Minister of Public Enterprises on State of Nation Address impact and Eskom

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Public Enterprises

13 February 2019
Chairperson: Ms L Mnganga-Gcabashe (ANC)
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Meeting Summary

The Committee was briefed by the Department of Public Enterprises led by the Minister Pravin Gordhan on issues emanating from the State of Nation Address (SONA). Load shedding is expected to last until April and Eskom is also technically insolvent. The Committee were told of the problems uncovered at some power plants which included the discovery of fine ash with oil or water that culminated in the collapse of seven units in one power station and ultimately to the enforcement of stage 4 load shedding. In another instance, cell phone signal was detected in a power plant, and this affected the fans that led to unscheduled shut downs that takes up to six hours to reverse. Eskom employee numbers were said to have ballooned from 38 000 in 2007 to more than 48 000 in 2018 and as result, employee costs have increased faster than revenue growth and thus, the cash generated could not cover operating and debt servicing costs. There was also the revelation of an escalation in municipal debt owed to Eskom. Soweto alone was said to owe Eskom R28 billion and this is growing at R1 billion a month. As the power utility is struggling to maintain operational sustainability, all these factors are impacting staff morale and leading to the loss of critical skills.

Members asked when the crippling power outages are expected to end. Others lamented that the people who has crippled Eskom and, by extension, the country still sit among them and are still part of the various government entities. They asked if the Minister could assist Members with the provision of a supplementary affidavit and evidence that could be used to get these people behind bars.

Meeting report

The Chairperson noted that the Minister is attending a Cabinet meeting and would join the meeting later. The agenda for this meeting is matters arising from the SONA delivered by the President, progress in addressing 2017/18 audit findings, a report back on the BRRR recommendations. The Department will be back in this Committee on 13 March to cover the recent visit to India by the President where collaboration between Denel and India defence industries were discussed.

Department of Public Enterprises briefing on issues emanating from SONA address
In the briefing presented jointly by Mr Thutho Shamang, Acting DG; Ms Avril Halstead, Acting CFO and Mr Kgathaso Tlhakudi, DDG of Manufacturing, they re-stated the commitment made in the 2018 SONA that it is critical that a process is initiated to review the configuration, number and size of national government departments that is optimally suited to ensure the most efficient allocation of public resources. In the 2019 SONA, the President indicated that the new structure and form of Government will be revealed after the 2019 National and Provincial Elections and the DPE and National Treasury are spearheading the work of optimizing State Owned Companies (SOCs) to ensure effective agents of development. This involves identifying assets suitable for disposal, involvement of private capital, and formation of new entities.

Eskom challenges
Eskom is technically insolvent and will cease to exist at current trajectory by April 2019 due to:
- High levels of debt currently at R420 billion – 15% of the sovereign debt. Default risk threatening the economy.
- Cash generated does not cover operating and debt servicing costs.
- Escalation of municipality and Soweto debt (R28 billion) growing at R1bn a month.
- The number of employees increased from 32 000 in 2007 to 48 000 in 2018 with associated costs growing from R9.5bn to R29.5bn.
- Ageing generation fleet - about 37 years on average.
- Essential mid-life refurbishments not implemented.
- Poor quality of maintenance due to poor workmanship – 40% of plant breakdowns are due to human error.
- Ongoing coal shortages due to poor management and lack of investments in cost plus mines.
- Significant loss of critical skills and low staff morale.

How Eskom Got Here
- Capacity grew slightly over the period
- Coal Purchases – volumes flat over the 10-year period
- Employee costs increased significantly driven by employee benefits
- Since 2007, revenue grew more than 4 times mainly driven by massive tariff increases. However, expenses (primary energy and employee costs) increased faster than revenue growth. EBITDA (proxy for free cash cash-flow) insufficient to cover interest costs and capex (investment) resulting in a shortfall which is covered through borrowing.

