Roadmap for Eskom; Minister input on Eskom & SAA

Meeting report

Roadmap for Eskom in a reformed electricity supply industry
Ms Makgola Makololo, DPE Deputy Director General: Energy, detailed the unbundling of Eskom and provided timelines. The unbundling of Eskom had been brought about as a result of the moral hazard that Eskom posed to the South African economy. Eskom had been unable to ensure electricity supply security at an efficient cost. The business model that Eskom had been founded upon proved to be outdated and based on an era of excess electricity supply and captive customers.

The lack of transparency, agility, operational excellence, widespread inefficiencies, lack of accountability and consequence management were all cited as factors that contributed to Eskom's woes.

The roadmap outlined the government's implementation plan to reform Eskom. DPE assured the Committee that the government was going to act urgently to reform an ailing Eskom. To reform the electricity supply industry, Eskom will be separated into three separate entities, Generation, Transmission and Distribution. According to DPE, this would allow for more transparency and increased efficiency within the three entities.

At the current rate Eskom was struggling to keep the lights on due to inadequate maintenance and poor build programme performance. To mitigate this, plans are afoot to strengthen Eskom's generation capacity.

Eskom's debt stood at R400 billion and the company experienced declined sales, rising tariffs, high costs and large debt owed by municipalities. To arrest this, Eskom had to institute radical cost reduction strategies amongst others.

Eskom was also confronted by climate change and environmental compliance regulations and to this end it was committed to the implementation of the Integrated Resource Plan 2019 and ensuring compliance with minimum emissions standards.

Discussion
Ms J Mkhwanazi (ANC) appreciated the presentation and asked if Cabinet had seen and commented on the Roadmap for Eskom. She asked the question within the context of the cross-cutting nature of the Roadmap. She called on the DPE not to lose focus on Eskom as State-Owned Enterprises (SOEs) are key to broad socio-economic development and economic growth. She asked if DPE had a plan in place to assist Eskom to improve on asset management. She was concerned that the time frame for the unbundling of Eskom was set for March 2020 which might be too ambitious. She asked if the unbundling of Eskom would require Parliament to enact enabling legislation for this.

Mr S Gumede (ANC) thanked the DDG for the comprehensive presentation. He hoped that the presentation would calm the fears of both politicians and the wider public. He lamented the pervasive corruption and the effects it has had on the stability of Eskom and asked what steps had and will be taken to get rid of corrupt elements still within Eskom. To Mr Gumede it was inconceivable that entrenched corrupt elements should form part of a restructured Eskom.

He broached the huge debt incurred by municipalities and wanted to ascertain whether Eskom had a strategy in place to ensure that these municipalities honoured their debt commitments. He cautioned against making any hasty decisions about retrenchments and called for dialogue with labour unions.

Ms J Tshabalala (ANC) stated that she would have wanted Minister Pravin Gordhan to conduct the presentation and field responses however she understood that the Minister had cabinet commitments.

She welcomed the paper as it was geared towards increased electricity generation and to make Eskom more effective and stable. It was thus important to move ahead from the current challenges.

She added that the ANC was looking forward to the unbundling of Eskom and wanted to ascertain who the driving forces behind the Roadmap were.

Ms Tshabalala requested an update on the appointment process of new Eskom board members and clarity on whether the envisaged new three unbundled entities would have their own boards as well. She requested a timeline on when these processes would be concluded if the response was in the affirmative.

She recalled that the National Union for Metalworkers of South Africa (NUMSA) had outlined the union's position about the unbundling, citing job loss fears. She asked if there had been adequate consultation with NUMSA and other labour unions.

Ms Tshabalala noted that the DDG had said there had been ongoing discussions with coal producers. She asked what the views were of the Department of Mineral Resources and Energy (DMRE) on coal prices. She emphasised that markets were looking for policy certainty.

She asked about the sale of non-core assets and if Eskom had identified potential buyers for these non-core assets.

She added that the debt owed by Soweto residents should be viewed within the context of the unequal society these residents lived in. She agreed that people had to pay for electricity use.

Inkosi E Buthelezi (IFP) noted that the DDG mentioned that Eskom used to have intra-company competition that led to efficiency. He asked why Eskom did away with this policy if it had a proven track record for excellent results.

