Eskom 2016/17 Annual Report

Meeting report

Eskom board member, Ms Sindi Mabaso-Koyana, introduced the delegation and expressed her appreciation for the Committee’s support. She made the following remarks:
• The appointment of the new board was and continues to be well received by stakeholders.
• Eskom is now in the final stages of appointing a Group CEO and CFO. Eskom should have a new GCEO by the end of April and a new CFO by end of May in place.
• There has been a departure of five senior management facing serious allegations of misconduct and more executives were suspended. A further four executives remain on suspension: two will be facing independent disciplinary hearings in April, with the remaining two in May. All this is being done to improve accountability; the Board will continue to act to combat corruption. Currently there are 239 cases under investigation that have come through whistle blowing channels.
• Eskom has also commenced mandatory lifestyle audits both at management level and two levels below. Through the audits, 24 employees have been identified to be doing business with the company and remedial action has been taken on 21; action on the remaining three is anticipated to be completed by December.
• Eskom's 2017/18 financial year ended on 31 March 2018 and it will hold its AGM in July.
• Eskom received a qualified audit from the Auditor General which can mostly be attributed to internal controls that could not be relied on. The company is however implementing a turnaround based on the audit recommendations. Based on this recovery plan, 91 contracts have been reviewed.
• Eskom faced challenges from flat revenue driven by declining sale volumes, of which municipal debt is a key contributor.
• Key decisions made have been placing a moratorium on the hiring of employees, stopping procurement from some suppliers and releasing the company’s interim financial reports

The Interim CEO, Mr Phakamani Hadebe, said that the 2016/17 qualified audit report laid bare the challenges Eskom is undergoing. Due to the audit, the company could not source funding from the market hence it could not implement some of the planned projects. The company was forced to implement a turnaround strategy which requires difficult measures.

On financial performance, the earnings before interest, taxes, depreciation and amortization (EBITDA) were R38 billion representing an increase of 14.4 % from the previous year. Revenue increased by 7.9% to R177 billion while own generation costs decreased by 8.5% to R60 billion of which total primary production went down by 2.3%. Cash generated from operating activities increased by 23% to R46 billion.

On operational performance, generation plant performance increased from 71.1% to 77.3%. Medupi Unit 5 achieved synchronized commercial operation on 3 April 2017 and Medupi Unit 4 on 31 May 2017.

On socio-economic performance, 207 189 households were electrified; procurement from B-BBEE compliant suppliers was 98%; and spending on black owned suppliers increased from 34% to 41%.

Profitability has been on an upward trend post 2015 and solvency improved from 2016 to 2017, though still below that achieved in 2015. The question is whether the improvements are adequate and sustainable.

Eskom Acting CFO, Mr Calib Cassim, provided further details on the numbers: Revenues increased by 8% 2016 to 2017 while total production costs saw a decrease of R2 billion; Employee benefits costs increased by 13% while financial costs increased from 8b to 24b (depreciation and financial costs expected to increase in future); Property, plant & equipment (PPE) and intangible assets increased by 13% from R524 billion to R592 billion; Due to the reduced borrowing as a result of the qualified audit, the company used cash reserves to finance operations leading to a decrease in liquid assets by 16%; Debt due from municipalities increased from R6 billion to R9.4 billion

There was improvement in generation operating performance with unplanned breakdowns reduced from 14.9% to 9.9% while 13.2 million tons of coal was transported by rail.

Corporate social investment (CSI) went up by 117% to R225 million with a total of 841 845 beneficiaries (an increase of 178%).

Human resources performance shows 2.9% of the work force are employees with disability while 65.8% racial equity has been attained at senior management level.

On the qualified audit report, irregular expenditure was the cause of the qualification as the completeness of the irregular expenditure disclosed in the financial statements could not be assessed due to insufficient evidence. The control of contract management at Eskom did not operate effectively to ensure compliance with contractual terms. The accuracy of numbers could not be established for: Migration of coal delivery from road to rail; Learner Intake; Local content (Eskom wide); Local content (New build). Four areas are being addressed to prevent undesirable future findings:
- Addressing and condoning (where possible) all instances identified
- Ensuring legislative compliance of all contracts
- Establishing monitoring and compliance controls and reporting systems
- Building relationships with key stakeholders for future dealings and assistance.

In conclusion, the going concern of the entity is expected to be an issue for the next 12 months as indicated in the released interim financials. The appointment of the new Eskom Board has resulted in increased investor confidence with Eskom securing a bridging loan of R20bn. The 2.2% price increase for 2017/18 has strained the cash flow situation and the 5.23% for the 2018/19 financial year will also negatively impact Eskom’s going concern status

Ms Mabaso-Koyana asked a Group Executive to speak on the current concern about coal supply.

