekana said he was referring to Tegeta and not “other” contracts. She was to please focus on what he was referring to and not something else.

Ms Nteta replied that combustion tests were conducted prior and post signing of the contract with Tegeta.

Mr Kekana noted that there appeared to be a discrepancy in the dates of the environmental and legal report. The date was indicated firstly as April and then as March. Eskom was asked to clarify.

Ms Nteta replied that the environmental due diligence commenced in April/March 2014 and the final date was the date of the finalisation of the report. She assured Mr Kekana that it was normal procedure.

Mr Kekana noted two meetings regarding the pre-qualification, as raised in the PWC report, between Eskom and National Treasury on the issue of Tegeta and due diligence. Had they indicated to National Treasury that it was normal procedure. Mr Kekana referred Mr Molefe’s statement that there had been a parallel process where PWC conducted its own report as did National Treasury. Before Mr Molefe handed over the PWC report to National Treasury, was there an engagement.

Mr Molefe stated that they needed specific details of the engagement as there had been numerous engagements and 11 requests from National Treasury to which Eskom had replied in 20 letters.

Mr Kekana said that he would come back to that. He returned to the supply chain issue. Eskom had stated that it complied with the PFMA and he understood that they had in-house supply chain management procedures. Was the in-house procedure in line with the PFMA?

The Company Secretary, Suzanne Daniels, confirmed that it was in compliance with all pieces of legislation that governed public procurement.

The Chairperson invited questions but said that the substance of the focus had to be on the PWC reports. He raised the question of Eskom not cooperating with National Treasury. Why was that concern making the rounds? Why was Eskom not providing documents so that the issue could be sorted out?

Eskom Board Chairperson, Mr Ben Ngubane, replied that the Board had been informed that they had cooperated with National Treasury. They answered every question, even though it took time. He was at a loss as to why people should say that they were not cooperating. There was nothing hidden and National Treasury could go to Eskom and access the documents themselves, if they so wished.

Mr Kekana stated that he was referring to Tegeta and asked if they had evidence to prove that they were cooperating with National Treasury. Was the request from Treasury dealt with by the Eskom Chairman’s team?

The Board Chairman stated that they could provide all the correspondence between Eskom and National Treasury because they wanted the matter clarified. There had been an engagement on Tegeta. He asked Mr Tshitangano to confirm that they had had cooperation.

National Treasury Chief Director: Supply Chain Governance, Mr Solly Tshitangano, stated that there had been delays from Eskom until they issued the first draft in April 2016. They had wanted a response by May 2016 but they finally received a response on 30 August 2016. From January 2017 up to the present time, they were exchanging documents. He confirmed that there was no lack of cooperation at the present time. There had been a lack of cooperation with other SoEs such as Transnet and the SABC.

The Chairperson stated that SCOPA had been requested to write a letter to Eskom about non-cooperation but National Treasury seemed to have given incorrect information.

Mr Ross wanted clarity as all four contracts with Tegeta were unsolicited bids and there was no competitive bidding. That put the contract in a questionable situation. Eskom had to provide evidence as to whether it was a valid contract or not and whether they had complied with the PFMA in terms of competitive bidding. Why the preferential treatment for Tegeta? Eskom could not review unlawful contracts. What were Eskom’s proposals in that regard? There was non-compliance with regard to stockpiles and so on. Secondly, the Board had an oversight role. What action had they taken in response to the PWC report in terms of their oversight responsibility? A divisional executive was given powers to give effect to the mandate. The Board of Directors had committed Eskom to contracts of over R3 billion per year over ten years to a single signing authority. Could the Board Chairman please explain how there could be a single signing authority which simply could not have been correct in terms of a non-competitive bidding process? What actions had the Board taken in terms of their fiduciary responsibilities?

The Board Chairman explained that in 2008, the Board elected a mandate of sole buyer or signatory in cases of emergency supplies. There was no competitive bidding in instances where there was an immediate need. Non-competitive bidding was the hallmark of Eskom emergency contracts. It was sanctioned by the Board in 2008, but the new Board changed that, and there would be a request for proposals that were in the market under very extreme circumstances. Four stations stood in place ready for load shedding as they had not stockpiled millions of tons of coal that they needed for winter. They had changed the system, although it might not be very good for the country.

Mr Molefe clarified that they had been operating on cost plus mines. They had R74 billion on them over the past five years but those original contracts had not had competitive bids. Eskom had never had a culture of competitive bidding. It had only just been introduced. Those companies happened to be white-owned companies with non-competitive bids. On instruction from the Minister, they had to move away from cost plus mines and to ensure black economic empowerment.

Ms N Mazzone (DA), Public Enterprises Portfolio Committee member, asked about due diligence. On 11 April 2016, an urgent board meeting was called to arrange and approve the pre-payment for coal. This was also on the same day that Tegeta informed the business rescue practitioners of Optimum Coal Holdings that it was R600 million short of the R2.15 billion required to obtain the mine. Eskom and Tegeta had both argued that pre-payment for coal was a normal and long-standing procedure. However, they knew that that was not true. Matshela Koko lied in a television interview but also lied to Parliament when he refuted the fact that the R600 million payment was conducted. Why the lies and why the necessity to try and hide the pre-payment? She found it quizzical, as did the Public Protector, that the CEO of Eskom, Brian Molefe, had to provide approval for supply of coal from Optimum to Hendrina when approvals for the supply contract had already been established. She requested an explanation.

