Special Appropriation Bill [B10-2019]: Parliamentary Budget Office briefing

Meeting report

Introduction by the Chairperson

The Chairperson welcomed the Parliamentary Budget Office, and a new Content Adviser for the Committee. Apologies were received from two Members.  

Briefing by the Parliamentary Budget Office (PBO) on the Special Appropriation Bill for cash injection into Eskom

The briefing was presented by Dr Dumisani Jantjies, Deputy Director: Financial Analysis, and Ms Nelia Orlandi, Deputy Director: Policy Analysis. Eskom’s debt reliant liquidity situation was the result of, among others, decline in sales volumes; the cost of primary energy; high debt service costs; high employee costs, and continuing cost escalations of the new build programme due to persistent delays. The proposed financial support for 2019/20 and 2020/21 would address the going concern status and enable Eskom to honour its obligations. The Special Appropriation Bill requested approval for additional financial support to Eskom. Additional to the 23 billion, R26 billion was requested in the 2019/20 year, and additional to the R23 billion, R33 billion in the 2020/21 financial year. In terms of the Bill, the Accounting Officer (AO) of the Department of Public Enterprises (DPE) had to transfer the amounts to Eskom. The Minister of Finance might impose conditions to be met by Eskom before any part of the amount was transferred. The Minister had to impose conditions to be met by Eskom after the transfer of any part of the amount. The Minister had to stop the use of any part of the amount in respect of which conditions had been imposed, until such conditions were met. The National Treasury had to monitor conditions for the transfer of funds. Besides having to make the transfer, the responsibilities of Public Enterprises were unclear. Eskom saw cash injection as part of a turnaround strategy.

Discussion

Mr A Sarupen (DA) asked how the budget deficit and borrowing would impact on the fiscus. What did over and above the initial R23 billion mean? The NT was not inclined to say where the money was to come from. The DG of the Treasury only commented that the NT would act responsibly. What did that mean? The reporting lines for SOEs were convoluted, which probably allowed them to get away with and to hide things. What were the various reporting lines? He asked that the PBO prepare a slide that set it out clearly. Parliament had to amend legislation to clear up reporting lines. The conditions set by the NT were weak.

Mr D Joseph (DA) asked for clarity about appropriation in advance. How would Eskom respond to conditions? Were conditions to be viewed as instructions, or did Eskom have a choice? Could the conditions have an impact on services? Eskom knew what it had to do, possibly better than Parliament. Eskom had to be brought in to say what it intended to do. Members agreed that Eskom and the DPE had to come before the Committee, but what about other relevant committees? The Committee could not be too technical in its approach, whereas other committees might have a better understanding of technical matters. The Treasury DG had authority over other DGs. What authority did the Standing Committee have over other committees? Could the Committee summon other committees to render assistance? He asked about the impact of reduced generation performance. There was no guarantee that Eskom was moving towards improved performance. It had to be unpacked. Electrification was needed to grow the economy.

Ms R Komane (EFF) remarked that it was essential to know where the money was to come from. Requesting injection in advance created a situation where Eskom would not do everything in its power to get out of its situation. It knew that money was forthcoming, and anticipated it. There had to be clear conditions related to how Eskom appropriated money. There had to be a plan guiding the conditions. Eskom had to sign a service level agreement that set out how it was to be held accountable. Reporting lines were vague.

Ms M Dikgale (ANC) referred to conditions for the transfer (slide 9). Would Eskom be able to adhere to the conditions? Eskom had to agree to the conditions in writing before the transfer. Were there assets that Eskom could part with to cover costs? It was the custom to refer to debt owed by municipalities, yet in her province of Limpopo municipalities did not owe for water and electricity. Other provinces could do well to follow that example. The increase in employee benefits was too much.

Mr X Qayiso (ANC) remarked that he had assumed that the healing period was going to be three years, but it seemed that it was more likely to be two years. According to the terms of reference, the Chief Restructuring Officer (CRO) had nothing to do with healing the current crisis. The CRO would come in with own programme of restructuring. There had to be an assessment after two years. Municipal debt to Eskom was well known, but how were other entities performing? What did the PBO see as the role of the government sector? How would the proposed conditions be different from previous ones set by the NT? He referred to the Wage Bill, and asked if the focus had to be on the upper echelons or the foot soldiers.

