Eskom Quarter 4 expansions & deviations & Tegeta: more information

Public Accounts (SCOPA)

28 August 2018
Chairperson: Mr T Godi (APC)
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Meeting Summary

Eskom admitted to the Standing Committee on Public Accounts (SCOPA) that its procurement policy was very weak and needed to be aligned with the PFMA. It acknowledged that its control system was lax. The Eskom CEO said that what has been lacking at Eskom for a very long time was consequence management. Eskom acknowledged that the Auditor-General indicated that 87% of the modifications were unjustifiable and unnecessary and were a result of poor planning and management.

SCOPA was frustrated and disappointed again at the failure of Eskom to provide sufficient information about consequence management. The Committee pointed out that the Eskom executives were not speaking as a unit and ended up contradicting themselves about what had been the consequence management outcomes.

Of the 26 of 59 expansion requests that were not supported by Treasury, three of these contract expansions went ahead and were implemented after Treasury refused them:
• M-Tech Industrial: Engineering and Project Management Services R50.6M
• Lephalale Site Services: Medupi Catering R189.8M
• Various security companies: Security Services R244.6M
Eskom conceded that the three projects that were not approved by National Treasury should not have happened, and admitted that the concerns raised by the Committee were relevant and understandable.

Of the 15 deviation requests submitted to Treasury in Quarter 4 of 2017/18 totalling R364 million, nine were not approved and five transactions were supported by Treasury. Eskom complied with Treasury's decisions where deviations requested were not supported. Eskom confirmed that none of the deviations was due to an emergency.

Meeting report

Mr E Kekana (ANC) commented that Eskom had 59 expansion requests for Quarter 4 of 2017/18. The expansions totalled R24.1 billion. Of the 26 expansion requests that were not supported by Treasury, three of these contract expansions went ahead and were implemented after Treasury refused them. He asked why Eskom continued with the three projects

An Eskom executive stated the contract was coming to an end. There were many breakdowns in the plant and they underestimated the problem. They, therefore, asked for 12 months to test the market. The whole tender would be open to more markets.

Mr Kekana remarked the biggest problem Eskom has was the lack of proper planning.

Mr Mongezi Ntsokolo, Eskom Group Executive for Distribution, stated the contract was for three years, starting in 2015 until 2017. It was valued at R260m. The first modification was to consolidate the different divisions. The second modification was for 25 contracts that were approved by Treasury in March 2017. That modification was for 12 months and Eskom got an additional R136m. That took the modifications to 44. He admitted Eskom made an error in not including the Gauteng Province. Eskom then went to Treasury for more money. Treasury was not happy about the oversight and for not picking up the contract. Eskom thought the new contract would be concluded in May 2018. Seeing that it was impossible to conclude it during May 2018, the contract would then be finalised early in 2019. The contract with Gauteng would be concluded.  Disciplinary action was taken against the contract manager and the contract manager resigned during the process. The senior manager resigned as well, including the executive head of security.

Mr Kekana asked if Eskom had National Treasury concurrence.

Mr Ntsokolo replied it did not.

Mr Phakamani Hadebe, Eskom CEO, explained that the executive resigned as there was an investigation, but the investigation would not be stopped just because the executive has resigned. 75% of resignations were due to better offers and people do not usually give an indication of why they were resigning.

Mr Kekana wanted to understand if the resignation was caused by the problem.

Mr Hadebe replied the investigations that were on-going were not about the issue at hand. The executive resigned with immediate effect. There were also allegations that were made in the media. The matter was work in progress.

Mr Ntsokolo added that consequence management started with the contracts manager for negligence. The middle manager (senior manager) took early retirement while the divisional executive manager resigned. The investigations were not complete when the charges were brought against the contracts manager.

Mr Kekana asked if Eskom did a preliminary investigation because evidence is collected first and then you ask the person under investigation to respond to the accusations.

Mr Ntsokolo replied that now the contract manager was gone, they would not continue with the internal processes of interrogating the contract manager.

Mr Abraham Masango, Eskom Group Executive for Group Capital, maintained that even if an individual resigned, investigations would continue and, if evidence was surfacing, Eskom would open a criminal or civil case.