Ms D Dlamini (ANC) thanked the DDG for the promising presentation. She stated that the Roadmap had been silent about the collection of revenue and asked if there was a strategy in place.

She asked from whom and where Eskom bought coal from and if these contracts would be renewed.

Mr G Cachalia (DA) welcomed the unbundling of Eskom and the timeframes attached to this process.

He labelled Eskom's ballooning debt, bloated labour force and endemic corruption as "park and pray areas".

He called for an end to paying lip service to good business practices and for red tape to be cut. He lamented the two-tier procurement system and called for a more streamlined system. He called on Eskom managers to be proactive when coal was purchased.

Mr Cachalia questioned the system of differentiated bonuses at Eskom and proposed that performance bonuses should be pegged at the same scale. He called on the government shareholder to play a meaningful role in this regard.

He referred to government interference in the day to day operations of Eskom and wondered if this did not lead to a culture of fear. He lamented what he called the over stringent application of the Public Finance Management Act (PFMA) and called for trust to be established between the government shareholder and Eskom management.

Mr E Marais (DA) asked how Eskom's debt would be restructured between the three envisaged new entities.

He requested clarity on the status of the Independent Power Producers Programme (IPPP) and called for increased investments into IPPs. He proposed that the government should follow the same tender process as with coal by concluding long term contracts to ensure sustainability and supply.

Complementing this, he asked what government was doing to ensure a viable energy mix against the background of increased investment in coal. He took issue with the continued problems encountered at Khusile and Medupi and questioned the quality of the workmanship.

Ms C Phiri (ANC) touched on the NERSA tariff determination that had been challenged by Eskom. She requested the DDG provide an update on how DPE as government shareholder was addressing the matter. The unbundling of Eskom concerned the whole country and asked if Eskom had a plan in place to engage stakeholders and the wider public.

The Chairperson asked if the unbundling of Eskom meant that the utility would wither. He also asked if the three envisaged entities would have their own boards.

Responses
Ms Makololo responded that the Roadmap enjoyed unanimous Cabinet support and that there had been wide-ranging engagements amongst the relevant Ministers.

She added that no amendments to existing legislation were envisaged. The policy framework for the unbundling was already conceptualised in 1998 as it was anticipated that the energy sector would evolve.

The DPE consulted with various policy units within the cross-cutting departments to ensure that these new structures would be aligned with existing policies.

Ms Makololo replied about current Eskom board vacancies, saying there were three vacancies following several resignations and that there was a process underway to fill these vacancies.

She explained that the previous board was appointed based on the skills that were needed to stabilise governance at Eskom. A different set of skills were required for new board members given the policy direction to unbundle Eskom. The skills matrix would thus be reviewed to ensure that the Eskom board was strengthened.

Ms Makololo confirmed that three separate smaller boards would be appointed to lead the new entities however it was anticipated that the holding company's board would stay in place.

She empathised with organised labour and the concerns about possible retrenchments. DPE was genuinely committed to prevent job losses and that organised labour was in a partner in ensuring that Eskom remained a viable entity.

On coal prices, she stated that the new coal index would be an online commodities trading platform that will be launched during the first quarter of 2020. This will potentially herald a new era of transparency in the pricing and procurement of domestic coal, the rising cost of which had become a major source of concern for both Eskom and government.

She added that coal remained the dominant primary energy source for the production of electricity in South Africa and even with high allocations for renewable energy in the latest Integrated Resource Plan, IRP2019, as well as the prospect of coal-plant decommissioning over the coming ten years, coal was still expected to contribute 59% of South Africa's energy volumes by 2030.

DMRE had indicated that the government would like the suppliers of coal to Eskom to accept a price cap, based on an index price. DMRE had been clear that government had no intention of imposing the cap unilaterally. Coal prices were too high and a new price formula was required. This would introduce a far higher degree of transparency over domestic coal prices, currently arrived at through behind-closed-doors bilateral negotiations between Eskom and coal mines. Also, it will add greater coal-procurement flexibility, as Eskom would be able to source opportunistically in the spot market and use the forward-market visibility created by the platform to lower the risk of medium-term contracts.

Touching on Eskom debt, she said that the feedback from interlocutors had been that there should be a debt resolution in the Roadmap. The overarching view of government had been that Eskom's debt had to be dealt with and that there was cognisance that the debt burden would not disappear when Eskom would be unbundled.