The Chairperson said that they must first deal with the two PWC reports and other questions would be parked until after the reports issue. It was relevant but it would be parked for the second phase.

Mr Hlengwa drew attention to the PWC report of 26 November where it stated under record management that “not all required documents were made available”. If even PWC had raised the question about documents not being made available, Mr Hlengwa believed that there was a serious concern about documentation and the Committee should not dismiss it lightly. Also, many documents were not dated and that called into question general record management. There was no evidence that Tegeta complied with the rules for the additional water use licence. He wanted to know about the A – Z of Tegeta, of whether Tegeta’s water licence was valid and whether it had complied. He wanted a full explanation.

The Board Chairman explained that that was why they had hired PWC. The Board found out about poor recordkeeping after calling in PWC. For Eskom, if a company had a water licence, they started work. It was the problem of Water Affairs.

Mr Hlengwa stated that PWC observed that not all required documents were made available and that was after a process. It was not about Tegeta getting a Water Affairs licence. The question was whether Eskom had checked all required documentation before signing the contract. There was no evidence that Eskom ensured that Tegeta complied with all requirements.

The Chairperson explained that when PWC had to investigate Eskom, they had wanted documents. They had not got them and so what had happened? Mr Molefe had attempted to say that it was a weakness identified by PWC. The question was why it had happened.

Ms Nteta explained that Eskom had been accessing documents from various areas and that when PWC came along; they had recommended a centralised database. Tegeta/Brakfontein Mine had had a valid water licence at the time of the signing of the contract.

Ms Mente pointed out that the technical report was not dated or signed. The PWC findings indicated that some elements of the health requirements were not accounted for when the contract was signed. How had Eskom signed the contract? The contract was signed on 26 March 2015 but a letter from Eskom showed that one of the requirements was the submission of a water licence. However, Tegeta’s water licence was dated December 2014.

Ms Nteta was adamant that prior to signing, the contractor had had a valid licence. Various elements of due diligence had been done, and an on-site visit was conducted but aspects that were still in process at that time could only be completed after the signing of the contract.

Mr V Smith (ANC) noted that Eskom had indicated that there was a valid licence in 2013 but the Acting Head of Water Affairs in Mpumalanga stated in 2016 that Tegeta did not comply with some aspects of the water use licence. How did it work that the mine had not submitted required documents at the appropriate time?

The Board Chairman responded that Eskom conducted repeated visits to a mining site to see if the mine was complying in every respect and visits from those who issued licences were ongoing. Water Affairs had to ensure compliance with their regulations.

Mr Molefe commented that it was like a licenced driver driving over the speed limit. As the Committee found the comment inappropriate, Mr Molefe withdrew it.

Mr Smith had concerns about compliance and he thought that perhaps National Treasury had to come in on the matter. Why had Tegeta been given the contract if they were not on the suppliers’ list? Apparently, the supply management procedures of Eskom had insisted that a supplier had to be on the list. Eskom was either breaking prescripts or they changed the rules without changing the prescripts. Which was it? Regarding compliance, he did not understand whether those involved in the negotiations declared their interests. If he understood the response, that it was not necessary to declare interests as it was not in the rules, but the procedure of Eskom required that it had to be done. He had never ever in his life heard of being a party to a contract without declaring interests. It has always been a principle to recuse oneself. The procedure of Eskom required that interest be declared. Eskom’s procedure stated that a company had to be on the suppliers’ list. None of that was done so how could they get an unqualified audit report? Thirdly, in National Treasury’s report, the observation was that the first health and safety check had been conducted eight days after the contract had been signed and the onsite visit was conducted two months later. Surely certain prerequisites had to be met before a contract was signed? Why was the contract signed before the prerequisites were met? Was it a valid contract? He was not judging, just asking. Ultimately, the Board was the Accounting Authority and should be able to answer the question. They should not have had to wait until PWC identified this. The board is responsible for maintaining and upkeeping the assets of an entity.

The Board Chairman responded that he was aware of the Board’s responsibility, and was maintaining the assets, which was precisely why they had called in PWC. When a mining contract was required, there were a lot of documents to be checked but the health and safety aspect could only be done once the mine had started operating. The inspectors went to the mine to check whether workers had gloves, masks and so on when they were operating. It cannot be a priori. The water licence was received but then the authorities checked to see that they were following the rules. Mines required ongoing compliance.

Mr Smith agreed that a mine had to operate before they could check but why did the report state that they could not do health and safety checks because the mine was not operating. Eskom’s response to the question about the health and safety checks being done was that it was not operating. Why was a government department seeing it as a problem? Where was the problem? Were they getting incorrect information?

The Board Chairman stated simply that if nothing was going on, there was nothing to inspect.