2019 SONA Commitments
Where SOEs are not able to raise sufficient financing from banks, from capital markets, from development finance institutions or from the fiscus, we will need to explore other mechanisms, such as strategic equity partnerships (SEP) or selling off non-strategic assets. We also seek to build a pragmatic and cooperative relationship between government, organized labour and private sector stakeholders, where we can jointly determine a strategic path for SOEs to create jobs, enable inclusive growth and become operationally and financially sustainable. As we address the challenges that face Eskom we will ensure that there is meaningful consultation and dialogue with all key stakeholders. We will lead a process with labour, Eskom and other stakeholders to work out the details of a just transition, and proper, credible and sustainable plans that will address the needs of all those who may be affected.

Interventions / Plans
The SOCs have to put together plans to liquidate some of their non-core assets or non-strategic assets to raise capital to sustain core assets. Opportunities for business units suitable for SEP are being explored by the SOC Boards. The Minister has had numerous engagements with business and organised labour to address crises as they emerged but also to seek consensus on appropriate interventions require ensure sustainability of the SOCs in the portfolio. The Presidential Coordinating Council on State Owned Enterprises has had its terms of reference (TOR) approved by Cabinet. The composition of the Council is being finalised to enable its operation. The consultations with key stakeholders are being undertaken and will unfold with greater intent in the aftermath after the SONA 2019 announcements.

Eskom’s Audit Outcome for 2017/18 FY
▪ Eskom annual financial statements were qualified on the basis of lack of completeness of the information required by the PFMA on irregular expenditure, fruitless and wasteful expenditure and losses due to criminal conduct in the 2018 financial statements.

▪ As a state-owned entity the PFMA note forms part of the annual financial statements that are normally prepared in terms of International Financial Reporting Standards (IFRS). There were no issues identified by independent auditors in terms of IFRS.

▪ Irregular expenditure increased to R19.6 billion from R3 billion when is compared with the previous financial year due to non-compliance with PFMA and other regulations.

▪ Majority of irregular expenditure incurred arises on the items of the previous financial year due to clean-up processes that the board is executing.

Budgetary Review and Recommendations Report (BRRR) recommended:
- Capacitate SOCs internal audit functions.
- Increase and strengthen oversight over SOCs through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to construction sites of major infrastructure projects.
- Increase and strengthen oversight over SOCs through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to construction sites of major infrastructure projects
- Fast-track the introduction of the Shareholder Management Bill to empower the department to carry out its oversight responsibilities
- Develop SOC guiding frameworks and ensure their implementations to provide stable working environment for SOCs
- Develop SOC guiding frameworks and ensure their implementations to provide stable working environment for SOCs.
- Greater emphasis on the monitoring and evaluation of SOCs' implementation of Government's policy objectives.
- Make progress on municipal debt.

Progress report
- Municipal debt increased by R1.6bn from R17bn in September 2018 to R18.6bn in December 2018;
- Top 11 defaulting municipalities constitute 77% of the total debt. Free State Municipalities are leading with 44% of the debt followed by Mpumalanga.
- On revenue management, a committee was established comprising of the different IMTT members to deal with the following:
- Funding and the implementation framework for revenue collection mechanism and the roll-out of prepaid meters;
- Establishment of an independent centralised collection mode;
- Management of defaults including triggers and consequence management;
- Program to deal with the “culture of non- payment”.

Minister’s Address
When the Minister Pravin Gordhan arrived, he apologised for his delay in joining the meeting and in his briefing, provided some context to the current Eskom crises. He stated that despite the shortness of memory of people, it has to be noted that this is the Committee that instituted the inquiry into Eskom. This Committee also came out with the report which indicated that the previous board and management of Eskom rendered the entity financially unsustainable due to irregular procurement, mismanagement and non-compliance with the existing policies. These actions led to the purging of highly skilled and qualified senior staff Members. The issues confronting Eskom today are mismanagement, getting rid of good people and replacing them with compliant people who allowed corruption to fester in this important company. Today we are dealing with the cumulative effect of many years of mismanagement.