Acting Group Executive: Transmission, Willie Majola, said seven of its power stations were experiencing low levels of coal stockpiles such as Hendrina, Komati, Majuba, Kriel, Arnot and Camden. Eskom was diverting coal from other power stations to these power stations. Eskom had CAPEX constraints because it had prioritised the Medupi and Kusile build programmes. Due to this, it did not invest enough on the cost plus mines. The constraints were made worse by Tegeta going into business rescue as it was supplying three power stations: Hendrina, Komati and Majuba. Realising the problem, Eskom approached National Treasury for a confined procurement. The application for an urgent confined period of coal procurement had taken longer than Eskom wanted, but Treasury had approved and the tenders had gone through. Some of these contracts have started delivery, but some have to sort out BEE certificates. Coal was moved around the power stations so that they had the right levels. Eskom would move coal in Mpumalanga with trucks on the road. It was discovered recently that Tegeta was given a prepayment of R7 million in September 2017, but the 37 kilotons of coal was not delivered to the Hendrina power station. It was taking action against the employees involved as the payment was not in line with Eskom policy. Suspensions have taken place and there is a forensic investigation.

Acting Group Executive: Generation, Mr Thava Govender added that the company had started to move coal around the power stations where there were insufficient supplies.

The Interim CEO, Mr Hadebe, reported on the matter in the news about irregularities in the tendering process. This had been discussed and the resolution is that investigations will commence on Monday 23 April.

Ms Mabaso reiterated that action will be taken about tendering irregularities. Eskom is currently staying clear of any entities implicated in state capture. Currently all contracts within the organisation are being reviewed.

Discussion
Ms D Rantho (ANC) welcomed the work of the new Eskom Board but cautioned that in the past, the Committee had received beautiful annual reports indicating a sustainable Eskom yet everything unravels. The Board ought to have an implementable strategy. There is a concern about municipality debt. The report states only six municipalities having payment arrangements and a further 20 are paying fully. What is the status of the other 29 municipalities? Also for those paying partially, what is the arrangement for them to repay fully? On the opening remarks by the Board member about charges against Mr Koko, what are these additional charges since he was cleared of allegations? Will the AGM be held in July or is it merely anticipated then? In the past the date has been postponed bringing a difficult working environment at Eskom. On the tough decisions the Board aims to take, are they consulting legally to avoid litigation?

Ms N Mazzone (DA) asked if a replacement was being sought for the recently resigned board member and what is the procedure if a board member resigns. On sabotage, is it internal or external and have any charges been laid? In the past, load shedding was attributed to state capture. Is South Africa again in such a situation and is it being held to ransom? On the 239 corruption cases, how far are the investigations? Municipal debt is becoming increasingly problematic. She suggested that they have a  municipal debt war room with Treasury, COGTA and other relevant departments. Has Eskom looked into laying criminal charges on municipal managers for fail to pay electricity bills which is misappropriation of funds? On the charges being brought up against Ms Daniels, the Committee needs assurance from Board that the charges are not related to the testimony she gave to this Committee since she did so under oath and ought be protected as a whistle blower. On the prosecution of Mr [inaudible] has Eskom incurred any costs and how does it aim to recover these? Lastly, is South Africa going to face load shedding this winter?

Mr M Dlamini (EFF) asked whether the power stations affected are going to be closed and if so what will happen to the workers. He sought clarity on payments made to Independent Power Producers (IPPs). How much was paid and to which companies? How much electricity are the IPPs bringing and who owns these companies? On the proposal to increase electricity charges to recover losses, this is transferring management incompetency to poor citizens, are there no other options? Since there is a state-owned company for producing coal, why not deal with this and help it to increase capacity instead of dealing with private companies that hold the country to ransom? On the irregular spending that contributed to the qualified audit, Eskom says that the company got value at the end - it is as if it is justifying the practice. If people do not have the necessary tax compliance certification, Eskom should not deal with them. There is a need to know these companies that were paid and yet they were not certified.

Dr Z Luyenge (ANC) said that the tariffs at which Eskom sells electricity to the poor is unfavorable, yet the municipalities also add distribution costs. How does the Board think this can be rectified? On social responsibility, is there a programme to give back to the poor? On the IPPs, Eskom must ensure the owners of the companies are not from former blacklisted companies. On Eskom's funders, if they continue to give conditions about Eskom leadership before funding, how does one ensure that this is not personal and that Eskom does not get directed by the funders?

Mr S Swart (ACDP) expressed his concern about Eskom as a going concern. The 2017/18 financial statements will reflect unfairly on the new Board as they inherited the mess. There could be a case of irregularities in the report as presented; were the prepayments for the purchase of a company and not coal? Why shouldformer executives Mr Koko and [inaudible] not be declared delinquent directors so they are unable to hold a directorship anywhere else within South Africa? Of the R3 billion irregular wasteful expenditure, R1.36 billion is due to criminal conduct expenditure. What steps have been taken on this? What does the Board mean by saying there is sabotage?

Mr R Lees (DA) commented that there was much concern about Eskom as a going concern, meaning that there may not be enough money to trade for the next 12 months. Eskom had been lent R5 billion by the Public Investment Corporation (PIC) to alleviate this. What is the status now? Are suppliers being paid within 30 days? 

