Special Appropriation Bill [B10-2019]: Financial and Fiscal Commission & Parliamentary Budget Office briefings

NCOP Appropriations

18 September 2019
Chairperson: Ms D Mahlangu (ANC; Mpumalanga)
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Meeting Summary

The Committee was briefed by the Parliamentary Budget Office and the Financial and Fiscal Commission on the Special Appropriation Bill.

The PBO highlighted the unsustainable financial position in which Eskom finds itself. The Bill empowers the Minister of Finance to impose conditions on Eskom before and after an amount or part of an amount is transferred. The 2019 financial position of Eskom shows the biggest challenge is around the significant increase in primary costs and lack of cash. The entity’s ability to repay its debt has also deteriorated and its earnings from operations has declined significantly. The short-term debt has escalated and this compromises the entity’s ability to meet its operational commitments. The broader issue is around its long-term strategy and what this would entail.

Members raised concern of the draft conditions not being made available to the Committee. It was important for members to know what the conditions are before the Bill can be approved. Members asked what powers the Minister of Finance has in imposing conditions on Eskom before and after the transfer of an amount of money. Members raised concern about the long-term contracts given to service providers and asked for such contracts to be reviewed and audited. Members were disappointed the presentation did not touch on the process of the separation of Eskom into 3 entities. The Committee raised concerns of whether Eskom is able to manage its costs of personnel, who is going to benefit from a monetary intervention, conditions to be imposed on the Minister of Public Enterprises, lack of consequence management, Eskom’s loss in public trust, rules governing the contingency reserve and the dual mandate of Eskom.

The FFC highlighted that Eskom was in crisis and requires an intervention. The main concern is profitability and a clear strategy to improve the viability of Eskom and return it to profitability. The challenge is not about demand but about supply costs. The Commission recommends that certain conditions must be included before the enactment of the Bill.

Members raised concern on the proper monitoring of conditions. Members asked what the main cost drivers were that led to government guarantee exposures and how it can be rectified going forward. Members raised the concern of unpaid debt by municipalities, the focus on the private sector and the market response to the enactment of the Bill. Members also raised concern for the need of consequence management, accountability and binding conditions rather than soft conditions. Members commented on the presentation failing to give a broader picture rather than a narrow snapshot, negotiations with trade unions in outsourcing non-core services, loss of sovereignty and the over-regulatory reach of having a detailed legislative framework with timelines for unbundling Eskom.

The Committee agreed to arrange a joint meeting with the Standing Committee on Appropriations to deal with the conditions. The Commisison was requested to submit outstanding responses in writing and the PBO made an undertaking to forward certain responses to Members.

Meeting report

Briefing by the Parliamentary Budget Office (PBO)
Ms Nelia Orlandi, Deputy Director: Public Policy, PBO, said Eskom has to borrow increasing amounts to service its debt obligations, placing it in an unsustainable position.

The Special Appropriations Bill (hereinafter referred to as the Bill) was tabled by the Minister of Finance in July 2019. The Bill addresses the going concern status of Eskom and requests approval for additional financial support for the entity. Conditions before the transfer of an amount may be imposed by the Minister of Finance in writing. The Minister of Finance must impose conditions after the transfer of an amount. Any part of the amount not transferred by the end of the financial year reverts to the National Revenue Fund (NRF). The Parliamentary Committees approve the Bill subject to conditions imposed on the Minister of Finance, Minister of Public Enterprises and Eskom.

Mr Dumisani Jantjies, Deputy Director: Finance, PBO, said the biggest challenge is the entity not having enough cash. The debt security has increased over time and this indicates the increase of interest payments. The debt trend shows that over the past 5 years debt has been increasing. Short term debt has escalated and this compromises the entity’s ability to meet its operational commitments. On Eskom’s 2019 financial performance, there has been a loss of electricity sales by consumers. Municipal debt has increased and this impacts the entity’s ability to achieve its operational requirements. The entity’s overall production volume from generation sources has declined. There is a significant increase in primary costs.

Mr Jantjies said another challenge is around costs and how the entity is able to manage costs. As debt increases, the cost of debt increases. Financial costs increased by 16% and the entity’s ability to cover interest payments has declined significantly. Earnings from operations declined and the entity’s ability to cover production costs has deteriorated further. There is an inability for the entity to raise money from the markets to deal with some of the challenges. As a result, there are bailouts or requests for additional money. There is material uncertainty relating to the state of going concern. Eskom sees government support as part of its turnaround strategy and main source of finance. On its ability to repay debt, from 2015 it was getting stronger but from 2018 the ability deteriorated further or there was more debt required to be paid. The long-term strategy and what it would look like remains the broader issue.