It is important to note that the new board was appointed not by the current Minister but by the previous administration in January 2018. Actions are in motion to understand the issues facing Eskom and there are constant meetings taken place between the board, management and Minister. The crises at Eskom today could be broken down into three broad categories and they are:

▪ Structural: The current structure of Eskom where we have generation, transmission and distribution and also Eskom finance, assurance is not manageable in the current environment nor is it consistent in the manner such utilities are managed elsewhere in the globe. The President in his SONA speech indicated that the security of power supply is absolutely imperative both for the economy and for every household in SA that relies on electricity for basics such as cooking, students studying and household chores powered by electricity.

▪ Financial: There has been continual deterioration in Eskom finances and the Minister of Finance will shed more light in his Budget Speech next week on what kind of financial support Eskom will be receiving from government to keep it afloat given the current fiscal constraints.

▪ Operational: We are currently confronted with the daily breakdowns at the power utility. We have to figure out what is happening at the power stations: what is breaking down, why it is happening and whether we have the technical competence at Eskom to resolve these. Again we have to ascertain the consequences of the current problems encountered at Medupi and Kusile power plants which are supposed to provide a buffer in times of energy distress and deep maintenance. There has been a distinct neglect in the heydays of the plants a few years ago.

The President had said that Eskom in its current form will severely damage our economic prospects and that urgent steps are needed to minimise any adverse effects on the economy. Three separate entities would be established [Generation, Transmission and Distribution] under Eskom Holdings. Today power generation does not lie with Eskom alone as we also have independent power producers, mines that have their own generating capacity, and the renewable energy power suppliers. Diversity is therefore developing though Eskom still remains dominant in coal related energy. At no stage has the President and indeed government indicated that Eskom will be privatised.

When the Finance Minister presents his budget and looks at the financial solutions for Eskom next week we will all come to know that dealing with R420 billion of debt is not an easy matter and that it requires a fair amount of determination and some solutions will start to emerge. Operationally, Eskom does not have the safety margins that Medupi and Kusile are supposed to provide and this is added to the unplanned maintenance outages that we are confronting. The seven units that went out of action two days ago that forced the level 4 load shedding was interrogated by the Eskom generating team and 30 000 megawatts would have been required by the country as against 27 000 that was available. That forced the level of load shedding experienced. Using diesel as a substitute has helped but is unsustainable because of the cost outlay and reliability issues.

Government is aware of the inconveniences to the citizenry in terms of traffic jams and overall impact to productivity the power outages are causing and we apologise on Eskom’s behalf. The President will announce further steps to ameliorate the situation today. After meeting with the Eskom Board, it was decided to ask a world leading supply entity for Denel in Italy to send us two to three coal power station engineers so that Eskom could utilise their experience together with SA engineers to establish the reasons for the frequent breakdown of our power plants, whether we have the right competence amongst our engineers and if the maintenance being done is the right kind of quality. Insights from this team will ensure we get a better idea of what is going on.

As a result of state capture, good top skills have left Eskom because of the toxicity of the environment they had to work in. Over the last forty-eight hours, we have been trying to track down some of the experienced engineers who left Eskom. It is fascinating how many of them are working in a variety of places such the Philippines, Indonesia and many other countries. Most of them have thirty years of experience at Eskom but are now offering those skills to other countries. As a result of the globalised world we live in, we expect this to happen but the loss of senior skills at Eskom is not a small matter. More attention will be paid to this matter going forward and to put out a positive message that we want them back, guarantee a harmonious working environment and to train our younger engineers to give them the benefit of their experiences. Again today, some additional units have become dysfunctional according to information reaching us in the last two hours. Updates will be provided on how to manage the situation. The Board and everyone concerned are working round the clock to ensure that Eskom’s difficulties are fixed in the interim to minimise disruptions to our economy and that load shedding does not become a permanent feature of South Africa’s life. Government is working to get to the bottom of the problems of design, the change of the design of Medupi and the threatened labour disruptions.

Mr R Tseli (ANC) welcomed the presentation and briefing by the Minister and the assurances that load shedding will be as short as possible. She noted the presentation was made available not soon enough which disempowers Members in their oversight function. With assurances given by the President during SONA, Members expect progress to be made to ending the crippling power outages. The problem is action needs to be taken more swiftly by all concerned. Progress in appointing the Boards of Denel, Eskom, and Transnet in 2018 is welcomed. Instances of corrupt practices that have come to light and action taken to recover monies wastefully spent, are also welcome developments. On measures being taken for SOE self-sufficiency, Members would want to be updated by the Department. The statement that irregular expenditure in Safcol and Transnet arose because of the clean-up processes needs to be clarified.

