Eskom on its 2015/16 Annual Report and pressing matters

Meeting report

Opening remarks
Mr N Nkwankwa (UDM) indicated that the Committee could not just deal with the annual report of Eskom and pretend as if there were no media reports about the contract given to the Gupta-linked Tegeta Exploration and Resources.

Mr N Singh (IFP) said that representatives from Eskom’s external auditors should have been present to answer questions. It would be appropriate for the Committee to cancel the meeting until they were present.

Dr L Luyenge (ANC) proposed that the meeting should go ahead as this meeting was part of the Committee programme in dealing with annual reports. This was not to disregard the issues raised by Members.

The Acting Chairperson proposed that the solution could be for the Committee to invite Eskom to be part of the meeting scheduled for next week with National Treasury and Denel. The Committee should indeed go ahead with the meeting as it would not be appropriate to tamper with the programme of Parliament. There is no doubt that everyone is interested in knowing what is going on with the Department’s State-Owned Entities (SOEs) especially those that are always in the media. Eskom should adjust its programme to be able to be part of the meeting next week.

Ms T Stander (DA) supported the proposal to have a joint meeting with all the relevant stakeholders so as to deal with all the outstanding matters.

Mr Nkwankwa said that there had been a long-standing request to have a joint meeting with National Treasury and all the SOEs that are experiencing problems. However, most Members are yet to receive a response as to whether that joint meeting would take place or not. The Committee should get an indication if the joint meeting was likely to take place and the relevant entities to be present at that meeting. It had been hinted that the most appropriate way of dealing with the matter would be a joint meeting between Public Enterprises, the Standing Committee on Finance, Treasury and Eskom, so as to be able to deal holistically with all the outstanding issues. It would be important to know if discussions had taken place with the Chairpersons of Standing Committee on Finance and Portfolio Committee on Public Enterprises.

Mr R Tseli (ANC) mentioned that all the Members were equally concerned about issues raised in the media around Eskom and National Treasury. It must be made very clear that a joint meeting between Eskom and National Treasury had been organised. Today’s meeting should proceed with the understanding that next week the Committee would be able to interact with relevant stakeholders. It would not be correct to create an impression that there are Members who are more concerned than others about the media reports on Eskom.

The Acting Chairperson ruled that the meeting should go ahead as there would be time to engage with both National Treasury and Eskom.

Eskom briefing on its 2015/16 Annual Report
Dr Ben Ngubane, Chairperson: Eskom; appreciated the work that had been done by the current leadership of Eskom as it was coming from a very poor base with the fleet that was faltering. The Electricity Availability Factor (EAF) in the country at the moment was sitting at 80% and this sounds like a miracle when one considered the state that Eskom was in a year ago.

Mr Brian Molefe, Group Chief Executive Officer: Eskom, mentioned that the financial statements presented today had been audited by an independent reputable firm that had been appointed by the Auditor-General. The Auditor-General did not find any qualifications and matters of emphasis on the financial statements and this was clearly another indication of the kind of work that had been done by the Board. The earnings for Eskom in the current financial year were sitting at R32 billion and this is an increase of 37.4%. The entity also had cost savings of R17.5 billion from the implemented cost-cutting measures achieved against the target of R13.4 billion. Eskom received a R23 billion equity injection from the shareholder and cash generated from operating activities had increased by 36.4% to R37.2 billion. Eskom also has liquid assets of R38.7 billion as at 31 March 2016 and this was an increase of 123%. A total of 57% of funding had been secured for the 2016/17 financial year.

Mr Molefe stated that Eskom had not had load shedding for more than a year; the last time load shedding was implemented was on the 08 August 2015. The generation plant performance had improved in the second half of the year, with EAF of 78% for Quarter 1 of 2016/17. Medupi Unit 6 was in commercial operation as on 23 August 2015, adding 720 MW generation capacity to the grid. The Ingula Units 3 and 4 had been synchronised to the grid on 3 and 25 March 2016 as per the Shareholder Compact (SHC) target and Units 2 and 1 were subsequently synchronised on 21 May and 16 June 2016 respectively, adding 666 MW peaking capacity. All Ingula units were thus able to support the grid with generating power during the winter months. A total of 345.8 km of lines had been installed and to date and an additional 12km and 800 MVA have been added. Eskom was proud of the fact that 158 016 additional households were electrified. The procurement from Broad-Based Black Economic Empowerment (B-BBEE) compliant suppliers was at 82%, exceeding the target of 80%. Procurement from Black women-owned suppliers was 19%, exceeding the target of 12%. The improvement in the liquidity position was as a result of an equity injection of R23 billion and cash generated from operating activities of R37.2 billion. In relation to overall electricity sales volumes, the international sales volumes growth of 12.2% was due to Eskom having surplus capacity. There was an increase in sales volumes in commercial (5.2%), agriculture (6.1%), mining (2.1%) and residential (2.9%). However, there had been a decline in sales volumes for municipalities (1.6%), rail (7.9%) and industrial (6.2%). The financial position of Eskom has improved drastically as the equity improved as Eskom was now with R23 billion equity by shareholder and conversion of R60 billion subordinated.
 
