Eskom finances: Parliamentary Budget Office research findings

Standing Committee on Appropriations

08 March 2017
Chairperson: Ms Y Phosa (ANC)

Meeting Summary



The Parliamentary Budget Office presented its research findings on Eskom’s finances. The role of state own enterprises is a critical one in the transformation of the economy therefore a focus on the efficiency and the effectiveness of how these institutions operate is essential.

It seemed that in the short term Eskom is to be able to manage their finances adequately, however, there are many uncertainties such as the possibility of further delays for the new build and shortages in supply of coal that increases risk in the medium term. There are also large risks in the global economy that could affect South Africa and Eskom. These risks reduce the narrow space that Eskom has for managing its finances. As a result, Eskom may need further large increases in tariffs to manage if any of these risks negatively affect their revenues and costs. There was a common understanding that the current situation is one where Eskom seems almost “too big to fail” because of its importance to the South African economy. Something which surprised the members and drew strong responses was the fact that Eskom spends over 50% of its profits on debt financing. Members felt that this is a waste since Eskom depends heavily on government finance and wanted to know how this can be reduced and suggested other possible ways of generating energy such as renewable energy.

This status means that as in the past there could be a moral hazard problem where Eskom’s management could incur large costs and risks that lead to an oversupply but they do not bear the full costs of taking on those risks. There could be a risk that Eskom as in the past focuses on managing their finances but because of overcapacity do not manage the efficiency of their plant adequately. In the longer-term, there are big questions about the future of utilities and whether and how they adapt to possibly disruptive changes.

Members raised questions and comments that included: There is nothing that tells us what Eskom has done with the R60 billion it borrowed from government except some of it was converted from a loan to equity – we need answers on how the money was used to determine if the money was spent on what was required and government got value for money; why do we want to build a nuclear plant costing trillions of rands that means we get electricity only 20 years from now; the adequacy of local skills and the outsourcing to other countries for skills and services; SOEs suffer when boards are interrupted by government; is it genuinely ageing infrastructure or is it a sabotage of the system to ensure that it does not work; the significant increase in finance costs from R5 billion to R9.3 billion in six months; if it was a wise idea to transfer facilitation of the nuclear energy project to Eskom, what informed the decision and if was it a wise decision; if the World Bank study looked at both wholly owned state entities or privately owned ones as well; if it is not better to maintain old power plants instead of shutting them down. The Chairperson concluded that the SOEs that have been prioritised will be called in so that the Committee can get reports on their finances.

Meeting report

The Chairperson noted that attendance and preparation is crucial to the success of the meeting.

Eskom’s finances: Parliamentary Budget Office research findings
Prof Mohammed Jahed, PBO Director, said the role of State Own Enterprises (SOEs) is a critical one in the transformation of the economy therefore a focus is necessary on the efficiency and the effectiveness of the operations of these institutions and how they contribute to the economic transformation of the country. They have provided both the full report and the presentation so members can follow either way.

Mr Seeraj Mohamed, PBO Deputy Director, expressed the hope that the PBO can provide information that will help the Committee's decision making easier. The document looked at revenues, expenditure, balance sheet and liabilities, changes in the electricity supplies industry and gave conclusions. The report was compiled in response to a request from the Chairperson of the Standing Committee on Appropriations who asked the PBO to investigate the financial position of Eskom.

Eskom is a state owned enterprise (SOE) whose importance to South African society and the economy is unquestionable. One of his colleagues who saw the presentation stated that he is using less academic and more colloquial language by saying ‘unquestionable’. He explained that he would be using colloquial language throughout the presentation in order to make it more understandable. This will also help in the analogies he will make later on. He said there is no doubt that the financial challenges faced by Eskom require ongoing close oversight.

The Chairperson interjected and asked Mr Mohamed to elaborate on what he said about the importance of the banks because the banks these days are being questioned.