Mr Kekana asked if Eskom was referring to investigations as part of consequence management. It was clear nothing has been done. Therefore, it was necessary to agree that Eskom still needed to do an investigation, and if there was prima facie evidence, then Eskom should go the legal route.

Mr Peter Sebola, Eskom General Manager for Group Capital, replied that an investigation on this matter was conducted by an external firm, but they did not have the full details of when it would be concluded.

Mr Kekana remarked that the reason why the previous engagement was not a success was because all the Eskom executives said different things about the matter. He suggested that next time they should speak as a unit, not as individuals, and give the Committee timelines of when the investigations would be completed.

Mr C Ross (DA) remarked that the value of the contracts were huge. The Committee has not been provided with case numbers and the consequence management. The Committee was scratching for information that was poorly presented. He was extremely suspicious of what was presented to the Committee.

Mr Kekana asked Eskom to respond to the third contract (#33 Upgrade of existing plant plus construction of new Ash Handling Plant at Camden Power Station).

Mr Masango replied that the engineer had left the organisation.

Mr Kekana asked where the engineer was.

Mr Masango replied he did not know where he was.

Mr Kekana remarked that Eskom was investigating people who then leave the organisation. This was making the Committee suspicious because people were leaving Eskom but still continue to do the same work for the entity. He asked the Eskom executives to be honest with answers. He wanted to establish when the contract expired.

Mr Masango explained it expired at the end of 2017. Panel A companies were the ones with the capacity to execute these tasks. The panels were the resources that supported the work Eskom was doing.

Mr Kekana commented that Eskom is a government institution that sees itself above the law. It was prohibited by law to do unlawful things. He asked why Eskom was not law abiding.

An Eskom executive elaborated that when the modifications started, Eskom thought the reasons for those were sufficient. When National Treasury rejected the modifications, Eskom realised that there were “people on site who had to be fed”.

Mr Masango said Eskom was not above the law because when National Treasury said no, Eskom had to find a way to escalate the project. After the forensic investigation, Eskom expected some recommendations that would ensure there were no repeats.

Mr Kekana remarked that some of the contracts were valued at R691m and there were people who would then tender for the projects. Then Eskom would go to Treasury and ask for additional money yet the contract was "cooked" for a specific service provider even though there were other service providers who had better bid proposals in terms of price.

The Chairperson asked that the Committee move on because it did not appear that there would be new answers coming from Eskom.

Ms T Chiloane (ANC) asked for an explanation on the need for a contract expansion as opposed to an open tender. Why were the expansions more expensive than the initial contract amount? What was LTE doing for Eskom because Eskom extended the LTE R5.9m contract by R52m?

Ms N Khunou (ANC) asked why Eskom goes for modifications when it knows a contract would be coming to an end in 12 months.

Mr Hadebe told the Committee they were there to give correct information. After their last meeting with the Committee they tried to gather all the information the Committee had questions about. What came out now from the audit report was that Eskom's procurement policy was very weak and needed to be aligned with the PFMA. He admitted Eskom's control system was very weak. The Board took a decision that the deviations had to come to an end. The executives were dealing with a gigantic institution. What has been lacking at Eskom for a very long time was consequence management. He indicated there were modifications that were justifiable and exceptional. Unfortunately, most of Eskom's modifications were not justifiable. He acknowledged that the Auditor General stated that 87% of the modifications were a result of poor planning and management. Eskom was working with seven agencies to try to resolve all these challenges because Eskom wants to clean its house. The three projects that were not approved by National Treasury should not have happened. He assured the Committee the controls that have now been put in place were bearing fruit at the top level. Over the next few years it is going to be a rough journey because the institution has to get rid of the dirt within itself. The matters and suspicions that have been raised by the Committee were relevant and understandable.

Mr M Hlengwa (IFP) looked at the deviations that Treasury did not approve. Deviations and expansions were becoming the norm. Who was the driving force behind these applications and why had Eskom proceeded after Treasury rejected the applications?

