Eskom on impact of coal prices, loadshedding, electricity tariffs, escalating costs of Medupi and Kusile & accommodation, with Minister

Meeting report

The Portfolio Committee on Public Enterprises (“Committee”) was joined by the following officials:
● Mr Pravin Gordhan (Minister of Public Enterprises)
● Mr Andre de Ruyter (Group CEO, Eskom)
● Dr Rod Crompton (Non-Executive Director, Eskom Board of Directors)
● Mr Calib Cassim (CFO, Eskom)
● Mr Snehal  Nagar (Senior Financial Manager, Eskom)
● Mr Bheki Nxumalo (Group Executive: Generation, Eskom)

The Chairperson welcomed everyone present in the meeting and noted apologies.

He indicated that the purpose of the meeting was to be briefed by representatives from Eskom concerning the impact of coal prices, load-shedding, electricity tariffs and escalating costs of Medupi and Kusile power stations, as well as the adoption of Committee minutes.

After introductions, the Chairperson recognised Mr de Ruyter for Eskom’s presentation.

Eskom’s Presentation:
Mr de Ruyter thanked the Chairperson for recognising him. 

He said Eskom would be covering four topics in the presentation. 

-The first topic, Eskom coal contracts, would be dealt with by Mr Nagar.
-The second topic, electricity tariffs, would be dealt with by Mr Cassim. 
-The third topic, Kusile and Medupi, would be dealt with by Mr Nxumalo.
-The fourth topic, the Wilge Residential Development, would also be dealt with by Mr Nxumalo

Eskom Coal Contracts: 
Mr Nagar said that for a very similar/lower energy output historically, Eskom is producing a similar output with a much more expensive coal supply mix. 

The use of expensive power stations (with no tied colliery) and a steady decrease in cost plus mine production due to a lack of investment has led to an increase in procurement on medium term contracts with additional transport cost. On average 30% of coal costs relate to the transporting of coal. 

In the 2019 financial year, 42% medium-term volume (~50Mt) contributes 51% of the coal costs. Thus medium-term contracts remain the most expensive coal contracts.

The reduced production from the Cost Plus mines (volumes) and the associated inflationary fixed cost escalations at these Cost Plus mines results in a higher unit cost of coal, that is, the fixed costs remain the same with reduced volumes.

From around the early 2000s, the utilisation of the power stations were increased beyond their original design capacity. Historically, the term used was 97/3. The 97/3 principle resulted in the power station burning more than what they associated tide mines could supply. That had to be supplied form a different source if the tide mines could not be increased, which started resulting in the blue bit of graph increasing over time, which was one of the factors. The other factor was that from around 2004, as the electricity demand started increasing, the burn at Majuba and Tutuka power station also increased quite a bit, requiring additional coal to be purchased to those stations that could not be supplied from the tide mines. And the Majuba colliery does not have a tide mine. So coal had to be brought in. From around 2006, the return to service stations started coming online, and does also not have tide mines associated with them. Therefore, the bringing online of those power stations resulted in additional coal that was required to be purchased and transported to those stations. From around 2006, again, there was also a steady decrease in the Cost Plus mine production. This decline needed to be replaced and supplemented with short/medium-term coal that required transportation as well. This effect can be observed from slide 3.

He said that the graph showed a “triple whammy effect.” All the power stations are coming online that require additional coal. There are the Cost Plus mines which are decreasing. And the production from decreasing Cost Plus mines needed to be replaced with other coal, which was bought from the market, and that coal needed also to be transported. Those are some of the impacts which have resulted in the cost of coal increasing over time.

Eskom uses two types of contract to secure coal. The first is Cost Plus contracts, which are long-term tide colliery contracts where the profit of the colliery is determined upfront what the miner will earn. There’s a lot more transparency with regard to what happens in the operations of the mining company. Eskom is exposed to the production and the cost risks of the underlying colliery because of the structure of the contract. The Cost Plus contract is one in which there is a contract miner. The owner of the miner if therefore in theory a contract miner. The contract is also “quasi-vertically integrated”. It is the next best thing to owning a mine. An important factor in these mines is that the coal resources are “completely dedicated” to Eskom.

The other kind of contract is called a fixed-price contract. These are usually long-term contracts which are typically tide mines, but there are also short- to medium-term varieties. These agreements have their base price fixed, and the price escalates over time with escalation aspect which is linked to market factors. They give you a more predicable price path, while at the same time providing less transparency in mining operations. Thus the time and base price of these contracts are important. Both these contracts have their advantages and disadvantages (as seen on slide 4).

Eskom has 5 operating Cost Plus mines in its portfolio, which are owned by three companies. (See slide 5 for details of each mine.)

Seriti owns the following mines: New Vaal, New Denmark and Kriel.

South32 owns Khutala mine.

Exxaro owns Matla mine.

Cost plus mines have the distinct advantage of insulating Eskom from market price fluctuations.

In securing a Cost Plus contract, Eskom is assured that all the coal in the reserve is dedicated to Eskom and the mining house cannot sell this coal to anyone else, or use the mining equipment for any other mining operations. A cost-plus contract refers to a contract when the contractor gets paid for the actual mining related expenses (“Cost”) as agreed. The term “plus” in “Cost-Plus” refers to the profit allowed to be earned by the contractor. The profit is in the form of an annuity calculated on the initial investment made into the mine. This annuity is further split into a monthly fixed and variable component: (1) The fixed component is a guaranteed component, (2) The variable component is linked to production. A cost-plus contract provides a win situation for the contractor because all risks are basically covered by Eskom, and all expenses are likely to be paid. Historically lowest R/t cost and hedging against price fluctuations. Provides Eskom transparency into mine operations and easier long term negotiations and simplified financing. A disadvantage for Eskom is the mine has no incentive to optimize operational costs and efficiencies.

Historically the Cost Plus mines have produced above the contracted quantities compared to the current production quantities. This was either utilised at the station where the station’s burn was above design capacity (the 97/3 principle). Where there was excess capacity at the station, they would transfer it to other stations. From 2006/2007, there was a decline in production from all other collieries (see slide 5). Under investment is the biggest contributor to the decline in production and this together with the corresponding replacement coal purchases, coal unit costs are negatively impacted.

Investment of about R15 billion capital in the cost plus mines until FY25, could avoid spending an additional about R35 billion (operational expenditure) in replacement coal (see slide 6). The impact of no capex investment into the Cost Plus mines will result in further coal supply reduction and increased spend on cost from replacement coal.

Before 2018, Cost Plus mines had an undersupply due to lack of capital investment for expansion required replacement coal from road and rail delivered Medium Term (MT) suppliers. Negotiations between Eskom and Glencore started in 2017, but due to the price Eskom was not prepared to conclude these contracts.

From 2018 to April 2018, Eskom started financial year 2019 with 10Mt un-contracted coal to match the burn requirements and adequate coal stock holding. The unexpected loss 8.5Mt of contracted coal supply, when Tegeta went under business rescue accelerated the coal stock decline.

Between April 2018 and October 2018, poor responses to urgent coal procurement did not achieve desired volumes of required coal.

From October to December 2018, the Eskom Board approved the Eskom Long-Term Coal Strategy which is currently being implemented. The primary objective of the strategy is to ensure security of coal supply with a predictable price path and to avoid this type of situation in the future. The coal stock levels deteriorated to a level where no further decline could be tolerated. Ten power stations dropped below 20 days of stock holding and six of these stations were below 10 days. Emergency procurement was undertaken with the support of the Eskom Executive Committee, Eskom Response Command Centre(ERCC) and the National Treasury.

In March 2019, 28 coal contracts were concluded under the emergency procurement. Most contracts concluded under the emergency procurement have a tenure less than 24 months. PED approached the Exco to obtain permission to conclude contracts with Glencore at high prices.

In March 2020, coal stock days recovery went above minimum levels, and in 2021, coal stock days are well above expected levels.

In Sept 2019, Eskom undertook an exercise to estimate the mining cost breakdown per short and medium-term suppliers compared to escalated contracted price. The exercise was based on information available to Eskom and the knowledge of internal coal mining subject matter experts. 30% was seen as a fair return for miners and only suppliers above this threshold were considered for intervention/re- negotiation. Contracts with remaining tenure of more than a year were prioritised to maximise potential savings for Eskom. Most of the coal contracts identified to be earning above market profit margins were signed during the emergency procurement in financial year 2019 when coal stock levels were very low. Most of these contracts have since expired. Seven suppliers were identified and engagements were held with these suppliers (that is, suppliers with high profit margins) to explore opportunities to reduce the contracted prices. While most suppliers were amenable to engage with Eskom, unfortunately, these negotiations did not achieve the intended result of cash savings for Eskom.

The outcomes of the negotiations included the fact that when Eskom approached suppliers on individual contracts, it soon became apparent that most of the suppliers were only willing to engage on a portfolio basis. This meant that the lower-priced contracts would be included for reopening of price discussions. This resulted in higher overall cash costs to Eskom.

