Eskom update on governance challenges; coal power stations; key performance targets, with Minister

Energy

28 August 2018
Chairperson: Co-Chairpersons: Ms L Mnganga-Gcabashe (ANC) and Mr F Majola (ANC)
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Meeting Summary

Eskom presented updates on its governance challenges, the status of coal-fired power stations and its key performance targets to the joint Committees of Energy and Public Enterprises. The Minister of Public Enterprises, the Chairperson of the Eskom board, as well as other Board members, were in attendance.

Eskom said much had been achieved, but it was not out of the woods yet. It had a R2.3 billion loss, R19.6 billion in irregular expenditure, and a debt of R380 billion. R1 billion had been recovered from McKinsey, and recovery processes were under way at other companies such as Trillian. Eskom no longer supported the Public Investment Corporation’s (PIC’s) debt to equity conversion, as it could lead to unforeseen and negative consequences. It was taking the National Energy Regulator of South Africa (NERSA) to court to review its decision to give a 2.3% Regulatory Clearing Account (RCA) increase, which Eskom felt was inadequate.

There had been a concerted fightback by Eskom executives and staff who had been dismissed, so it was not a situation that could be handled solely through disciplinary cases. It needed to review its business model, as it had to adapt to the changes in the global energy sector and the Integrated Resource Plan (IRP) in order to become sustainable and resolve its internal contradictions. The appointment of a new Chief Financial Officer (CFO) was under way, and would be finalised at the end of September. The Multi Year Pricing Determination Four (MYPD 4) would be submitted together with an RCA application for the financial year 2017/18 by the end of September.

Eskom had low coal stocks because of supply challenges, and one of the biggest concerns would be protecting the vulnerable stockpiles in the coming rainy season. There were plans in place to deal with the low stocks, the rainy season and the effects of the recent industrial action. Eskom admitted that the coal supply challenges were caused by its own decisions not to maintain cost-plus mines, as they had believed the Medupi and Kusile power stations would come on line.

The Committee asked questions about the R33.4 billion loan from the China Development Bank, Eskom’s relationship with the NERSA, the challenge of municipalities not paying what they owed for electricity, coal supplier loyalties, wage negotiations, the size of Eskom’s staff component, sabotage at power stations during the industrial action, criminal and disciplinary investigations, as well Eskom’s going-concern status, which was under pressure because of liquidity issues.

The Members were adamant that Eskom must not give in to union demands to forgo disciplinary processes for workers implicated in sabotage during the strikes. They also called for accountability to be maintained and punitive measures to be applied for executives and staff who had been implicated during the inquiry. They commended the Board for all its hard work and progress.

The Minister commended the Board for its work and commitment so far in cleaning up and repositioning Eskom for the future. Eskom needed to review its business model and consider its provision of renewable energy. He suggested that coal suppliers, implicated Eskom staff, investigative entities and different categories of municipalities be called to present and account to the Committees. 

Meeting report

Co-Chairperson Majola said the meeting would cover major governance and operational issues. He hoped that Eskom’s challenges would be addressed, and in due course Eskom would be on a path of sustainability.

Mr Jabu Mabuza, Chairman: Eskom Board, introduced himself and his colleagues. He was accompanied by Ms Sindi Mabaso-Koyana, Chairperson: Eskom Audit Committee; Mr Phakamani Hadebe, Chief Executive Officer (CEO): Eskom; Mr Calib Cassim, Acting Chief Financial Officer (CFO): Eskom; Mr Jan Oberholzer, Chief Operating Officer (COO): Eskom; and support colleagues from procurement and forensic auditing.

Eskom Chairman’s opening remarks

Mr Mabuza said that he would talk about the key performance targets for the current financial year. He appreciated the fact that Mr Pravin Gordhan, Minister of Public Enterprises, was attending as the shareholder representative. The Committee’s agenda confirmed the government’s support of the strategic contribution to the economy, and was in line with the government’s call and intent to stabilise and revitalise state-owned enterprises (SOEs). This platform also allowed for the continuous discussion of Eskom’s operations in a transparent manner.

Notably, this invitation had come at a time when the euphoria of a new dawn was captivating all spheres of society, including state-owned entities. The appointment of the group CEO and COO bore testament to this. The appointment of a CFO was under way to ensure leadership stability. When the President appointed the board to steer Eskom earlier this year, it was impossible to dismiss the fact that it was in a dire situation. Turning the tide of this 95-year old icon required quick and decisive action. Seven months into the journey of the organisations’s renewal, it was encouraging to know that the challenging period had been transcended. Along this journey, a number of executives and employees implicated in various forms of wrongdoing had fallen by the wayside, creating a favourable working environment for the CEO and his team to focus on Eskom’s primary mandate, which was to provide secure and reliable electricity.

Since the appointment of the Board, its discussions had focused on finding solutions to liquidity issues and addressing governance-related matters. A high level of review of Eskom’s business operations had revealed that its governance challenges were centered on three critical areas: leadership; supply chain management; and ethics and discipline.