Mr Tshitangano from National Treasury informed the Committee that Eskom should have PWC file No. 192. The report on that page had three columns. The first column shows the findings from the PWC review. The last column is the comments from Eskom management, not Treasury. In the findings, PWC highlighted non-compliance with supply chain management but Eskom did not give new comments. The original comment by Eskom was that it was an oversight. That was irregular. They had not given new comments. So, the question was whether the non-compliance was recorded in their books. If not, why? He had asked the Auditor-General why the non-compliance was not red-flagged in the Auditor-General’s Report as Eskom agreed with PWC that it was non-compliant. The Auditor-General met with Eskom and later with National Treasury. Eskom had not included the non-compliance in Eskom’s audit report. A health and safety report was a prerequisite. Even in Eskom’s pre-evaluation minutes, Eskom officials had said that they could not do the tests because Tegeta’s excuse in response to every compliance question was that the mine was not operating. That was not Eskom’s problem and Eskom should not have excused them because they were not operating the mine. They should have operated the mine so that Eskom could evaluate as that was a prerequisite. In one of the sets of minutes, Eskom had asked if they could not give a sample so that they could evaluate that the fourth seam upper and the fourth seam lower would be relevant to Eskom when combined. Tegeta’s response was that the mine was not operating. But Eskom still signed a contract on 10 March 2013. Eskom should have allowed the mine to operate first before signing a contract.

Mr Smith said that he still did not buy the non-compliance declaration story and they had not answered his question about Tegeta not being on the suppliers’ list, as was their policy.

Ms Nteta explained that in terms of the pre-qualification and being on the suppliers’ list, that was from the supply development and localisation section within Eskom and the discussions that they had had was that putting suppliers on a suppliers’ list precluded other suppliers from possibly being looked at from a technical perspective. So, what was requested was that they did technical evaluations of all the suppliers. Once they were satisfied with the technical element of the supplier, then they would forward them to the supply development and localisation section to be placed on the pre-qualification database for them to be placed on the vendor data list. It was a requirement to allow for more suppliers.

The Chairperson raised general supply chain management as there were problems not only with the Tegeta mine, but with the other three mines as well. There were numerous non-compliance issues. They had only sampled four mines. Did it mean that the weaknesses would be found in regard to other mines as well? What was happening?

Mr Booi noted that the Committee had decided to focus on Tegeta but looking at the report, he could see that there were problems with the other mines as well. Should the Committee change its strategy from focussing on Tegeta only? They could not resolve all of the issues.

The Chairperson agreed that they needed to focus on Tegeta but they needed to know to what extent there were problems with supply chain management.

Ms Nteta replied that the four suppliers selected for the PWC report had come into the Eskom system from 2008 so over the period of ten years, there had been changes in the Eskom supply chain procedures which was previously a 32188 and was currently a 321034. PWC utilised some of the elements of the 1034, which was then the current system, on suppliers that had pre-dated that change.

The Chairperson commented that she would simply have said that they were bad at supply chain management and that was what they had done to sort it out.

The Board Chairman said that they had studied findings from the four mines, including Tegeta. But Solly’s issues of non-compliance showed many issues of non-compliance.

Mr T Brauteseth (DA) asked if Eskom was familiar with National Treasury Note 11 of 2008. Did they know what it dealt with? He eventually stated that he would take their silence as an admission of ignorance. National Treasury Practice Note 11 of 2008 dealt with unsolicited bids. Eskom had said that people before were doing the wrong things but if they had paid attention to Treasury Notes, they would have known the correct procedure for unsolicited bids. Eskom had declared that did not like to close the list of potential bidders. The reason for that was clearly to open it up for people to take an angle and to get work through unsolicited bids. The whole idea of putting together a panel was to have a list of pre-approved suppliers that one knew would comply. Eskom had not pulled the wool over their eyes on that one.

Mr Brauteseth said that Mr Smith had referred to the declaration of interest and Ms Nteta had stated that there was no need to declare conflict of interest. However, point 2.2E of the Treasury Note 11 of 2008 instructed that a declaration of interest was compulsory. It also said that an unsolicited bid could only be considered when it was a newly invented product or a new and cost-effective method of service delivery. It must be a product that was not in easy supply and was new. That was not coal. Coal was not new. They had opened the process to allow people like Tegeta to sneak in. Eskom had stated that 33 other suppliers had been forced to go through the process. Could Eskom therefore commit to providing a full dossier of every one of the other 33 suppliers who were assessed and turned down? They were looking at Treasury Regulations and Notes but he believed that they could not show a competitive process.

Eskom Company Secretary, Ms Daniels, started with the compliance questions. At the time, Eskom was exempt from the Preferential Procurement Policy Framework Act (PPPFA) and therefore the Treasury Notes did not apply to Eskom but they did have procedures for unsolicited bids in their procurement policies and coal had very specific specifications and each resource was different. In respect of the declaration of interest, while there was no specific requirement for people at negotiation team level to do that, Eskom had a system of annual declaration of interest in terms of legislation and that was done annually. At the time, colleagues did not do it for each specific action and that process had been corrected and implemented.

Ms Nteta replied that they could supply the details of the 33 suppliers referred to in the document.