Suppliers saw this as an opportunity to increase their overall supply to Eskom by either offering additional volumes or new resources as a condition for price reductions. This approach did not present cash savings for Eskom, as the additional coal offered was not the cheapest option and, given the current low demand and high stock days, this was not a viable solution.

One of Eskom’s cash cost reduction levers is the optimisation of the coal inventory through reducing coal deliveries to minimum contractual levels for all contracts, without compromising stock levels. This operational requirement posed challenges to the renegotiation process, as some suppliers wanted the resolution of operational issues as a prerequisite for any engagements on cost reduction initiatives. Given the current high stock levels, an increase in monthly volumes back to nominal levels was not feasible.

Eskom was unsuccessful in achieving the desired outcomes of renegotiating the prices down and therefore, the direct savings value attached to the above high priced contract renegotiation initiatives is now zero. The main reasons for the unsuccessful outcome related to suppliers requesting increased prices on other contracts, contract volume increases and/or increases in the delivery profile of coal all of which were assessed to be more expensive than other alternatives.

Eskom is implementing a long term coal strategy which will ensure a predictable coal price path and security of coal supply. The strategy gives preference to dedicated long-term coal contracts, with coal delivered on conveyors.

Electricity Tariffs
Mr Cassim presented that Eskom has been more and more dependent on government equity support and further debt due to the shortfall in recovering its efficient costs and a fair return.

NERSA and Eskom have been on a journey towards achieving prices reflective of efficient costs and a fair return for many years. This is in accordance with the Electricity Regulation Act. The efficient costs do not go away if the consumer does not pay, then the taxpayer has to pay. This negatively affects other government priorities. The High Court confirmed that NERSA had been deviating from its methodology, resulting in incorrect decisions. This has resulted in further shortfalls being experienced by Eskom. The dependence on government equity has increased to address the gaps caused by inadequate price increases.

Measures are in place to protect vulnerable sectors especially (1) poor residential customers (who have free basic electricity and subsidies), and (2) identified energy intensive customers (the Department of Mineral Resources and Energy has provided for short- and long-term negotiated pricing agreements).

Further price increases are required to limit the burden on the fiscus.

Eskom’s balance sheet continues to threaten its sustainability and the sovereign.  Adverse NERSA decisions have resulted in a R370 billion cumulative revenue shortfall.  Borrowing at the time assumed cost-reflective tariffs in future–including a reasonable and market-related return on assets.  There is a mismatch in debt tenor for the new build programme is relatively short (10 years)—while the recovery of the asset is over 50 years. High cost to service debt coupled with sub-cost reflective tariffs resulted in a need to borrow to service debt.

On average going forward, Eskom’s interest bill will be around R30 billion per annum. Its capital is also around R30 billion per annum, requiring R60 billion just to service debt going forward. In the present financial year total repayments and interest (especially the capital repayments) were much higher, in the region of R94 billion for the period ended March 2021. That is what here is a need for the additional support of R56 billion from the government.

Even after adjustment, South Africa’s tariffs will remain competitive globally to support investment and economic growth (see slide 15).

Updating the Committee on revenue and price decisions to be made, he indicated that NERSA had made the decision that will define the price of electricity effective from 1 April 2021 resulting in a 15% increase from the previous financial year.

The tariff has remained relatively flat for industry, but mitigation steps are required. Potential mechanisms to mitigate the impact include: (1) Remove existing 1980s R8 billion subsidy from industry to agricultural users; (2) Increase FBE from 50 kWh/month to 100 kWh/month for indigent users; (3) Raise licensing cap from 1MW to 50MW to allow consumers to self-generate; (4) Extend 12L Income Tax Act for energy efficient investment; (5) Use the National Prosecuting Authority for energy intensive users to mitigate impact of price increases; and (6) Address discrepancies in municipal tariffs as mark-ups vary widely: from 18 to 161%.

He then presented ways in which the poor and vulnerable sectors and residential consumers could be assisted.

Through the MYPD process, NERSA approves the prudent and efficient revenue that must be recovered by Eskom to remain financially sustainable. Eskom must therefore recover the full revenue as approved by NERSA.

If one customer group pays less (are subsidised) within the tariff base, another customer group must pay more (to pay for the subsidies) as costs do not go away and Eskom must still
recover approved revenue.

Eskom does not have the mandate to determine which customers should be subsidised government should develop and integrated policy.

International regulatory practices clearly make a distinction between role players in the industry: 

(1) Government: Policy, 
(2) Regulator: Implementation rules and ensuring implementation of policy, and
(3) Utility: Implementation of policy according to regulatory rules.

The Eskom Retail Tariff and Structural Adjustment methodology, however, provides for “the Energy Regulator to allow cross subsidies between various customer groups."

Increase FBE from 50 kWh/month to 100 kWh/month for indigent users. 

In the past NERSA has made a decision to limit the increase to the 2 blocks of the Eskom lifeline tariff (Homelight 20A) to protect the poor Regulators typically do not have policy powers which are normally reserved for Governments.

Mr Cassim concluded his briefing by presenting that Eskom should enforce a “User Pay” principle as alluded to by the President and Minister of Finance. Currently Eskom’s average price is <US$ 0.07 /kWh (at R15.75 US$ 1 which is extremely low by any credible international benchmark is significantly below cost reflectivity and main cause of Eskom’s financial unsustainability. Once cost reflectivity is achieved around US$ 0.09 price will still be very low and competitive Eskom price is still inelastic. In the short term Eskom, similar to any other company, has three sources of funding namely revenue, debt and equity. In the longer term there is only one source, namely revenue. Eskom has been dependent on further and further borrowings and shareholder support in the recent past this avenue has been exhausted and is not sustainable. The missing link has been a tariff that reflects efficient costs this is where further progress is needed. The economy is better served by increasing tariffs. A once-off additional 10% increase in the 2022 financial year is equivalent to continuous annual R23 billion injections. The IRP refers to competitive electricity price at least 25 per cent more than Eskom’s price. IPPs are in a sustainable situation their efficient and prudent costs and a competitive return is recovered through the Eskom tariff. However, the same does not apply to Eskom business.  It is accepted that a migratory path needs to be followed for the average price of electricity. Electricity price is not only determinant for economic growth other factors include policy, labour costs and logistical costs.

Kusile and Medupi
Mr Nxumalo presented explained that Eskom remains focused on bringing new capacity online and driving effective plant defect corrections. 7 000MW has been commissioned since 2015 and
13 137MW has been commissioned since 2005. Between financial years 2021 and 2025, Eskom plans to commission 3 994MW. The following targets apply within the next four years:

● Kusile Unit 3 (March 2021): 800MW
● Medupi Unit 1 (July 2021): 794MW
● Kusile Unit 4 (January 2023): 800MW
● Kusile Unit 5 (December 2023): 800MW
● Kusile Unit 6 (May 2024): 800MW

He then outlined the major plant defects and high-level progress feedback at Medupi and Kusile and presented some solutions.

In total, six major plant defects are applicable to Medupi and Kusile and one major plant defect is applicable to Ingula.

Kusile and Medupi:
● Pulse jet fabric filter plant;
● Mill defects;
● Dust handling plant ash silos and conditioning plant;
● Furnace exit gas temperatures and reheater spray flows;
● Gas air heater performance and fouling; and
● Control and instrumentation repeated distributed control system card failures.

Ingula:
● Dual Load Rejection (defect has been closed)

The presentation noted that at this stage, the defect costs will be split on a 50% share basis between Eskom and the contractor (MHPSA) at both Medupi and Kusile. Meanwhile, an important contractual process (Clause 3.5 Consultations, Determinations) is under way through the Dispute Arbitration Board to determine liability. The current estimation for completing the effective correction of the major boiler plant defects at Medupi and Kusile is 2023, depending on the outage availability of the units as per the Generation Division outage plan.

However, Eskom was making steady progress in resolving the major new plant defect challenges:

● A major New Plant Defect Correction Plan is being executed and closely monitored.
● Effective February 2020, the Ingula dual load rejection defect was corrected successfully (units upgraded from 245 MW to 331 MW sent out capacity).
● The availability and reliability of the synchronised units at Medupi and Kusile are gradually improving.
● Medupi Unit 3 identified as a test case to implement defects resolutions and establish root cause analyses, before implementing all the solutions on the other units.
● In April 2020 Medupi Unit 3 reached full generation capacity (793 MW) after implementing design defect modifications. The Unit has achieved seven consecutive months of improved performance on the modified plant since the implementation thereof.