Mr Molefe indicated that payment agreements have been signed with 60 municipalities, including 19 of the top 20. The arrear debt by municipalities, including interest, increased from R5 billion to R6 billion. The average Soweto collection level improved from 16% to 18%. A total of 17 527 post-paid meters were converted to pre-paid meters in Soweto. 5 992 smart meters were installed in Midrand and Sandton, and will be converted to prepaid meters. Eskom has also managed to improve generation operating performance. The EAF for 2016/17 is 79.1% as of the end of July 2016 year to date, compared to 71% for 2015/16 financial year. Unplanned breakdowns were reduced from 16.4% in 2014/15 to 15.9% in 2015/16, to 10.4% in 2016/17 at 31 July 2016 year to date. Planned maintenance was increasing from 9.9% in 2014/15 to 13.0% in 2015/16, to 10.6% in 2016/17 at 31 July 2016 year to date. Eskom managed to reduce reliance on Open Cycle Gas Turbines (OCGTs), resulting in a decrease from R 9.5 billion in 2014/15 to R 8.7 billion in 2015/16, to R 0.09 billion in 2016/17 at 31 July 2016 year to date. Eskom is striving for no further use of diesel to meet demand for the remainder of the year.

A total of 13.6Mt coal was being transported by rail, which is 1Mt more than 2014/15. Since inception, a total of 3 392MW of Independent Power Producers (IPPs) are connected to the grid, with 2 145MW of renewables. Transmission achieved a best ever reported performance for system minutes lost <1 of 2.41 (2014/15: 2.85) and there was only 1 major incident that had occurred. The distribution network performance (SAIFI and SAIDI) was within acceptable limits and demand savings of 215MW achieved. All the Ingula units were able to be synchronised to the national grid ahead of schedule, on 3 March (Unit 3), 25 March (Unit 4), 21 May (Unit 2) and 16 June 2016 (Unit 1). The Kusile Power Station continued to achieve set milestones on the path for Unit 1 commercial operation in the second half of 2018. The conversion of the Gourikwa and Ankerlig OCGTs nozzles to dual fuel was expected to be completed in 2017. Transmission lines of 346kms were installed and substation capacity (2 435MVA) was commissioned to support network strengthening, new generation capacity and IPPs. Equipment theft / crime decreased by 28% in value compared to the prior year and high-value crime was targeted and success was achieved with 229 arrests.

Mr Molefe concluded by highlighting that Eskom was committed to corporate social investment spent of R103.6 million (2014/15: R115.5 million) for the year, exceeding budget by 5.1%, benefitting 302 736 beneficiaries (2014/15: 323 882). A total of 158 016 households (2014/15: 159 853) were electrified during the year, with almost 90% of all households electrified. Eskom is on a firm financial and operational footing and this is showed by improved financial performance with its healthy liquidity position, generation performance has been stabilised, with continued improvement expected. Eskom was not anticipating any load shedding. A new build programme was on target to meet delivery dates.

Discussion
Dr Luyenge gave Eskom credit for the sterling performance, especially the 90% electrification in the country although there should be a strategy in place to move towards universal access to electricity. The current leadership of Eskom should be commended for stabilising the entity and the improved electricity availability in the country. It was unclear if the R17.5 billion showed that there was sustainability and credibility in the organisation. Was the R17.5 billion being managed efficiently in order to be able to grow? It would be important to hear if there is an asset management policy at Eskom so as to manage the R38.7 billion that had been generated from liquid assets. The entity should have a retention strategy to retain highly skilled individuals in the organisation. The current leadership should also given credit for ensuring that there was no load shedding in the country for more than twelve months especially when one considered the climate in which the Board was operating. He asked if there was credibility and cost effectiveness in the synchronisation method that was being applied in the organisation. Was there a possibility Eskom could completely avoid the utilisation of diesel?

Mr Singh also appreciated that there had been no load shedding in the country for the past twelve months as this was a big relief to all the South Africans. It was unclear if the reasons for having reliable energy pointed to the improvement of operations. It was concerning that there had been a decline in electricity sales volumes in municipalities (1.6%), rail (7.9%) and industrial (6.2%). The audit report had expressed concern over the leadership of the entity, where it stated that “the public entity’s executive management did not exercise adequate oversight responsibility regarding compliance with applicable laws and regulations which resulted in fruitless and irregular expenditure”. This statement made it clear that there is something wrong with the management of Eskom in executing its oversight mandate. It was concerning to see that there had been massive performance bonuses especially since the auditors had raised concern about Eskom’s leadership. Did the Board have a policy in place on performance bonuses?