The engagement comes against the backdrop of the announcement of Eskom’s annual financial results, which was characterised by a R2.3 billion loss and R19.6 billion in irregular expenditure resulting from a verification and cleaning up exercise that had uncovered reportable items from December 2012. This exercise saw a significant increase in irregular expenditure in 2018, from an initial R3 billion to R19.6 billion, with many of these items being from previous years. While the amount of irregular expenditure was totally unacceptable, it was important to note that it had been uncovered in efforts to improve governance and ensure that all requirements had been adhered to from at least 2012. The effort to curb governance irregularities had been bearing fruit, with the restoration of the organisation’s credibility and improved investor confidence providing some much needed financial support. The recent 10-year global bond issuance of US$1.5 billion, R1.35 billion from the German Development Bank (KFW) and the R33 billion loan agreement with the China Development Bank, attested to this fact.

Efforts were being made to develop a long-term strategy to achieve financial sustainability at Eskom, and once the strategy was finalised it would be shared with Members. The process of lifestyle audits had begun, despite being delayed by legal issues. Unified efforts against fraud, corruption and maladministration were yielding desired results. More employees were using ‘whistle blowing’ channels, and 50% of investigations had confirmed allegations. Internal procedure was being followed, as well as plans for criminal prosecutions, money recovery and other punitive measures against those implicated. In response, the Board had created a stringent process for sole source and emergency procurement, and was more demanding that variations and modifications be exceptions rather than the norm.

One of the biggest challenges was in supply chain management (SCM), which had led to many deviations and expansions. The Board had decided that no modifications would be accepted unless there were exceptional circumstances, and was strengthening its internal processes of procurement planning, contract management, risk management and mitigation. The Board acknowledged that the journey was not complete and that there would be challenges as it moved forward, but the audit recovery programme would be continued in its aims to achieve a clean audit and improved procurement processes.

While it was evident that notable strides had been made in turning the organisation around, there was still a long road ahead, taking into account that the organisation had both economic and developmental mandates. It was undeniable that Eskom was grappling with challenges pertaining to coal stock levels at power stations, but a recovery plan had been put in place. It was in its interest to the handle the dispute concerning the on-going wage negotiations as professionally and amicably as possible for benefit of the organisation and the nation. The new Board and leadership of Eskom did not have the luxury of a mandate to keep lights on at all the costs, but were being told keep the lights on and manage costs.

Update on governance challenges

Mr Hadebe, CEO: Eskom, said stability under the new leadership had been achieved, but the truth remained that it was not out of the woods and there were two years of cleaning up the institution left.

Eskom had major challenges due to leadership and governance instability. It had had 10 CEOs and three boards in the last 10 years, and this had led to an unstable strategy which was not sustainable. Governance had not been prioritized, and this could be seen in Eskom’s weak controls -- for example, deviations had become the norm. It had to be acknowledged that the appointment of a new board had brought necessary change. The Board’s approach was not business as usual, and therefore its starting point had been the cleaning up of the situation. The financial situation had been dire, and therefore it had needed to be cleaned.

The future of Eskom needed to be thought of, as it was important. Despite the difficult year there had been “green shoots” which motivated the board to believe the goal would be achieved, such as attracting investors, and an improvement in operations, governance and control systems. Eskom was looking at a strategic plan with shareholders to ensure that it survived another 95 years. The next two years would be tough, and the transition to financial and operational sustainability would demand painful decisions and decisive leadership, especially in respect of procurement.

To understand the journey traveled in the last six months by Eskom, it needs to be segmented into four phases.

Phase one was the clean-up, which had two main objectives. The first objective was instilling transparent and effective corporate governance, and the second was to address qualified audit reports and identify irregular expenditure. Not all irregular expenditure had been cleaned, and more would continue to be identified.

Phase two was stabilisation. The Board had taken the corporate plan of 2017 and 2018 and established that the institution was not sustainable and needed a financial viability strategy. Eskom had a debt of R380 billion, but the corporate plan indicated that the debt would have increased to R600 billion in four years. Eskom was already struggling to service its R380 billion debt, and therefore the increase to R600 billion would be suicidal, as there was no way the institution could operate with such a high debt. Eskom consulted the Minister of Energy to allow it to create a corporate plan for only one year, which would allow it to borrow R72 billion so that the dynamics it was facing could be understood. By the end of the year, a new corporate plan, which was informed by a new shareholder compact that prioritised Eskom’s challenges, would be created.