On the new plant major design defects for Medupi and Kusile Power Stations:

Medupi Power Station:
● December 2020: Evaluation tests and inspections completed on Medupi Unit 3 Roll out is progressing and further improvements are being developed.
● Design modifications roll out include:
-June 2020: Unit 6 Gas Air Heater and Fabric Filter Plant

-September 2020: Unit 1 Gas Air Heater, Fabric Filter Plant, Erosion Protection, Short Lead Items on Milling Plant

-October 2020: Unit 4 Gas Air Heater, Fabric Filter Plant, Erosion Protection, Short Lead Items on Milling Plant (1) January 2021: Unit 2—75 day outage completion; (2) May 2021: Unit 5—75 day outage start

Kusile Power Station:
● Boiler plant modification outages to start mid 2021 for running units (1 2 and 3).
● Boiler plant modifications on construction units (4 5 and 6) to be done before commercial operation of each respective unit.
● Unit 3 is currently in its testing and optimisation phase.
● June 2021: Unit 1—75 day outage start.
● September 2021: Unit 2—75 day outage start.
● January 2022: Unit 3—75 day outage start.

On the cost overruns, Medupi and Kusile budgets have not changed since the 2015 Eskom board approval (see slide 24).
 
Wilge Residential Development
Mr Nxumalo then presented the summary of the events concerning the Wilge Residential Development.

The Development was undertaken in 2012 to build residential units for the Kusile Power Station Project to accommodate artisans during the construction of Kusile Power Station.

Its contract was awarded at R260 million for the completion of 336 unit flats by December 2013. The cost incurred to date is R 633 million on the development of the flats and an additional R207 million on common infrastructure and related work.

On 4 August 2017, the Board Tender Committee resolved that Eskom should negotiate the termination of the contract with Liviero Wilge Joint Venture for the construction of 336 residential flats. Following this, the contractor’s obligation to complete the works was terminated on 31 August 2017.

In December 2019, exco approved the strategy not to continue with the construction of the Wilge Residential Development Project and approved that the disposal process be initiated.

In accordance with the Department of Public Enterprises procedure governing the disposal of non-core assets State Owned Companies are required to give the government the first right of refusal. Eskom has engaged with the DPE to dispose of the property. The government is currently conducting their due diligence in accordance with the PFMA.

Eskom has declared R840 million as fruitless and wasteful expenditure.

On consequence management, in 2019 Eskom appointed Bowman Gilfillan Inc. to investigate various allegations of fraud, corruption and financial irregularities pertaining to, inter alia, the Kusile Power Station build project Kusile. Part of their findings included fruitless and wasteful expenditure on the Wilge Project.

Also in 2019, Eskom instituted disciplinary action against the General Manager of Facilities of which the Wilge Project is a part. The disciplinary process was concluded in January 2020 and the General Manager was found guilty and subsequently, Eskom terminated his employment.

Eskom is currently concluding a disciplinary process on an additional implicated employee; this process is at an advanced stage.

Eskom has initiated a legal process recovering monies from the General Manager concerned.

He then handed back to Mr de Ruyter, who concluded the presentation by thanking the Chairperson and Committee members.

The Chairperson opened the Committee for discussion.

Discussion
Ms J Mkhwanazi (ANC) asked if the Minister could elaborate on the work on coal quality and coal contracts. She also wanted clarity on timeframes, since the report indicated the end September 2021. She also wanted elaboration on the “historical poor maintenance of Eskom generation” and also “poor coal quality.” She wanted to know from the Minister whether these issues have been addressed and, if so, what impact this would have on load-shedding. She felt that the issue of load-shedding needed to be dealt with “aggressively” since it is inconvenient and is having a negative impact on South Africa’s economic development.

On Medupi and Kusile, she asked if the Committee could have “time and space” for oversight, “just to check on the effective correction that has been reported and the work that has been done around that area.”

On the electricity tariff, she wanted a progress update on the work that has been done by the ministerial task team on the issue of municipal debt and on Eskom’s engagement with indebted municipalities. On the final slide of the presentation, she wanted Dr de Ruyter to provide the Committee with clarification on bullets eight and nine which refer to IPPs. She wanted to know how this would assist Eskom going forward.

On audit outcomes, particularly concerning the wasteful and irregular expenditure, she wanted to know how Eskom planned to address this.

She noted the progress on the Kusile accommodation and said it “has taken too long.” This needed to be noted.

She wanted timeframes and plans to conclude the consequence management, especially on the issue of the recovery of funds. This needed to be acted upon. She wanted to know what the plan going forward was concerning Kusile accommodation, because she did not think that the government should have to invest “so much money” only to leave the property unused.

Mr G Cachalia (DA) said “In the conclusion paragraph of the research document that was given to Committee members, it states ‘our supply remains unreliable, unpredictable’ and I say you can add ‘increasingly unaffordable,’ and that ‘Eskom is a long way,’ it says, ‘to being a successful business entity.’ The question is, therefore, how do we get there […] and is it possible?”. While he appreciated Eskom’s report which showed its various interventions, “the fact is that Eskom’s model is broken.” It borrows money, it charges consumers for electricity and uses the difference “in finance and costs, finance costs and consumer income to pay for operational costs, new build and fixes and, in the past, even paid dividends, although that will never happen. And that includes expenditure on the liability maintenance, which is important. Very important. But now the debt is so big, that the model can no, no longer works (sic).” He added: “And while rationalising coal contracts and identifying discreet instances of corruption and more—it’s all very good—it is nowhere near addressing the elephant in the room, which is debt and finances.

“So if, as stated in slide 13 […] that further price increases are required to limit the burden on the fiscus, we need to understand. And please note these following five questions and provide answers to them, now or later if the information is not at hand, and I will send these questions through to the secretary to ensure that they’re followed up on:

(1) What are the finance costs of the debt existing, proposed on balance sheet, off balance sheet, and covering existing and proposed maintenance and new build fixes on a time frame? 

(2) What exact level of proposed tariff increases are needed to limit the burden on the fiscus and provide the required fill-up in terms of revenue?

(3) What is the quantum of the gap between [tariff] increases and financing costs that will need to be filled by the fiscus?

(4) Is this sustainable? And if so, how?

(5) If not, what are the alternatives? While, as Eskom focuses on debt reduction of R200 billion—and we need details on that please—and seeks to balance the positives and negatives for Eskom in terms of IPPs against the interest of Eskom’s needs and the nation’s needs (which should be in sync, not separate). I’d like answers on these.”

Ms O Maotwe (EFF) said the presentation was long and had to be grasped. She asked the Chairperson for his patience.

On coal prices, she said that if you look at the Eskom contracts, which have been running for 40 years, starting with Kriel in 1979, are coming to an end. I heard the presenter say that the contract is going to be extended. Its duration is for “one years and five—I don’t know whether its five months or half a year.” But nonetheless, she continued, it’s the contracts forty-first year, meaning its soon coming to an end. She wanted to know what plans Eskom had in place “to then make sure that we don’t end up losing the coal that’s coming from here, which will definitely affect the Kriel power station?”

She recalled that the presenter spoke about “underinvestment in these Cost Plus mines, which costs is, then the shortage of coal and all that (sic). Now, you’ll remember that these mines are private and they are running [these] mines with the lifespan of the mine itself in mind. So if the coal in that area is meant to last for forty years and the mine is on its thirty-fifth year, common sense tells you that you’ll not invest much because then you’re investing [in] something that is dying anyway. So, Eskom should have seen this coming because you can’t be in a partnership with someone for forty years and then you don’t know their plans, you don’t know how much coal they have that they can supply with you. It should not be a surprise. And they should have known that there’s going to be an underinvestment; it’s a concession, a concession that’s got an end date, and it does not make any financial sense to anyone to invest in your last few years of existence. So this should not be a surprise.

She recalled the presenter saying that the “calls to invest R15 billion capital in the Cost Plus mines, have they done the necessary homework? Have they assessed these mines? And what stake will Eskom have in them after spending this R15 billion in taxpayer money?” She did not think that this amount could be spent while maintaining a “supplier, service provider kind of relationship.” There must be some sort of “solid-relationship” which is “Eskom should be owning a stake in this mine” since they were going to be investing.

She noted the presentation indicated that the board signed a long-term coal strategy, but that “surprisingly two months later—which is December—the stock levels went, deteriorated badly to the levels that the holding stock was less than 20 base in ten power stations. Now what does it say about that long term strategy that the board has signed? Does it mean that it’s not helping? Or was it almost like a move, then, to push Glencore, because the presenter says, just two lines later, that they were then focused to buy coal from Glencore at high prices. So was the strategy of the board to deliberately squeeze in Glencore with high prices by sabotaging the entity by signing that long-term strategy, which did not yield any results except to have the low-levels going even much lower. Which then necessitated Eskom to go into emergency procurement that meant that Glencore is now selling at high prices.”