Ms N Mazzone (DA) thanked the Minister for the proactive and bold steps being taken to end load shedding. We are now living the consequences of connecting the dots. As we join the dots we are now seeing what we always knew was happening even when the Minister was part of this Committee. The people who did this to our country still sit among us and are still part of our entities. Could the Minister please assist Members with the provision of a supplementary affidavit and evidence that could be used to get this people behind bars? That these people are still not behind bars is frustrating everyone and what exactly does it take to get arrested in this country? Stealing from an entity like Eskom equates to treason because they bring the sovereignty of our country into doubt. Eskom is telling us to expect the current power outages to last into April, what is the real story? We had a war room looking into Eskom presided over by the man who is now the President, what happened to the ideas of that war room? Members are worried about the industrial action being threatened at this time, this is also treasonous. If Eskom goes down, this country goes with it. What plans are in place to protect our key points, our power stations from possible industrial action? Has it come to the point to break SADC and NEDLAC protocols and stop the exportation of power? At what point do we face the penalties of breaking contracts that are not of our making and ensuring that the power we have remains in our country?

Mr S Swart (ACDP) thanked the Minister on the attempts to remedy the situation. Could the Minister brief Members on the outcome of the task team that was appointed in December? How does that link in to the Board and the Italian engineers being approached? Why are we bringing in foreigners instead of SA engineers that left Eskom? It was shocking to hear the President say he was “shocked and angry” when he is being briefed continually and is fully aware of the situation? He was part of the war room, how could he shocked and angry? The public should be the one to be shocked and angry and not him because as Members of Parliament we know where this came from. Slide 11 laid bare from where these problems emanated. Revenue generated was R42 billion. Primary energy cost escalated from R13bn in 2007 to R85bn in 2018. Maintenance was R6bn in 2007 and R18bn in 2018. Maintenance is where the problem lay. Maintenance has been reducing over the years and by almost 50% in the last four years.

Mr N Singh (IFP) asked when sanity can be restored at Eskom and the time frame for an end to load shedding. He asked if labour is on-board working with government and Eskom to find a common solution to Eskom’s woes. Looking at slide 8, the number of Eskom employees jumped from 32 000 in 2007 to 48 000 in 2018; can we honestly say that productivity has increased? What happened? Are people being employed just for the sake of increasing the numbers or are they there to be productive? Is government investigating the possibility of the sabotage of Eskom’s facilities and, if so, what is government doing about it? Millions of tonnes of coal are being exported to the world over, yet we pay exorbitant prices for coal here. Are coal suppliers getting better deals elsewhere and therefore crippling the SA economy by not supplying Eskom the coal it needs? Are there any discussions with Treasury about debts to Eskom especially Soweto’s debts of R2 8billion to Eskom that is increasing by R1 billion a month?

Mr T Rawula (EFF) noted the increased Eskom staff and asked if this could be a prelude to retrenchment. Is the President’s assertion in SONA that Eskom will be unbundled a hint to the effect that retrenchment will take place? On the cost escalations of building Medupi that shot up from R100 billion to R300 billion attributed to corruption, Members want to know what type of corruption is being referred to here? Was it money that was embezzled? And by whom? Was it money that was redirected to a group of people? Who are those people? How much is Eskom spending annually on the two newly built power stations? What does the Minister mean by saying that the two power stations were badly designed? Does it mean they will never ever work and we will continue to lose money over them? What is the logic on insisting on independent power producers (IPPs) when considering the huge cost difference?

