Special Appropriation Bill [B10-2019]: National Treasury briefing

NCOP Appropriations

17 September 2019
Chairperson: Ms DG Mahlangu (ANC, Mpumalanga)
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Meeting Summary

The Committee met with the National Treasury for a briefing on the Special Appropriations Bill. The Department of Public Enterprises and Eskom gave inputs. 

National Treasury, in presentation on the Special Appropriation Bill, highlighted that owing to Eskom’s failure to meet commitments and obligations on debt, government needed to intervene, and funding had to be found earlier than initially thought. In February, the Minister of Finance announced that Eskom would require more funding. It would require R23 billion per annum over 10 years, which would be a total of R230 billion. This amount was not initially budgeted for. The intention in February, when the announcement was made, was that it would go through a special appropriation so that by the time it gets to October there would be a special appropriation of R23 billion in the year 2019/2020. What subsequently happened was that when lenders felt, given their own assessment, that they would be holding back on funding that created a problem because there are debt obligations that need to be honoured and this debt is guaranteed by government. So when an entity fails to honour a debt, commitments and contracts entered into in February – when that fails to happen government needed to intervene. If a default is triggered on one, a default is triggered on all of them. Therefore there was need to find funding earlier than initially thought. This was when Section 16 of Public Finance Management Act (PFMA) to approve maximum allowable amount of R17.652 billion was invoked and the approval of Section 16 accelerated part of the R23 billion allocation announced in February 2019 budget. To date, government has transferred R13.5 billion to Eskom of the R17.652 billion approved under Section 16 of PFMA. The remaining R4.1 billion is to be disbursed in line with Eskom’s cash flow requirements. The remaining part of the R23 billion will be disbursed from the contingency reserve under 2019 Appropriation Act. The contingency reserve was approved in February. It was a funded contingency reserve but it was not specified how and where that funding would be allocated. The contingency reserve will now be used to fulfil the R23 billion for the 2019/2020 financial year. National Treasury and the Department of Public Enterprises (DPE) continue to work closely with Eskom’s treasury to monitor Eskom’s daily cash flow requirements and its financial position. 

Members commented on Eskom’s funding plan, noting that 58% of the R46 billion had already been secured. They sought clarity about the funding mix. Did that include consumption collection, i.e. collection for services, or will the R46 billion be raised purely from external funding, special appropriations or contingency funds being used? What options would be available to Eskom if it does fail to execute its funding plan? Treasury and DPE monitors Eskom’s daily finances and the trends that had emerged since the decision to make more money available to the entity. What were those trends showing so far? Could Treasury share that information with the Committee or was it market sensitive? There must be progress happening as money was being transferred into Eskom. Mr Freeman Nomvalo was a good choice to have as Chief Restructuring Officer (CRO). Were there any tensions emerging between established management in Eskom and the CRO? The CRO could be seen as an external monitoring agency and if so how was that being managed? There was also the urgent matter of appointing a new CEO and filling the vacancies that exist at senior level. What was the progress on filling those senior management positions? They hoped that the special paper would address the many issues that preoccupy the Committee. The Committee did not want generalities. A clear and precise way forward was needed. There needed to be a very clear strategy with very clear timelines.

 

Meeting report

Briefing by National Treasury on the Special Appropriation Bill

Mr Anthony Julies, Deputy Director-General of National Treasury: Asset and Liability Management, presented the Special Appropriation Bill for Eskom to the Committee.  

Background

Eskom is a critical entity of the South African economy. It is critical to support growth in the South African economy. Eskom is experiencing significant challenges both short term, liquidity challenges, and structural challenges in terms of its business and operational efficiency. It is an entity that required all stakeholders to be on board. Eskom since the crisis of 2009 received a stimulus package to deal with the global financial crisis. This stimulus package was intended to invest, significantly, in infrastructure. Eskom was identified at the time as one of the entities that would play a significant role to support infrastructure as a stimulus package.

Government has provided a number of measures to help Eskom. This includes R350 billion worth of guarantees. Government had provided significant equity. At the time government sold Vodacom shares, which amounted to R23 billion. There was a concessional loan given to Eskom by government, that was later changed into a grant, of R60 billion. Tariffs were adjusted to be cost-effective. There were significant increases in electricity tariffs over a number of years. Eskom was required to introduce efficiencies in their business and an amount of R60 billion over a five year period was identified and had largely been achieved. That was the package of measures.