On electricity tariffs, she asked, as she had before, if Eskom could provide a list of the top twenty companies or corporations that owe Eskom money. She said that “every time we hear that consumers will pay for the shortages, meaning Eskom can switch off my light [in] my household. But I’m not being told about the corporations that are owing Eskom. We all know about Soweto residents not paying Eskom, but how come we don’t get to know who are the top twenty corporations or companies that are owing Eskom?” She wanted this list “as a matter of urgency.” She said that any discussions suggesting that there “must be an increase in tariffs” will be met with rejection from the EFF. We are not going to agree to increase tariffs on consumers, “purely because we are being bullied by the mines.” She asked “if the existence of Eskom providing electricity, is dependent on coal—which is clear, it’s apparent, the fact that we are having forty year contracts, a contract that was entered into before even I was born, and it’s still running until today—it means that Eskom needs coal. Now, the question is—and I’m sending this to the Minister—isn’t it time that SOEs… Minister, you established a SOE […] that will run a coal mine that will supply coal at a reasonable price to Eskom. Instead of depending on this coal mines that, at some point, they even connive amongst themselves to hide the prices of coal, and we find ourselves in a desperate situation, like now. These mines, their contracts are coming to an end. The next one that is coming to an end is the one from […] 1983, which is left with three years. Followed by 1989. I can tell you now for free: they will not invest any capital on the mines that will mean that those assets will then live beyond the lifespan of this mine."

On Kusile, “you spoke about the availability and reliability which has increased gradually, but you’re not telling us what’s the target. What is your reliability target? And what is your availability target? And where are you sitting right now? And may also to take it back to the Eskom coal contracts, are you not managing this coal contracts through the same reliability availability on those mines, coal contracts you have signed with the mines? If yes, then how come we are still being told about the quality of the coal, and how come we are still being told about stock levels and all that? It means the reliability and availability performance measures are not being put in place, or are not being managed properly.”

“You spoke about the Medupi and Kusile units,” but that “when you look at the costs, to me, where I’m sitting, it suggests that very soon you are going to run into [a] shortage of funds, especially for Kusile. When I look at the [financial] expenditure to date versus […] what is on the ground, and versus the money that is left from that project, it tells me that very soon you might run short of funds. Now, can you guarantee that we will not be seized with a submission that seeks to ask for additional funding for Medupi and Kusile? I’m happy that the costs have not increased since 2015, you have not increased the budgets, sorry. So, can you safely say with the work that is done, and what is left, together with the money that is left, you’ll be able to finish this contract [without] asking for additional funds.”

On the residential development, this project has failed and everyone agreed on that. She asked why it was an issue in 2020. The reason she was saying this was because the project had been started in 2012. It was then cancelled some time in 2017. “And we’re only talking about fruitless and wasteful expenditure in the year 2020/2021. Why is that?” She asked why in 2019—after the contract was already cancelled, and knowing full well that the project had irregular expenditure, had “fraud” and other corruption—did Eskom appoints a private company to investigate instead of taking it directly to the SIU. Because, now, they’ve investigated and they have come with recommendations or the outcome, and only now you take it to SIU. Why didn’t you use government entities that are already in existence to avoid to spend more money (sic)? And how much have we paid this [private company] that was investigating this residential development? How much was paid? What was the contract, and how much was paid, and why did we see the need to outsource this to them when we could have gone straight to SUI? Because we have the report. The fact that the board cancelled the contract, it was because of various reasons that were forwarded to them, of which fraud should have been part of it. Corruption should have been originally part of it, and financial irregularities. So, why did we need to then still contract this one, and how far is the SIU with the investigations of this residential development?”

Ms C Phiri (ANC) conveyed her appreciation of the presentation. She wanted to know if Eskom had plans in place to recover the mismanaged money or finances. The country needed the money and it needed to be paid back. She wanted a detailed report from Eskom delineating this.

On the Duvha unit, she said three incidents had been reported. She wanted to know what technical issues relate to Duvha.

She wanted to know how Eskom was addressing the findings made by ratings agencies.

Ms M Clark (DA) said she had several questions and that if they were not answered in the session she would submit them in writing.

She wanted to know what the implications were of the National Energy Regulator of South Africa (NERSA) decision “for the consumer as well as the sustainability in terms of the reticulation regarding municipalities, considering their credit control has dropped to around 65% in bigger metros and many municipalities are not honouring their debts with Eskom. The burden and risk municipalities impose on the grid and several issues related to this have massive illegal connections and capable theft. Municipalities do not have the capability to spend their capital budget to ensure that infrastructure’s upgraded, and how does this affect Eskom in the long-term?”

She wanted to know “what is Eskom doing about the 33 environmental legal contraventions incidents: 91% being water-related incidents? Where did these contraventions occur? And what was the sum in fines imposed on Eskom, and was there any legal costs relating to these contraventions?”

She wanted clarity: “Why were the long-term IPP contracts of IPPs at Eskom entered into more expensive than the new IPP generation office? The report speaks of writing off four billion as a result of over payments to a number of contractors involved at Kusile power station. Can this pleased be clarified as to how this happened and how this would be mitigated in the future? And contractors that default not their obligations: Are they blacklisted?”

“What plan has been put in place within Eskom in order to enhance critical skills? How would Eskom ensure that careers are tracked in terms of scarce skills, like engineers? And how would we bring back engineers into the fold back into the organisation? Maybe looking at establishing a fraternity of engineers where Eskom could tap into.”

On the Wilge development, she said it’s taken nine years for the report to “be exposed,” and five years to put a stop to “this contract”. She found the whole issue “unbelievable.” It is a clear indication of a “looting opportunity.” She wanted to know if the project went out through a tender, were there competitive bids, who were the companies that shortlisted for the contract, how many other contracts has Liviero [Wilge Joint Venture] been given by the DPE, and what are the status of those contracts (sic)?”.

She also wanted to know whether the following processes in terms of building laws were followed: “Were the proper, approved plans submitted to the local authorities and approved? Were there building inspections in the course of the project and final compliances done? Has Liviero been investigated and are they being blacklisted for future contracts? And did the NHBRC [National Home Builders Registration Council] also inspect this project and give certificates to the relevance (sic)?”

Mr S Gumede (ANC) said there were too few documents and too many questions. On accommodation, he said that politicians were the primary actors “doing the wrongs.” In his view, the punishment doled out, along with the consequence management, was not right. He did not understand why persons who were alleged to have stolen money were not instantly arrested and monies recovered, as opposed to a mere dismissal. He wanted to know who initiated the accommodation project at Kusile. The buildings are there, but no-one wanted to stay in them. He was worried that feasibility assessments were not done, and wondered who could have appointed the contractor, since it appeared that there was some sort of impairment to the buildings causing a lack of demand to stay in them. He understood that the board suspended the contract, but wondered whether the contract had been reported initially. He wanted to know the reason for the late suspension of the contract.

He said there were two investigations in the report, alongside the SIU’s investigation. These are separate from Eskom’s official report. “Other than the 336 flats that were going to be built with the money that it accumulated to the 840, we could have built 1680 units. It tells us how some other people… I’m saying, in many instances, you know people look at, and the contractors, or any other people, look at Eskom as a milk cow. Everything is just inflated: ‘don’t worry, Eskom will pay.’ But I must say, this is the project that reflects badly on us as politicians as well as on Eskom, let alone on DPE, because the Department could have in fact seen this, and that person be straight taken to jail (sic).” With the way it was reported, no-one is perhaps willing to buy those flats, especially with the impairments escalating prices. It now stands at “918”. This is an embarrassment.

He said Eskom is “our” hope: It’s a hope for South Africa. We cannot do anything without electricity. It looks as if, as we read about Eskom, the reports begin to show how expensive it is to maintain the organisation. “I was worried about the fact that each unit within Medupi is R300 million, where there are about six units”. He said defects were worrying him. He did not know whether they were operational or structural. At the end of the day, who is accountable for them? This would also be borne by Eskom. He asked who was responsible for appointing all the contractors.

On page four, he asked if Eskom has the option other than accepting the conditions laid out by the contractors. He said Eskom pays for three aspects: Transport, mining and coal. That is how the prices is determined. It tends to be too expensive, making Eskom’s survival precarious.

On page five, he asked what the impact was on Eskom in terms of “Cost Plus.” It looked like an incentive: If the contractor was in a position to give what was required, more money is given to them. He was worried how the fluctuations in prices levied to Eskom were controlled.

Mr R Komane (EFF) said it seems Eskom has too heavy a load to carry. She wanted to know what Eskom was doing to address this.

She asked how the ratings agencies’ findings were being addressed by Eskom.

Given the court order against NERSA, she asked what bearing did the NERSA decision have on the “poor consumer”. 

On the finalisation of the remaining plans, she asked how much was spent and how much was left and whether the remainder was sufficient for the completion of both Medupi and Kusile. This was so that Eskom does not make a surprise request for a further bailout.