Mr Singh requested that the Committee should be briefed on the pre-payment to the Gupta-linked Tegeta Exploration and Resources on the coal contracts. It would be interesting to hear about the impact of the non-granting of the requested increase in the electricity tariffs on its financial viability and sustainability moving forward. Municipal debt was still a vexing problem as municipalities owed Eskom. What kind of sustainable plan is in place to deal with the municipal electricity debt? It would be unfair to blame communities for the ineffectual municipalities and the relationship between Eskom and municipalities. The Committee should be briefed on what had given rise to the cost increase for the Ingula project from R8.6 billion to R26 billion.

Mr D Maynier (DA) wondered if the Group Chief Executive Officer could give the Committee an assurance that the information required by National Treasury on pre-payments made to Gupta-linked Tegeta Exploration and Resources would be furnished to Treasury. It was unclear if the report dated 12 April 2016 received from National Treasury with a request for comment was a draft or final report. It must be stated that the Chief Procurement Officer, Mr Kenneth Brown, had made it blatantly clear that the Group Chief Executive Officer of Eskom was not co-operating with National Treasury in the review of coal contracts. He asked if the Group Chief Executive Officer of Eskom still maintained the position that “the Guptas are friendly and likeable people” as this statement could imply that the organs of state investigating the family such as National Treasury, was unfair and unwarranted.

Mr Maynier pointed out that the Committee should also hear if the Board Chairperson was taking full responsibility for the saga between Eskom and National Treasury and provide assurance that Eskom would comply with its responsibilities under the Public Finance Management Act (PFMA) and its duties in cooperating with National Treasury in complying with the review of coal contracts. The Board should consider investigating the conduct of the Group Chief Executive Officer, Mr Molefe, to the allegations that he had failed to comply and blocked National Treasury’s review of the coal contracts to the Gupta-linked Tegeta Exploration and Resources.

Dr Luyenge wanted to check it if was in order to raise matters that the Committee had already agreed would be discussed in the joint committee next week. The agenda of the meeting was Eskom’s annual report and not the issue of Eskom and National Treasury.

The Acting Chairperson responded that Members should be allowed to ask whatever question that was relevant to Eskom.

Mr Tseli said he had a problem with the ruling of the Acting Chairperson as the intention of the meeting today was to do justice to the annual report. It was pointless to talk about matters that the Committee had already agreed would be discussed in a proposed joint meeting next week.

The Acting Chairperson maintained that some of the questions asked by Members are coming directly from the presentation.

Mr T Rawula (EFF) supported the Acting Chairperson’s decision to allow Members to ask whatever questions were relevant to Eskom. Eskom as a state-owned enterprise had the responsibility to win back the confidence of the people of South Africa. It would be totally unacceptable to have Members acting as if they are some kind of “shop stewards of Eskom”.

Mr Molefe wanted to confirm that the matters raised are matters of public interest and therefore the entity is ready to answer all the questions that had been posed by Members.

Ms N Mazzone (DA) firstly thanked the leadership of Eskom for the open attitude today in dealing and responding to all the questions asked by Members. The Cabinet and the Department of Energy (DoE) as well as the President during the State of the Nation Address (SONA) gave assurance to the country that the Independent Power Producers (IPPs) would be introduced as part of the electrification programme going forward as well as ensuring that our economy maintained a sustainable energy supply. However, it was worrying to witness Eskom refusing to sign the IPP deals and this was a contradiction of the Cabinet, President and DoE statements. Eskom’s lack of gazetting provincially and locally for nuclear sites was a matter that needed to be looked at as there were complaints that notice periods for gazetting were incredibly short. What is this rush towards nuclear site approval without it being correctly gazetted?

Ms Mazzone commented that the cost overruns at Ingula project could not be completely ignored especially in light of recent media releases and this project could be considered as “one of many elephants in the room”. What was causing these cost overruns in the Ingula project and were the contractors involved in these cost overruns as South Africans are the ones that had suffered because of these cost overruns. What was the cause of the damage at Ingula Unit 3? On the suspension of senior managers at Koeberg, the Committee should be briefed on what had led to these suspensions and the possible impact of these on Koeberg operations. It is clear that there seemed to be this miraculous supply of energy in the country and this should be appreciated. However, one also needed to be concerned as to what was causing this miraculous supply of energy as the additional energy added to the grid by Ingula and the Medupi power station still did not answer for this miraculous supply of energy. The Committee should be briefed on the number of companies that had actually pulled out their supplier requirement from the grid which resulted in this extra freeing up of capacity.