Mr Brauteseth said did not want a list of names; he wanted a dossier showing all had gone through the same process.

Ms T Chiloane (ANC) asked who were Board Chairman and CEO from 2008 to March 2015.

The Board Chairman indicated that he had been Board Chairman from March 2015. The Chairman was Bobby Godsell at one point and the CEO was Brian Dames and when Zola Tsotsi was Chairman, Tshediso Matona was CEO.

Ms Chiloane noted that the Committee dealt with the past. She asked Mr Molefe how much the Tegeta contract had cost and what was the period of the contract?

Ms Nteta responded that it was a 10-year contract valued at approximately R4 billion.

Ms Chiloane asked how much was Tegeta charging per gigajoule?

The response was the base price for the contract was R13.50 per gigajoule.

Ms Chiloane asked whether the R4 billion was going to increase.

Ms Nteta explained that the base price of R13.50 was subject to escalation and there were also yearly escalations and monthly escalation or reduction for various items such as diesel.

Ms Chiloane felt that the Tegeta contract was hastily done. Could they get a background as to how Tegeta got the contract despite all the issues? She asked Mr Molefe how Tegeta got the contract.

Mr Molefe stated that the contract was done over two years.

The Chairperson said was she not referring to the pre-payment contract with Optimum? That was not in the PWC report. The Chairperson decided that the question had to be parked.

Ms Chiloane asked for clarification regarding the 73% of non-black owned coal suppliers. If SCOPA were to visit Eskom would the Committee find that the record keeping systems had been amended? Eskom had a meeting with Tegeta in 2014, which was before they received a contract in March 2015. How did the contracts of Eskom operate? Did they have a pre-meeting with suppliers?

Ms Daniels explained that when their exemption from the PPPFA lapsed, they had to include it but prior to that, they did have an Eskom supply chain management procedure and it was updated as the law changed.

Ms Nteta replied that it was correct that PWC identified recordkeeping as one of the elements that they needed to address. Since the first PWC report was issued, Eskom had extensively looked at their recordkeeping and made it more centralised so she would like to say that recordkeeping had vastly improved, based on the PWC report. The meeting with Tegeta in 2014 was part of their engagement with Tegeta from 2013 when the process started. The meetings were part of the due diligence process. There was a pre-meeting before a contract was signed.

Ms Chiloane asked for an explanation of the pre-qualification. She was trying to understand why there was a belief that Tegeta had been given preference.

Mr Molefe explained that it was not pre-qualification, it was awarding without a tender, i.e. an unsolicited bid. They had explained that the rules that were designed by Eskom in 2008 allowed for Eskom to procure coal without a competitive process on an emergency basis. He had added that Eskom had been doing that when it was not an emergency. For example, cost plus mines had not gone through a competitive process to gain the advantage that they had. For the past 75 years, Eskom had spent R75.4 billion on cost plus mines that were not black owned. Those were things that they were beginning to change at Eskom. The Minister had insisted that there should be black economic empowerment and competitive processes for contracts, and they did not do cost plus mines any longer.

Ms Kunou said that the information had to be correct and that National Treasury had to be given accurate information. It was not acceptable that National Treasury had not been getting responses. Who had been suspended for not taking compliance issues into account? What kind of rules were they using before 2015?

The Board Chairman stated that the terrible load shedding in 2008 had led to the Board Resolution about unsolicited bids but that had been eliminated as they had no load shedding. However, there was a risk of load shedding because they were not getting authorisation to buy more coal as they stockpiled for winter.

Ms Nteta told the Chairperson that four officials were suspended as a result of the coal quality issues that were identified in July 2015 and also laboratories plus a supplier were suspended. Two suspensions had been lifted; one was subject to disciplinary processes; one had terminated employment with Eskom.

Mr Molefe added that they had received allegations that the Tegeta coal was not up to standard and so they had suspended the Tegeta contract in August 2016. They had sent samples to the South African Bureau of Standards to verify the quality of coal. The suspension of the Tegeta Mine at Brakfontein was lifted when they got the report. So, Tegeta did not get special treatment.

Mr Booi said the Committee should focus on the PWC report. Who was in the negotiating team? That team and its powers seemed to have overrun everything that was legal in Eskom. Did they include all of the bodies or employees who should have been part of the negotiations? PWC had said that the Tegeta contract had been put together hastily by cutting and pasting sections of the contract. There seemed to be a lack of integrity. There was addendum data dealing with the BEE undertaking but the evidence was a letter from the supplier itself. How could the supplier declare their own compliance? Although it was reported that an updated procurement strategy had been developed, it was not produced for PWC, nor was there any evidence demonstrating that the procurement was in accordance with strategy. The discrepancies in the procurement process had raised the alarm. The relative price escalation differed from the prescribed basket. The costing of the R4 billion was not in accordance with their own mandate. They had thumb sucked it as they were thumb sucking in this meeting. The person getting the tender was not even worried but the money was not their money but that of the taxpayer. If the pricing systems were not adhered to, how did they come up with the R4 billion? His last question was on quality. PWC had stated that it was evident that coal was supplied by Tegeta despite the supplier having failed pre-qualifications, including pre-combustion tests. How could all these issues be ignored and still Tegeta had been given the contract. How did it happen? Was the negotiating team so powerful?