On the residential development, she said that projects should only be engaged when there is a need. Thus there should be stakeholder engagements. She asked whether the decision was political. For whose benefit was this decision, she asked, since there was no-one willing to occupy the flats. She wanted to know if there was an analysis of the demand. She wanted to know who the flats were built for. The dismissal of the general manager was not enough, nor was the “external investigation” along with its cost, which has not been disclosed. She asked how Eskom would recover if the matter was referred to the SUI so late. She wanted Eskom to tell the Committee how the money was going to be recovered, and not just blame things on the managers.

She echoed Ms Maotwe’s by again requesting a list of Eskom’s largest debtors. It was time that the Committee saw this list.

She wanted to know what the technical issues were, relating to the Duvha unit 3 incident. She wanted to be taken through this.

Ms V Malinga (ANC) commended Eskom on recovering money and expelling the general manager who was “found wanting” but suggested that they do the same with contractors.

On the residential development, she said “you can’t move from a [R]260 million to [R]840 [million].” This was “absurd” and a bad reflection on Eskom’s project management.

On Kusile and Medupi, she said “the same process that is unfolding with these residential flats should also unfold with the architectures (sic) or the contractuals (sic) of Kusile and Medupi.” This likewise means project management was found wanting, since they failed to plan adequately.

On the Cost Plus mines, she wanted to know why Eskom had “relegated” (sic). This is because “the presenter gave the advantages of the Cost Plus mines.” The advantage is cited as Eskom having a “stable resource. Eskom has reduced incentive.” She asked why there was underinvestment on a project which had good results for the SOE.

She asked if the DPE had engaged the DMR in terms of how to use safe carbon emission methods in order to cap pollutions to avoid litigation on environmental issues.

Ms J Tshabalala (ANC) referred to the previous day’s SCOPA meeting in which Eskom had said they would be applying for R70 billion in spending deviations in under a year. She said “deviations are applied by the entity to the Minister for signing. Now, this has occurred in Eskom[’s] case due to renegotiation of coal contracts, and that’s what has been reported. Now, it is a reflection of not yet engaging in proper planning, if you ask me. So, Eskom[’s] biggest deviation was not approved. The question is: What is their rationale for application for the deviation. The second […] example of Eskom for deviation (sic) it has been reported that it was due to unplanned breakdown[s] and needed the spares and this was not planned for (sic).” She said the issue was in the planning, and felt that Eskom needed to find a way to deal with these issues within the constraints of the budget. She said the progress made needed to be recognised, but asked when the identified defects intended to be resolved. She asked how the capital expenditure overruns impact the electricity tariffs, because the cost efficiency would become critical. She asked how Eskom was dealing with this. She said “This reflects the historical lack of financial controls, therefore at this point one could definitely say that the new management, the fact that its not allowing such, it is really commendable.” She said it does not end there, however. She said “I think we need to have a better, special Portfolio Committee, where we really get from Eskom all the Costs Plus mines special briefing around this coal mining companies (sic). I think it’s really important to really get as members of Parliament.”

On Medupi and Kusile, she acknowledged in the presentation that there was sufficient budget being spent. “However, Chair, I really feel that we need to get a proper final costs that will be fully operational on coal powered power stations. Really, the original build costs including the costs of the correct—to correct the defects—I think we need to get that (sic)”. She said Eskom should supply the Committee with the maintenance programme. Which power stations are under maintenance and which have been returned to service? Maintenance is a large factor in load-shedding. This is why it is important for the Committee to know which power stations are under maintenance and which have been returned to service. She also wanted to know what the prospects were for load-shedding in February 2021. There was no way the Committee could have had the current meeting where load-shedding was not addressed.

On the NERSA decision to “grant Eskom an additional [R]6 billion in revenue,” she wanted to know how this would affect the entity’s income statement. She wanted the officials to give the Committee a sense of Eskom’s financial efficiency. Eskom’s objective was to significantly reduce its debt balance of R200 billion. “The margin of 35% to enable the entity to achieve independent financial stability: what is the progress on achieving this target? […] Eskom should be in a position to update us on the outstanding municipality debt, and what has been the progress on collecting the outstanding funds.”

She would continue to emphasise municipal debt. “We, over time, emphasise the issue of Soweto debt because it becomes a huge debt. However, there has been progress from our last meetings that we had around collection from Soweto. All we needed—and I’ve been saying this to Eskom—can you give us a spreadsheet that shows us progress in terms of projects that you’ve been [implementing], especially on this meter boxes that you’ve been putting on, because over time they’re proving to be able to assist in revenue collection, because when people don’t buy electricity or purchase, there’s no way they’ll have power, so it pushes the customers and consumers to do so. So can we get that spreadsheet so that we are able to deal with it. I’m highly disappointed on the issue because I did raise this thing about a place in Tshwane, where I did mention that in Tshwane, now [it’s] going for three years, that Committee doesn’t have electricity. The issues about the planning of that community: the shacks and people taking electricity illegally and so forth, they are there, we understand it. However, we cannot fold our arms and say there is this challenges (sic) we just report on them.” She re-asked her question concerning what the plan was going forward.

She said that Eskom should update the Committee on the utility debt programme, as well as predictions concerning the entity’s “loan book.” She declared that Eskom can be self-sustaining and need not rely on the government’s support.

On the matter of the role of the Chief Restructuring Officer, she asked “What has his term[s] of reference and why was his report not submitted to [the] government?” She added “a priority for the Eskom CEO is that during the restructuring of the entity, good governance is maintained, however, Eskom received a qualified audit for the 2019/20 financial year, with high levels of fruitless and wasteful expenditure as well as irregular expenditure.” She added that a qualified audit finding was also made in respect of insufficient delegation of authority, according to Eskom. “Now this delegation of authority had been updated. Why was there a finding with respect to the delegation of authority not being adequate?” “The right-size Eskom number of staff due to Covid-19 and over what time frames will Eskom achieve this (sic)? What is the current number of staff at the company, and the cause associated with this? I’m raising this issue on the point of the staff components because we would have seen what needed to be done around the right-sizing in terms of [Eskom’s] slide presentation: The issues of severance packages already mentioned as well through natural attrition (sic).”

Minister’s Response:
Minister Gordhan said he wanted to make some general points and then refer specific operational issues to Mr de Ruyter and his team.

He said “SOEs like Eskom are still pretty much in the recovery phase. Meaning that projects like the Wilge project (and that’s a small one compared to some of the others) go back sometimes 10/15 years. And the current management is now asked to account for decisions that would have been taken in the early 2000s, for example, as is the case with Medupi and Kusile.” He added: “To the best of our ability I can assure you on behalf of the board and the management of Eskom that whatever information is available, and that we can find, will be put before Parliament whenever there are questions raised, so there’s no issues in relation to that.”

On the matter of the recovery of funds, he said that answers to this were given before but perhaps Mr de Ruyter could repeat them. “You’ll remember the company called ABB, there was a recovery of R1.55 billion and similarly I think McKinsey paid a certain amount and other companies have paid certain amounts as well. But as the investigation processes and assessments go on in Eskom itself I can assure you there will be further processes that will be put in place, some of which I will discuss with the board in the next fortnight or so, and whoever we find that there was culpability by [a] former board member or former executive, who currently are making a lot sounds out there in the public space to distract everybody’s attention from their role in what has happened at Eskom, we will track down that money. And there are ways of doing that. And when we make some progress and have some certainty about the path that we’re going to follow, we’ll certainly come back to you as a Committee but also to Parliament more generally.”

On the issues raised by Mr Cachalia: “Is this a business that can be ‘saved and repositioned’? I think that is what [the] government is committed to doing. But you have to keep in mind what I said earlier on, which is that these are historically determined processes in many ways, and the attempts we made at the moment and over the last two years, and the one or two years that will follow, are attempts to ensure that we do reposition issues such as debt, sustainable tariff increases, both for consumers and for businesses, and at the same time the general pattern in many of the SOEs including Eskom is not just plain recovery, but also ensuring that new business models and operational models are evolving. So in the first instance, it’s the implementation of the Eskom road map and the creation of an independent transmission entity. You’ve had information as a Committee indicating that that will be completed by December 2021. In the second instance, responding to the energy market, which has significant changes taking place globally in view of the climate change challenges. But also at the same time ensuring that we implement [the] government’s IRP19 within that overall framework. So it’s a complex environment in which to prosecute the just transition. And at some stage, I think the Eskom management team can brief you and the Committee, Chair, on what exactly the just transition mean[s]. What are some of the [inaudible] and preparations taking place, and how will some of the older power stations be repositioned.”

On the question of Cost Plus mines: “This is a historically determined way of doing business. Secondly, there were commercial benefits arising from this particular model. Because, remember, the model was that what we would have is power stations being built in or around coal mines that could assure, firstly, the quality of coal; secondly, the quantity of coal that will be required during the lifetime of that particular power station. And the additional investment that we are talking about on behalf of Eskom is about ensuring that the benefit of such a formula be looked at.”