Over the past number of years Eskom had not been able to deliver even with all the support and funding that had been provided. They were not able to deliver in terms of what the funding was intended for. Funding was intended to deliver infrastructure. There were still power stations under construction. Eskom had not been able to sell the product that was intended to be sold for revenue to be earned. There was no product to be sold and there was increasing debt and limited revenue. Eskom also had a structural problem with its business model. The world has become a different place with regards to energy and electricity generation. Eskom has become an outdated organisation in terms of a modern energy entity. Eskom is insolvent given its debt and it is illiquid. This was the crux of the problem.

Eskom is important to the South African economy. It is the sole supplier through the transmission of electricity into the economy. It is the majority producer of electricity. It is therefore an entity that had to be protected. It must be changed and restructured in order to function efficiently and profitably. As Eskom was currently, no investors want to invest in the entity. Rating agencies raised concerns over whether Eskom was able to service it’s over R450 billion worth of debt. It was important to deal with the willingness and ability of Eskom to service its debt. Debts have increased, ability and willingness of Eskom to change and restructure has been questioned and this has resulted in lenders being doubtful that Eskom was likely to change. Multilateral institutions and various financial institutions had been entered into contracts with Eskom and these lenders were not seeing a structural change in the entity happen. Eskom had to follow through on the commitments made with the various institutions it had go into business with.

Government intervention

Owing to Eskom’s failure to meet commitments and obligations on debt, government needed to intervene, and funding had to be found earlier than initially thought.

In February, the Minister of Finance announced that Eskom would require more funding. It would require R23 billion per annum over 10 years, which would be a total of R230 billion. This amount was not initially budgeted for. The intention in February, when the announcement was made, was that it would go through a special appropriation so that by the time it gets to October there would be a special appropriation of R23 billion in the year 2019/2020. What subsequently happened was that when lenders felt, given their own assessment, that they would be holding back on funding that created a problem because there are debt obligations that need to be honoured and this debt is guaranteed by government. So when an entity fails to honour a debt, commitments and contracts entered into in February – when that fails to happen government needed to intervene. If a default is triggered on one, a default is triggered on all of them. Therefore there was need to find funding earlier than initially thought. This was when Section 16 of Public Finance Management Act (PFMA) to approve maximum allowable amount of R17.652 billion was invoked and the approval of Section 16 accelerated part of the R23 billion allocation announced in February 2019 budget. To date, government has transferred R13.5 billion to Eskom of the R17.652 billion approved under Section 16 of PFMA. The remaining R4.1 billion is to be disbursed in line with Eskom’s cash flow requirements. The remaining part of the R23 billion will be disbursed from the contingency reserve under 2019 Appropriation Act. The contingency reserve was approved in February. It was a funded contingency reserve but it was not specified how and where that funding would be allocated. The contingency reserve will now be used to fulfil the R23 billion for the 2019/2020 financial year. National Treasury and the Department of Public Enterprises (DPE) continue to work closely with Eskom’s treasury to monitor Eskom’s daily cash flow requirements and its financial position.

Special Appropriation Bill

In June, it became clear that more funding would be required for Eskom because of the cash flow requirements and the commitments over the period ahead. When the Auditor-General looked at the finances it needed assurance that Eskom would be able to meet future commitments up to the period of between twelve to eighteen months. When the Auditor-General looked at Eskom’s balance sheet it realised that given the commitments, there was a significant amount of debt that had been maturing since 2009, that needed to be honoured Eskom would require help. If any entity was not able to fulfil those debt commitments because of inadequate revenue, government steps in. Government brought forward the R230 billion that was committed and front-load that amount. The President announced that the Special Appropriation Bill would be tabled by the Minister to propose allocation of significant portion of the R230 billion that Government proposed over the next 10 years in the early years according to Eskom’s requirements. The President also said that this was done because Eskom was too vital to the South African economy to be allowed to fail. On 19 June, Cabinet approved additional funding allocation to Eskom for the 2019/2020 and 2020/2021 financial years to assist the entity with its financial challenges. For this purpose, on 23 July 2019 the Minister tabled in Parliament a Special Appropriation Bill.

Special Appropriation Bill proposes the following additional financial support for Eskom:

  • Additional R26 billion in 2019/2020 financial year
  • R33 billion in 2020/2021 financial year

Mr Julies indicated that appropriation only happens annually. Even when a commitment of R23 billion per annum over 10 years was made it was still a requirement for the 2020 budget to appropriate. Why is it then that it needed to be announced now? That may be a question. Why not wait until February next year to announce the R33 billion? The Auditor-General, in order to sign off the account of Eskom, as a going concern needed the assurance that in the next twelve to eighteen months there was funding available for Eskom to meet its obligations. The R33 billion for 2020/2021 was part of that eighteen month period so it then becomes necessary to state very clearly that Eskom will be getting R26 billion in 2019 and R33 billion in 2020. These amounts satisfy the Auditor-General to approve the financials of Eskom as a going concern. This financial support is based on Eskom’s ability to execute its funding plan of R46 billion for 2019/2020 which 58% has already been secured. Failure to execute funding plan may result in Eskom experiencing liquidity shortfalls at 31 March 2020 and require additional funding in addition to funding provided through the Special Appropriation Bill.