Ms Mazzone was pleased to see that the profit at Eskom had increased dramatically and the cost-cutting measures implemented seemed to have worked very well. However, it was displeasing to see that massive bonuses had been paid out at a time when the country is in an economic slump, when South Africans are suffering more than ever and more South Africans remain jobless than ever before. That these massive performance bonuses were paid out at a time when Eskom was one of the contributors of the country’s economic downturn is “a slap in the face for South Africans”. It was unclear why these massive performance bonuses were paid when one considered the Auditor-General’s concern about poor leadership at Eskom. Was it true that the driver of Eskom was dispatched with sending the required coal contract documents to National Treasury? The Committee should also be afforded an opportunity to scrutinise the coal contracts that had been concluded with the Gupta-linked Tegeta Exploration and Resources.

Ms Mazzone asked for assurance from Eskom about the quality and cost of coal supplied to Eskom and that it is the correct grade of coal. She requested information on the amount of good grade coal that was being exported. Was this closely monitored?

Ms G Nobanda (ANC) asked if a monitoring system is in place for the PFMA training that is undertaking by new employees. What are the steps that had been taken to ensure that municipalities are able to settle their electricity debt? What was the progress in wage negotiations between Eskom and the labour unions?

Mr Rawula appreciated the drive by Eskom towards electrification of households around the country especially those in rural areas. However, there is a huge outcry about the increasing cost of electricity and its impact on poor households. There are also allegations that this increase in electricity cost is as a result of over-subsidisation given to companies. What is the possibility of awarding free electricity to indigent people? On the use of alternative energy, he asked if there are chances for the country to ultimately migrate from fossil fuel to green energy so as to alleviate the cost of electricity. The Committee should be briefed on whether Eskom was creating job opportunities for the people of South Africa. Eskom had a responsibility to dispel the notion that the entity is captured by the Guptas.

Mr Rawula added that the public is aware that the Guptas had had the monopoly over the business deals given by Eskom and its many service providers. Tegeta Exploration and Resources indeed proved that there had been a preferential treatment given to the Guptas. Eskom should come out clear and explain whether the prepaid arrangement was a normal practice or confirm the allegations that the Group Chief Executive Officer had been bending backwards when it came to the Guptas. Mr Molefe had been quoted as defending the Guptas and even stated that the “Guptas had been subjected to a kangaroo court”. Eskom’s refusal to comply with Treasury regulations showed that the leadership of the entity was being petty and recklessly utilising public funds.

Mr Tseli commended Eskom for the 19.3% increase on procurement from Black women suppliers especially since this achievement was against a target of 12%. The Committee should also appreciate the sterling work done by Eskom on the R115.5 million for corporate social investment and it would be useful to provide detailed information on the programmes undertaken. On municipal electricity debt, it had been suggested that perhaps the Committee needed to have an engagement with the South African Local Government Association (SALGA) so as to deal with this challenge. What is the progress on the suspension of senior managers at the Koeberg nuclear station? How would these suspensions impact on the operation of the plant? What measures had been put in place to deal with the fruitless and wasteful expenditure that amounted to R886 million?

Mr N Nkwankwa (UDM) stated that it was clear from the ruling party that there is scramble for the control of SOEs and what Members are interested in is to ascertain whether Eskom was part and parcel of that scramble. The matter of prepayment to the Gupta-linked Tegeta Exploration and Resources was indeed also a matter of primary concern to South Africans.

The Acting Chairperson said the solution to the accumulation of municipal electricity debt was a prepaid system. However, the revenue of some municipalities is dependent on the tariffs being charged. Is there a strategy from Eskom aimed at assisting those municipalities struggling with revenue collection? Was there any intention of using diesel in the near future? What is the possibility of completely migrating from diesel? She asked if the damage at Ingula Unit 3 affected the synchronisation to the national grid. The matter of illegal electricity connections was a primary concern as they might impact negatively on the grid. There should be an engagement with those municipalities where the problem of illegal electricity connection was rampant.

Dr Ngubane responded that Eskom is a wholesale supplier of energy except in cases where the organisation was supplier to the Energy Intensive User Group. The municipalities are the retail arm of the electricity supply chains and therefore it was not the sole responsibility of Eskom to ensure that all debt was collected and transferred to the entity. Public representatives should really spread the culture of not being destructive towards state assets. Illegal connections are very destructive to the grid. Eskom has provided all coal contract information that National Treasury wanted. The next scheduled Eskom board meeting is 21 September 2016 and this was where the matter of the coal contracts was to be discussed including the submission of the coal contracts with Tegeta Exploration and Resources. There is absolutely no intent from Eskom to be uncooperative about the request made by Treasury as there is nothing to hide. He said it must be made clear that he has full confidence in the Group Chief Executive Officer of Eskom in all the decisions that had been taken.