Dr M Ndlozi (EFF) thought it was a shame that the current crop of people in government over the last ten years has dismally failed and that includes the Minister and the rest of this cabinet with or without former President Zuma. The current problems we now face are as a result of the current incompetent and incoherent individuals running the government. We should now consider that the Minister step aside because he has put us in the crises because no country can conceive of a developmental agenda without reliable energy. All of them contributed to destroy our supply. When the Minister was in charge of finance, systems failed so is the war room system at Eskom and now Eskom itself. The crises now point to the incompetence of those in government. We should get a special report on Kusile and Medupi power plants that give all the details. What is meant by the statement that there were wrong designs? Who changed the design in the middle of building the plants? It is reactionary to say that when trade unions are going to march to defend their jobs, it equates to treason because it is their constitutional right to do so. IPPs are the most illogical model.

Ms T Mahambehlala (ANC) welcomed the presentation but wanted to know why maintaining its power plants is a problem for Eskom? What is our coal strategy in this country? What is meant when the Minister said that human error is part of Eskom’s problems? What are the implications of cost over runs, poor engineering, poor planning, design, poor procurement practices and poor contracting and corruption to electricity security supplies? What measures are in place to solve the problems the coal plants face?

Ms D Rantho (ANC) was disturbed by the reaction of the President to load shedding in his press briefing. We are normally notified when load shedding is about to be implemented but it happened randomly this time around. There were people working round the clock to avert load shedding so what went wrong this time? Some of the experienced ex-employees of Eskom who left are writing to us that they want to come back to help. Can the director of Alexkor explain why it continues to maintain its offices which were supposed to be closed in Johannesburg?

In his response, Minister Gordhan said that Cabinet has reported regularly on the 2018 SONA especially on what is happening in each of the SOEs under this Department. They included changes such as board and management changes, financial progress and all other changes. On the self-sufficiency of SOEs, only Transnet is reasonably self-sufficient; all others still have many problems that are yet to be resolved. On the irregular expenditure, auditors also played a part in aiding to mask what was happening in the SOEs because they signed off on the reports and did not fully disclose corrupt transactions; neither did they ask the right questions about irregular expenditures. When new management came in and a new audit was carried out last year, new disclosures began to come to the fore. Corrections are now taking place in the SOEs and audit firms are still not yet held to sufficient account for their role in the state capture saga.

On what was said by our EFF colleague, we live in a democratic society so people can use or exercise their rights to demonstrate their displeasure or support as long as it is done within the law. The Minister agreed that anyone found to be corrupt should be in jail and if that is not done we all will lose the trust of the people irrespective our political inclination.

On how long load shedding will last, it is difficult to say because no one anticipated what happened in the last few days. In one case they found coal was mixed with oil and water and it got stuck in the chute that supplies coal to the boiler which resulted in some major problems. That same problem spread to the other two units in the power station. We do not know what caused it even after our meeting for over two hours with engineers yesterday. In other cases, they found instruments that get triggered if a cell phone is used in the power stations. Cell phones are not allowed in that complex but phone waves were found to be impacting on the instrumentation in the power complex that disrupted the fans. With that, it goes out of control that could last for six hours. Reports are still being awaited and everything possible is being done to minimise load shedding. Once we get a grip on things, hopefully in the next ten days it will improve.

On why we bring in foreigners; as it is now, any expertise that could help should be engaged whether they are foreign or not, after all there are significant number of foreign consultants in SA but to put that into context, this is an emergency. There is also an Eskom sustainability group established last year by the President which has submitted an interim report to him. The necessary authority will protect national key points if the need arises. On the point that SA should stop exporting power, we should be humble enough to admit that we also import about 15 000 megawatts hydro power from Mozambique, so it is a give and take.

It has to be noted too that a number of our power stations are more than 35 years old and that is why the new power plants at Medupi and Kusile are very important because they were supposed to replace the aging plants. There must be litigation when those responsible for changing the designs of the new power plants are identified. The state capture project has messed up many things including procurement processes to supply coal, oil and other things. We have to establish those that benefited and diverted public money into their pockets.

The Chairperson thanked the entire team from the department led by the Minister and appreciated the gesture of the Minister to avail himself for the meeting despite his hectic schedule. It is a joy to see all the Members back safe and sound to Parliament after the New Year festivities. Good luck to the Minister on his hunt for a solution to Eskom’s problems.

The meeting was adjourned.

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