Mr Mohamed responded that we can think of South Africa using the banking analogy to describe Eskom’s importance for the economy of the country. He referred to the banks during the time of the financial crisis; if one allowed one bank to fail, it would have tremendous effects on the economy. The financial challenges facing Eskom stem from the condition and operation of the physical plant, transmission and distribution systems as well as conditions that affect the cost structure and revenue collection of the utility, including regulatory issues.

He said the research also explores some of the broader political economy issues that affect outcomes for Eskom. The political economy issues are really important because studying Eskom’s past and especially looking at the programs they started in the early 1970s when Eskom added a huge amount of capacity. During this time there were important political economy issues in the relationship between the government SOEs like Eskom, Transnet, Sasol to some extent and also the private sector. In the mainstream economic discourse there is a separation between the State and the Market but what is really important to understand in the development of Eskom, the coal mining industry, rail infrastructure, the port and the terminal at Richard’s Bay is that all of this was due to a certain joint interest and very close cooperation between government and private business.

Separating the role of the state and market does not provide them with the best analysis. They will talk about these things in the context of how the political economy has changed in terms of the relationships between the different actors, especially private sector actors in coal mining and other parts of the private sector and government. Overall, Eskom has had to make substantial new investments while facing large increases in expiring energy and costs. There are risks and uncertainties in the global economy and in South Africa that could negatively affect Eskom. There are large changes within the global power sector that may affect the future structure of power utilities and there are important decisions to be made about Eskom’s future within the context of these possible changes. He asked his colleague to present on revenue.

Mr Rashaad Amra, PBO Analyst, said revenue is a very important component of Eskom’s profitability and financial position. He presented an overview of revenue trends since 1994. That revenue has two main components: price and quantity. Thus, if the price goes up they will obviously make more money and become more profitable. This in turn affects Eskom’s financial position. He referred to the slide on Eskom’s profitability since 1994. The green line on the graph is Eskom’s profitability and the orange line is the overall economy excluding the financial sector. There is a contrast between Eskom’s profitability and the rest of the economy.

Between 1994 and 2006, Eskom’s profitability average exceeded the average profitability of non-financial corporations across the economy with Eskom’s average being 11.4% while the rest of the economy is 8%. However, since 2008, this trend has reversed: Eskom’s profits have been lower on average than that of non-financial corporations. He moved on to compare Eskom’s profits to its revenue. Between 1994 and 2007, net profit and revenue record significant increases. However, since 2008 Eskom’s profits have declined despite the significant and sustained increase in revenue. Between 2008 and 2015, Eskom’s revenue grew by a real annual average of 9.7%, while profits fell by 9.6%.

This is rather interesting to have an increase in revenue and yet a decrease in profits (high revenue and low profitability). Expenditure must be a determinant in this contrast and his colleague will discuss expenditure in a moment. There is however more to it than expenditure increasing faster in that period. Referring to the slide, revenue increases as sales decline. He explained that despite a 28% increase in sales between 1994/5 and 2007/8, revenue decreased by 2.8% while in the period 2007/8 to 2015/6 electricity sales declined by 4% while revenue increased by 117.3%. Thus, since 2008/9 revenue has increased despite a reduction in electricity sales. This revenue increase is primarily due to significant tariffs since the multi-year price determination (MYPD) 1.

Why are there low increases in prices between 1994 and 2007? It is particularly because before 1994 the South African government through Eskom went on a large investment drive thus there was significant overcapacity for electricity due to many plants being built across the country and therefore it was able to provide electricity to the market at low costs. Consequently, the South African government was able to have low inflation price increases. In 2007 there were changes in policy which caused the electricity tariffs to increase significantly. Several elements determine tariff level. He explained the process and said that Eskom applies for revenue from the National Energy Regulator of South Africa (NERSA), NERSA approves the revenue. After that, Eskom calculates tariffs based on sales forecasts and revenue allowed and NERSA approves the tariffs.

The regulatory asset base is the key determinant because revaluation of asset base was necessary to allow Eskom to finance future expansion. Eskom has never been afforded a full return on its asset base which means that tariffs are not cost reflective. A cost reflective tariff would require higher tariffs and revenue for Eskom. The income Eskom received may just be enough to cover operation costs but not enough to make investments. He handed back to his colleague to speak about expenditure.