Eskom reconfiguration

Part of the requirements given to Eskom was that it must become a more efficient organisation. Therefore there was a need for a Chief Restructuring Office (CRO). Mr Freeman Nomvalo was appointed the Head of the Chief Restructuring Office. The CRO was responsible for developing financial turnaround of Eskom and will be vital in development of sustainable turnaround strategy. This will be a ‘multi-pronged’ process that will take into account stakeholders in various sectors.

Government is working on a Special Paper to be released in September on Eskom to outline the roadmap for reform of Eskom. This paper seeks to outline:

  • roadmap and more details on transformation of Eskom
  • clarity on measures Government will implement to resolve Eskom’s financial challenges
  • consolidate outcomes of various processes that have been undertaken and provide clarity on reforms to be implemented in sector to ensure sustainable electricity future.

In conclusion, government’s ability to restructure Eskom, manage its finances, reduce its reliance on fiscal support and at the same time, ensure energy security to all is crucial for economic growth and maintaining sovereign investment grade rating is paramount. Failure to urgently strengthen Eskom’s balance sheet while government is working on long term sustainable solutions may likely have a negative systemic impact as Eskom is the largest non-bank corporate debt issuer in South Africa and any default will result in crisis for government and to some South African banks given that Eskom is largest exposure to some banks and Government.

Discussion

The Chairperson stated that the Committee meeting was of vital importance. She also stated that she was not a financial expert and therefore requested for some clarity on certain aspects of the Treasury’s briefing. She asked Mr Julies to further explain the allocation of R230 billion and provide a break down on what that money would be used for. She asked Mr Julies to slow down and re-explain the briefing report in simpler terms. Slide 7 states that R13.5 billion has been transferred to Eskom, was the R13.5 billion part of the R17.652 billion under Section 16 of the PFMA? Why had the remaining R4.1 billion of the R17.652 billion not used or disbursed to Eskom? Have certain conditions not been met on the side of Eskom? She referred to the bullet point which stated that the remaining part of the R23 billion may be disbursed from the contingency reserve. What was remaining from what? What was actually being dealt with? What was the actual amount remaining? She opened the floor for clarity-seeking questions from Members.

Mr Y Carrim (ANC, KwaZulu Natal) agreed with the Chairperson and commented that it was not the Committee’s job to simplify things. It is the duty of National Treasury and the Department of Public Enterprise to simplify things and explain it to the Committee. The NCOP will not be a rubber stamp. He welcomed the Chairperson’s plea to slow things down and stated that the NCOP could not be taken for granted.

Mr D Ryder (DA, Gauteng) stated that the Committee kept on getting ‘a snapshot’. The Committee needed to look at the whole picture to better understand what had been presented. He asked for an understanding of the trajectory of debt up until now. In terms of the repayments, what needed to happen if R59 billion was thrown at the problem today?

Mr Ryder said he was scared by the final point on slide 9 which states that ‘failure to execute funding plan may result in Eskom experiencing liquidity shortfalls at 31 March 2020 and require additional funding in addition to funding provided through the Special Appropriation Bill’. That came across as an early warning message. What was the trajectory that got the entity to this stage? What was the final outcome? He referred to the funding plan mentioned in the presentation. Does that mean that Eskom was going to be raising more debt to pay off the current debt? What was Eskom going to look like going forward? What was this intervention going to try and achieve?

The Chairperson asked Mr Julies to highlight the timelines from 2009 when Eskom was in R40 billion worth of debt up to now.

Mr Julies replied that the reason why background information on the financial crisis of 2008 and 2009 were given was to show that government intervention at that time was the right thing to do. Government decided to introduce a stimulus package in the face of the global financial crisis. To grow the economy during a time of global financial crisis government will need to spend money. Government spent money specifically on infrastructure. This infrastructure was the building of schools, clinics, hospitals and roads etc. Government also then stated it would provide guarantees for infrastructure spent as a way to stimulate the economy.

Mr Ryder asked what the debt was at the time.