The decisions made were reaping benefits, such as a 21% increase in earnings before interest, tax, depreciation and amortisation (EBITDA), a Regulatory Clearance Authority (RCA) determination of R32.7 billion, and improved liquidity by raising 72% of the funding requirement for FY2018/19. Funding had been secured for the following year, which meant the opening balance for funding next year would start from 34%, unlike this year where there was a struggle to raise R20 billion to service debt. The increased funding requirement had happened because the Board had engaged with investors and been honest. There had been capital expenditure (capex), maintenance and operating expenditure (opex) reductions to achieve financial viability. Capex would be reduced to roughly R45 billion over the next five years, and this would save R50 billion in five years. With opex, the growth annually was between 9% and 11%, and it had been reduced to 4.5 %, which would save R10 billion annually. Maintenance had been reduced, but they had been advised not to reduce further and maintain a figure of R19 billion per year. The cost saving initiative meant Eskom would save an amount of around R100 billion in five years, but because of the degree of debt, this would not be sufficient. More would need to be done, and wage discussions had added to this challenge.

Phase three was efficiency optimisation, which focused on how Eskom could enhance and generate revenue. The first step was to target high energy clients that had been advised to leave Eskom earlier. Municipal arrear debt had to be dealt with. A decision had been taken that this was not only an Eskom issue, but needed intervention, and therefore an Inter-Ministerial Committee (IMC) task team had been created. Dr Zweli Mkhize, Minister of Cooperative Governance and Traditional Affairs (COGTA) and Minister Gordhan were working to find a solution. The third step was to manage the increasing cost of coal. There was a need to restore relationships with the coal companies, because in previous years these relationships had degenerated. The first time challenges with coal became apparent was when there was no investment in cost plus mines, which had caused in an increase in the export of coal. Exporting had led to an increase in the price of coal per ton. Engagement was happening, and one coal company had agreed to sell 10 million tons of coal at a better price, due to the engagement. The fourth step was to optimise staff productivity levels. Eskom staff’s productivity levels were benchmarked to other similar institutions globally, and it indicated they were not at the level they should be. The last time it was competitive had been in 2003, but efforts were being made to address this challenge.

Phase four was to position Eskom for the future. The global energy sector was changing rapidly and Eskom had to determine its future position. It would look at optimising its balance sheet, as there was too much debt, but over and above that, a new businesses model to sustain the new changes had to be created.

Clean-up achievements

Mr Hadebe said Eskom could point to a number of clean-up achievements:

  • 10 senior executives had exited, and the finalisation of outstanding disciplinary hearings relating to senior executives was being accelerated.
  • 11 criminal cases had been opened, five of which involved nine senior executives.
  • Total of 1 049 disciplinary cases had been initiated since April 2018, of which 628 had been finalized, resulting in 75 employee exits.
  • 239 “whistle-blower” cases had been investigated, and 122 had been concluded. Disciplinary processes were under way in respect of 67 confirmed cases.
  • Remedial action had been taken against 25 staff doing business with Eskom, and seven had exited.
  • Lifestyle audits of senior management were in progress. There had been effective declaration of interest.
  • All irregular supplier contracts were being investigated, and so far five suppliers were no longer doing business with Eskom. The amount spent with these companies in the past three years had been R2.3 billion. It had ecovered R1 billion from McKinsey, including interest, and in December, Eskom would go to court to face Trillian to recover R600 million.
  • It was cooperating with eight regulatory bodies conducting major investigations.

Efficiency Optimisation: Key initiatives to drive growth and efficiency

The key initiatives to drive growth and efficiency were:

  • Grow sales: Eskom wanted to grow its sales because it would increase revenue; stimulate sales by developing new products and services and optimising tariffs; implement sales growth initiatives for an additional 3.5 TWh, which would result in R2.9 billion additional revenue over two years. Nine deals had been signed.  
  • Reduce arrear debt: Collect a minimum of R1 billion from municipalities, obtain government support in solving municipalities’ arrear debt, and continue the installation of pre-paid meters.
  • Manage the risk of increasing coal costs by investing in cost-plus mines and the optimisation of logistics costs, including migration from road to rail.
  • Optimise productivity levels: Conduct a holistic review and hold robust stakeholder discussions to identify optimal productivity improvement solutions.

Ultimately, the talk should be about what the shape of the new Eskom would be.

Status of coal-fired power stations

Mr Thava Govender, Group Executive: Risk and Sustainability, Eskom presented on coal-related matters. He said the coal power stations were aging and were in midlife, and some required substantial refurbishment, which Eskom was not capable of.

Regarding plant performance, the Energy Availability Factor (EAF) was at 75.4% as at Q1 this year, compared to 83.4% in the same period last year. There had been a drop, but it should be noted that four months into the new financial year was being compared to 12 months in the previous financial year. The Unplanned Capability Loss Factor (UCLF) was at 14.9% for the first quarter, compared to 7.7% last year.

On Open Cycle Gas Turbine (OCGT) usage, the Eskom OCGT load factor (LF) was at 1.4% for Q1, compared to a target of 1%. In the first quarter of the year, R201 million had been spent on OCGT, but this had been due to strike action, so gas turbines had to be run.

On environmental compliance, targets were being met, but there were emission-related challenges which were related to the strike action as well.