The Chairperson asked when you say “it has never been afforded full returns”, who is it afforded by?

Mr Mohamed replied by government or by NERSA. At the moment there’s a multi-year price determination process and within that process Eskom will propose what the tariff should be, based on what the asset base and return should be. NERSA will look at that and say instead of R0.25c we think it should be R0.18c. Within that, Eskom wants to have a certain level of comfort to some extent and some of the inefficiencies and problems in Eskom may be reflected in that tariff. The question for the oversight process is even if there are large levels of inefficiencies that can be reduced over a period of time, how do you deal with that? Is Eskom too big to fail? How much inefficiency do we have to keep up with because of that? It makes the rigour of the oversight process really important to ensure that we keep Eskom on its toes and as efficient as possible.

With the expenditure, there was a shift towards considering replacement costs and more cost reflective tariffs while on the other side there was a huge increase in Eskom’s cost structure and expenditure. The three drivers of Eskom’s costs are coal (the South African electricity supply system is largely dependent on coal); costs of diesel and use of gas turbines; and costs related to renewable independent power producers that Eskom has to now buy electricity from. This section considers certain drivers of Eskom’s primary energy cost when large investments are made by Eskom.

He referred to the figure on page 13 to illustrate the point that the South African electricity industry is predominantly a coal industry. The figure shows that the consumption of coal in this country, 65% is used for electricity. This gives the sense that Eskom is still very much a coal business. The pie chart on page 13 was taken from the 2016 integrated annual report of the Energy Department. He went on to discuss energy sources in South Africa and found that 91% of electricity production comes from coal power stations. In the last few years there have been increases in the uses of gas turbines and renewable energy but their percentage is quite low on the pie chart.

The development of electricity and the coal industry from the 1970s occurred rapidly. There was a development of washing of coal that separated grades from run-of-the-mine coal and this created opportunities for Eskom and the coal mines. This meant that the high quality coal could be exported and the lower grade coal could be used by Eskom. From the 1970s we see that SA becomes one of the largest exporters of coal and this was pretty high grade coal. The rest of the lower grade coal was used by Eskom. Therefore, Eskom secured supply and supported the coal mining companies by entering into long-term cost plus contracts. Eskom provided capital for development of the mines and took risks based on the geology of the mines. It also entered into a long term 40 year contract to supply coal to new power stations. This meant that mining companies developed new infrastructure and port facilities to export coal.

New power stations were built at the coal mines and thus saved transport and other related costs. By signing these agreements, Eskom took the risk of the operating costs of the mines. Today we see that many of the mines are old, some are 30 years old, and some of them 40, which means the cost of coal mining from those mines has become expensive and the quality of their coal has declined over time. So Eskom has not been able to get adequate supply from these mines and also the cost of running these mines has increased. However, at the time when these mines were built, this was a huge opportunity for Eskom. The mining companies developed new rail infrastructure with the state entities and also port facilities to export coal.

Eskom’s business was also influenced by politics of the day. Today we talk about BEE but it is worth mentioning that Afrikaner businesses and mines were supported more by Eskom because it was at the time dominated by the English mining companies. The term minerals and energy complex (MEC) does not only describe the sectors but also describes a system of accumulation. This includes relationships between the State, SOEs and private sector corporations that shape economic outcomes. The evolution of the MEC required close coordination between these actors. During the 1970s Eskom was confronted with increasing demand but there were challenges to Eskom’s rapid growth. For example, with the increase in demand, the response was to build enough capacity to meet this demand. And the result was a rapid upscaling of generation capacity.