On the sale of non-core assets, she explained that Eskom would sell these on the open market and that no private entities had been identified as possible buyers.

On intra-competition, the DDG replied that when Eskom introduced a centralised system of management it became difficult to continue with the intra-competition policy as all functions became centralised.

Eskom had devised a strategy on municipal debt and would happily present the strategy to the Committee.

Speaking on procurement processes, the DDG admitted that it continued to be a challenge coupled with deep-seated corruption and that there would be a consideration of alternative procurement methods. National Treasury was reviewing the government's general procurement framework as well.

Ms Makololo said that the Eskom shareholder compact will be shared with the Committee.

She commented that Eskom had been committed to cost-cutting and that the DPE would not have embarked on an unbundling process if it was not assured of viable entities.

She explained that the government had foreseen expansion of the IPPs and that generation would primarily come from the private sector. Government was committed to cleaner energy resources and that this process was being led by the DMRE. The IPPs were an example of this.

On the court case between NERSA and Eskom on increased electricity tariffs, the DDG stated that there was a gap between what Eskom wanted and what NERSA allowed. Eskom felt that a legal challenge was the only alternative left, especially since NERSA discounted government's financial guarantees when it assessed Eskom's request for a tariff hike. DPE had consulted internally on how to proceed as the court case could drag on for years which was a scenario best avoided. One silver lining had been the proposed establishment of the NERSA Tribunal that would consider appeals.

Follow-up questions
Ms Tshabalala welcomed the Roadmap as it was an indication of progress. She requested more information on the driving forces behind the Roadmap. She lamented the pervasive corruption and said that the vetting of officials remained a challenge.

Ms Mkhwanazi asked what Eskom intended to do to raise awareness about the unbundling of Eskom. The presentation outlined six major benefits of Eskom's restructuring, she asked how innovation would be promoted and encouraged.

Mr Gumede was satisfied with the presentation, though it appeared as if the DDG made corruption a secondary issue. He explained that the thrust of his previous question had been on the corrupt elements still employed within Eskom.

Mr Cachalia welcomed the response by the DDG on procurement, the promised release of the Eskom shareholder compact and the measures implemented to service Eskom's debt. He decried the fact that DDG did not answer the question about government's interference in the day to day running of Eskom, HR processes and the disjointed bonus scales. He requested clarity on the job losses envisaged as the DGG indicated no large scale job losses.

Mr Marais asked if the Minister was "surviving" all the problems with the SOEs.

Ms Phiri expressed her concern at the large number of acting positions and called on these positions to be filled, especially at this critical time for Eskom. She called for the stringent enforcement of consequence management.

She requested information on the shareholder compact as the Committee had been informed that it had gone to Cabinet.

At this juncture, the Chairperson officially welcomed Minister Pravin Gordhan. He commended the Minister for sticking to his word about the appointment of the new Eskom CEO, Mr Andre de Ruyter.

Response by Minister
The Minister of Public Enterprises, Mr Pravin Gordhan, replied that the Roadmap had been a collaborative effort between National Treasury, DMRE and the Department of Environmental Affairs (DEA). The group that worked on the Roadmap went through 30 drafts and there might be a follow-up document that specifically dealt with technological advancements.

On innovation, the Minister replied that research into innovation was ongoing and that new and different modes of generation were being explored. He noted that the government was considering fitting solar panels on rooftops in poor communities. The electricity generated through this would be fed into the national grid and the households paid a stipend. This would dramatically change the character of electricity generation in a sustainable and environmentally friendly way.

Addressing corruption, the Minister emphasised that state capture and entrenched corruption continued to be a challenge to Eskom and that this situation had been brought about by wide-scale looting by top Eskom officials who normalised corruption.

He added that corruption also took the form of media leaks and created doubt in the financial markets at a time that South Africa was experiencing economic woes. He cited the recent example of certain names being bandied about in public from a supposed list of possible Eskom CEOs.

The Minister addressed vetting concerns and said that there had been a vetting backlog and that the vetting of senior officials was a requirement. He noted that 1200 Eskom employees were doing business with Eskom through proxies. This was one rationale why lifestyle audits were so important.