Mr Julies replied that Eskom’s debt at the time was R40 billion. Now the debt has an additional R400 billion. The current amount of debt was as a result of the outcome of a deliberate countercyclical financial policy strategy. Government did not anticipate, while it was committed to raising debt, that year after year the economy would underperform. The South African economy was underperforming. When government underperforms on growth then it also underperforms on revenue. This is because the revenue that will be able to raise through taxes is linked to the performance of the economy. Revenue that was projected is based on growth forecasts. Government projected lower growth and lower revenue. Expenses are not lowered so government has to borrow. When revenue underperforms and the expenditure still needs to be financed government has to borrow more. Government then had to borrow to finance the appropriated expenditure. For Eskom, when the economy underperforms the need for electricity drops. The revenue of Eskom then decreases. This revenue was supposed to service Eskom and service its debt. Today Eskom’s debt stood at R450 billion because it raised a lot of borrowing and the intention was that Eskom would be selling electricity to service that debt. But it could not because there was no demand.

The Chairperson pointed out that in 2009 there was said to be a guarantee made to Eskom. Was it correct to say that this money was converted into an equitable share?

Mr Julies replied that there was a loan from government to Eskom. Eskom was required to pay back the loan with interest. There was then a conversion from a loan to a grant and this meant that Eskom did not have to service the debt, it did not have to pay interest on the loan.

The Chairperson thanked Mr Julies for the explanation.

Mr E Njandu (ANC, Western Cape) stated for clarity that Eskom was given a R60 billion loan from Government and that was converted into a grant. At the time the debt of Eskom was R40 billion and now it was R450 billion.

Mr Julies said that in February the Minister of Finance announced that Eskom would be requiring funding. Eskom would be requiring R23 billion per year for the next 10 years. When the Minister made the announcement it was not in the budget for 2019/20. The Minister just made the announcement in the budget speech. What the Minister had in mind to legalise that R23 billion for the 2019/20 financial year was that amount would only be required after October. In February as well, money was approved for the contingency reserve. Post the budget speech and the uncertainty of Eskom’s finances and the announcement that there would be unbundling of Eskom into three different entities lenders, in the absence of clarity of the unbundling process, were unsure as to who would be paying back their money. Lenders grew concerned and were reluctant to transfer funding to Eskom even when contracts and commitments were entered into. Eskom did not get the funding that was required to meet the debt that was falling due and this required government to intervene. The R23 billion needed to be brought forward. The only way money could be brought forward or transferred quickly was through the Section 16.  Section 16 is very clear as to what amount can be transferred annually, there was a specific formula used to calculate this. The amount came to R17.652 billion. Once this is approved Section 16 allows government to transfer funds immediately to Eskom. R23 billion was intended for 2019 and government secured R17.652 billion through the allowance of Section 16. Government was, however, only transferring the funds as and when Eskom needed the money to settle its debt and meet its obligations. So to date the amount that has been transferred, of the R17.652 billion by Eskom, was R13.5 billion. R4.1 billion could still be transferred through the provision made by Section 16. However, R5.3 billion which was needed to reach the total of R23 billion for 2019/2020 was not catered for under Section 16. The decision was made that the R5.3 billion would be taken from the contingency reserve. That means that the R23 billion for 2019/2020 comes from Section 16 and the contingency reserve. The President then realised after SONA that more money was needed. Eskom needed money now so the decision was made that money should be brought forward from the funding planned for the future years. From the total R230 billion, National Treasury frontloaded an additional R26 billion for 2019/2020 and an addition R33 billion for 2020/2021. The Auditor-General would only sign off Eskom’s financials as a going concern if additional funds were provided. This would help Eskom meet its obligations over the next twelve to eighteen months. As it stands government was not expecting Eskom to need more funds.

Every year there is a funding plan so there was no reason to be scared of it. As long as your revenue is not fully financing your expenditure you have to have a funding plan. The funding plan will explain how Eskom will service its current and maturing debt as well as how it plans to raise funding to finance the operational plan. It was good for investors to see what Eskom’s funding plan will be.

A Department of Public Enterprises representative clarified that the R59 billion was intended to assist Eskom as a going concern for the Auditor-General to sign on its financials. The R59 billion is meant to ensure that for the next eighteen months the entity was a going concern.