The build put pressure on Eskom’s resources and skills but also put pressure on Eskom’s finances which means there was a large increase in debt, Eskom increased borrowing and tariffs. This also meant that Eskom’s management was more focused on profit and meeting demand than the efficiency of their plant. There was rapid growth from the 1970s and because of this there was overcapacity. Due to the overcapacity and the rapid tariff increases during the 1980s, Eskom was able to pay down debt and keep prices low. In the 2000s Eskom played an important role in electrification because from the 2000s there was increased demand for electricity in response to rapid global and domestic economic growth and electrification. During this period the tariffs were not cost reflective. At the same time the age of the mines and the electricity generation capacity reduced the quality of coal and the efficiency of electricity production in the plants declined.

Due to this, there was a backlog in the maintenance that Eskom is still trying to catch up. It also means that they must keep proper management of plant and it means taking off a large capacity of the plant for months at a time to ensure against load shedding. Eskom has to keep a balance between keeping the lights on and proper maintenance of the plant. As a result, Eskom’s costs increased because diesel costs also rose significantly. This was also fuelled by an increase in labour, water and other costs. It meant they had to spend more on maintenance, property, plant and equipment. In addition to this, primary energy costs particularly of coal rose significantly. He went on to describe the index of selected expenditure items of Eskom. He explained that the index starts at about 100 percent and we see a rapid increase six times by 2008, referring to the graph on page 18 of the report. The second light line is the cash spend on equipment. Wage increases on average have been above inflation level.

There was spending of about R10 billion on diesel and this was Eskom trying to reduce load shedding. This means Eskom was using much of its operating costs to pay for diesel and this was a difficult period for Eskom.

Ms Gloria Mnguni, PBO Finance Analyst, said her colleagues have covered Eskom’s income and expenditure patterns and she would focus on capital which she refers to as the engine of the business because without sufficient capital “you have nothing to invest on your capital assets. If you do not have sufficient capital assets, you do not have sufficient revenue, therefore you will not have good profits”. Capital can be in the form of equity and debt, and this is of particular importance as well for government because government is the primary shareholder and Eskom relies heavily on government support – be it in the form of loans or equity or guarantees. In striking a balance between the two, being equity and debt, this sets the tone for an entity’s capital structure. She described the long term debt and debt to equity ratio of Eskom which has been on the rise the past decade. She described the meaning and significance of the interest cover ratio.

The lower the interest cover ratio, the greater the burden of the debt expense on the entity. When an entity’s interest coverage ratio is 1.5 or lower, its ability to meet debt interest expenses may be questionable. She explained that a high ratio portrays a risky scenario and it is unfavourable for investors. It is useful to verify Eskom’s ability to pay its debts. She discussed Eskom’s liabilities, total debt, cost of debt, and interest cover ratio according to the slides on the presentation. Total liabilities have been steadily increasing over the past ten years and Eskom has increased its reliance on financial backing from government from 2016 onwards. There was an equity injection of R23 billion, a shareholder loan converted to equity amounting to R60 billion and about R350 billion contingent liabilities available; R168 billion used.

Auditors continue asking questions such as how long will you feed the beast. Given these conditions, government will have to continue funding Eskom. External lenders are usually sceptical of funding Eskom and usually require guarantees. She asked how the inefficiencies in Eskom can be improved through interventions. There is a heavy reliance on government funding. Over 50% profits go to paying the debt and there is a significant increase in finance costs from R5 billion in 2015/16 to R9.3 billion for the six months ending September 2016. Eskom’s profitability has declined over the years with debt financing contributing significantly to these expenses. We are close to the danger zone of 1.5%.

Mr Mohamed said on a light note that the sign of a good accountant is their ability to sober you up and they are very happy to have a good accountant on their PBO team.

The Chairperson says they are feeling some discomfort because of the findings of this report, particularly the fact that over 50% of Eskom’s profits go to debt financing.

Mr Mohamed said that what they were trying to do when talking about the history is to show that the problems they have now are not just problems of the last ten years or caused by poor management or inefficiency but instead they developed over a long term period of 30 years or more. Due to the old mines they found that they have to use diesel which is a very expensive way of generating electricity to meet the demand. The problems we have now are not new but due to old mines and low quality coal. We are sitting with a problem today based on a long term problem but we have to deal with it to fix it. Referring to slide 29, he said at the moment things do look bad and financially things do look tight and we might have to face further risks which must be taken into consideration in term of providing oversight over Eskom.