On Ms Maotwe’s “important point about whether there could be an equity stake taken by [the] government as a result of its contribution,” he said: “the Eskom management team will look into the viability of that. The state as a minor—well the state does have an SOE in the form of a mining company which reports into the Department of Mineral Resources and Energy. Bu they’re not ready to take on this kind of responsibility. Nor would [the] government have the incentives—or the cash for that matter—to put into such a venture (sic). So many of these instances when the private sector is being brought in, or asked to play a particular role, or provide it with an opportunity, it’s about ensuring that private sector capital can be drawn into some of the projects that we’re actually talking about and that includes the question of coal. What is worrying, though, as the CEO will explain, is the quality of coal at some of the power stations, which plays a highly disruptive role in the operational mechanisms, leads to trips of one sort or another, and that then leads to shortage of supply in terms of megawatts, which could lead—if they have too many of those—to the kind of load-shedding phenomena that we have. Although, load-shedding as a separate item also requires more than just fixing the quality of coal, it needs a multi-pronged strategy in order to do so. So there’s wisdom in the Cost Plus mines but we’ll certainly take into account some of the contributions made.”

On references made to slide nine and Glencore, he said: “according to that slide and what’s in there, on the left hand side, as I read it, Eskom did not enter into any contract with Glencore because of the price issue.”

On the residential development or “the flats,” he said, “the management team can provide you with the specifics, but there has been some consequence management but we need to know what happened to this company: who ran the company, and I think it’s fair for the Committee to raise those sorts of questions as well.”

On the “coal issue,” he said: “I don’t think the Committee has had an opportunity to invite the coal mining community to appear before the Committee and to explain itself in respect of many of the questions that you’ve actually raised. Whether it’s the consistency of supply, the level of investment that is actually taking place or not taking place, how do they see the future of coal, how do they see the global market as far as coal is concerned, and how do they see the domestic market in which Eskom is the biggest consumer of coal. But secondly, there’s a lot malfeasance that fits into the coal supply chain, and how does the private sector explain itself, whether it is the miners, whether it is the trucking community, or whether it is employees of Eskom itself. So you might want to consider calling in the coal companies in order to get some explanations directly from them and give Eskom an opportunity to respond as well.”

On the of corporations or companies that owe Eskom money, he said: “there was a question asked on 4 December and it was responded to on 2 February, where the top 50 corporate companies have been listed in the annexure to the answer given. So this is a question I think asked by Honourable Maotwe. So the answers have already been provided in the question. I’m not sure if the Parliament has published the answer. But you can certainly find it there.”

On the question of the Chief Restructuring Officer (CRO) in the “report,” he said: “The CRO is now part of history. We did explore certain debt options via the CRO. There is a report of sorts that has been presented. Eskom has done its own work in this particularly regard. And the most recent development here is the Nedlac compact has been signed on the question of Eskom and Eskom debt and Eskom sustainability. And the question is how do we start giving effect to that? And we can assure there’s a lot more intensive work will go into this during the first half of this particular year.”

Eskom’s Response:
Mr de Ruyter welcomed an oversight visit by the Committee to Wilge, Medupi and Kusile. He said Eskom would liaise with the Secretary of the Committee to facilitate such a visit. This would comprise a fuller briefing on the progress and what has been uncovered at those three sites.

 “As the Minister has stated, there is a significant impact on our power generation as a consequence of coal quality. Our most reliable power stations are those power stations that are served by linked mines and we therefore have to find a way to accommodate a greater diversity of coal suppliers while at the same time being able to blend and homogenize coal quality. We are in discussions with Transnet to establish a so-called in-land coal terminal that will enable us to do exactly that: to still continue to buy from junior and emerging miners, while at the same time being able to manage the coal quality going into our power stations more closely. So there are a number of proposals that we are investigating in this regard. It is in a very early feasibility state. So it’s not going to happen overnight. But we are working on it to address our coal quality.”

On the question of irregular expenditure on the Wilge flats, he said: “Obviously that’s a very disappointing saga. It has taken a very long time for us to resolve this matter. Just to reiterate: Unfortunately, Eskom does not have powers of arrest. We are dependent on the law enforcement authorities to do that when we bring cases and dockets to their attention. But we are making progress with the SIU to conclude civil claims from the former general manager to the tune of some R75.8 million that we are seeking to recover from the individual concerned. I must again just emphasise that our cooperation with the SIU is really exceptionally good”. He then thanked some SIU officials for their support.

On Mr Cachalia’s questions, he said: “We agree that we need to make Eskom a sustainable business going forward, depending on continuing liquidity assistance from [the] National Treasury, which essentially just helps us to pay our interest bill, it doesn’t help us to pay down the principle debt, is very important.” In response Mr Cachalia’s other questions, he added: “Net debt service cost is R32 billion per annum, which is a huge burden,” bearing in mind that before this cost at an operative profit level (EBIT), Eskom was profitable in the previous financial year. “So that just tells you that the debt is really the biggest challenge that we’ve got.” The exact level of the proposed tariff increase in terms of the High Court order, based on an agreement reached between NERSA and Eskom: “the proposed level of increase, which now needs to go through various approval authorities in order for us to implement it by 1 April, is 15.63%. It is our anticipation that if we are able to have a further increase in the following financial year of another 15%, we will be able to cap further increases at a CPI related measure. And that CPI related measure has to then, of course, be augmented with a provision for carbon tax and any excessive IPP recoveries. We think after that—provided of course we resolve the municipal debt challenge, which is a significant one—Eskom should be a sustainable business going forward. This is I think a promising way forward. There is some pain to be achieved, but we also need to recognise that if we, as Eskom, are unable to reward our capital with the current level of tariffs, then private investors into the generation sector—which we are hoping to attract—will also not be able to do so. So the cost reflectivity of tariffs is an important enabling lever.”

In reply to Ms Maotwe’s question of the Kriel contract and what plans there were, if any, to replace the supply as well as questions related to the underinvestment in Cost Plus mines, he said he would ask Mr Nagar to respond.

Mr Nagar said that “the two significant point extensions we have is Kriel and Matla. On the Kriel colliery we’re looking—and we’re already investing—into what we call the ‘next reserves,’ which are right next to, or adjacent to, the current Cost Plus mine delegated reserves. So there was a question ‘if the contacts are coming to an end at a certain date, why are we continuing to invest, or why would it make sense?’ and the intention is to look beyond the contract end date to mine resources and reserves that extend to beyond that contract date. So on […] Kriel, we’re looking at the ‘block F project’ which we’re looking to realise about four million tons of coal [per annum] on that particular project, and we also then looking at the open cast reserves, they call it the pit 11 and 13, we looking to get about three million tons [per annum] out of there. So the long-term strategy for Kriel colliery is to get the production up to 7.5 million tons if all the business case[s] stack up. The block F business case is already stacked up and we’re investing into it. And the pit 11 and 13—the feasibility studies to progress with the project, that is continuing. And [as] soon as we are ready, we will then approach the necessary governance committees to approve the positive business case and then start the investment into those collieries. On the Matla reserve, similarly, […] the coal resource is […] the contract ends in 2023, but I estimate the remains reserves, which are not part of the dedicated contract at this point in time, to be in excess of 200 million tons. So there’s significant un-mined reserves that are right next to the power station, right next to the current mining operation, and we look to extend this Matla contract into those adjacent reserves and prove that that [is] a positive business case. The positive business case that I refer is not only financial, but also from a quality perspective. So, can the mine, or the adjacent mine, supply the required reserves? Or, do we need to do something at the power stations to accept this coal? And what is the sweet spot, or the optimum business case, to achieve both. And that’s what we need to put onto the table before we extend the contract.”

He said: “When I look at the Khutala [Mine] coal supply agreement, that is an agreement whereby there isn’t adjacent reserves. And therefore I have explained that when a Cost Plus mine doesn’t make business sense to invest in it, we then accept—or potentially look at—how we resolve that issue by looking different supply options into the adjacent power station, rather than trying to invest in it where it doesn’t make business sense. We certainly look at this from all angles and not only just with the mindset to invest in these collieries.

On the management of the Cost Plus mines, he said: “We certainly managed these Cost Plus mines on a monthly/daily basis where there are teams looking at management meetings, technical meetings, we look at life of mine plans; so we certainly look and all of these and manage it on a continuous and daily basis as we deal with the Cost Plus miners. So there’s a lot more Eskom involvement in many Cost Plus mines than there is on—call it—the ‘other coal supply agreements’.”

On the matter of the historically low stock levels of coal stock in December 2018, Mr de Ruyter said that it caused Eskom to “have to enter into short-term contracts two months after the adoption of a long-term plan, and I think that the response to that is that the effect of the long-term plan clearly was not able to be implemented in the two months before the coal stock shortage manifested itself.”