Discussion
The Chairperson thanked the officials for the presentation and asked Members to raise questions and comments.

Mr D Ryder (DA; Gauteng) noted the R60 billion capitalised loan before 2010. Was the loan immediately capitalised or was it raised before 2010 and only capitalised in 2010? Draft conditions were provided to the Standing Committee and not the Select Committee. What are those draft conditions? Can they be provided to members? Does the Minister of Finance have limited and indirect powers to impose conditions on Eskom? On the R59 billion that has been appropriated, is it going into the current ratio or is some appropriated for the reduction of longer-term liability? Where is the money going to be spent? On the debt trend, it is useful to see the trend from 2009 when debt started to escalate.

Mr Ryder said the National Energy Regulator of South Africa (NERSA) has its own mandate. The developmental mandate of Eskom has been abused for self-enrichment and state capture. Passing this onto consumers is not fair. Before blaming NERSA, it is important to remember they act as a control mechanism and have their own mandate.On employee benefits, can you provide members with more information of the 7% increase going up to 13%? The responsibility of the Department of Public Enterprise (DPE) to make the transfer is confusing. Can you explain this? Shouldn’t it be a condition on Eskom that it does not raise further finance from the market?

Mr Z Mkiva (ANC; Eastern Cape) asked whether the presentation is drawn from information provided by Eskom or the PBOs own research? If the information is from Eskom itself, have you conducted a proper analysis taking into account the entity’s context? Members were told there are long-term contracts which pre-date this dispensation. Contracts seem to be a permanent feature of service providers. These contracts are bleeding Eskom into the state of affairs it finds itself in. It needs to be exposed if people want the crisis to be maintained so they can intentionally benefit from it. If Eskom can’t be liberated from state capture then there is a fundamental problem.

Mr Mkiva said electricity is a key asset to the nation and the entity can not be allowed to dwindle year by year and take resources that are required by the poor only to enrich a particular mafia that has not been exposed. The presentation must make a critical analysis and work in the best interests of the South African populace. The population is growing and there is a huge demand for electricity in the country. How can you say the declining electricity sales led to a decrease in production? The Committee must ask for a review of the contracts and to have them audited in order to have an informed picture. Members would have liked the presentation to touch on the process of separating Eskom into 3 entities.

The Chairperson noted the government guarantee given to Eskom in 2009 and 2015. What impact has this intervention had on Eskom? What is your observation on the DPE’s capacity? What is your view on DPE’s commitment to reskill and upskill employees? On costs, what is your view of the costs of personnel at Eskom? Is the entity able to pay and manage its personnel at this stage? Understanding the value for money is important. Who is going to benefit from an intervention? To what extent are the Committee’s inputs taken seriously on the conditions for transfer. The draft conditions must be made available to members before finalisation and approval.

The Chairperson said the presentation indicates the Minister of Finance “may” impose conditions before the transfer and “must” impose conditions after the transfer. Why the choice of words? There is a legal difference between the two words. The Committee needs to know what the Minister of Finance expects from Eskom and the DPE. The Committee is not making any decisions today. Members will first have a discussion and take into account the analysis. If money has not been utilised for the year it must be reverted back to the NRF and used for something else. The insertion of the word “must” is important. The approval of the Bill is subject to the conditions on the Minister of Finance, DPE and Eskom. The Minister of Finance has to have some kind of Memorandum of Understanding as a condition on the DPE. The reporting line should be very clear. The Minister of the DPE is the critical head responsible for the functioning of Eskom and the Committee expects conditions to come from him.

The Chairperson noted the presentation highlighted that Independent Power Producers (IPP’s) contribute to 5% of energy that Eskom produces but it accounts for 25% of primary energy costs. Why is there this misalignment?The matter of lack of consequence management was raised the previous day. There are findings of fruitless and wasteful expenditure but there are no steps or corrective measures that have been taken. What is your view? The cost of debt graph in the presentation only goes up to 2021. The projection in the graph indicates that even with an intervention there will still be this increment effect. The Committee is expecting Eskom to be independent, sustainable, able to raise its own revenue and run its own business and mandate.