Ms E Peters (ANC) remarked that the DPE had to be focused on, as it had to assume responsibility for Eskom, was a shareholder, and had to exercise oversight. If the DPE was not strong there would always be challenges. 62 percent of the budget went to compensation of employees (CoE), followed by goods and services. A lot of money was paid to consultants. Capacity in the DPE was the key question. Capacity implied more than the presence of warm bodies, as skills and competence were needed. What powers of reporting did the DPE have? The DPE needed the authority to make decisions. Finance, energy and engineering skills were needed to oversee Eskom. Power plants were functioning badly. Bad maintenance compromised the capacity to produce power. Oversight could not be effective if people had to oversee things they did not know about. The challenge of municipal debt was well known, but there had to be a focus on private sector debtors and service providers. The response of municipalities about debt had to come to the Committee. There were areas in the private sector from which debt could be recovered. The private sector could not survive without Eskom, and yet it sponged off Eskom. Private sector debtors had to be named and shamed. The same applied to executive directors of SOEs. Those were guilty of negligence, as they did not discharge their responsibilities. It was delinquent governance. The Committee agreed with setting conditions, and had to oversee it. Eskom was but one of many entities requiring bailouts. What was the role of the CRO? The CRO had to engage with the Public Enterprises Portfolio Committee.

Mr O Mathafa (ANC) remarked that if one went to a banker for finance, one first had to be scrutinised by a credit bureau. It would be asked if one would be able to repay the loan. Eskom had to be asked if it could meet conditions. There was a lack of personnel capacity in Eskom, and high levels of debt. Could the CRO execute his/her role? How would the skills set be restructured? Supply chain management (SCM) processes in Eskom were fraught with corruption through irregular expenditure. Who was to be held accountable? Did Eskom respond with corrective actions to Auditor-General’s (AG) reports? How did Eskom comply with conditions in the past? Bailing Eskom out was like fixing a car and giving it back to a reckless driver. There would be restructuring, but SCM practices and the executive would remain as before, and everybody would hope for the best. If the request by Eskom were to be granted, what would be the effect on the fiscus? Input was needed on the role of the CRO. There were structures and people in Eskom, but it was run like a car driven by a reckless driver.

The Chairperson asked the parliamentary legal adviser if the funding spread over two years was legal.

Adv Frank Jenkins, Senior Parliamentary Legal Adviser, replied that there was no legal problem according to the Public Finance Management Act (PFMA) and the Money Bills Act. Money could not be spent out of revenue without clearance.

The Chairperson referred to the main contributors to instability in Eskom. There was the escalation of unit costs. Why did a power station cost R35 billion? It was not built by Eskom, but by private companies. Contract management had to be looked into by the Eskom Board, the CRO, shareholders and other departments. The NT had a role to play, as well as the Department of Energy and the DPE. Conditions could be set by different role players. Why was the balance sheet weaker than projected? Eskom was the biggest saga in SA. There were continual engagements with the entity, as it was on the previous day with the Financial and Fiscal Commission (FFC) before the Committee.

Ms Orlandi replied that she did not know about the entire effect on the fiscal framework. The effect would be visible when the fiscal framework was approved in October. The fiscal framework for the medium term first had to be approved. NT had to provide clarity on whether the R33 billion was additional to the R23 billion. The NT had indicated that there was going to be front-loaning, but the question was from where. It was bound to be new money, as the R23 billion was already provided for, and now it seemed that there would be another R33 billion forthcoming. There was not currently additional funding available, as it was not published in any other government publication. The NT could provide a preliminary fiscal framework. As no additional money was available, the money would have to be loaned, which would create additional debt.

Ms Orlandi answered Ms Peters about capacity in the DPE by stating that she did not know about qualifications in the DPE, and that it could be asked of them. However, there were sub-programmes 2 and 3 that dealt with governance and legal systems, hence one could presume that there were legal people in the Department. There were shareholder risk profiles and mitigation strategies. There was reporting on financial and non-financial performance, and proposing intervention measures when required. Programme 3 conducted reviews, research and modelling of pipelines, and the operations of state-owned enterprises (SOEs). Mitigation instruments were developed, and there was research modelling and job creation. Transformation instruments for SOEs were a specialised responsibility within all sub-programmes. It could be assumed that there were highly skilled people dealing with such matters.