Coal station performance and net installed capacity over five years

To put the presentation in context, it had to be noted this was not the total availability of the generation fleet -- this was only the coal fired units. For example, for financial year 2018, it says 74.7% EAF, but that was only for coal, and if the total availability for all the fleet -- hydro, nuclear and gas—was included, it would be 78%. For the financial year 2018/19, the EAF was 73.5%, but including the entire fleet it would be 75.6% . The unplanned UCLF was 17.4%, which was higher than previous years even though it was only for four months vs 12 previous years. In terms of coal performance, 17.4% was high and a concern, efforst were being made to reduce it. It was actually reducing if one looked at the monthly value in March of the previous financial year, when it was 20.06%, while in April this year, it had dropped to 19.53% and in June to 15.2%. However, in July and August it had gone up to 17.58% and 18.68%, which explained the drop to 73.5%.

Operational capacity

On the issue of excess operational capacity, there was adequate capacity to meet the demand for most hours of the day. There was surplus capacity during certain parts of the day, but not during peaks. The variation in demand of usage was a challenge in this country. For example, during winter the demand was high, and close to 36 000 Megawatts needed to be served, but at 2 am it could drop to 21 000-22 000 Megawatts, and this operational surplus in the morning was called the night minimum. This high variance between different times of the day was a challenge, and smoothing out the peak was necessary. During peak hours, OCGTs that were powered by diesel were used, which was expensive and they were used only to meet the peak demands, as that was what they were designed for. Medupi and Kusile would come on line to improve the situation. Three Medupi units and one Kusile unit were already operational.

Plant status, availability and performance

In terms of availability, the coal fleet was below aspiration and the 80% EAF target would be difficult to meet, but there was a plan to achieve at least 78%. This referred to the total fleet.

Some of the challenges had been a loss of experienced people staff to other countries where coal fired stations were being built. About 16 highly skilled people had been lost. On the nuclear side, Koeberg staff had been lost to Abu Dhabi, and this could impact outage quality.

The biggest challenge was the low coal stock pile, which could be damaged by the rain. If the rain wets a high stock pile, dry coal could be dug out from underneath, but if the stock pile was low, all the coal would be wet and unusable or extremely difficult to use, which leads to higher turbine usage. Some of the actions being looked at to address matters was the deployment of technology staff at head office to turbines, hiring service providers, looking for additional funding for maintenance, having focused teams on full and partial load loss and recovery, and the contracting of experienced and skilled resources. Staff had had to be brought back on short and medium-term contracts to stabilise the organisation.

Monthly OCGT Generation Usage/Cost

It had been highlighted that the highest usage was in June and August due to industrial action, which led to an increased usage of diesel. March in the previous year was also high, but had been decreasing until the strike action.

Impact of industrial action

The industrial action in June/July/August had been unprecedented. There was a high number of stay aways and a reduction from 180-200 people per shift to about 15-30 people who were running the power stations. The people who remained to run the power stations were not operators, but rather managers, engineers and specialists. During this period, there was quite a loss of megawatts and units were shut down because they could not be operated for long durations. There was loading shedding because there had been a loss of close to 7 000 megawatts. The loss had been due to the lack of staff to operate units, environmental challenges such as breaching licences due to not being able to get rid of ash, and difficulty in transporting coal.

When load shedding decreased, strike action had resorted to sabotage. Mr Govender said he used the word sabotage, but it was actually treason as it was against national key point facilities. There had been serious incidents of sabotage at Majuba, Tutuka, Hendrina, Grootvlei, Duvha, Komati and Matla Power Stations. At Tutuka, Unit 3 experienced tampering on the hydrogen vent, causing overheating of the generator. Very good work by employees had identified the issue, as this could have caused very serious damage to the generator. However, this unit did trip later and requires extended outage for repairs. There had been cases opened with the police, but it was out of Eskom’s hands. The police would do investigations and not Eskom, because it was a national key point.

The recovery plans for the last strike had resulted in problematic units having to be shut down while the planned shutting down of units had to happen as well. Recovery plans were to prioritise units impacted by emissions issues and demineralised water restrictions, to deal with maintenance not dealt with during the strike and the recovery of low coal stock and fuel oil levels.

The biggest impact was the coal situation which was serious, as nine stations were below the minimum and during the strike two system stock days was lost. This was a big issue, and with a rainy season coming, the situation was very challenging. Two system stock days had been lost for the stock fleet, but it was actually four days lost for stations which were already low, like Arnot, Hendrina and Camden.

Plans in place to address stock levels

The total system average coal stock level was 28.2 days, excluding Medupi and Kusile, but would been 30.2 days without the strike.

Nine of the 15 coal-fired power stations were below the Eskom prescribed minimum level, and six were below the National Energy Regulator of South Africa (NERSA) grid code requirements. NERSA had been informed from a regulatory point of view.