Ms Nteta explained in terms of BEE requirements that when negotiating with a supplier, Eskom negotiated BEE requirements for the supplier. They requested that the supplier must provide a letter showing that they would meet all the requirements of BEE.

Mr Booi interrupted and asked for specific answers, not general answers. He wanted a specific answer to his specific question. PWC had said that the supplier should not send a letter but include the BEE obligations in the contract. Eskom had amended contracts to agree with the findings. Mr Booi said that he wanted to hear the Eskom explanation. How come they had not thought about such things until PWC told them. It seemed like they had not thought about BEE as it had not been included in the contract. He had thought that the laws of the country were clear. The Committee was trying to determine if Tegeta had received preferential treatment. Had they received preferential treatment in being allowed to simply supply a letter?

Mr Molefe explained that a lot of things that were wrong were identified in the PWC report. Maybe they should have reported on the disciplinary action against the people that led to the 48 PWC findings. They had not looked closely at consequence management but they could go and have a look but, more importantly, they had fixed the things indicated by the PWC Report and ensured that it would not happen again.

Mr Booi told Mr Molefe that he was avoiding the issue. The public had been informed of many aspects of the situation and the Committee wanted to find out for the public what had happened. What kind of person or professionals could make so many errors in drawing up a contract and that poor contract cost the taxpayers about R4 billion? Mr Molefe could not expect the Committee to put cement over it and leave it just like that. It had to be explained. The Committee wanted details. If he was plastering over the problems and taking a shortcut, the Committee would not know what to write in its report. He was looking for a detailed answer. Consequences could be discussed later. What happened regarding the BEE?

Ms Nteta replied that BEE was aimed to ensure that they would be able to reach 51% black ownership as was practice for Eskom. The supplier had to show how they would get to 50 +1 % to meet Eskom requirements. The supplier was to supply a letter showing what steps they were going to take to do this. The PWC finding indicated that requesting a letter from suppliers was not binding, and it was agreed that Eskom needed to include it in the future coal contracts. An updated coal supply strategy was tabled at the Board and when PWC came, they were provided with the coal supply strategy which talked to the transformational approach of Eskom to coal suppliers.

Mr Booi noted that PWC had complained regularly about undated documents. What was the problem with the dating? Why did the writer of Board minutes ignore dates? There seemed to be a problem with dates and they seemed to think that dates were not important.

Ms Nteta explained that they agreed with the PWC Report findings about record keeping problems at Eskom and that referred specifically to the lack of dates. There was a record management problem as they obtained information from different areas. Poor record management explained the lack of dates for certain events.

Ms Daniels explained that Eskom had a standard template for a contract. Templates were not managed properly so people could copy and paste to create a new contract. There were certain details that were supplier specific but now they had tightened up control and any changes to contracts had to be recorded.

Mr Booi alleged that copying and pasting had cost the taxpayer R4 billion. It was not just small peanuts. Eskom was dismissive of practices that was costing the country R4 billion. The deal was in the public space and creating a lot of controversy. The people who wrote the contract had to take full responsibility. It was only improved after PWC picked up on it and had found it to be an irregularity. The capacity of Eskom was a concern. Did they know what they were doing at Eskom? She had not given a proper answer. He wanted to hear from the Chairman of the Board.

The Board Chairman explained that Eskom went through a terrible time which was why the Board appealed to the Minister to bring a tested CEO. She brought Brian Molefe from Transnet because the problems were serious. A national catastrophe was about to happen in terms of a national blackout. When a black-out happened, it took more than 36 hours to get out as it took time to build up to the right frequency again. Once current dropped below 49 MHz frequency, they were in serious trouble. Mr Molefe came with his top engineers and they sorted out the problems. There was a period of chaos at Eskom which was why the Board valued Brian Molefe. But it had been resolved.

Mr Hlengwa noted that Mr Booi had asked a serious question but the Board Chairman had replied about black-outs and so on and he had not addressed the question of record management. He had not explained how they had a contract with “loopholes”. They were standing on shifting ground in terms of responses. There was no need to plead the cases of employees.

Mr Booi said that the report was too big. SCOPA, Eskom and Tegeta were in the public space and the contract was at the heart of everything, yet it was copied and pasted. The Board Chairman talked about catastrophes, but at the end of the day, there would have been Ministers to whom they could run to and complain. They had to be professional and they had to be able to write a contract.

The Chairperson explained that the cutting and pasting of contracts related to all four contracts in the PWC sample. He advised Eskom to answer the question and not to add a lot of spice as the point got lost. The Board Chairman had explained that there was chaos. That was it. Stop there. The problem of document management had been raised repeatedly as it led to what was in front of the Committee. The Chairperson suggested that Committee note it and include it in the Committee report as a problem area.