Dr Jantjies replied that oversight of SOEs could be more effective if there were both short-term and long-term conditions. The Presidential Review Committee on SOEs dealt at the macro level with the mandates of SOEs. Most SOEs had a commercial and non-commercial mandate. The commercial mandate was related to profit-making, and the non-commercial mandate compelled the entity to contribute to development. The question was who was to fund the non-commercial mandate. The Presidential Review Committee looked at Eskom and found poor governance and financial management. The Committee’s oversight had to cover both mandates. When extracting the non-commercial mandate, it had to be asked how much infrastructure was needed. When conditions were set, the role of government in relation to the non-commercial mandate had to be clear. Denel and the SABC were also requesting bailouts. The financial records of debtors only listed municipalities. A list of other debtors could be provided. The decline of sales was an issue of concern for the AG. When sales declined, production declined.

Mr Siraj Mohammed, Deputy Director: Economic Analysis, PBO, responded that when conditions were assigned, it had to be asked how Eskom would deal with ethics and corruption. The PBO produced a report on Eskom finances in 2017. In the history of Eskom problems, some were from within, but others were related to management by shareholders. In the interests of development and social upliftment, electricity had to be kept cheap. There had to be more production of coal from BEE and SMME producers. Some of those goals were achieved. Eskom had multiple goals, and it had different bosses across government. He referred to Mr Mathafa’s analogy of the reckless driver. Before 1994 there was a national electrification forum. Up until 2000 the whole electricity programme was funded internally, some by local government, and a lot of it by Eskom itself. A major difference was made to people’s lives. 90 percent of households had electricity. The figure was less than 60 percent in the nineties. But Eskom failed to consider the cost of replacements of plants. Between 1997 and 2007, real tariffs were reduced by 62 percent. The electricity regulator came into being, and then there was the adoption of price equality. Between 2007 and 2016 the real price grew by 168 percent. Then there was a price increase, as the new build was embarked on. Government plans were to build a new generation, but it did not want Eskom to build it, intending for it to be done by Independent Power Producers (IPPs). The size of Eskom was to be reduced. The decision to build new power stations was deferred for ten years. The power plants were thirty to forty years old, and were pushed hard for the World Cup. There was corruption in the new build programme and unplanned outages. Old leaking boilers produced less and less electricity, which was why more money had to be invested in diesel. There were long-term problems. Conditions had to take into account that Eskom was committed to improve the operation of plants, but had to answer how it was to be done with old plants. There was not enough investment in coal mines. The mines were between 30 and 50 years old, and it was expensive to get the coal out. Coal was sold for R1000 a ton. Eskom stated that it would renegotiate the coal contract. It also stated in its 2016 annual report that there was very little financial space to invest capital in mines. The turnaround had to address the challenge of having to spend more money to save money. The question was how to avoid using more diesel in future.

Mr Mohammed pointed out that the Eskom approach to human resources was to rely on natural attrition. It was talking to mining communities. There was to be less overtime and better productivity, and manager’s bonuses would not be paid out. According to an integrated report, the cost of IPP had decreased by 75 percent. Government wanted to bring in renewable energy. Wind was cheaper than coal or nuclear. How to manage cost structure was a big part of conditionality. An Oxford Professor studied mega projects, and found that nine out of ten of mega projects had cost overruns, chiefly because once the project was completed, it did not perform as anticipated. The right lessons were not learnt from the Eskom big build in the eighties. A power station like Medupi was delivered at double the original cost, and it took twelve years to complete, not six years as anticipated. In South Africa it was hard to get the engineering right. There was a global move to gas and wind, and modular and small-scale production. It did not require much capital investment. The large-scale utility model was outdated. Eskom and the Presidency was saying that Eskom had to raise money for capital expenses, related to maintenance and operations. The question was how much debts would increase in the future, and whether there would have to be new guarantees. Having to raise money led to questioning the viability of Eskom. There was pressure from society related to getting money from countries in the North, and pressure on banks not to lend. There were costs related to the move from contract coal to market coal. Ethics could be introduced as a condition. Eskom had to clean up corruption. There were anti-competitive practices related to private loans, and a lack of going concern. The question was what Eskom was doing about governance and ethics. The Board was committed to a code of conduct and ethics policies. Responsibility would be delegated for instituting a code of conduct, and for monitoring the implementation of ethics policies and conflict of interest policies. Charges brought against conflict of interest had led to resignations of managers.