There were measures in place to address the current coal shortages, and the recovery plan included aggressive reallocation of existing coal sources. The biggest challenge was poor delivery from suppliers. In addition, more was being paid because suppliers knew about Eskom’s shortage. Increased international coal prices also added to the costs. Meetings between the COO and mining executives of underperforming suppliers had been held to address the matter. Another challenge was compliance issues, which could lengthen processes. Contracts had been concluded, but it was now a matter of delivery.

The rainy season would be a challenge, but there were plans in place. Ways of covering coal stock piles were being investigated, as well as technology to address the matter. More tenders were currently being evaluated to procure coal for the next five years, and work was being done with Treasury on improving the review processes for procurement. Eskom had taken a decision to reinvest in cost-plus mines, but the issue was that coal would only flow out of mines in three years because these mines had to be set up. Another challenge was that few new mines had opened up in the country.

Summary

The take away from the presentation on the coal aspect was that Eskom’s existing fleet of coal-fired power stations was aging and performing on lower levels. Maintenance had been deferred in the hope that Medupi and Kusile would come online, but they had never come online. Maintenance now had to be done and this affected reliability, production cost and environmental impact. The completion and commissioning of Medupi and Kusile was happening.

Further investments in new power stations would depend on the outcome of the latest Integrated Resource Plan (IRP). The IRP was currently being studied to see how it would fit in with decommissioning plans. The rainy season would be the biggest challenge due to low coal stock piles. He highlighted that load shedding had not been due to a lack of capacity on Eskom’s behalf, but strike action

Mr Mabuza closed the presentation on the note that Eskom enjoyed shareholder support, had a strong board and management in place, liquidity and access issues had improved, governance issues were being addressed, but plant availability and the coal situation remained a focus and concern. The current coal situation was not an accident but a consequence of earlier actions at the institution -- decisions such as not investing in cost-plus mines because Medupi was supposed to come online. The board had instructed the CEO to investigate how Eskom had been able to provide cheap electricity in the past and determine how the institution could go back to providing cheap electricity. Municipal debt arrears was a concern, and it was being reviewed. Eskom was reviewing its business model to respond to global energy industry changes, growing the business into new markets and products, and improving trust and restoring labour, investor and stakeholder confidence. It was also reviewing the Independent Power Producer and coal strategy, and strengthening its financial position and balance sheet, noting that the financial turnaround would take a few years, given the current challenges. There was a concerted fight back by dismissed executives that still had some “tentacles” reaching back into the system. The fight was more complex than simply transgressions that could be addressed with disciplinary processes.

Discussion

Mr M Matlala(ANC) said that the Portfolio Committee on Energy would arrange its own meeting with the board in future. He asked when the position of CFO would be filled permanently, as he was concerned that an individual in an acting position would not act in the best long-term interests of the entity. He questioned Eskom’s relationship with NERSA, and asked when the Multi-Year Price Determination (MYPD) would be submitted.

How would the loan from the China Development Bank be serviced? Was Eskom allowed to do business to with other countries according to the law? On Tegeta, he asked if there could be a business as usual with a company that was under business rescue. He requested that the board update the Committees on the investigations of misconduct at Eskom, as well as the municipal debt situation. On Soweto and its municipal debt, he asked how Eskom could legally bill residents and not the municipality which it falls under.

Mr G Davis(DA) gave thanks to Eskom for being frank about its challenges, and wished them luck. He asked where the process of appointing a CFO was. On the IRP and how it affected Eskom, he knew the report was just the previous day, but according to the IRP, it was stipulated that 1 000 megawatts should come from coal, which was a huge downward revision from 16 386 megawatts, as well as 0 megawatts from nuclear, as the programme had been stopped. Could Eskom confirm that it was consulted on the IRP, and that the IRP was in line with Eskom’s bottom line and plans? What did the downward revision of coal in the IRP mean for the building of new units such as Medupi and Kusile, and would they still be necessary? On coal procured from Independent Power Producers (IPPs), he asked if procurement would still go ahead despite the downward revision of coal in the IRP. On municipal debt, Eskom was owed R13 billion by municipalities, and there had been a joint meeting with COGTA where an IMC task team report had been mentioned. The report had been due to be released at the of January but had not materialised. Had the report been completed, if so what were the recommendations? If it had not been completed, why not?

He requested an update on the litigation against NERSA over the tariff increase. In March, it had been said by Ministers Gordhan and Radebe that the impasse would be solved without going to court -- had the impasse been resolved? Regarding the industrial action, he understood Eskom had offered its workers an increase of 7.5%, a housing allowance and a R10 000 bonus, but the sticking point was the union’s request that those who took illegal action would not have to face disciplinary actions by Eskom. Given the culture of lawlessness, specifically cases of sabotage, could Eskom give its word that it would not bow down to unions on this request and condone the breaking of the law. On Eskom’s 33% bloated workforce status, he asked what would be done to decrease the wage bill without causing further industrial action.