Ms D Rantho (ANC), Portfolio Committee on Public Enterprises member, explained that her Committee had not received the file that SCOPA had received. She wanted to understand whether the supply chain management was done for that time and that contractor. It seemed that the supply chain management was adapted to the situation. She was worried about Eskom’s position that once a supplier had a licence for water, they did not have to monitor. They had not monitored the water so even if conditions changed, Eskom would not have known that the water situation had changed until an outside body monitored it. How many contractors had done wrong things in getting contracts with Eskom? Eskom was inefficient and ineffective and it raised questions as to what was done in Eskom. She also wanted to know if National Treasury had given Eskom money. If the conditions of Treasury were not the conditions that Eskom used, why would they ask Treasury for money? If Treasury had said that the money given to Tegeta was wasteful and fruitless according to their procedures, why could Eskom decide it was not wasteful according to Eskom’s criteria?

Dr Z Luyenge (ANC), Portfolio Committee on Public Enterprise member, noted that in respect of the Tegeta case, there was no cosmetic massage of the original case. The PWC Report findings were never rejected or denied by either the management or the Board. There was something very sinister. The PWC Report was never considered by the Board but the findings were effected. On the advance payment made to Tegeta, could he get a response from the Board or the CEO as it was against National Treasury regulations? The automatic inflation provisos and the manner in which they were made begged the question whether any projections were made of the possible inflation up until the end of the term. The public must also give the Board the benefit of the doubt when it said that that was happening and they needed Molefe to intervene. There was nothing wrong in that. He wanted to ask the fundamental question of what they had done as a Board to respond to those issues as Tegeta had cost the taxpayer a lot of money. If the money had been lost, how do they recover it?

The Chairperson asked for follow-up questions and then they could go back to the question of Optimum and the issue of 73% suppliers versus 23% of suppliers.

Mr Booi said that he would give them an opportunity to go haywire as the report had to be completed as the Committee was entering speculative territory. While there was vagueness in their responses, he would leave them, but he was putting it into Eskom’s hands to respond fully. Eskom was being given the opportunity to finalise the details so that SCOPA could complete the report.

Ms Mazzone noted that two issues had since been raised in relation to her parked question. She wished to elaborate on the question before it was responded to.

Mr Ross referred to National Treasury and the status of audit reports. The 2015/16 audit report for Eskom indicated that there were irregularities in supply chain management and processes were red flagged. Had Treasury engaged with the external auditors and what were the outcomes?

Mr Hlengwa referred to the PWC findings on the validity of the contract. The observations were that the results of the combustibility tests were inconclusive and so it was unclear whether Tegeta had complied with the requirements of the contract regarding combustion. Two recommendations accompanied that observation. The Eskom CEO had written to Treasury on 30 August 2016 saying that Eskom contracts were being managed and it was managing risk and would take steps against suppliers who exposed Eskom to risk. How did the CEO write in such confidence when the combustion test was inconclusive? Tegeta had been operating without a water licence for two years during which discussions took place. Why did he get the sense that Tegeta was aided and abetted and raised like a baby until they complied? Had the other suppliers received such support? Why was special focus given to Tegeta so that they could be given a R4 billion contract? Had Eskom put the same effort into other mines wanting contracts? He was convinced that Tegeta had received special assistance. He was convinced that the original putting together of the deal was part of an executive collusion and he was waiting for someone to prove him wrong.

Ms Mente noted that the PWC Report observed that neither coal supply nor contract manager were clear on key aspects of the compliance of Tegeta such as quality testing or potential risks. The observation was that everything went ahead despite, these key things that had not been done. When the meeting began, Eskom had said that Eskom had commissioned the PWC report. Why? They knew that they were doing wrong and wanted to fill in the gaps. They had not calculated that the PWC Report would have to be public. How had they sourced a service supplier to tell them what they should have done, when they had already done that? PWC told them in honest truth that Tegeta had not been qualified to be given a contract but they had not reversed the contract. Eskom had to cancel the contract. It did not qualify at any level. She would not even talk about the money. The Board Chairman had said that PWC had looked into areas in which they were not supposed to look. PWC was telling them the contract was wrong. Therefore, it had to be scrapped.

Mr Smith wanted to address the Minister, the DG and the Board Chairman. SCOPA was not going to call the Minister unnecessarily. If the contract had been declared by the Auditor-General as irregular and fruitless and wasteful expenditure, they would have flouted the PFMA as their jobs were to prevent fruitless and wasteful expenditure. Mr Smith said that the Minister’s job was to ensure that PFMA regulations were adhered to. There would be consequences if everyone in the meeting ignored the flouting of the PFMA.

Mr Booi referred to the PWC report finding but he thought that SCOPA had to deal with it. They could not wait any longer for the Board to deal with a contract that had 10 years to run. The Board should think about what was happening and find a solution.

Ms Kunou stated that it would be a serious problem if Ms Nteta answered a question to satisfy an individual. They were writing a report to be debated in the House and get resolutions to help South Africans. She had not received responses to her disciplinary action. She referred to the PWC report which showed that consequence management was not taken seriously. It was an offence to use water without the relevant licence. People needed to know that if they flouted government regulations, they should be imprisoned. They needed Ngubane to answer fully, not to open new issues. They had spent so much money on the cost-plus mines. If government had spent so much money on cost plus mines, they needed to have the contracts signed between Eskom and the companies listed in the PWC report. They needed details of the contracts as so much money was given to companies that did not supply coal, resulting in load shedding. The Board Chairperson had said they had a problem of load shedding but the suppliers had not been doing what they were supposed to do. What was the problem and how were they penalised?