There is a possibility that South Africa may face serious coal shortages in the future. The South African Coal Roadmap show concerns about the supply of coal. They estimated a shortage of coal of about 60 mega tonnes per annum. Eskom also estimated shortages for generation of 40 mega tonnes per annum. There is a possibility of large new coal production in the Waterberg but there will be an increase in coal prices due to transport.

The current utility model of large scale thermal power generation is over a century old and was seen as having matured 50 years ago. The process described as disruption for power utilities has started globally. The term disruption is being used more often to describe changes in the power sector globally. These global disruptions in the power sector create uncertainties about the future of energy generation. There are rapid decreases in prices and increases in installed capacity of renewable energy in developed and developing countries. There are global financial woes in the power sector and the financial problems of Eskom are not unique; instead they are reflective of the global trends in the power sector. The problems in electricity utilities seem systemic and may indicate that the old utility model that dominated the past 100 years may be in trouble.

South Africa can respond to the disruption but the adoption of the changes that could be disruptive to the electricity supply industry in SA could be negatively affected by policies and regulations. In the short-run some of these decisions may seem to benefit Eskom’s viability and South African energy security but a short-term perspective could tie South Africa into a road path of dependence based on an outdated electricity utility model that could be a burden on the economy and future generations.

Conclusively, in the short-term Eskom seems to be able to manage their finance adequately. However, there are many uncertainties such as the possibility of further delays for the new build and shortages in supply of coal that increases risk in the medium term. There are also large risks in the global economy that could affect South Africa and Eskom. And these risks reduce the narrow space that Eskom has for managing its finances. Eskom may need further large increases in tariffs to manage if any of these risks negatively affect their revenues and costs. The current situation is one where Eskom seems almost “too big to fail” because of its importance to the South African economy.

This status means that as in the past there could be a moral hazard problem where Eskom’s management could incur large costs and risks that lead to an oversupply but they do not bear the full costs of taking on those risks. There could be a risk that Eskom as in the past focuses on managing their finances but because of overcapacity do not manage the efficiency of their plant adequately. In the longer-term, there are big questions about the future of utilities and whether and how they adapt to possibly disruptive changes.

Concerning the future of Eskom, policymakers will have to seriously discuss their future vision of the South African electricity supply industry because SA has large sunk capital in Eskom and needs it for energy security. At the same time, choices with regard to Eskom today can constrain the country’s options in the future, given the massive changes in the global electricity sector. The MEC grew because there was cooperation between government, SOEs and the private sector. The lesson from that phase of Eskom’s growth was that it was costly and inefficient and led to an overcapacity.

Discussion
The Chairperson said that it was an insightful presentation and it has shaken them out of their comfort zone.

Ms S Shope-Sithole (ANC) thanked PBO for the wonderful lecture and she calls it a lecture because she learnt a lot. She asked what do they exactly mean by renewable energy and what falls under that category? She agrees with them about the saying that Eskom is “too big to fail”. She also referred to the bankers who threw the whole world into an economic crisis and she called it corruption.

Mr A McLoughlin (DA) said that as coal dwindles, the prices will go up thus making it more costly to run the power stations. At the moment we are sitting in a position where we are converting R60 million to equity and are pumping money into Eskom. The government borrowed Eskom money and within six months Eskom was in China borrowing R10 billion. If this goes on we will find ourselves in a position where Eskom will run out of the capacity to supply power because if they keep pushing up the prices, no one will be willing to buy from them because they cannot afford it. That will leave the government with the responsibility of carrying Eskom and they will have to find some money to pay for Eskom’s waste. He asked what they do then. They will have to find some other way to generate power whether be it nuclear power or other. No one will want to buy from Eskom and they will be sitting with this huge debt burden.

