Eskom recapitalisation & debt relief funding

Standing Committee on Appropriations

26 April 2018
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The Standing Committee on Appropriations met with Eskom for a briefing on the expenditure and performance progress by Eskom following the approval of the recapitalization and debt relief funding.

Eskom indicated the newly appointed board and management had been well-received by the investor community and this was positive. Significant progress had been made since then. Notably, liquidity issues and corporate governance issues Eskom was grappling with upon its appointment had been significantly addressed. However, stability and finalisation of internal investigations remained its priority. The board was satisfied that due and thorough process was being followed in rooting out irregularities. She expressed the board’s commitment to clear corruption in all forms, as part of a collective effort to restore the entity’s credibility. A comprehensive recovery plan under the board’s constant review was on track to address balance sheet weaknesses. The entity was in the process of finalising its integrated report and annual financial statements year, to be released by July 2018, and was actively working to reduce municipal debt and recover outstanding debt. Arrear debt due from municipalities, including interest, increased from R9.2 billion to R12.4 billion between 2016 and 2017. She urged the Committee to assist Eskom in this regard. She pointed out that contrary to what was being reported by the media, the electricity grid was stable and there was no risk of imminent load shedding. A detailed picture would be shared at a press briefing on 3 May 2018. Overall, while there were a number of issues which still needed to be addressed, significant strides had been taken in dealing with the organisation’s challenges.

The environment in which Eskom is operating had changed significantly since March 2017 due to 2016/17 audit qualification on irregular expenditure which meant that access to funding became restricted and impacted on liquidity. However, the appointment of the new board in January 2018 and their decisiveness was well received by the financial markets. The focus remains driving a focused turnaround and ensuring Eskom’s sustainability. To ensure Eskom’s future sustainability the Board had embarked on a revised business strategy. Consequently, operational performance had improved to date. Notably, generation plant performance improved, with plant availability at 83.2%, from 78.4% in September 2016. Distribution network interruption frequency had improved, although interruption duration declined slightly. 100 380 households were electrified, and Kusile Unit 1 and Medupi Unit 5 achieved commercial operation, adding combined installed capacity of 1 594MW. During the period, 6 481 split meters were installed in Soweto, and 4 199 meters converted to prepaid meters. A total of 10 014 smart meters were installed in Midrand and Sandton; 2 986 meters had been converted to prepaid meters. In addition, 350km transmission lines were constructed and 1 000MVA transformer capacity had been commissioned. In conclusion, the appointment of the new Eskom Board had resulted in increased investor confidence with Eskom securing a bridging loan of R20 billion. The governance, ethics and accountability concerns were being addressed, and the investors in the domestic market have shown supportive sentiment. Eskom is continuously seeking efficiencies and would continue to do so. Improving liquidity and ensuring financial sustainability of Eskom including ensuring the funding plan is realized was paramount.

Members said Eskom should convince the Committee that funds being received from government were being used prudently and effectively. The current board and management should not go down the same path of corrupt practises which characterised the previous management. A hard-line had to be taken on corruption. They emphasised the need to deal with evergreen contracts. These were a hindrance to broad-based empowerment and economic development.

The Chairperson requested a comprehensive written response to Members’ questions to be sent within seven days for consideration by the Committee. She thanked everyone for the meaningful engagements. She urged Eskom to take concerns raised by Members on board and ensure they permeate into its operations. She expressed the Committee’s full support of the newly appointed board.

Meeting report

The Chairperson welcomed everyone and noted that the Committee approved Eskom’s Subordinated Loan Special Appropriation Amendment Bill on 23 June 2015. This consisted of a R23 billion equity injection that was aimed at driving delivery of planned maintenance and capital expenditure. The Committee indicated that it would be monitoring implementation of Eskom’s long-term strategy very closely. The Committee then recommended that its procurement systems should be efficient, effective and transparent to ensure value for money and attainment of entity targets. Therefore, the Committee welcomed the recent appointment of experienced and credible leadership and management within Eskom. In addition, Eskom’s operational and financial conditions needed to be continually strengthened mindful of its strategic role especially in driving economic growth.