The Chairperson said there are warm bodies doing wrong things in the name of Eskom such as state capture and corruption. The Committee can not promote the approval of public funds to fund corrupt activities. As a result, members want to see the conditions. Based on what the conditions are, members will be able to approve the Bill. Until such time actions are taken and people are made to account and pay where necessary for what they have done, this will be ongoing just like it’s happening in South African Airways (SAA). Eskom has lost public trust and have to regain it. The public must see what is being done.

Ms Orlandi replied tha the conditions are taken from the Amendment Bill. In terms of the Special Appropriation Bill, the Minister of Finance will determine the conditions to be imposed on Eskom. On reporting lines, the Minister of Finance will transfer amounts to the DPE that will then transfer it to Eskom. They all have a role to play in terms of reporting lines. On DPE’s capacity, the PBO looked at its structure. It has 3 programmes and the biggest amount of funding is allocated to Administration. The funds will be transferred from either programme 2 or 3. On its organisational structure, by the end of this financial year, it will have full staff. This includes high-level management positions. The Special Appropriation Bill mainly transfers money from programme 3 but the Amendment Bill transfers from programme 2 so there is confusion around where money will be placed and transferred from.

Mr Jantjies explained that in 2015 the PBO looked at state-owned entities and this work was commissioned by the Standing Committee on Appropriation. This work can be made available to members. State-owned entities are faced with the issue of duplicate mandates. Government needs to deliberately look at non-commercial mandates because there is an expectation that it will address social issues. There is an assumption that this is the responsibility of government and it is an important aspect to take into account in long-term strategies. It is easy for entities to blame the non-commercial mandate when it is doing poorly. It speaks to governance issues and the same argument around NERSA can be applied here. On employee benefits, the figure has increased between 2018 and 2019 by 13%. Employee costs only increase as much as other costs do. On capacity, employee capacity has increased. The PBO has done some work on Eskom and this can be shared with members. Conditions are seen as a mechanism to ensure the entity is compliant and adheres to governance issues. On production costs, there is quite a high increase but the fact remains the costs are higher than the entity is able to deal with. On the R60 billion loan, this will be looked into and sent to members. On IPP’s, contracts were entered into and the benefit is realised over time.

Mr Seeraj Mohamed, Deputy Director: Economics, PBO, replied there has been a focus on finances. The PBO tries to give an in-depth analysis but it is not possible to know everything about Eskom. Some issues have still not come out at the Zondo Commission. One of the biggest challenges going forward is how to manage costs because there is so much uncertainty on what is happening with coal contracts. There is going to be a struggle with coal costs.

Mr E Njandu (ANC; Western Cape) said the Committee needs an in-depth analysis so the turnaround strategy does not become a turnaround circle. If this happens, it is uncertain what the end point is. How do members ensure there is no continuity of things mentioned in the Zondo Commission? Members do not have an idea of the state of projects and their duration. The presentation is not giving the Committee clear information so that it can make a clear decision.

Mr Ryder said Eskom’s failure to execute its funding plan resulting in liquidity is a potential red flag. On the contingency reserve, what are the restrictions, limitations and conditions? Is there any kind of limitation on what can be paid from the reserve? How much gets appropriated from the reserve? What are the rules governing the reserve?

The Chairperson said Eskom has a dual mandate, a developmental and a commercial one. The commercial mandate ends up subsidizing the developmental one and this causes the entity to collapse. How can this problem be resolved?

Ms Orlandi replied that the contingent reserve for this year is R13 billion. It is normally used for unforeseen, unavoidable purposes and is allocated during the adjustment appropriation process. In the past, the entire amount has been appropriated.

Mr Jantjies explained that conditions are used to strengthen the behaviour of entities.The Committee is encouraged to follow through on some of the conditions in the near future. On mandates, it is important to strictly separate the 2 because it conflicts in terms of funding. The main issue is for government to attend to the 2 mandates separately.

Mr Mohamed replied there has to be clarity within government on dual mandates. Social requirements on all corporations must not be seen as bad things but rather things to be well managed.

The Chairperson thanked the PBO for their presentation. Members must agree on a joint meeting between the Standing Committee on Appropriations and the Committee to deal with the conditions. Can we take a resolution on this?

Mr Ryder replied a joint meeting is not appropriate. The separation of the 2 Houses is important. The Standing Committee should have the first bite and the Committee has the second bite.