He added that: “We are making good progress on performing [the] reliability maintenance programme. This is an exhaustive programme as we communicated in January of last year. While we execute this programme, there is going to be enhanced risk of load-shedding which is the unfortunate result of having to cash up with this backlog of maintenance. We have taken out the equivalent of two major power stations to perform this maintenance that has created of course a capacity tightness which when we have unplanned outages in some of our other units, there is then the unfortunate necessity to implement load-shedding. We anticipate that by the time that the 11 units that we have maintained that when they return to service by April of this year, so the first wave should be finished by then, that we will be in a position where can significantly reduce the load-shedding. And when the second tranche is completed that we will then have seen a step change in reducing the risk of load-shedding. It will not be entirely eliminated. There is a capacity shortfall that needs to be addressed by bringing more capacity online, but then we will have broken the back of the backlog in maintenance.”

“The cost of repairing the defects—as I think was stated in the presentation—it’s about R300 million per unit at Medupi so far. While we have not absolved the contractor […] of accountability in this regard, in order to ensure that we can bring the capacity on the grid as quickly as possible, we have agreed with them that at this stage we will share those costs 50/50 in order not to hold up putting in place those design corrections so that we can unlock the much-needed capacity. And in the background, there is a separate commercial/contractual process on the go in order to address the accountability for that particular project and of course we are of the view [that] the design defects are the responsibility of the contractor and that the full costs have to be borne by them.”

On the budget for these two projects, he said: “The current allowed budget—as was communicated on the slides—we regard as being sufficient to complete both projects. So we do not—at this stage—anticipate that there will be a requirement for further funds to be appropriated for the completion of these two projects.” He asked Mr Cassim to address the questions of the classification of Wilge as fruitless and wasteful expenditure, and also some of the issues that were raised in terms of the qualified audit.

On the fruitless and wasteful expenditure relating Wilge, Mr Cassim said that “this was presented to the Exco in December 2019 and once we became aware of it at an Exco level, then we accounted for it in terms of fruitless and wasteful [expenditure].” He wanted to reiterate that “as management, if we discover these items, we will make sure that the financials, then, are fairly representative of these irregular expenditures and, as you’ve seen, the last two to three years the number of irregular expenditures as well as fruitless and wasteful disclosure from Eskom has increased. What are we doing about it in terms of the audit findings? We do have an established loss control function that we are currently capacitating, and we are also working closely with [the] National Treasury and [the] auditors to address some of the backlog of the condonations. And you will see that the trend in new irregular contracts that are disclosed din the financials is downward sloping, which is a positive indication of the discipline and controls that are being implemented.”

Mr de Ruyter said that the appointment of Bowman Gilfillan Inc was made “some years ago,” and added: “we are trying to find out exactly when that decision was made and then also how much they have been paid. Unfortunately, we don’t have those numbers [at] hand. But we will record the question and then report back to the Committee in order to answer the” question.

In response to Ms Phiri’s question, he said Eskom has embarked on a process of recovering moneys which have been “misappropriated”. Eskom has recovered R1.577 billion from ABB. R1.1 billion was recovered from McKinsey. R177 million was recovered from Deloitte. R93 million is in the process of being recovered from PwC. There is a claim of R3.8 billion against 12 former Eskom board members and executives that is being pursued, “including the members of the Gupta family.” The process is ongoing, and will continue as Eskom identifies other past instances of malfeasance.

On the Duvha unit 3 “incident,” there was a turbine over-speed incident on unit 3 that led to a catastrophic failure on that unit, which has been nonoperational ever since. At the time, Eskom approached the market and awarded the contract to a consortium called “Dongfang” under “doubtful circumstances.” This contract award is currently being investigated by the SIU and the contract has since been canceled. Having regard to the cost of rebuilding Duvha unit 3, with escalation delays, the cost is presently estimated to be “some R11 billion” and by looking at the expected remaining life of the power station (until 2034) Eskom does not anticipate that it will be able to recover this amount of capital investment over that time period. In November 2020, the board took a decision to cancel that project and not to proceed with the reconstruction of the unit, which is the correct decision from a business point of view.

On the question of Eskom’s response to the ratings agencies, he said that Eskom is linked to the sovereign rating, so that whenever there is a change in the sovereign rating the Eskom rating changes accordingly (typically after a “couple of days”). This is because of Eskom’s close link to the national economy and also to the fiscus. Eskom is thus highly dependent on rating agencies views of “the sovereign”. Eskom hopes that as it improves its own financial sustainability that ultimately that would have a positive impact on the ratings agencies’ perception of Eskom and possibly even of “the sovereign” itself.

In response to Ms Clarke, he said that Eskom was “very aware” of the complications of the NERSA decision on consumers, “we understand that we live in very economically constrained and straightened times, and we have therefore put forward some proposals that government is considering in a number of fora for mitigating the impact on, in particular, the poorest of the poor, by allowing them greater access to—for example—free basic electricity. But this is not an Eskom decision, this is something that rests in the policy space. But we have certainly made those proposals to the relevant government departments.”

On defaulting municipalities, he said: “Of the R36/37 billion worth of debt that is owed to us by defaulting municipalities, about 70% is owed by the top ten municipalities, and 82 by the top 20 municipalities. So, while it is a very concerning problem, it is confined to a relatively small number of municipalities.” Eskom has attempted to recover money from municipalities over the years, and much money has been spent on legal fees. He said “we have attached bank accounts, we have attached assets, we have applied a nominated maximum demand and this has created service delivery issues in addition to the lack of capacity in those municipalities.” We have recently adopted a constructive approach—called “Active Partnering”—with municipalities, where they are assisted to run their distribution networks more effectively, do catchup maintenance, install prepaid meters, and effectively operate as the agent of that municipality, also collect the revenue that is due, which will be paid to Eskom. The idea is that at least the current account of Eskom will be able to be serviced. The first number of agreements, he said, have already been reached with distressed municipalities. He said Eskom was in discussion with the political task team on ways to address the legacy debt, but was not able to convey any news in this regard as yet.

On the higher cost of IPPs, he said, “signed and bid window one and two—those are significantly higher than our own cost of generation. There are efforts ongoing between the DPE and DMRE to renegotiate some of those contracts, particularly with regard to lower cost of financing which is currently applicable. We are engaging with the IPP office as well with DMRE with a view to explore other ways to reduce those costs, but of course these are long-term contracts entered into with the backing of the sovereign. So from an investor-certainty point of view, we have to be very respectful of abiding by the contractual terms that were initially agreed.”

On the question of environmental violations raised by Ms Clarke, he said: “For the year to date […] we have recorded 62 environmental legal contraventions, 53 are water incidents, and 6 are for air emissions. In addition, power stations have been operating for 0.87% of the time under national Environment Management Act, section 30 reported incidents. During the previous financial year, we ended with 59 environment legal contravention incidents, of which 39 were water, 17 were for air emissions, and three were for waste contraventions. There has been one criminal case opened against Eskom which is currently finding its way through the magistrates court in Ogies, the first appearance has already taken place by Eskom in that case. That is the only criminal prosecution that is relevant at this point in time, or that is ongoing.”

On the question of writing off debt, he said: “Of course when write off from an accounting perspective, that doesn’t mean that we stop our pursuit to recover those funds. Those are two separate actions.” He said collections and investigations are still ongoing. At this point in time there are a total of “25 packages” under investigation. Two cases have been referred to the NPA and two former Eskom officials have appeared in court, and counsel has been briefed on civil referrals in order to set up the relevant civil claims. In total, there are 39 NPA referrals, 32 referrals to asset forfeiture unit, and 3 disciplinary referrals, two officials resigned, one was dismissed, and then there are four civil litigation matters.

On the question of skills, he said this is “a major concern for us”. And we have identified a number of current Eskom employees who are approaching retirement and these so-called ‘grey-beards’ (although just to be correct, some of them are female) they will be deployed to transfer skills in structured way as part of our operations excellence programme. This programme has already been kicked off. It is a very well defined programme that will address 19 identified key priority areas per power station, and we will use the available skills that we have across Eskom to bolster and transfer knowledge to our power station teams. And also in our transmission and distribution businesses, similar programmes will be followed to ensure that we share the knowledge that we have inside the organisation as best we can.

On the detailed questions about Wilge, he asked for the Chairperson’s “indulgence” and requested that Eskom respond to these in writing. It was a fairly detailed list of questions and he wanted to do the questions justice.

In response to Mr Gumede’s question, he said: “We are in advance discussions with the Department on Human Settlements, with a view to making available the Wilge flats to distressed communities in the vicinity and they have confirmed in writing to us that they are keenly interested in pursuing this as an option, and we are therefore very pleased that we should be able to find ultimately, inspire of this very deplorable over expenditure on the project, a useful purpose for this particular project.”