There was a five point plan to transform governance, with a focus on consequence management, irregular appointments, and enhancing commercial government. There would be disciplinary charges and legal actions taken. Such commitments could be drawn on, and made part of conditions, with short, medium and long-term goals within that. There had to be an enhanced reporting process to monitor the progress of consequence management. Eskom received a modified audit opinion. Adequate systems had to be put in place to monitor and report all irregular expenditure. A review of all contracts since 2012 could be included in the conditions. Costs had to be kept down, the Committee could sit with the NT and the DPE to see that Eskom was monitored properly, Eskom had to come with scheduled plans to state what was being done to avoid breakdown of power stations. The onus was on government departments to report to Parliament. Work done by the Standing Committee on Public Accounts (SCOPA) could be drawn on. SCOPA visited a power station and came down hard on the Eskom management. Keeping costs down was highly important. The efforts of SCOPA, the DPE and the Committee could be coordinated, in the interest of monitoring and oversight.

Ms Gloria Mnguni, PBO Finance Analyst, responded that Eskom had adopted the accounting standard. The standard required that it had to be seen if debt would be recoverable. Consequently there was an upward trend of receivables. The standard required that debt be recoverable on an annual basis. However, that requirement was open to interpretation by individual accountants. A decrease in receivable accounts had an impact on both balance sheets and income statements. There was a decrease of R2.2 billion, and a continued decline in account receivables because of correct accounting. The treatment of revenue was currently to use a cash basis, and not accruals. Concerning assurance, the biggest item noted by external audits was the going concern. The question was if Eskom could continue its operations into the future. If not, there were indications that the entity should be liquidated and operations terminated. It was the responsibility of the accounting officer (AO) to assess going concern, supported by governance structures, the audit committee and external auditors, who would evaluate the adequacy of the assessment by the AO.  The audit report was signed off, based on continued government support. Her own view was that Eskom could be a going concern, but not without government support, and there was uncertainty about that. Eskom could get debt independently or in the form of loans. Without continued government support, there might have to be liquidation and termination. There were deficiencies around supply management. 20 employees were implicated in fraud of R500 million. One employee defrauded Eskom of R28 million. There were no criminal charges, only ongoing investigations, and it was well known what that implied. Eskom had been audited by the same auditor for five years in a row, and the same issues surfaced every year, especially lack of internal controls. It had to be asked if remedial actions were being taken. 80 percent of irregular expenditure was related to open contracts, with amounts emanating from extension of contracts. External auditors were unable to see the full extent of irregular expenditure, which might have been understated. Auditors could not determine the full extent of fruitless and wasteful expenditure, and found that inadequate steps were taken to prevent it. She answered about the skills set, that there had been three Board resignations. The CFO only took up the position in December 2018. The high staff turnover impacted on the day to day functioning of the entity.

Dr Jantjies noted that the PBO was not saying that there was a 30 percent salary increase. It was a movement from the previous year to the current year. A lump amount was referred to. The Minister had stated in 2015 that assets had to be turned into supporting SOE entities.

Mr Joseph asked Mr Mohammed if it was the most recent conditions that he shared about. Were the conditions of 2015, that Prof Plaatjies of the FFC called soft conditions, the most recent conditions? 63 percent of Eskom money went to staff, followed by goods and services, and then operations. What could be done to shift money to unbundling and increased distribution of electricity?

Mr Mohammed replied that he was not referring to conditions actually set. After 2015 there were no fixed and hard conditions for capital injection. The Minister of Finance would set the conditions for the Special Appropriation Bill. One would like to see the NT and the DPE looking at the Eskom turnaround strategy, so that it could be built out and made more concrete. Eskom had to be pushed to give substance to its own turnaround strategy. It had to be held to what it was saying. Concerning staffing, the main costs were coal, IPPs, diesel and management costs. There had to be a clearer HR plan, and the costing of that. He had respect for the second generation engineers that were keeping thirty to 40 year old plants running. Their experience and institutional memory could go lost. The focus had to be on finance management, and people involved in the new build and coal. It was not yet understood what restructuring might mean. He advised that it be put on the agenda. He had picked up from people in the industry that transmission might need R50 billion, because there was inadequate maintenance on transmission systems. There was an assumption that restructuring would save money, but sometimes money had to be spent on new things that would work better, only then saving money.

The Chairperson commented that there had to be a deeper analysis of the genesis of the problem, to avoid superficiality. Eskom was sometimes viewed unsympathetically, with operating conditions not properly understood. Sometimes the fault was with government, as when bids for power stations were postponed. Eskom also had to face the problem of unfunded mandates. In spite of criticism about Eskom, 90 percent of the country was electrified. The market could not have electrified his village, if it was only based on what the market could afford.

Adoption of minutes

Minutes of 27 and 28 August were adopted without amendment.

The Chairperson adjourned the meeting.