Mr Ntsokolo pointed out that before Project 41 Construction Line in the Eastern Cape was completed there was an issue with the land. The second instruction Eskom received was that there were land claims and rain in the target areas. 95% of the project was completed by the time the project lapsed. Eskom wanted to continue with the remaining 5% and Treasury refused. It cost R3.5m to complete the remaining 5%. Eskom could not afford to get a new service provider because it had to acclimatise first to the project.

Project 43 CCTV, to monitor security control remotely, was a pilot project in Mpumalanga with all cellular phone companies in the country. National Treasury allowed Eskom to go for Vodacom. In the next twelve months Eskom would go for an open tender.

An official from National Treasury pointed out that Eskom's efforts to test the market resulted in wasteful expenditure. Eskom came back to Treasury to say it has a new quote. There was no way that to complete a 5% short project should cost R3.5m instead of R1.8m. He said there were many examples Treasury could provide to the Committee.

Mr Hlengwa asked why there was no progress in consequence management yet it has been identified as the problem.

Mr Hadebe admitted that consequence management was the challenge facing the institution. The Board was trying to pursue it. In the last quarter, Eskom had 1 049 disciplinary cases. 628 cases have been resolved and certain employees have lost their jobs as a result.

Mr Hlengwa asked why the state must bear the costs for Eskom's negligence and how much was poor planning costing Eskom.

Mr Ntsokolo replied that there were projects in the pipeline that needed equipment in order not to delay the implementation process.

The Chairperson remarked it was impossible to identify poor planning and not to apportion blame to a person.

Mr Hlengwa said if the Committee does not engage with Eskom and put a face to the problem, then that would be a serious problem. The CEO was admitting there was a problem. He had tried to get the transaction costs but now it was clear there was nothing to be gotten from the engagement with Eskom. He wanted to establish if any of the deviations was an emergency.

An Eskom executive replied that none of the approved projects by Treasury was an emergency.

Mr Hlengwa said the Committee had to get to the bottom of the problem and it appeared there was a syndicate involved in this problem engulfing Eskom.

Mr T Brauteseth (DA) asked for the number of dismissals in the 628 disciplinary cases completed.

Mr Hadebe replied that the completed cases included written warnings and dismissals. He only knew the names of senior level managers and those who have done something very serious. He admitted Eskom has moved very slowly on disciplinary cases and this was discussed at Exco to speed up the process.

Mr Brauteseth suggested Eskom forward the Committee a full list and picture of the 1 049 cases which include the names of the individuals involved, suspensions, written warnings, and dismissals.

Mr Hadebe said the board has made a commitment to deal with serious matters and cases which involve many different things.

Ms Khunou reminded Eskom the Committee was dealing with specifics, not general statements. The Committee does not understand why it was difficult to put names to the investigations. The Committee does not want Eskom to come to Parliament only for bail-outs. It was interested in resolving problems before they escalated. The Committee wanted to see what had happened and the actions taken. If people were not disciplined, the rot was going to re-occur.

Mr Hlengwa requested that the Committee be given the list of cases related only to financial matters, expansions, deviations, and include the cost factors involved.

Mr Ross indicated that SCOPA has an obligation to fix lax internal controls that have led to the loss of millions of rands. The Committee was concerned about Eskom and was willing to help the entity to fix those lax controls. He urged Eskom to engage with National Treasury and to extend the investigations and consequence management to law enforcement agencies.

Ms Chiloane suggested the Eskom team should be given three months to see if there was progress in its work.

Ms Khunou proposed the Committee visit Eskom and interview people to get to the bottom of the problem.

Mr Kekana pointed out he was disappointed with the response from Eskom, but appreciated the progress the entity has done. He proposed Eskom be part and parcel of the Committee by thoroughly going through the Quarter 4 spreadsheet from National Treasury. Eskom should focus on the requests that National Treasury rejected, ask itself why it decided to go against Treasury regulations and identify who was involved in that process. The Committee was trying to assist Eskom and it should come back to the Committee after a month for further engagement on this.

The Chairperson noted that if the matters raised were not resolved when the Committee meets Eskom again, there would be a problem. Eskom needed to reassure the Committee that these wrongs would not happen again, and the information Eskom was giving the Committee was starting a conversation.

The meeting was adjourned.

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