Dr Ngubane added that the South Africans should be thankful for having this kind of leadership at Eskom as it had changed many people’s lives and changed the prospect of new investment in the country because of the stability brought about. Eskom is on a roll and playing a vital role in the whole region and this would need the trust of the Members. It is unfair to portray Eskom as being captured – this was “a total nonsense”. The state was captured in 1948 when the National Party came to power. There are contracts at Eskom that had lasted for 40 years and were approved by the National Party government. The shareholders sitting in London benefited massively from the sweat of our miners. There is a need to be clear when talking about “state capture” as this was still unclear at the moment. Eskom is committed to fostering transformation. Eskom is intending not to renew contracts coming from the five big companies when they end and this is to give an opportunity to small Black-owned and women-owned miners as part of the duty stipulated in the National Development Plan (NDP).

Dr Ngubane clarified that National Economic Development and Labour Council (NEDLAC) was the hope in 1994 to create a platform where everyone would talk about transformation in the country. It is unfortunate that NEDLAC was “killed” and the main item discussed is wage negotiations. There is no doubt that there could never be reconciliation without justice. The reality is that Tegeta Exploration and Resources is only 5% of the coal supply to Eskom and the prepayment that had already been made is not even in the multi-millions. Eskom made the prepayment because of the high demand for coal at the time and it was to avoid another possible load shedding. Members should stop believing lies being told in the media about the leadership of Eskom.

Mr Molefe replied that the objection from Members seemed to be that Eskom should not have done any business with Tegeta Exploration and Resources at all. However, there is not a single person to come forward and say the deal with Tegeta should not have been done as it would not benefit Eskom. The concern about sub-standard coal being provided by Tegeta had no substance at all as the coal was tested at the South African Bureau of Standard s(SABS). The employees that had described the coal provided by Tegeta as substandard after it was tested by SABS, were suspended. It is still unclear why the employees described the coal as substandard while SABS had found otherwise. It seemed that doing business with Gupta-linked Tegeta was the only problem. It would require Eskom to blacklist Tegeta in order not to conduct any business with the company in the future and there is a process in the PFMA for blacklisting the suppliers. Eskom would be required to provide cogent reasons for blacklisting Tegeta. It seemed as if Members are blemishing Tegeta based on gossip and innuendos and this was exactly like a kangaroo court.

Mr Molefe explained that everyone had judged the Guptas as having done something wrong without actually going through the judiciary process for proving guilt or innocence. It is quite clear that the Guptas had not been found guilty of anything or broken any of our constitutional laws. Eskom could not blacklist the Gupta family primarily based on the fact that their aeroplane landed in Waterkloof. Eskom would still consider any bid by the Guptas if they want to do business with it as the Constitution is clear that everyone should be treated equally. It looked as if people are now found guilty without any evidence of wrongdoing and some are presumed guilty until proven innocent.

Eskom Chief Financial Officer, Mr Anoj Singh, responded that the R17.5 billion business productivity savings is a requirement of the equity injection approved by the Cabinet. There is a programme of initiatives that make up the R17.5 billion and there is target that is associated with that for the next three years. The biggest contributor to the R17.5 billion business productivity savings achieved was the reduced used of diesel. The bulk of the savings captured under the business productivity initiative programme would be sustainable as the organisation was not anticipating placing reliance on diesel going forward. On the question of an asset management and disposal policy, Eskom does have a rigorous asset management policy with a focus on residual values, when to maintain the assets and the manner of the maintenance. The assets are maintained by the original equipment manufacturers. There is a disposal policy that Eskom was required to adhere to.

Mr Molefe explained that Eskom needed about 3 000 MW in order to deal with load shedding. Eskom had been able to prioritise on the efficiency and maintenance of all the plants providing electricity to the grid and this has resulted in the improvement in the energy availability factor. Eskom had been able to improve the energy availability factor, which is linked to the efficiency measure from 69% to 79%. This increased efficiency on its own had resulted in the supply of an additional 3 700 MW that the machines are offering by just operating them better and efficiently. In addition, Eskom fast-tracked and finalised the commercial operation of Medupi Unit 6 which offered about 794 MW and this was an addition to the 3 700 MW directly coming from the implemented efficiency measures.

The synchronisation process is when the machine is connected to the grid but is still in a testing phase and not yet handed over for commercial operation. The winter strategy of Eskom involved synchronising all four units of Ingula project. Unit 3 for the Ingula project was damaged during the testing process and there is no corruption that was involved in that. In essence, Unit 3 failed but there was no additional cost to come to Eskom as the contractor involved had accepted responsibility for the damaged machine. The plan is for Unit 3 to be brought back to the synchronisation process during September and it should be operating commercially by the end of the current financial year.