Eskom presentation

Ms Neli Magubane, Board Member, Eskom, apologised on behalf of the Eskom board chairperson, CFO and interim CEO for their non-attendance. The trio were in Washington D.C. engaging lenders and investors in an effort to address the challenges at Eskom. She spoke about the recent Eskom management and board appointments. The newly appointed board and management had been well-received by the investor community and this was positive. Significant progress had been made since then. Notably, the liquidity issues and corporate governance issues Eskom was grappling with upon its appointment had been significantly addressed. However, stability and finalisation of internal investigations remained its priority. The board was satisfied that due and thorough process was being followed in rooting out irregularities. She expressed the board’s commitment to clear corruption in all forms, as part of a collective effort to restore the entity’s credibility. A comprehensive recovery plan under the board’s constant review was on track to address balance sheet weaknesses. The entity was in the process of finalising its integrated report and annual financial statements year, to be released by July 2018, and was actively working to reduce municipal debt and recover outstanding debt. Arrear debt due from municipalities, including interest, increased from R9.2 billion to R12.4 billion between 2016 and 2017. She urged the Committee to assist Eskom in this regard. She pointed out that contrary to what was being reported by the media, the electricity grid was stable and there was no risk of imminent load shedding. A detailed picture would be shared at a press briefing on 3 May 2018. Overall, while there were a number of issues which still needed to be addressed, significant strides had been taken in dealing with the organisation’s challenges.

Ms Ayanda Noah, Group Executive: Customer Services, Eskom, highlighted Eskom’s challenges. The challenges were outlined as follows: the demand growth for electricity was steadily slowing- electricity sales to key segments such as industrials, mining and commercial sector had declined, and were at or nearing a 15 year low; coal costs rising higher than industry norm, with Eskom rising at 19% per annum against 10 to 12% for SA coal mining; continued rise in manpower costs, driven largely by increase in staff numbers; new built schedule uncertainty; rating downgrade impact on funding costs and overall debt plan; and regulatory uncertainty and unsustainable price path.

Eskom has received significant support from the government in recent years specifically through the Government Support Package. The quantum of government guarantees amounted to R350 billion (extended for 5 years in March 2017). Notably, the government provides guarantees to Eskom’s lenders which assists the business to access a wider range of lenders with more attractive pricing options. Included in the Government Support Package (GSP) was the conversion of an existing Shareholder Loan which amounted to R60 billion. The loan was converted to equity which improved the financial position of the company and strengthened the balance sheet. In total, 83 billion shares were issued during the 2016 financial year. To further strengthen the balance sheet, Eskom received an equity injection of R23 billion which was subject to conditions being met. Eskom had engaged both the Department of Public Enterprises and National Treasury to ensure compliance to conditions attached to the equity injection.

Mr Martin Buys, General Manager: Finance, Eskom, indicated the power utility had achieved the Business Productivity Programme (BPP) savings; measured in accordance with the original baseline committed to government as part of the support package. Financial performance in 2017/16 had improved when compared to 2016/15’s as follows: 8% revenue growth (R177 billion); 23% growth in cash from operations (R46 billion), Interest, Taxes, Depreciation, and Amortization (EBITDA) growth of 14.4% (R38 billion). Also, own primary energy costs had reduced by R5.6 billion during the period. Furthermore, generation operating performance had improved as follows: Energy Availability Factor (EAF) had improved to 77.3% (2016/17) from 71.1% (2015/16); and unplanned breakdowns reduced from 14.9% in 2015/16 to 9.9% in 2016/17. Eskom received a qualified audit for the financial year ending 31 March 2017. The qualified audit resulted predominantly from a lack of completeness in documentation as well as deviations from prescribed procurement processes. To address the findings and to ensure no repeat findings, the following will be undertaken in parallel within the Eskom procurement environment: addressing and condoning (where possible) all instances that were identified; ensuring legislative compliance of all contracts placed; establishing monitoring and compliance controls and reporting systems; and building relationships with key stakeholders for future dealings and assistance.

Putting the current performance in perspective, the March 2017 results showed good overall performance. Since the release of the March 2017 results, Eskom had released the Interim results for 2018, while the March 2018 results will be available after July 2018. The environment in which Eskom is operating had changed significantly since March 2017 due to 2016/17 audit qualification on irregular expenditure which meant that access to funding became restricted and impacted on liquidity. However, the appointment of the new board in January 2018 and their decisiveness was well received by the financial markets. The focus remains driving a focused turnaround and ensuring Eskom’s sustainability. To ensure Eskom’s future sustainability the Board had embarked on a revised business strategy. Consequently, operational performance had improved to date. Notably, generation plant performance improved, with plant availability at 83.2%, from 78.4% in September 2016. Distribution network interruption frequency had improved, although interruption duration declined slightly. 100 380 households were electrified, and Kusile Unit 1 and Medupi Unit 5 achieved commercial operation, adding combined installed capacity of 1 594MW. During the period, 6 481 split meters were installed in Soweto, and 4 199 meters converted to prepaid meters. A total of 10 014 smart meters were installed in Midrand and Sandton; 2 986 meters had been converted to prepaid meters. In addition, 350km transmission lines were constructed and
1 000MVA transformer capacity had been commissioned.

In conclusion, the appointment of the new Eskom Board had resulted in increased investor confidence with Eskom securing a bridging loan of R20 billion. The governance, ethics and accountability concerns were being addressed, and the investors in the domestic market have shown supportive sentiment. Eskom is continuously seeking efficiencies and would continue to do so. Improving liquidity and ensuring financial sustainability of Eskom including ensuring the funding plan is realized was paramount.