On the question of the impact on poor consumers, he said: “In our presentation we highlighted a number of interventions which we believe could assist the poor consumer in mitigating the impact of tariff increases. We are very sensitive to that. The point to make, though, is that it is either a question of recovering higher tariffs from the electricity consumer or requesting the already hard pressed fiscus to make further contributions to Eskom. Ultimately from a sustainability point of view the higher tariff is the solution to implement.”

On Ms Malinga’s question about project management at Medupi and Kusile, he said: “We agreed with the honourable member’s statements around project management.” In retrospect, it was very clear that Eskom’s project execution methodology was wrong. Eskom assumed the responsibility for interface management. And this was, I think in hindsight, a mistake, and as a consequence we had significant slippage and expenditure on that project and many claims that we had to entertain.” He said he would prepare another presentation on the way forward with Cost Plus mines, and on air quality. He gave the Committee his assurance that Eskom was “working hard” to be compliant. Two units are off at the Kendal power station for “extensive repair work” which would bring Eskom in compliance with air quality emissions standards. Second, a number of projects are being pursued which come at significant expense, and this is part of an opportunity that has been identified to repurpose some power stations which have reached the end of life, to ensure that Eskom can still assist the communities which have given Eskom 50 or 60 years of their lives, and to ensure that the plug is not simply pulled on those communities.

On Ms Tshabalala questions, Mr de Ruyter said he agreed once again, and said “our planning for spares procurement is not what it should be. This is the subject of another extensive exercise to ensure that we sell obsolete and redundant spares, that we free up cash from inventory that we no longer require, on the one hand. On the other hand, that we ensure that we have the necessary spares on hand to do the job that is requires. This is a very complex exercise as you may imagine. But we are making good progress on that. Linked to that is significant work that is required to be done on our SAP system which is our enterprise resource planning system, our computer system that we used to scan in various items that we procure. And one of the first steps was to prevent the uncoded purchase of spares. That has now been stopped. And we are now in a position to bring some more order to what we buy and how we buy it in order to bring prices down, but also to ensure that we buy the right spares at the right time.”

He said that Eskom is “obliged in terms of the World Bank loan agreements for Medupi, to construct a
flue-gas desulfurisation plant at Medupi. Such a plant is already budgeted for and provided for at Kusile, but at Medupi there is further expenditure that will be required. We are looking at ways of mitigating that expense but it could be in the order of some R40 billion.”

On the right-sizing of Eskom staff, he said: “We have embarked on a series of voluntary severance programmes. The first programme resulted in the exit of 184 senior managers from the organisation. The payback on the packages that we have offered them in terms of the savings that accrue is just over one year. So from a business perspective, that certainly is a very good investment in terms of cost savings. And then we are continuing with our efforts to further reduce our headcount while avoiding section 189 forced retrenchments, and we are on the trajectory to reach our target of a significantly reduced—about 38 000 employees—by 2024 based on natural attrition and potential further voluntary severance programmers. He then handed over to Minister of Public Enterprises.

Minister Gordhan, on the question of the CRO, said: “In relation projects like Medupi and Kusile, there is a specialised set of studies that are being undertaken across the globe now on what I call ‘mega projects’ and they seem to always run into very similar difficulties,” and that “there are a lot of lessons there. Certainly in the case of Transnet some of the lessons from Eskom will have to be learnt as we go on into the future. Whether you have turnkey operators or whether the state takes responsibility to be project integrator, clearly the former is the way to go and the latter is what creates immense problems.”

Speaking on subject of the Deputy President’s political committee, he said: “The issue of municipal debt […] has been under discussion. I think there’s an interesting model that is beginning to emerge […] Across most municipalities, what we’re finding is that the issue of illegal connections, the overloading of transformers and substations, and so on, is a big issue. The other side of that coin, of course, is the installation of meters, so that people pay for what they use. In parts of Soweto, for example, that has been very successfully implemented. But what we want to do in a month’s time or so, is have a special session on the distribution part of the Eskom business so that we understand collectively how that side of the business works and how it relates to some of the issues that have been raised including the companies that owe money.” He said “you now find certain coal companies that seem to be owing Eskom money for electricity that they might have used.”

On irregular expenditure, he said that he was finding across all SOEs at the moment that “because of the recovery work that has been done, and more careful audits are being done, irregular expenditure from five or six years ago…is now being put through as current irregular expenditure in the audit statement. The auditors are not careful to disaggregate the past from the present, and so that creates this impression that, for example, in 2021 financial (or the 2019/2020 financial year), you have a massive explosion of irregular expenditure. Whereas that amount is an accumulation of all past amounts. So one of the appeals that we’re going to make from the audit profession, whether they come from the Auditor-General (AG) or elsewhere, is to disaggregate some of these numbers and take account of the past that I described earlier on.”

On the matter of the “debt tenor that is largely about 10 years versus the lifespan of a power station and the kind of investments that are made in infrastructure,” he said: “I think this is an issue that we will engage with the Eskom management on and see what can be done in that particular regard.”

On the matter of IPPs, he said: “I want to confirm that IPP round one/round two contracts must be renegotiated. We started the process, it’s halted a bit, but it needs more energy to be put into it. From all accounts that have provided funding for some of these projects are walking away with quite substantial profits and returns, and that’s not fair on the consumer at the end of the day if there isn’t a proper sharing of benefits arising from some of these projects.”

On the question of skills transfer, he said: “There is no doubt that the management, the board of Eskom, and ourselves agree that there is a clear message that the CEO has been sending out with his colleagues: that the operations efficiency within Eskom has to improve, and a lot more effort needs to be put in to share skills from people who have experience to young managers who need the experience. And bit of humility on all sides will be extremely helpful to make sure the right level of learning actually happens in this particular regard. So that is currently the kind of approach that the management is taking which we full endorse.

On the question of load-shedding, he said: “Whilst there are operational difficulties, we do require—as has been said on many occasions to our partner department, DMRE—to come to the party faster in respect of additional megawatts that can be utilised and provide cover. But I think that is a matter that is under discussion, and the regulator has to play its rightful role in that particular regard as well. So I think there is a spirit of cooperation which we hope to build on over the next few weeks and we can then inform you of the results that we’ve had.”

He added, in conclusion, that “I think Eskom is going through the recovery process quite well, and at the same time there are these additional business model changes that are ongoing for 2021, and the challenge of climate change and the Just Transition which will also occupy all of our minds. Once we have the content of that put to you as a Committee, we can have a lot more constructive discussions as well.”

The Chairperson thanked the Minister and opened up the meeting for discussion once again, recognising only two members for the second round due to time constraints.

Discussion
Ms Maotwe, addressing the Minister, thanked him for the list of the corporations she requested. With regard to the mining companies which are providing and selling coal to Eskom, she said the easiest way to check was simply to refer to the invoices. “I mean how does Exxaro owe R1.2 million?”

She said she had not heard any response on the question of Bowman Gilfillan Inc which was contracted to investigate the Wilge project. [Mr de Ruyter had earlier in the present meeting indicated that since the appointment was made “some years ago, we are trying to find out exactly when that decision was made and then also how much they have been paid. Unfortunately, we don’t have those numbers [at] hand. But we will record the question and then report back to the Committee in order to answer”.] Ms Maotwe wanted a response, either in the meeting or in writing.

Ms Tshabalala wanted to follow up on the R70 billion in spending deviations that Eskom indicated in a prior SCOPA meeting that it would apply for during the current financial year. She said: “Of course it was not approved.” She wanted to know earlier in the current meeting what the rationale was for the application of the deviations. She said she had received some answers, but wanted to know whether this could be “dealt with” by the current planned budget.

Minister Gordhan said question of Bowman Gilfillan Inc would be provided in writing, as Mr de Ruyter had indicated.

On mining companies owing Eskom money, he said that was an operational issue and suggested leaving this to the management to deal with and added “if they have difficulties, they’ll come to you and embarrass those companies in the appropriate way.”

On the question of deviations, he said “perhaps the CEO must repeat his answer and just give a bit more detail. As far as I can understand it, there’s no untoward conduct there. But let me leave it to Mr de Ruyter.” 

On the question of deviations, Mr de Ruyter said: “Yes there was a request for deviation of some R67 billion for the expansion of a coal supply contract for the Duvha power station for a further period of 14 years. This request was denied by [the] National Treasury. Eskom then decided to change its approach and it has now agreed for an expansion of the existing coal supply contract for a period of four years. That comes at a cost of R8.1 billion. After the expiry of that contract, we will go out on open tender for the supply of coal to Duvha power station for the remaining life of that power station.” He said he hoped that answered the question.

Ms Tshabalala thanked him and said it did indeed answer her question.

The Chairperson thanked all present.

Ms Tshabalala moved to defer the adoption of minutes to the next Committee meeting.

Ms Mkhwanazi seconded the motion.

The Chairperson accepted the deferral.

He adjourned the meeting.