“There’s nothing in here that tell us what Eskom has done with the money, that’s my concern! We haven’t had value for the R60 billion”. Eskom borrowed the money but has never told government what they did with it although some of it was converted from a loan to equity. He asked what happened to it, what did Eskom do with the money? It was enough money to buy every family a generator and fuel the generator for a year. He asked again, what did they do with it? And exclaimed that it just vanished and they keep on wanting more, without telling government what they did with the previous amount. He asked if any study was done on what the money was spent on. The money for operating revenue must cover something even though it is not cost reflective.

Mr M Figg (DA) said that the presentation was done by two parties, economists and a financial accountant who really gave the facts that they want. He referred to slide 11 which deals with the determinants for selling prices. His question was how reliable is this calculation. He is asking this question because he cannot believe or understand that if the costs warrant it, why NERSA would not approve the selling price or tariff. He is a bit concerned about that. He referred to slide 16 which discusses the pressure on Eskom’s finances. We know that R60 billion was borrowed but not a cent was returned but everything was converted into equity, and he requested a comment on that.

He referred to slide 31 and asked why we are focusing on solar energy only when there are other forms of renewable energy. He noted that the costs are used to determine the tariff which included depreciation and other things in the calculation. According to his understanding, if you want to calculate the selling price, you use the current costs not the depreciation amounts because depreciation is used not for costs but to replace assets. If you need money to invest in capital, there are two ways of doing that: the first is to borrow and the second is to sell shares. He again asked why they resort to using depreciation amounts in the calculation of tariffs.

Ms E Louw (EFF) raised a concern that the Committee had only an hour to ask questions and comment. She referred to the current demand on Eskom since the load shedding. Between then and now, many businesses had to close down. One talks about how one has stabilised the energy supply or the demand for energy but the business closures are not taken into consideration. How many businesses were on the grid? For her it means the energy supply has not been perfectly stabilised. Why speak of renewable energy while we want to build a nuclear plant costing trillions of rands that means we get electricity only 20 years from now.

She asked about the skills between 1994 and now, how many are sourced from outside and how many have been developed so that we do not have to outsource for skills. Her party would like Eskom to remain a state entity and expenditure discipline is needed when it comes to spending. She added that SOEs suffer when boards are interrupted by government.

Ms C Madlopha (ANC) said that she knows that Eskom is in a difficult position but did the researchers go deeper to determine if the money that government gave as a grant was spent on what was required and government got value for money. There is a scary report that unplanned negative developments would cause Eskom to divert borrowing to fund operational costs. She repeated that this prospect is scary and asked what can be done especially by those in oversight roles, including the executive boards. She asked what the Committee must concentrate on. She asked about the ageing infrastructure, how even during their maintenance, load shedding was caused. She asked what was the status now, could one go back to load shedding? Does Eskom has skills that are in line with its mandate, and if they have skills, are they local or international? Personally, she did not like outsourcing skills and services to other countries.

Ms M Manana (ANC) said the presentation was very informative. She noted the question about skills which others had raised. She asked about the overcapacity and the critique on the overcapacity as well as the moral hazard. She asked if they can elaborate on that.

Ms S Nkomo (ANC) found the input valuable. On infrastructure, she asked if it was genuinely ageing infrastructure or is it a sabotaging of the system to ensure that it does not work. She asked if we still have those male Afrikaans mining magnates having the monopoly over the system, and how much of that is being addressed to ensure that there is transformation even 10 or 15 years from now. What scared the daylights out of her in the presentation was how long will they feed the beast? She asked about the significant increase in finance costs from R5 billion to R9.3 billion in 6 months and she asked, where is the value for money? She referred to chairperson and said that we may not get a full answer on how the money was used, so that we can justify value for money as has been stated.

Prof Jahed replied that he will allow the team to respond to the technical issues such as on skills, value for money, and asked that we call in Eskom and ask these questions directly to them.