Mr SN Swart (ACDP) said the issue of sabotage was absolutely outrageous. It was outrageous that a country could be held to ransom due to industrial action, and he therefore joined his colleague in saying Eskom must not back down on the illegal actions. The police needed to brief the Committees on their investigations, as they should not be allowed to sit back and not assist because Eskom had made it clear the criminal side of the matter was out of its hands. On the loss of skills at Koeberg, he asked if it presented a danger to citizens and to the quality and supply of electricity in the Western Cape. He welcomed the action on the disciplinary cases and commended Eskom for the amount of cases addressed. He was pleased that looted money had been recovered with interest, and encouraged further recovery of looted funds.

Regarding the coal mines, if capex was being reduced, how would Eskom invest in cost-plus mines? Anglo’s New Largo coal deposit for Kusile power plant was an example of where cost-plus mining was not being carried out. The New Largo mine remained underdeveloped, and coal was being trucked in, which was concerning. Another case was at Hendrina power station, where the conveyor belt was not being used. Based on history, Eskom had succeeded because of cost-plus mines, where power stations were built on coal deposits. He pleaded Eskom to consult with Anglo and Exxaro and other executives to re-engage over cost-plus mining. The Mafube contract was another case. The contract had allowed low quality, yet affordable, coal at R100 per ton to be provided to Arnot power station, but had been cancelled to allow Gupta coal to enter. These issues required a lot of work but what was done, had to be undone. A way to reduce transport via road had to be found as well, as it was expensive and dangerous. He requested the details of the China Development Bank loan, such as the repayment terms and interest. He asked if there had been progress on the Public Investment Corporation (PIC) debt to equity conversion. On auditing, when were the going-concern (liquidity issues) going to be addressed?

Co-Chairperson Mnganga-Gcabashe asked what “Gupta coal” was?

Mr Swart responded that he was referring to Tegeta.

Ms N Mazzone(DA) said what had happened at Eskom was epic, and that Eskom had the Public Enterprise Committee’s full support. Eskom’s debt spiraling out of control was a big concern. When was the multi-year supply request going through to NERSA, as South Africans were terrified because they could not afford further increases? COGTA had met with the Department of Public Enterprises, but the meeting had not been fruitful. She urged Eskom to address the municipal debt issue as it was spiraling out of control. Charges had been laid against municipal managers who used money intended for Eskom to enrich themselves. She requested that Eskom lay charges as well, and aid in mustering the political will to make sure that the money was recovered, and punitive action was taken. People should be put in jail. There were names and irrefutable proof about these municipal managers, but it was time that these names were exposed. The tentacles of executives that remained must be cut. More effort had to be made to start showing by example what would happen to corrupt people when they stole from South Africa. Political will was needed to ensure that people were held accountable by ending up in jail. There were many who deserved more than dismissal from jobs, and they should not be let free form punitive consequences. No one should get away from almost selling off one of the most important state entities in the country.

She said South Africa had to ensure that it had adequate coal before it got sold off overseas, and perhaps government controls needed to be put in place to prevent this. On sabotage, she said she agreed that it was treason, as it had caused damage to National Key Points and it was a jailable offence, so individuals could not get away with a slap on the wrist. It was treason for union leaders to threaten that if action was taken against the sabotage, strike action would happen again. Treason needed to be punished to set an example. She was pleased about McKinsey paying the money back, but this should not let them off the hook as their criminal charges still needed to be addressed and not dismissed. She reiterated the need for political will to drive action that led to accountability and punitive measures against those who had almost collapsed the country.

Dr Z Luyenge (ANC) said that there were staff who were not on the Eskom organogram, and suggested this matter be addressed according to labour law. On municipal debt, he said the Chairpersons had to advise other institutions to assist, because certain government departments such as COGTA had not paid municipalities, and they needed to adhere to Eskom payment cycles. He did not support long enquiries -- prima facie evidence should rather be taken to the police station, instead of wasting money on employing consultants. He agreed on going back to Eskom providing cheap and quality electricity. Municipalities used different rates for electricity, and this had to be addressed as it added to the challenges. He acknowledged the Board for its hard work.

Ms T Gqada(DA) referred to the wage increases, and asked where Eskom would get the money to perform as expected by the unions. To deal with the bloated staff component, would there be a downsizing?

Mr R Tseli (ANC) said good work had been done on the governance clean-up, and it would be appreciated if more were done. He asked if money would also be recovered from other contracts that had been revealed to have been entered into irregularly during the inquiry. Municipal debt was an issue that could be handled better. He sympathised with municipalities that did not have funds to pay Eskom, but there were municipalities that had returned money to COGTA that could have been paid to Eskom. A report needed to be created about municipalities that could, and could not, pay and their challenges. A blanket approach on defaulting municipalities was not helpful, and therefore a way of categorising was necessary. He asked for a briefing on entities that were bidding on behalf of each other. The shareholder compact had to be made available to the Committees.

Ms Mazzone thanked Mr Mabuza for the written response she had received on the China Development Bank. She understood that commercial sensitivity was the reason for the limited information available, but more information was required for oversight purposes. Could there not be an anonymous table of loans created, with the financial details of loans such as interest rates and base rates?