Mr Kekana needed to check with Eskom the value of the PWC contracts? The initial report and the review. Eskom had said that they were the largest buyers of coal on the continent and they spent R50 billion per annum. He needed a breakdown of that money. What were the implications for the ratepayers or customers who had to benefit from the R50 billion. Could they quantify the loss over five years? What did they mean by the cost-plus mines that they had discontinued? How much had been lost and why had the Minister wanted the contracts cancelled?

Ms Mazzone believed that Mr Booi’s questions were not adequately answered. She said that it appeared that the sole purpose for giving Tegeta the contract, was so that they could purchase the Optimum Mine, according to the report. Between August 2015 and April 2016, the Public Protector had found that Mr Molefe had had extensive dealings with the Gupta family. For the April 2016 board meeting, was a direct instruction given to Mr Molefe by the Gupta family to make the R600 million transfer to Tegeta in order for them to purchase the mine? She noted that Minister Brown had now instigated an SIU investigation into Eskom. If everything was okay with the Board, why had the Minister been forced to refer the Tegeta deal for investigation?

The Chairperson explained that the Minister had to attend the Inter-Ministerial Committee meeting on Eskom so she had to leave but he invited her to address SCOPA before she left.

The Minister of Public Enterprises, Lynne Brown, apologised for having to leave early. She said that coal was a very important issue in the country. Coal, as the procurement of raw material, was an important issue. Coal procurement was how the pre-1994 economy was built and so they had to get to the bottom of coal procurement across the board. Tegeta was part of across-the-board as far as she was concerned. As she had said in her budget speech, the Minister was implementing an SIU investigation into Eskom to look at the seven reports since 2007. Many of the recommendations had been fulfilled but she wanted to know if the changes had changed the systemic way that Eskom did business – the procurement process across the board. The cost-plus mines had had 20, 30 or even 40 year contracts. In those mines, the labour, the machinery and everything was paid for by Eskom. Those people paid a management fee to Eskom. So, it was necessary to re-look at everything. That had to re-look at the 2008 load shedding, when they had to get quick coal and that then became a process that they used over a long period. During the 2014 load shedding, they had purchased diesel, which cost R1 billion a month. It was necessary to find a better course for Eskom. It was one of the four largest utility companies in the world. It supplied 95% of electricity to South Africans. It was an economic driver and it had to be fixed. Tegeta would be part of the process and it was an imminent investigation. It would be completely independent within the SIU and it would be overseen she hoped, by a retired judge in terms of what the recommendations were that came out of that process. Recommendations would go back to National Prosecuting Authority (NPA) or to the company so that the company could fix itself.

The Board Chairman was asked to respond to the various issues that had been raised. All responses had to be via the Eskom Chairman.

The Board Chairman explained that the Eskom internal auditor had engaged PWC because he had not had enough resources to do it himself. The report was self-correcting exercise. Water inspectors visited the mines regularly and Eskom relied on their expertise. Eskom did not deal with water licences but suspended operations if someone was guilty. Pre-payment of coal was common and happening all the time. The most recent one was to Exarro for R1.8 billion. Eskom needed the coal so they paid up front. The shares of Tegeta was the surety for pre-payment and it was certified by the internal auditor that coal supplied to date equalled the pre-payment so it could not be a loan. They had the coal. Cost plus mines was an inheritance from the National Party. They were given 20, 30, 40 year contracts and Eskom would sink the shaft, buy the equipment and pay for the coal. The Eskom research institute did combustion tests all the time. One seam of coal was never the same as another. If it did not combust, it was rejected and the supplier paid for it. The tests were ongoing. When there was controversy about coal, the SA Bureau of Mineral standards determined that it was correct. When they were hitting the winter season, they discovered that they needed two million tons of coal and Optimum had stopped mining and Hendrina was out of coal. Time, quantity and quality determined that they needed a supply of coal and that was who the thing came about as only Tegeta and Simbete had sufficient supply of coal. They had to take it. The value for the taxpayer out of the report was that Eskom had implemented a number of corrective measures. He had already said that he would welcome an investigation. He would love it as they wanted to clear their names. He was happy that the Minister had called in the SIU as there was nothing criminal that he or his colleagues had done.

Mr Molefi Nkhabu, Chief Internal Auditor at Eskom, stated that the reason for PWC was an audit, not an investigation. It was to self-correct. Due to the nature of coal, management had allowed them to have their own procurement processes out of the need to perform, the things that had been seen had happened. They had asked PWC to help them to deal with their own processes and to provide a blueprint so that Eskom could be world class. The CFO had asked them to address the issues. They had taken one of their internal managers to be in the coal space. They had taken steps and arrested the process. PWC was asked to do a follow-up. Documentation was an issue. He could not deny it. When the PPPFA was introduced, Eskom, particularly coal, was exempted. The exemption was extended for a year. They had given people the space to have their own process because of the need to perform. The people in the management at the time no longer worked for Eskom. Eskom had done what it could to address this as the problems were all across Eskom. The initial PWC tender was R150 million, but he did not have the final figure. It was an audit and not an investigation.