A National Treasury representative replied to the question about the risk of Eskom experiencing liquidity shortfalls by the end of March 2020. Currently, Eskom had managed to secure 58% of its R46 billion funding plan. If they cannot raise the rest of that funding it will probably result in government having to step in. What was important for the lenders to honour or assist Eskom in terms of advancing further lending, was the fact around the restructuring process happening at Eskom. At the moment lenders were concerned as to the future roadmap of Eskom and what it would entail. What were the funding plans for Eskom? What was the role of the CRO? What was government doing with Eskom’s debt that had ballooned from R40 billion to R450 billion? Because as it stands Eskom cannot service that debt on its own. This risk was highlighted by Treasury. The risk that if Eskom was not in a position to honour its funding plan there was a possibility that Eskom may need additional funding than that announced in the Special Appropriation process. Treasury did communicate with the team from Eskom to ensure that the cash flow was managed on a daily basis.

Mr Ryder referred to slide 7 of the presentation and commented on the contingency reserve. It was stated that the remaining part of the R23 billion may be disbursed from the contingency reserve. Was that legal? The contingency reserve has certain conditions around it. On the funding plan, 58% of the R46 billion had already been secured but what was the funding mix of that? Did that include consumption collection, i.e. collection for services, or will the R46 billion be raised purely from external funding, special appropriations or contingency funds being used? What options would be available to Eskom if it does fail to execute its funding plan? We might run out of options by 31 March 2020. On slide 9 it stated that National Treasury was developing loans to be imposed both before and after transfers were made to Eskom. The conditions of the loan were massively important. He wanted to understand the debt trajectory. The presentation explained that in 2009 Eskom’s debt was R40 billion. He wanted to know where the transition from R40 billion to R450 billion debt came from. There had been no value for money. In terms of how Eskom was operating at the moment, was there restructuring happening? When will Eskom reach a stage where it is sustainable and able to pay its own debt? Mr Ryder commented on the process of procurement. Was Eskom getting value for money in terms of procurement going forward? How urgently can National Treasury intervene to make sure that there was value for money coming into Eskom?

Mr M Moletsane (EFF, Free State) commented on slide 10. It was highlighted that Mr Nomvalo was appointed Head of the Chief Restructuring Office but that there was also a Chief Restructuring Officer. Was duplicating roles not putting Eskom in further debt? Was the Chief Restructuring Officer incapable of performing the duties that Mr Nomvalo is tasked with doing in terms of creating that turnaround structure?

Mr Njandu raised a question on the funding plan. Were there any measures that Treasury had in terms of the target of the R46 billion? What were the practical measures to avoid the situation of liquidity shortfalls by 31 March 2020?

Mr Carrim said that Treasury and DPE monitors Eskom’s daily finances and the trends that had emerged since the decision to make more money available to the entity. What were those trends showing so far? Could Treasury share that information with the Committee or was it market sensitive? There must be progress happening as money was being transferred into Eskom. Mr Freeman Nomvalo was a good choice to have as CRO. He expressed his support for the idea of the CRO. Were there any tensions emerging between established management in Eskom and the CRO? The CRO could be seen as an external monitoring agency and if so how was that being managed? There was also the urgent matter of appointing a new CEO and filling the vacancies that exist at senior level. What was the progress on filling those senior management positions? He hoped that the special paper would address the many issues that preoccupy the Committee. The Committee did not want generalities. A clear and precise way forward was needed. There needed to be a very clear strategy with very clear timelines. He hoped that the special paper would be negotiated with the trade unions. Otherwise there will be an immediate response from the trade unions saying that they were not consulted. He also hoped that the special paper would include broader energy policy issues. There was going to be increasing divestment from coal. Many investors were beginning to retreat as other sources of renewable and clean energy become more prominent. Many businesses were going off-grid. Middle-class people who could afford to were going off-grid. There were many people, who were Eskom clients and consumers, seeking other sources of energy. Given the changes in the industry and policy to take into account climate change and the receding value of coal and the fact that so many people were going off-grid. The paper needed to consider all those issues.

The Chairperson commented on the CRO. The CRO office will need human resources. What financial impact will there be in terms of establishing this office? There was a need for the office but she wanted to know what the financial implications of the CRO will be. What were the terms and conditions under which the CRO was appointed? Was his term of office contractual? What were the terms of his contract? Maybe things should be done in a different way. It was the mandate of the Department of Enterprise to deal with State Owned Entities (SOE). However, when a SOE needs funding that entity comes to this Committee for processing. All the relevant parties needed to be given enough time to look at the bigger picture, holistically, and not to deal with the problems in piece-meals. The SOEs needed to be dealt with head-on. She wanted to know about the conditions given to Eskom and who could contribute to them. To what extent will the various parliamentary Committees and stakeholders in this sector have an influence on the conditions given to Eskom? Where will the combined R59 billion for the next two years come from? Where will government get this money from? On the roadmap, the Committee, as an oversight body, was interested in the stakeholder roadmap. All interested parties need to be a part of the development of the road map. There should be maximum support for it. Lastly, would the R23 billion that must be given to Eskom each financial year be adjusted for inflation?