Dr Ngubane responded that Eskom was doing what is called performance contracting and the performance bonuses were awarded based on the achievement of the Key Performance Indicators (KPI) of the organisation. It would be impossible for Eskom to change the performance bonuses as this could lead to a situation where highly skilled individuals would look for greener pastures elsewhere. The country was in dire shortage of engineers and artisans that are highly qualified and there should be a strategy to maintain this cohort of highly skilled individuals in the organisation.

Mr Molefe added that the performance bonuses were based on two parameters and the one that had the most weight was dealing with load shedding and restoring the profitability of the company. The management team of Eskom managed to deliver on all the parameters that were set. Eskom used diesel as a last resort to avoid load shedding until relatively recently and this was based on the understanding that the cost incurred on the utilisation of diesel would be recovered through the tariffs. The regulator pointed out that the consumer would bear the brunt if this method was to be applied and it was also made clear that the money spent on diesel was unrecoverable and was extremely expensive. Eskom had been able to stop the use of diesel without resulting in load shedding and also managed to prevent the erosion of the organisation’s balance sheet. Eskom had been using about R1 billion on diesel a month and this amount in the month of July 2016 was standing at zero.

Mr Singh (CFO) clarified that the concern raised by the Auditor-General about the leadership was mainly referring to the previous Board members. The Auditor-General looked at the leadership at Eskom trying to identify the root causes in three categories: leadership of people, systems and processes and governance.

Mr Molefe explained that the shares referred to in the annual financial statement are phantom shares, meaning these are not the real shares but long-term incentive schemes.

Mr Singh explained that Eskom also has a modifier that is related to shareholder compact performance. The payment of long-term shares was modified by a total of 10% after the perpetuation of transgressions that had been seen as fruitless and wasteful expenditure. He said it must be made clear that prepayments are part and parcel of normal commercial transactions. The biggest part of R3 billion is related to prepayments that had been made on normal commercial contracts that Eskom had with big suppliers of energy. The historic events related to prepayments, particularly in the coal area, are not unique as Eskom has undertaken prepayments before. There is also a policy in place that is mainly focused on the process of prepayments. There were prepayments made in 2008 for the purchase of equipment in one of the coal mines in the country. Rand Mines also benefited from prepayments as a loan was made to the company and this was recoverable over a period of 20 years and only ended on 31 December 2013. There is also a loan that was subsequently made to that and this had already been settled as well.

Mr Singh added that Exxaro had also requested a R1.8 billion prepayment for digging a new mining shaft for Eskom and the organisation was still to decide whether to commit to this. In essence, it is a common practice for Eskom to make these prepayments to companies and this was not first started with Tegeta Exploration and Resources. Eskom was not approached by Tegeta for the prepayment arrangement. There was a security of supplier issue raised by the operations in overcoming the winter challenges. There were many suppliers identified in dealing with the concern raised by Eskom’s operations. Eskom granted the prepayment on the ground that there would be a 3% discount from Tegeta on the price of the coal and this had already been benchmarked by those involved in the operations. Eskom requested and received adequate security from Tegeta and the duration of the prepayment would not extend beyond the winter period. Eskom insisted that the amount should be settled within the period of six months and not beyond. The prepayment had already had been honoured and repaid by 12 August 2016.

Mr Molefe explained that the RCA tariff was set aside as the High Court judge was concerned about whether proper procedure had been followed in the tariff increase decision by the National Energy Regulator of South Africa (NERSA). The judge went on to say that the tariff granted should continue but NERSA should go back and review the process that had been followed. NERSA had decided to appeal against the judgement and Eskom was awaiting NERSA on the way forward on the matter. It must be made clear that Eskom is not overly concerned about the matter as it would be resolved in due course.

On the problem of municipal debt, Mr Molefe said Eskom was proposing the prepaid method as a way of dealing with the accumulation of municipal electricity debt. Eskom had been given a mandate from management to introduce the prepaid method. It would be important for Eskom to enter into agreements with municipalities in order to install prepaid meters so as to prevent further accumulation of electricity debt going forward. Eskom was about to start a pilot project of the prepaid method in the Eastern Cape and the Free State province was also in support of this method. The municipalities would not lose the revenue as Eskom would be able to calculate the amount that is due to a particular municipality at the end of the month. Eskom believed that South Africa should migrate to the prepaid method so as to avoid the situation where municipal electricity debt was accumulating towards R12 billion. The prepaid system used in the telecommunication industry was working very well and should also be emulated by Eskom.