Mr Booi stated that his responses were not relevant.

The CEO, Mr Molefe, responded to Mr Smith’s questions around oversight. For the record, it was important for it to be understood that it was an Eskom Report. Eskom had commissioned PWC so that the newly appointed Board had a fair understanding of the challenges facing the organisation. Out of that, they put together an organisational plan.

Mr Booi angrily intervened explaining that National Treasury had asked SCOPA to look at the matter. SCOPA did not look for reports in the street. The CEO was addressing the wrong people. He must not treat the Committee as if they did not know what they were doing and it was not for him to lecture the Committee.

Mr Molefe clarified that he was not misleading SCOPA and he was clarifying that Eskom’s understanding of the PWC Report was that it was commissioned by the Board to inform the Board about weaknesses in the system and the management had implemented the recommendations.

Ms Kunou reminded the Chairperson that she wanted to know about the money spent and yet they had still had load shedding.

Mr Tshitangano, National Treasury, clarified that the unsolicited bid came about because of an emergency and so Eskom was going to get coal from Tegeta. However, it took two years to finalise the deal with Tegeta so how could it have been classified as an emergency. No emergency took two years to finalise. He did not see where the emergency was. Regarding the audit, National Treasury had written a letter to the Auditor-General raising issues from the PWC/Eskom report which showed much non-compliance. He asked why the Auditor-General had not seen a red flag. The Auditor-General explained that the audit was done independently by external auditors, SizweNtsalubaGobodo. The external auditors came to National Treasury and the Auditor-General. They had two reports on Eskom. National Treasury asked whether the PWC report was given to them before the 2015/16 Audit. It had been served to the Internal Audit Committee meeting but external auditors were not present as the report was presented by the internal auditor.

Mr Tshitangano said the advance payment was problematic but the varying coal price from Optimum was critical. The auditors were looking at these matters. They had also asked for previous audits to see if previously non-compliance had been present. National Treasury also raised the possible conflict of interest as they had audited Eskom and the mines. So, when Eskom commissioned the PWC report in September 2015, National Treasury had already commenced an investigation. Eskom had not given the PWC Report to National Treasury until 2017. National Treasury had wasted extensive resources on investigating matters for which Eskom already had a report. Treasury had therefore incurred fruitless and wasteful expenditure which had to be recovered from Eskom. The main recommendation in that 2015 PWC report said that the contract had to be reviewed but it still had not been done. They said it would be reviewed in March 2017.

Mr Singh, CFO, provided a breakdown of coal costs by supplier: R7 billion with Anglo-American, R5.5 billion with BHP Billiton, R600 million with Glencor, R5.4 billion spent with smaller, white-owned companies, R12 billion with Exarro, R6.7 billion with Tegeta and R8.5 billion with other black-owned companies, equally around R43 billion.

The Chairperson said that the responses had helped the Committee to write their own report. Quite serious issues had been raised about the Tegeta Mine but also in relation to the other three mines that could point to problems across the board. The Minister had come with a possible solution. The SIU investigation would give a comprehensive view of what has happened. Independent auditors were quite different from the Auditor-General but his powers were limited.

Mr Molefe stated that he had not been at the Board meeting of 16 April 2016.

Mr Hlengwa asked about the plan that Eskom had spoken of that followed the PWC report. He requested a copy of the plan to understand how the Board and Eskom had looked at those findings. He requested the plan, together with the other documents that had been requested.

Ms Kunou said that the Anti-Corruption Task Team had told SCOPA about the problems they had in terms of functioning and so they knew it would take a long time to get a final report, so SCOPA needed full details on all contracts as requested. There lots of documents that they were waiting for. The Committee needed a verifying report about the remediation of the 39 points. Important was the report from Treasury. How far were they? The Committee could not conclude until they had seen all the documents.

Mr Hlengwa noted that according to documentation the PWC Report had not been considered by the Eskom Board. However, the Audit and Risk Management committee was subordinate to the Board. What was the status of the implementation plan if the Board had not seen the Report? Was the PWC report edited – No.

Dr Luyenge asked how it was possible that the Board had not considered the Report but the findings were being implemented. Was the report commissioned by Eskom, in which case, Eskom should have announced the report along with the findings? The processing of the report was causing confusion as there was not clarity about whether it was an external report that was really internal.

The Chairperson thanked Eskom for the responses.

The Eskom Board Chairman caused a stir when he said to the Committee and the people of South Africa that the business implications of implementing National Treasury recommendations had cost Eskom R520 million in negotiated savings - because of National Treasury.

The Chairperson had to ask everyone to calm down in response to this comment and to leave it at the PWC Report. Other matters should be dealt with in the Portfolio Committee. If they were the facts, no one could run away from them.

Meeting adjourned.