National Treasury responses

Mr Julies said that the Special Paper will answer many of the issues raised by the Members because it was meant to be all-encompassing. In the context of a structural reform, not only of the entity, but also of the sector, teamwork was needed to deal with all the challenges and to find solutions. Multiple stakeholders needed to be involved. There needed to be absolute clarity on what Eskom wanted to achieve and there had to be commitment to achieve that goal. There needed to be synergies between all stakeholders, be it the trade unions, the private sector, government, civil society and Eskom itself. Once a goal has been set, there also needed to be accountability in terms of measuring the execution the objective.

The Chairperson clarified that the resolution taken by the Committee stated that as soon as the Special Paper was completed the Department of Public Enterprise would make the Paper available to the Committee. Members expressed the need to convene quarterly biannual joint meetings with the Portfolio Committee on Public Enterprise. There was a need to underscore the implementation of necessary consequence management. Consequence management should also form part of the conditions. There should be consequence management at every level of Eskom. The Committee needed to work together with Eskom to ensure that trust was regained from the public.

A National Treasury representative, in response to Mr Ryder’s question on the contingency reserve, said the reserves could be tapped into. In February 2019, the Minister of Finance, during his Budget Speech, did highlight that the contingency reserve would be increased by R7 billion to look at possible requests from South African Airways, the SABC and from Denel. A few weeks back R1.8 billion was provided to Denel from the contingency reserve and as recently as last week R300 million was provided to SA Express, also from the contingency reserve. The amount that was available at the beginning of the year was R13 billion. The Minister was limited by what he could draw from the contingency reserve depending on how much money was in it. The second option was to look at the Appropriation Act. This allowed the Minister to appropriate funds for Eskom but the earliest funds could be drawn from there was in December or January. National Treasury therefore had the two options of drawing funds from the contingency reserve or under the Appropriation Act.

During Treasury’s daily liquidity call there was an understanding that an extra R4.1 billion of the R17.652 billion could still be advanced to Eskom during the course of the next three months. Based on the daily calls, Treasury understands that Eskom would need the remaining R4.1 billion by October or November 2019. There was no immediate requirement to draw from the contingency reserve nor a requirement to seek funding from the Appropriation Act as soon as December or January 2020. The situation was being managed by Eskom, Department of Public Enterprises and Treasury on a daily basis. On the funding plan and what the R46 billion was comprised of, the amount was formulated after Eskom looked at its revenue and cost projections, and what it had available to fund its operations. It also takes into account cost containments that they have done. Any movement, be it lower revenues or cost optimisation has an impact on the funding plan. That was a net requirement after taking into account all revenues, tariffs and costs optimisations. Things do change depending on how the economy performs and that did have an impact on the funding plan, but that was being managed on a daily basis between Eskom and Treasury.

On Eskom’s debt trajectory, National Treasury’s concern was that if the debt situation was not arrested very soon, then there could be a situation where the debt could rise well above R450 billion. The work of the CRO will be to look at the various options available to deal with the debt. It was important to highlight that while Treasury arrests the debt trajectory, the business model of Eskom needed to be more robust. There cannot be a situation where government takes over debt but Eskom was still in the same situation where it was not generating sufficient cash to service new debt that may arise. This would be part of the unbundling process to restructure Eskom’s business model to ensure that it does not come back to taxpayers to request more funding. The CRO will be working with Eskom, the Department of Public Enterprise and Treasury to start the unbundling process. The CRO will also be looking at the various options for financial restructuring around the debt issues of Eskom.

On how Treasury was dealing with procurement issues and whether Eskom was getting good value for money, Treasury was looking into this together with DPE. The restructuring and unbundling of Eskom will also include renegotiating the coal contracts at a more favourable level for the entity. However, Eskom was not getting value for money in terms of procurement currently.  

Treasury could not disclose what the actual cash flows were or who the lenders were as that was market sensitive information. Treasury does have detailed information on spread sheets. Treasury will have to discuss how to share that information with the Select Committee as it does contain very market sensitive information. The CRO was meeting with senior management in Eskom looking at cash flows. The CRO was also having discussions with independent parties around how to deal with the debt and liquidity. The concerns raised over the conditions attached to the recapitalisation of Eskom was a concern to Treasury as well. Treasury does not want a situation where conditions are put into place but the conditions are not met and there are no repercussions or punitive measures. Treasury was working with DPE on strengthening the conditions to be more stringent. Treasury felt it needed to be firmer with conditions around the implications if these conditions were not met and on who takes accountability for the conditions not being met. There will be pre-conditions meaning that Eskom will have to meet some of the conditions before the transfer of the additional funding.