Mr Molefe responded that Eskom does have a policy to provide a certain amount of electricity to indigent households and this could be managed very well in the prepaid system where those households would be given vouchers for free electricity. The contract at Ingula project was a re-measurable contract, meaning a contract priced on a detailed bill of quantities specifying all elements of path construction and other associated work to be completed. It must be stated that three of the Ingula units are now in commercial operation and Eskom was willing to account fully for the unit that was not yet in commercial operation. The interest of Eskom is on finalising the matter and ensuring that all the units in Ingula are able to be in commercial operation. Eskom managed to deliver the required documents to Treasury and they had been signed by someone at Treasury as received. Eskom had been ready to forward the required documentation for as long as the contract was finalised. The Board was shocked and perplexed to read in the Sunday Times that the Eskom Board was reluctant to cooperate with the request by Treasury. The Board had been cooperating with the request from Treasury to submit the required documents but the Board should meet before making any submission to Treasury.

Mr Molefe said he was not interested in responding to the fact that Chief Procurement Officer, Mr Brown, labelled him a liar as he had been called worse things before. It was in the best interest of Eskom to comply with the request by National Treasury to submit the documents on coal contracts with Tegeta Exploration and Resources. There is documented evidence that Eskom was willing to comply with the request that was made by the Treasury.

Dr Ngubane stated that Eskom was under the Department of Public Enterprises (DPE) and therefore it was strange to witness National Treasury requesting the submission of documents from Eskom instead of the Department. It was also absurd to see that there is this eagerness to publicise and cast aspersions on Eskom instead of the Minister of Public Enterprises.

Mr Molefe said Treasury instructions are very clear that any deviation from the contracts needed to be approved by National Treasury and this was applicable as of 01 July 2016. Eskom asked for approval for deviation from the contract on the Koorfontein Mine on the 17 August 2016 and this company is owned by Tegeta Exploration and Resources and ultimately the Guptas. Treasury had approved the deviations in the contract of Tegeta Exploration and Resources and this again showed that there was nothing wrong with doing business with the Guptas.

Mr Molefe said Eskom has been extremely careful around the IPP deals as the cost structure of the deals was still unclear. He was not trying to change policy, but that he needed to understand any deal that was set to cost “R5 000/MWh”.

Dr Ngubane explained that the major concern about renewable energy was around reliability and the reality is that renewable energy at the moment could not bring about stability at Eskom.

Mr Molefe responded that the concern about the lack of adequate time for gazetting had been remedied as the notice period had been extended after there was an outcry from the public. The suspension of a senior manager at Koeberg was after a crashed drone was found by the station manager and returned to its owner without the completion of an investigation. The crashed drone was in contravention of a number of laws including those to do with Civil Aviation and National Key Points. It must be made clear that the nuclear safety at Eskom had not been compromised by these developments as everything is now being controlled by the acting station manager, Mr Velaphi Ntuli.

Mr Molefe said the strike at Eskom had been resolved and the organisation signed an agreement with the relevant trade unions such as Solidarity and National Union of Mineworkers (NUM). The outstanding signature for the agreement is the National Union of Metal Workers of South Africa (NUMSA). The increase in staff complement was as a result of hiring 1 300 artisans and this is the kind of increase that everyone would like to see. The cost-cutting measures should not impact on the artisan programme that is in place to develop highly skilled individuals for the benefit of the country.

Mr Molefe indicated that Eskom was not in position to respond to the question that had been asked in regard to the scramble for the control of SOEs as this was something Eskom was reading about in the media.

Mr Mongezi Ntsokolo, Group Executive: Distribution; replied that Eskom was working together with municipalities in dealing with illegal electricity connections. This problem of illegal electricity connections was compromising the quality of energy supply and it also interrupts those that are legally connected. The long-term solution in dealing with this problem is obviously accelerating the matter of universal access to electricity so as to ensure that all the connections are legalised. Eskom was hoping to achieve universal access to electricity by 2020.
 
Mr Nkwankwa agreed that indeed the question on the scramble for the control of SOEs was a political question and perhaps it needed to be answered by government. People are concerned about a conscious or an unconscious bias towards the Guptas and this was eroding an important principle in our community, which is the principle of providing equal opportunity to everyone. The concern was raised by community members in the Eastern Cape during the oversight visit that some villages are not receiving the free 50 MW electricity. Who is responsible for the distribution of the free 50 MW electricity? Eskom should be exercising control for the distribution of the 50 MW of electricity so this service can be distributed evenly. What are the targets for the redistribution of procurement to Black-owned suppliers? It is clear that Eskom is on the right path and the intention of Members is not to discourage the Board.

Mr N Singh asked if there are checks and balances from the team of experts at Eskom who are able to verify whether the variation requested by a contractor was legitimate. The Committee should be briefed on why Eskom was paying for diesel despite making the statement that the entity had decided to discontinue using diesel. It was absurd why the phantom shares were written into the financial statement of Eskom as it had explained that these shares are “unreal”. It was unclear if there were terms and conditions for the R23 billion equity injection last year.