Mr Mohamed said his colleague will to talk to pricing and tariffs. He said these are long and deep problems and when you think where the money goes to; it went to the ongoing need for money. Eskom has not gotten much revenue because their tariff increases were not in line with what they needed. He also replied about the possibility of sabotage and said even if that were to be happening, given the age of the plants, it is like a car, when it is a certain age you do not get the same performance and output as when it was still new. Some of these power plants are 30 years old and thus increased costs are inevitable. Thus we need to have a sense of what our assets are and build assets. And have energy-using resources where you do not finish your resources. He referred to the question about renewable energy and gave examples such as bio-energy, animal waste, solar, waves, hydroelectricity.

Mr Amra said that before he talks about the pricing formula, he will speak about other issues. The increased electricity demand has actually declined and the economy has been going slower. The older your asset is the more the maintenance costs and it results in more unplanned maintenances. SA is using what is standard in most countries utilities. When Eskom applies for revenue, they ask themselves, “what do we anticipate our primary energy costs to be”, NERSA plays the role of regulating and overseeing the price setting. When it comes to the auditing of asset base, NERSA does its best but NERSA does not know anything. For example, NERSA gave Eskom an increase of 6% over a five year horizon instead of 8%, thus it transferred the risk from Eskom to the fiscus.

Ms Louw said that NERSA reports to the Department of Energy

Ms Mnguni said she will only attempt to answer two of the questions. She spoke about why there is such a significant increase in the cost of debt. There is limited information on why this is so but increase in debt could be one of the reasons. We will have to wait for the final financial statements. On the question of how long will we feed the beast, it is a policy issue and its financial health is of national importance because it is a SOE. It is better to work with management to improve it and make it work.

Mr Mohamed referred to Ms Shope-Sithole’s question and said he will not respond to Ms Mnguni’s comment on the significance of the SOE. We must think about how we want to see that asset develop over time when we look at state asset. Our thinking must not be about pulling the plug but developing a plan to tackle most of the challenges.

Dr Mmapula Sekatane, PBO Policy Analyst, had made a study on SOEs and found that there is a conflict of interest because there is a developmental mandate and a commercial mandate. It is the choice between the two that would determine how far you feed the beast. There will probably be a point where one will have to determine how much debt one would expect, which might result in cutting of losses. On skills, in an interview with Thabo Mbeki he was asked: "What are the regrets of your Presidency", and he said his regret is that he did not work hard enough on developing skills. This is a pertinent issue because we cannot continue outsourcing. South Africa does not have the capacity to build new turbines thus they had to import them.

Ms Shope-Sithole suggested a two day workshop where they call Eskom and NERSA so that they deal with this because Eskom and other SOEs are where a lot of money is wasted because of outsourcing to foreign countries.

Mr Figg referred to the evaluation done by the World Bank on these groups. He asked are they all 100% wholly owned by the state or do we know if they are privately owned.

The Chairperson wondered if it was a wise idea to transfer facilitation of the nuclear energy project to Eskom and what informed the decision and if was it a wise decision. Concerning the old infrastructure and possible shut down of old power plants, she thinks it is best to maintain these plants instead of shutting them down. She asked about the serious coal shortages in the future as she had a problem with that point. She knows that in Mpumalanga for example, almost the whole underground is made up of coal. So why is there talk about possible coal supply shortages in the future?

Mr Mohamed replied that the World Bank profitability study looked across the world where there are different models of power utilities, transmission and distribution of power. It is difficult to say that the ones which were found to be less profitable were state owned or privately owned. There is no simple straightforward answer to it because there is a huge mix and as a result, they do not suggest that the power stations close down but they continue. In relation to the ageing power stations, we must take advantage of existing assets before jumping to renewable energy. On the shortages of coal, the question is not necessarily the shortage of coal but rather the question is: are there going to be enough coal power plants to meet the demands of the future.

The Chairperson said that this was a very interesting meeting and she also understands why Brian Dames resigned on 2014. The presentation has enriched their knowledge and said that SOEs that have been prioritised will be called in for a meeting so that they can get reports on the SOEs finances so that their engagement becomes meaningful, helpful and useful.

The Committee adopted the minutes of the 28 February 2017 and 01 March 2017

The meeting was adjourned.