Treasury shared Members’ concern about the global picture of SOEs. Treasury has a global perspective in terms of performance of SOEs. Treasury could provide a picture on the performance and challenges SOEs to the Committee. Treasury was considering disclosing the conditions to the public. To say that everyone will be held accountable to that, and the public will then know the conditions that will be imposed on Eskom.

On the R23 billion allocation to Eskom, the sum will be availed to the entity yearly for the next 10 years; to make it R230 billion in total. Depending on the requirements for the year, allocations will be adjusted for inflation. On where the R59 billion will be coming from, Treasury will look at where it could cut budgets by 3-5% over the next three years. If Treasury cannot cut budgets or raises taxes then government would then have to go to the market and borrow. In some of the conditions given to the various SOEs, Treasury had asked them to identify non-core assets within the entities and to sell them off. State Owned Entities have identified non-core assets to sell.

A DPE representative said the Department would provide the Committee with reports on assessments and funding requirements of the seven SOEs. The point raised on the implementation of consequence management was a very important one. In some cases when officials realised that they had been found of wrongdoing they resigned. This cannot be allowed to happen. Resigning cannot be allowed to absolve people from action being taken against them. It was important to highlight that resigning or getting out of an institution does not mean that people will be allowed to get away with wrongdoing. The application window for the position of CEO had closed and the shortlisting had been done. Those lists will be taken to the Minister and then tabled by Cabinet. The DPE has been working on a Special Paper that will provide a clear roadmap and state of the energy sector because this situation cannot only be looked at short-term. The long-term of the energy sector also needs to be looked at. On the work of the CRO, it had already started. The CRO will provide a clear picture of what the costs will be once all those options have been interrogated and then will indicate the requirements from an Eskom perspective. It will give an indication of the costs that will be allocated to realise what the CRO is to undertake. The primary mandate of the CRO was to develop the finance options of optimising the balance sheet of Eskom. The financing and operational part needed to be looked at. Eskom needs to be looked at holistically so that long-lasting solutions could be found. The CRO was currently reviewing all available options and as soon as they have been evaluated they will be narrowed down to what is actually viable and then a recommendation will be made to government. There are three sources through which Eskom can be funded. It could be through tariffs, debt or government intervention. What has historically happened was that the tariffs that Eskom has been applying for has been less than what was expected. That has resulted in a funding gap. In terms of the CRO and tensions emerging, Eskom, DPE and Treasury have all been aligned and were meeting periodically. All stakeholders have been involved and the support from Eskom is vital if this process and turnaround is to be successful. The Department was working very closely with National Treasury on the conditions and making sure they are aligned.

National Treasury clarified that the bailout conditions will be shared with the Select and Standing Committee on Appropriations so that government gets supports from both Committees before it gets imposed. Because if government imposes the conditions without consulting Parliament, that would be a problem. Rating agencies were concerned by the amount of guarantees government has. Treasury wants to set a limit for guarantees amounts. Treasury will look at a guarantee limit for Eskom and other entities. Treasury should not be issuing guarantees for current expenditure. Guarantees must be for infrastructure. When a guarantee is provided to link it to some infrastructure; it must not be for operational purposes. There must be a reducing of exposure. In the Budget Speech in February it was said that the following was needed to turnaround the situation of SOEs: the restructuring of the business model, need to restore good governance and strong internal financial controls. Bonuses should not be based on the balance sheet. Bonuses should be based on the income statement.

A delegate from Eskom responded to some of the questions asked by Members. On how Eskom determined the R46 billion in the funding plan, when the entity does its budget it looks into what the market is doing and compares this to the money that it believes it can raise. Some of the funding was very specific. This meant that Eskom might get funding that could only be spent on a specific project or there is funding called the general pool of funding. Eskom has an entire department working to find out where it can source the R46 billion from. On the future of the entity, EBITDA (earnings before interest, tax, depreciation and amortisation) had been raised. Eskom believes that EBITDA will strengthen. There were a couple of variables that could impact it- price and cost inflation. The key is going to be to restructure the balance sheet of Eskom. Eskom was not sure yet how it was going to do it and by when it was going to. This would be unfolding during the CRO process. On how Eskom went from R40 billion to R450 billion, there were a couple of big projects that the entity had to undertake in 2008 when it realised it was running out of capacity. Eskom had to bring back online three stations that were old and that cost a lot of money. Eskom then built a pump storage in KwaZulu-Natal. Eskom had to also then strengthen the transmission network. Those were the big projects that incurred most of the money that moved the debt from R40 billion to R450 billion. Eskom meets with the CRO on a weekly basis. During those meetings Eskom takes the CRO through the business itself so that the CRO has an understanding of the finances and the operational parts of the business. Experts are brought in to explain to the CRO how the business works.