Ms Rantho asked what happened to 129 of the 239 corruption cases being dealt with (75 completed, 39 under disciplinary processes). On the 24 employees who broke Eskom policy, the report indicates 21 cases have been dealt with and 3 still pending; are the 21 employees still with Eskom and if so did they pay anything to the company? Regarding high value crime targeted, how many cases were there? On the middle managers, has Eskom audited all these including senior managers since they were the implementers of previous executive found to culpable?

Ms Mnganga-Gcabashe (ANC) commented that there is a need for a timeline for the recovery plan. Also, it is not clear from the briefing what were the concerns raised by the auditors in the management letter. She encouraged the Board, saying that the systems are there, they only needed to be implemented and enforced.

Ms Mabaso responded that the Board is working on a strategy that will actually work and the Board will only bring it forth when it has a clear implementation plan. On the corruption cases, each case needs to be unpackaged separately which takes time. That is why 129 cases are still pending. The 24 Eskom employees told the Board that previous Eskom managers had encouraged them to do business with Eskom but as the new board, policy has been reemphasized, thus these were not penalized. On lifestyle audit, the scrutiny has now gone below the executive layer to management to check on behavior and corruption; most of the 239 come from these levels. In addition, the Board reduced the materiality of irregularities from R1.2 billion as set out by the AG to R750 million so that more unscrupulous actions are brought out.

Eskom's Group Executive: Customer Services, Ms Ayanda Noah, gave some insights on municipal debt saying that the situation now is beyond Eskom. Unlike in the case of individuals where electricity is disconnected if the individual is in default, in the case of municipalities Eskom has been instructed to reconnect in the past.

Committee members asked who ordered the reconnection.

Ms Noah replied that the former CEO instructed her not to cut off electricity to defaulting municipalities ahead of the 2016 local government elections. Last year, she was again instructed that power cuts were out of the question because they were not politically palatable. This situation led to escalating debt. Even when the payment arrangements are made easier for the municipalities, the debt is not being cleared. Action has now been taken and power has been interrupted to five municipalities. Eskom has also advanced the installation of smart meters and prepaid meters to help municipalities in cost cutting and easier control. On the suggestion of having a municipal debt war room, there is already an inter-ministerial task force chaired by COGTA that deals with this. On laying criminal charges on municipal managers, this happened three years ago but the municipal managers did not adhere to court order. Eskom followed up and took the case to the Constitutional Court, but the case has not proceeded since then. A contributing factor is that municipal managers are not appointed on a permanent basis and keep on moving, hence it is difficult to follow up.

Mr Hadebe replied about Mr Koko that Eskom does not have the legal basis to follow up the case after he resigned but it is cooperating with ongoing processes on the matter. He reiterated the commitment of management to the turnaround strategy. On sabotage, this refers to activities done deliberately to make sure the institution is not stable, but the management is dealing with this.

Mr Majola replied about load shedding saying that that three coal mines are now in business rescue meaning that they cannot supply, and Eskom must get an alternative supply which has affected the company adversely.

Group Executive: Generation, Thava Govender, said there was no need to press panic buttons and there would be sufficient coal supply for winter. However, it would be disingenuous of him to say there would be no load-shedding. However, load-shedding was caused by various factors such as inefficiencies and also weather-related issues. He could give assurance that every person employed at Eskom would ensure that they do not get to the stage of load-shedding.

On the McKinsey case, Mr Hadebe replied that the Asset Forfeiture Unit was attending to this and the process is ongoing for paying back the money. On Ms Daniels, the Board just wanted her to come and explain some issues since she was already suspended before the new Board was appointed.

Mr Majola replied about closing power stations that since the commissioning of new units, some of the more expensive older stations are not efficient to run. The Board is deliberating whether to put these into extended reserve CHECK, or to shut them down. The decision arrived at will take into consideration all the ramifications.

Mr Govender replied about the ownership of the IPPs, saying he has requested this information and it will be given to the Committee.

Mr Cassim replied about irregular payments to non-compliant suppliers. The situation currently is that if a supplier does not have a tax compliance certificate, payment is stopped until this is provided

Mr Hadebe replied that the role of Eskom in a developmental society is clear. Eskom is a state-owned corporation that works with government departments and other corporations for the good of society. The company connected more than 200 000 households to electricity in the past year while CSI was more than R200 million. Nevertheless, while there is need to do better, the current problems facing Eskom mean that its development arm might not be very visible.

On the demands by the funders of Eskom, these are not impossible to work with. Eskom also has credit committees, hence management understands their standpoint regarding explanations from Eskom on what it is doing to clean up its house in order to receive the funds. However, these demands from the creditors do not require Eskom to do more than is required. That said, South Africa needs to take cognizance that the number of funders willing to put money into Eskom is declining, hence the need to look at diversifying.

On making sure that those resigning do not serve again, Mr Hadebe replied that that is the intention. If the investigations end and there is reason to take an individual to court, then Eskom will do that and it will also ensure the names of these directors are known countrywide.

On whether Eskom has the money to continue for the next twelve months as a going concern, Mr Hadebe replied that the domestic markets are opening. The funding requirement for the next financial year is R72 billion. It is going to be tough and will require shifting costs. However, Eskom has no intention of going back to government for funding.

The meeting was adjourned.