Discussion

Mr N Paulsen (EFF) asked about dampening electricity sales, identified as a challenge and said to be nearing a 15 year low. What could be the possible causes? He noted that 38% of Eskom’s suppliers were black-owned companies. He asked for the rand value of those contracts? What was the value of evergreen contracts per year and what was being done to phase them out? He asked how much was being spent on open cycle gas turbines by Eskom. How could the drastic increase in the cost could over time be explained? Should not Eskom be looking into renewable energies rather than these? He emphasised that the current board and management should not go down the same path of corrupt practises which characterised the previous management. A hard-line had to be taken on corruption.

Mr A McLaughlin (DA) said Eskom should convince the Committee that funds being received from government were being used prudently and effectively. He made reference to an attempt to acquire 240 000 chairs to the tune of R240 million by Eskom. What was it going to do with all those office chairs? It was mind-boggling and fortunately this was rejected. These were things which made the Committee extremely suspicious about what Eskom gets up to. What happened to the R60 billion loan, where did it go? He could not get any sense or reconcile any of the figures the Committee was getting from Eskom. Also, that the presentation reflected quite a rosy financial picture whereas the auditor-general was extremely worried and gave a qualified audit was mindboggling. He asked why there were so many subcommittees within the Eskom board. He asked for a breakdown of costs such as travelling, venue hire and catering during their sittings.

Ms D Senokoanyane (ANC) acknowledged that the new board and management was working on a new recovery path in an effort to address the challenges left by the previous structures. However, the Committee would have wanted to hear about the turnaround strategy more comprehensively.

Ms S Shope-Sithole (ANC) emphasised the need to deal with evergreen contracts. These were a hindrance to broad-based empowerment and economic development. She asked for a list of all evergreen contract and how the board intended to address them. She also asked for a list of the municipalities said to be owing Eskom huge sums of money.

The Chairperson asked what concrete steps Eskom was taking in strengthening consequence management. She noted that Eskom was one of the entities identified to be incurring major procurement deviations. The two major projects in question being Medupi and Kusile plants. She asked for a breakdown and analysis on this. Did Eskom submit its procurement plans to Treasury? By when would the aforesaid revised turnaround strategy be in place? It should be treated with the urgency it deserves. She asked Eskom to furnish the Committee with comprehensive written responses.

Ms Magubane, in response, said the board has been seized with the issue off evergreen contracts. It was the board’s considered view that this was a priority and it was being treated as such. It was flagged as one of the priorities on its to-do list. As part of the turnaround plan and strategies, all procurement contracts above a billion rand were being looked into. It was agreed that by September 2018, not only a new corporate structure but a new turnaround strategy would be in place as it was not business as usual. She asked for Parliament’s support throughout. Some of the issues raised needed detailed response which could be furnished to the Committee in writing.

Ms Noah said the major reason for the decline in electricity sales as identified was the gradual shift towards renewable energies. Alternative energy efficient sources were slowly being embedded into the large businesses’ investments. A slump in commodity prices globally was also a reason for the decline in sales. On the chairs which Eskom intended to acquire, this was related to an upgrade of a facility at Megawatt Park. The project was subsequently stopped as part of the cost containment measures being put in place. Further, Eskom was in continual engagement with contractors as part of its cost containment measures, as the entity was currently a price-taker within the market. On the concern about the number of board subcommittees, these enabled the board to oversee the different facets of the organisation. The costs and fees of the subcommittee meetings would be outlined in the year-end financial results. However, in an effort to minimise costs, various technologies such as teleconferencing were being adopted. The use of own facilities for the meetings was also informed by the need to contain costs.

Mr Buys explained the R60 billion three year saving. The savings came from capital as well as operational cost rationalisation. There were specific targets for different packages relating to capitalisation and operations and the budget was reduced accordingly and built into the financial systems. The key point was that it was not just operating expenses alone but also included the capital aspects. He added Eskom applies International Financial Reporting Accounting Standards accordingly when handling its financial statements.

Ms Magubane commented on procurement processes. She pointed out that the actual procurement process of Independent Power Producers Procurement programmes was done by the Department of Energy; Eskom was merely signing them off. The procurement processes were robust and Eskom is clear that none of its employees could do business with the entity. Other questions would be responded in writing. In addition, procurement plans had been submitted to Treasury and had gone through Eskom’s internal governance subcommittee.

The Chairperson requested a comprehensive written response to Members’ questions to be sent within seven days for consideration by the Committee. She thanked everyone for the meaningful engagements. She urged Eskom to take concerns raised by Members on board and ensure they permeate into its operations. She expressed the Committee’s full support of the newly appointed board.

The meeting was adjourned.

Documents

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