He stated that strong action needed to be taken against corrupt practices and that organised labour should refrain from coming to the defence of their members who had been implicated in corrupt practices. Fighting corruption entailed a collaborative effort from all political formations.

The Minister added that strong and efficient public entities encouraged increased investments in important sectors and would have a knock-on effect on governance.

Minister Gordhan said that energy costs had a great impact on the South African economy and that when a decision was taken to restructure an energy utility; it should be done by being mindful of the prevailing situation, not only domestically but internationally.

He stated that South Africa ran the risk of becoming irrelevant on the continent as countries like Kenya became more and more attractive to foreign investment and interest. South Africa should thus not become complacent.

The Minister noted that on the entrepreneurial front, innovations such as battery storage technology had become important and South Africa had recently inked a deal with the World Bank to invest in this technology.

He assured Members that there would be increased spending on communication and creating awareness of the unbundling.

Additionally, the Minister said that a pilot project was underway to ascertain how best to support communities where power stations had been closed.

The Minister explained that that in Cabinet all Ministers worked as a team and that he regularly engaged with the Minister of Mineral Resources and Energy, especially on the Integrated Resource Plan (IRP).

In reply to Mr Cachalia's question on bonuses and incentives, the Minister promised to provide a detailed written response as he did not have that information at hand.

The Minister stressed that it was not the intention to introduce large scale job losses with the unbundling of Eskom and that government and organised labour should work together to find an amicable solution.

Plans were afoot to integrate workers from closed power stations like Komatipoort into the staff component at Kusile. At the same time, Eskom has advertised 200 positions that needed to be filled as a matter of urgency in the generation space.

The Minister denied that government had interfered with Eskom's management processes and explained that the only time government sought answers from Eskom was when serious issues arose that required government's intervention such as the threat of load shedding and its effects on the country and the economy.

The Minister decried the cost overruns at Medupi and Kusile and shared an anecdote of a certain company that was contracted at Medupi who invoiced government to the tune of R27 billion. When the government conducted its investigation, it found that the actual amount owed had been R2 billion. These are serious issues that had to be addressed with the private sector who are the biggest beneficiaries.

Minister Gordhan was emphatic that governance rules should be respected and adequately implemented by all stakeholders and to this end, he was committed to ensuring that Eskom's board was properly constituted.

The Minister informed the Committee that the Shareholder Management Bill had not yet been to Cabinet. This Bill was a legacy of the erstwhile Phiyega Commission into SOEs on the measures that government had to take to stabilise and improve SOE efficiency.

Ministerial comments on South African Airways (SAA) strike
Minister Pravin Gordhan decried the ongoing strike at SAA and stated that grounded planes meant a loss of revenue to the airline to the tune of R50 million daily.

He noted that wage increases at this moment will be tough on SAA's financials and condemned those who allegedly intimidated people that wanted to report for duty.

Government was committed to saving SAA, but the government was not able to offer more financial help.

Over the last three years, the government had given more than R20 billion in bailouts to SAA to keep it afloat, a situation that had now become untenable.

He said that SAA's cost structure was simply too high and that as a result of South Africa's geographical location, it was unable to become a hub like Addis Ababa and Nairobi.

SAA was faced with the scenario that it cannot afford to buy new planes and took possession of two new A350s that it was leasing.

Operating margins of airlines across the world had declined amid rising fuel prices.

Minister Gordhan accused unions of lying to the public about safety issues on SAA flights and called these comments malicious and a serious threat to South Africa as SAA was a key government asset.

He assured South Africans that world-class pilots are operating the planes.

The Minister spoke out against the intimidation of those SAA staff members that did not want to strike and called on their rights to be respected.

He had engaged with organised labour regularly and as early as 22 July 2019 met with seven labour unions for more than two and a half hours. At that meeting he informed unions that SAA was facing a real crisis and that everyone had to work together to save the airline.

Further to this, all role players had been encouraged to return to the negotiation table and find an amicable solution. It had thus been agreed to appoint a mediator to find a way out of the impasse.

Several international flights were operating and that regional flights would soon be up and running.

He once again appealed to all parties to reconsider their positions, especially in the wake of SAA not being able to pay salaries at the end of November 2019.

The Chairperson thanked Minister Gordhan and DDG Makololo for the thorough briefing and adjourned the meeting.