Dr Luyenge asked what the automatic inflation management of all loans was.

DPE’s response

Minister Gordhan gave apologies for having to leaving early. He said there had been a lot of commitment by the Board and management, not just on the clean-up of Eskom, but on completely repositioning the business. Eskom had to be repositioned due to global changes in the energy sector globally, its own IRP, which was a game changer, and its own internal contradictions which needed to be resolved so that it could be repositioned as a stable entity. The question of what Eskom would look like in five years in terms of structure, function, sources of electricity and the manner in which electricity was distributed, had to be thought of. In his view, there was no reason, if coal side of business declined, that Eskom should not provide other renewable sources of energy as well, and create a competitive market. He asked for Parliament’s assistance in respect to some of issues members raised.

At the meeting with the Department of Cooperation and Traditional Affairs(COGTA) and South African Local Government Association there had been agreement to categorise debt-owing municipalities. Municipalities not being able to pay Eskom, was a structural issue. A new business model for municipalities needed to be investigated, as they had been built up on the colonial model of raising revenue, which was inadequate. If the electricity sector was restructured, how would the municipal financial structure cope? Municipalities from different categories had to be called by the Committees so that they could experience Parliamentary oversight, and the Committees could better understand the municipalities’ behaviour.

Mr Gordhan said the Committees might want to call big and small coal suppliers, to understand their mindsets and challenges when it came to the supplying and exporting of coal.

On the fightback campaign, he said in institutions where serious malfeasance had taken place, there were elements who had left and elements who had remained, combining with all sorts of strange political and other forces, linking up with social media “bots” and fake news machinery, which he dubbed the “Bell Pottinger Two” phenomenon. It was phase two of the “Bell Pottinger” phenomenon, because when action was taken against those who had been corrupt, there were political and other forms of mobilisation. Former managers that were being charged should be called to explain their conduct. There were former managers that were still trying to call the shots in one form or another. There had been repeated calls for people to be charged and prosecuted, and the relevant entities such as the National Prosecuting Authority (NPA), the police and other entities should be called by the Committees to account on the situation, so that justice could take place.

Eskom had to look at its skills retention strategy, as the character of Eskom had changed.

Co-Chairperson Majola said that Eskom’s future role as a state entity in relation to renewable energy was a matter that had to be discussed. He agreed that the police and other different investigations agencies must be called to present to Members. On the issue of the strategic suppliers of coal, he also agreed that they must be called to test their commitment to South Africa. Based on categories, municipalities should be called to present, so that members could aid Eskom.

Mr Mabuza responded on the appointment of the CFO, and said Eskom’s own set deadline had been missed, but it was an on-going process. Eskom should be able to conclude the process by the end of September. There was more pressure and urgency on dealing with operations at Eskom, so prioritised the filling the post of the COO had been prioritised. The Board had found no concerns, and was confident with the current acting CFO.

On the NERSA relationship, he said it could not be better. They both recognised their roles and the necessary and healthy tension between the two that existed. There was an endeavor to resolve differences on the increase, given that it was not cost reflective, and at court a methodology would need to be achieved to determine that the determination given by NERSA was correct. There had been three formal engagements with NERSA, and it had been agreed that going to court was a better option than finding a solution amongst themselves. Going to court was in recognition of the right to do so, and not the result of a strained relationship. Eskom had taken NERSA to court to review their decision to give a 2.3% increase, which Eskom felt was inadequate. A court date still had to be determined. Once NERSA had determined the amount that Eskom must receive through the RCA, and reason for the decision was given, matters would be finalised. NERSA wanted to give Eskom about R33 billion, but Eskom felt the amount had to be around R60 billion. The board recognised that NERSA might not have this cash to offer in a lump sum, and an alternative might need to be found.

On the China Development Bank loan, it was a US$2.5 billion final drawdown from a US$5 billion loan. It had been a scheduled draw down, and it had been done with the concurrence of Treasury. The shareholder minister was also a signatory. Eskom could assure the Members that it was efficient and prudent in its funding.

On Tegeta, he said it was a business under rescue, but without wasting time it should be understood the coal problem had been created by Eskom. Eskom had taken a decision to not invest in cost-plus mines, part of the reasoning of this decision was the belief that Medupi and Kusile would come online and produce the required coal, and therefore it would not be necessary to maintain cost-plus mines. A decision had been taken to procure from a preferred supplier, which was Tegeta/Optimum, and Eskom had assisted it to buy mines and had given them contracts. Regrettably, the preferred supplier had fallen short, as it could not meet quality and quantity requirements over time. Eskom had had to decide if they would call back their previous suppliers, but now at the prices that they demanded or find alternatives, as Eskom could not run without coal.