Mr Molefe responded that indeed there are checks and balances from the team of independent experts like engineers and artisans at Eskom that is able to verify whether or not the variation requested by a contractor was legitimate or not. The engineers are always there on a continual basis. Eskom had met all the requirements for the R23 billion equity injection.

Mr Maynier maintained that the statement made by Treasury was clear that it was Mr Molefe that was refusing to cooperate to the request for submission of the coal contact documents. Was this implying that the Minister of Finance and Treasury was lying in their statement that the CEO was reluctant to cooperate with National Treasury’s request? It would be important to know why Tegeta was threatening to interdict National Treasury from publishing the report on alleged corruption in respect of coal contracts at Eskom.

Mr Molefe pointed out that the Minister of Finance had not said anything about the matter of Eskom cooperating with the request from National Treasury since Sunday 28 August 2016. Eskom was taking very seriously the request made by Treasury and this is why the Board had complied and submitted the required documents. It is unfortunate that the statement issued by Eskom on the matter of National Treasury was ascribed to me as I had not issued any public statement on the matter.

Mr Rawula expressed concern that the CEO was consistently in defence of the Guptas and even went further to say that he was friends with the Guptas. The targets on procurement should be able to translate to the improvement of people’s lives on the ground. The problem of illegal connections was probably the manifestation of the problem of some communities that are yet to be electrified. The problem of illegal electricity connections was a result of the delays by Eskom in the provision of universal access to electricity.

Dr Luyenge asked if Eskom was complying with the requirement of 30 working days for the payment of service providers. Was Eskom assisting local service providers in terms of capacitation? What was the measurement being used by Eskom for the rendering of service?

Ms Mazzone mentioned that a leaked Treasury report showed that SABS had declared that the coal provided by Tegeta was not compliant to the standard. There are also minutes from Eskom’s technical team where they expressed concern about the quality of coal provided by Tegeta. It is the mandate of Eskom to “keep the lights on” and operate in a profitable way and there should not be the expectation of a bonus for this basic mandate. There is a complete and utter breakdown between Eskom, DPE and Treasury and it is quite clear that these stakeholders are not talking to each other. The elephant in the room is basically the Guptas and the CEO needed to come out clearly on whether he had a relationship with the Guptas.

The Acting Chairperson asked if the Board had a scheduled meeting in between March and September 2016. Was it not possible to ask for an urgent Board meeting?
 
Dr Ngubane wanted to make it clear that he had nothing to do with the Guptas and this is a notion that needed to be dispelled in the public domain. He reminded Members that he had always served the country with distinction and was part of the Convention for a Democratic South Africa (CODESA). “I want to be clear that I reject with total contempt the impunity on my honour and integrity”.

Mr Molefe mentioned that he had met the Guptas and they are nice people and this did not imply that the Guptas had “captured” Eskom. It seemed everybody expected Eskom to show hostility towards the Guptas.

Mr Singh (CFO) responded that it was indeed true that Eskom had not met some of the targets on the socio-economic aspects of the compact. Eskom had put measures in place to actually meet the targets for those socio-economic aspects of the compact in the current financial year. Eskom would be talking on the localisation of service providers and supplier development initiatives that had been developed as well as the Black Economic Empowerment (BEE) elements associated with Black-owned activities and Black youth initiatives.

Mr Matshela Koko, Group Executive: Energy Generation, responded that Eskom had suspended two coal laboratories and four employees on the 31 August 2015. Eskom also suspended the Tegeta supplier contract because Eskom could not verify the quality of coal that had been provided. The suspension was lifted after the results from SABS proved that the coal provided by Tegeta was of a good quality. It was totally incorrect for anyone to claim that SABS had said that the coal provided by Tegeta was of poor quality.

Mr Singh added that there are internal audits to verify that coal that was out of specification was not utilised and paid for.

Dr Ngubane said that it was up to the Department to review and change the legislation to allow the process of localisation to benefit small businesses. Eskom was intending not to use diesel in the future as this has proven to be costly. There are about 300 000 households the commercial grid has yet to reach and solar panels are being used for those households.

Mr Molefe indicated that part of working for Eskom involved the payment of performance bonuses and this was clearly not corruption. Illegal electricity connections were not as a result of delays in the provision of universal access to electricity as the problem was happening in areas that had been connected to electricity. The areas that are without electricity could not connect to any electricity. The statement that the Guptas did not have licence for water was totally incorrect and this is one of the matters that had been clarified in documents provided to Treasury.

Adoption of minutes
The minutes of 24 August were adopted without amendments.

Committee Oversight Programme
The Chairperson went through the Committee Oversight Programme page by page and it was
provisionally adopted without amendments.

The meeting was adjourned.