A DPE representative raised a point on costs. Coal procurements was where the costs had actually ballooned. Eskom was not actually generating coal from where the coal was. There were transportation costs and this was where a large portion of the costs were coming from. Those costs need to be reviewed in order to reduce costs. Mr Carrim was correct in saying that many of the banks were no longer funding coal projects and have indicated that they want to fund cleaner sources of energy. The energy mix going forward is going to be important. Eskom needs to migrate to cleaner sources of energy and move away from using fossil fuels.

Mr Ryder raised an issue on the National Energy Regulator of South Africa (NERSA). Treasury cannot blame NERSA for not approving price hikes. NERSA must not be seen as a part of the problem. NERSA has a mandate to deliver on and they have delivered on that mandate. They are meant to protect the consumer. If they see that there are unwarranted increases they need to block those. He did not see NERSA as being part of the problem. The funding that went into the big projects should start showing a return on equity. Has there been any impact from those projects in terms of the returns coming in and lower cost realisations? Or has that yet to be achieved?

The Chairperson asked if the Minister was allowed to spend from the contingency reserve without consulting the Committee. Was it legal? On the projects that Eskom had developed, she stressed that the infrastructure projects must have maintenance plans. The Department needed to ensure that Eskom has maintenance plans for those infrastructure projects so that the lifespan of each infrastructure project will be known. She asked the delegation from Eskom, DPE and Treasury to come up with a long-term socioeconomic solution. She looked forward to a permanent plan and solution going forward. Stakeholders needed to work on something that is sustainable. On Treasury’s suggestion to cut budgets to free up more funds, had it ever considered approaching the Public Investment Corporation (PIC) for money?

The delegation from National Treasury replied that PIC had already invested significantly into Eskom and was in fact the biggest lender in terms of its exposure to Eskom. There was a growing market for investment in renewable and clean energy. The continent needed energy and there were resources on the continent that could provide that energy. There was an opportunity for Eskom and others for investment into African energy resources.

Mr Julies agreed that they were not providing a comprehensive plan to deal with the systemic issues at Eskom. He agreed that it was very important to have that bigger picture. Treasury does not ultimately want to be cutting budgets, it wanted to be growing the economy. Eskom is vital for the economy because without any energy there would be no investors. In terms of maintenance, the Department had a nine point plan that would restore the generating capacity of Eskom. Asset management was key. The power plants that have massive costs need to be maintained in order for them to produce sufficient electricity.

The Chairperson said that given the paradigm shift towards the independent power producers (IPPs), what will be the input of the IPPs in the already built infrastructure? Will the paradigm shift be sustainable for Eskom?

An Eskom representative, in response to whether Eskom had realised returns from those stations coming online, from a national perspective there was a benefit as there would have been load shedding much earlier. The pump storage stations and transmission lines have also been beneficial. The new Eskom projects will have a huge cost benefit when those stations come online. He then responded to the question on the role of the IPPs coming in. One of the issues with renewable energy is that there needs to be a mix. When solar panels are used there are times in the day when there is no light. When wind turbines are used there are times when winds die down so there needs to be a mixture of energy sources. The optimal mixture of energy for the country needs to be found. Some of the older power stations are coming to the end of their useful life. Going forward there needed to be a combination of renewable, fossil fuel and nuclear energy sources. Eskom reports to DPE on a quarterly basis on the maintenance of power stations and other infrastructure.

Mr Julies, on the question about the R23 billion, the sum will be allocated per annum; that was the projection. Government announces a nominal amount. When Eskom said this was what it required it worked on a balance sheet. If that amount changes government will have to give a different nominal amount. The entities do their balance sheet on an accrual basis so it is marked to the current rate. For government it is the cash it has at the time of entering into that transaction or guarantee. He assured the Committee that using money from the contingency reserve was legal and that Treasury never went over the prescribed limit. Before any money is drawn down or used, the Appropriation Bill must be enacted. It has to go through Parliament and once it has been enacted then only can the Minister of Finance use funds from the contingency reserve. At some point after the Minister uses the contingency reserve, there will be some form of reporting to Parliament in terms of what amounts had been used.

The meeting was adjourned.

 

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