The model of Eskom had been to build power stations on top of mines and use conveyor belts to move coal from underground to the furnace, which was why cheap coal had been produced. This model was not in practice, as Eskom was transporting coal via road, which had resulted in higher costs. The sad reality about this situation was that someone had to pay, whether it was the consumer or government, as there was no other economic model. 

There was more in-depth information about the clean-up and misconduct investigations in the integrated report.

On Soweto, he said Eskom was billing and providing electricity directly to the area, and meters were being installed. The bigger problem in respect of municipalities was not the amount of debt, but the possibility of non-payment going forward. The even bigger problem was the approach, because when one allowed the current person not to pay, one created a precedent for non-payment. The increase in defaulting year on year had increased, and was alarming.

The Board had been assured by Koeberg management that there were sufficient skills, despite the loss of personnel, and the situation was not dire.

The recovery of funds was an on-going process, and Trillian was being pursued.

He said that despite the reduced capex, about R1.5 billion had been allocated to cost-plus mines. The current IRP allowed Eskom and shareholders to review various sources of energy, and this would be investigated.

On PIC converting debt to equity, he said that Eskom had initially thought it was not a bad idea for shareholders to convert debt to shares, but had since changed its position and thought it was not a good idea. It could be compromising with creditors, and lead to unforeseen consequences with other funders and the financial market.

Regarding the 7.5% wage increase, the wage demands met had to be seen in the context that over time, Eskom had increased salaries at between 9.5% and 10% and it was not known why this had been done. It had been acknowledged that there was a premium for achieving stability in three years, and this wage increase was a part of this premium.  

There was no way Eskom could disagree about holding those who had wronged accountable. It was committed to embarking on a due and fair process which would discipline those who had wronged the entity.

All the IRP plans were based on assumptions, and those that were in the current IRP were 2010 assumptions. He urged the Committees to allow Eskom to study the IRP before it could respond in detail. Eskom had contributed to the evolution of the report, but had not the seen the final version until it was released.

Eskom had laid charges, and continued do so as well as work with the investigation entities, but at the end of the day it was these entities’ duty to address the issues. There was no sense that there was no political will to address the matter. He believed charity begins at home, and therefore more needed to be understood about coal suppliers that were exporting.

On the staff complement, he said there was a World Bank bench mark which suggested Eskom was determined at 50% in relation to comparable utilities all over the world. However, after further research it was determined that number was closer to 33%.

There was little that could be done on the balance sheet, and Eskom would look at its income statement and ways to increase revenue. Costs were, however, an area that could be reduced. The main three costs were primary energy, people costs and debt servicing costs. The costs had to be cut, and it would have to be done in all three areas. There was overstaffing at all levels, but Eskom was committed to suitable staff at all levels, and would achieve this within the constraints of the labour laws.

The details of shareholder compact which had been requested, were in slide 16-17 of the presentation.

Ms Mabaso-Koyana said the going-concern problem had been raised as a concern in 2017, and it remained a concern because last year there had been a liquidity crunch for the first time, where funders were not offering funding, which materialised in a loss this year. The going concern remained very tight, but the turnaround of funders had created a short-term breather. Despite the breather, the EBITDA remained tight purely because Eskom was unable to finance its financing costs. Fortunately, requirements were met operationally, as operational profits were being made, but the crunch comes when financing finance costs. Going forward, the operational model must be reviewed, especially when looking at coal prices and people costs. The revenue line was also tight, and efforts needed to be made to review and improve this area as well. Eskom needed to review its business model to transcend these challenges and become sustainable. Eskom was not out of the woods on the going-concern issue. The strain of wage negotiations and coal price increases meant the year would still be very tight.

Mr Cassim said the MYPD 4 report was being finalised and had to be submitted by the end of September. The Committees had to be made aware that was part of the process, because the last year of the MYPD3 had been completed, and the submission would be accompanied with an RCA application for the financial year 2017/18. NERSA would follow with the necessary processes and public hearings in adjudicating these applications.

Mr Hadebe said that an entity was legally allowed to do business with other countries, and it was a normal practice in the global market.

He said there was a number of regulatory bodies that Eskom was working with on investigations into corruption, such as the National Treasury, the Zondo Commission, SAPS, the Hawks, etc.

With regard to Soweto, he said NERSA provided licences to Eskom to deal directly with areas. The matter was being discussed by the Inter-ministerial Committee (IMC) task team, but it was a normal practice.

On the litigation against NERSA, he said that it had been a mutual decision with NERSA to go to court.

Mr Govender responded on how cost-plus mines would be invited back, and said the cheapest coal was that which was next to the power station and could be run on conveyor belts. There had been capex dedicated to the investment in cost-plus mines, but even if there was investment this year it would materialise only in two to three years. Investing in cost-plus mines which used conveyor belts was the first strategy to decrease the load on the road.

Mr Hadebe said Eskom would respond in writing to questions that had not be answered.

Co-Chairperson Mnganga-Gcabashe said that joint meetings such as these, with the Board present, would be welcomed in the future.

The meeting was adjourned.

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