Mr Y Carrim (ANC; KwaZulu-Natal) replied there is no problem in having a joint meeting provided the Committee does not take any decisions on the basis of it. The advantage is that more members and researchers are present. This matter is too complex and it needs to be finished reasonably quickly. The Committee is not taking any decisions it is just hearing what the conditions are.

Mr Mkiva seconded this. The 2 Houses are not competing. In the interest of time constraints, it is important to allow the 2 Committees to sit for the purpose of hearing what the conditions are.

The Chairperson said cost effectiveness, time constraints, resources and the availability of people who will be making presentations must be considered. The Committee will have its own session to take its own decisions.

Mr Ryder accepted this but cautioned that this practice should should not become a precedent. There are benefits of being subsumed into thinking with the majority in an environment of a joint sitting. Members must be warned against this. The Committee should not take any decisions or be forced down a particular path.

The Chairperson asked the Committee Secretary to process the joint meeting and for the next presentation to begin.

Briefing by the Financial and Fiscal Commission (FFC)
Prof Daniel Plaatjies, Chairperson, FFC, said the Eskom matter is extremely complicated and not even National Treasury (NT) knows what is going on. The DPE is not capable to adequately manage and monitor Eskom. The Board and Chief Executive Officer (CEO) of Eskom have greater powers than the Minister of Public Enterprises. The issue lies around government guarantees. Eskom colleagues that appeared before the task team said they can not release information because of competitive principles. This is a tricky issue and can only be resolved by Cabinet.

Prof Plaatjies said the President has announced the unbundling of Eskom and the Commission welcomes this. The issue with the costs structure is compounded by the fact that many middle-class industries are opting out. People look at solar energy now and this is a danger on municipal resources. The issue is not about demand but about supply costs. The Committee must agree on the wording of “may” and “must”. On bail outs, there have been a number of rescues and it has become common practice over the years. Turnaround strategies over the years have not yielded anything.

Mr Chen Tseng, Research Specialist, FFC, said in looking at the comparison between government guarantees and exposure, first there is a budget and then at the end of the financial year there is an exposure. The deviation thereof shows the credibility or lack of credibility of the budget. Government is tightening its belt to make room for these over-exposures from a fiscal perspective. This is important for the Committee to note.There were more people working in Eskom with higher costs and headcount but the total capacity only increased by 3.5%. Operations increased yet electricity sales decreased. In other words, there is increase in input costs with more people working at Eskom but decreased or stagnant output costs. This is evidence of operational deficiencies and inefficiencies. On the income statement of Eskom, everything seems relatively defensible except the interest payment and investment requirement increased. A large part of the problem is a financial and debt issue. It is worthwhile for the Committee to look at contracts, how much Eskom is paying to service debts and the returns on such debts.

Prof Plaatjies said there is a crisis that requires an intervention. There is an element of fiscal consolidation that needs to be considered. The going concern status of Eskom has been recognized. One can’t not look at the other appropriations and its impact on a new one. The main concern is profitability. This appropriation is quite a different matter. It is about national and public interest and contains rigid conditions. It is no longer about soft conditions. The Commission remains eager to learn of a clear strategy to improve the viability of Eskom and return it to profitability. The Commission recommends that certain conditions must be included before the enactment of the Bill.

Discussion

Mr Ryder noted the debt on municipal bulk accounts that are not recognisable. There are different rules of prescription around debt. If the normal accounting practices are applied here it will make the position even worse. Is there a plan to do something about it? It’s desirable to get rid of historical debt, clean it up and move on. It would have been useful to include a view of 2009 in the presentation. It helps to see a broader view of where Eskom has come from rather than a narrow snapshot. There are projects which have managed to keep the lights on with no additional capacity. Does the capacity include the IPP’s? The need for transparency, consequences and binding conditions rather than soft conditions is very important. Conditions must be made part of the appropriation.

Mr Ryder said Parliament does not have the capacity as it stands now to do proper monitoring. The President mandated the Deputy President to have an Inter-Ministerial squad to conduct oversight. The problem is that Parliament needs to be better capacitated. On report backs, quarterly reports are massively important particularly on conditions that are going to be put in place. Conditions are key to taking this thing forward but they need to be monitored. The Committee is expecting a paper from Eskom in the next month or so. What kind of conditions would the Commission suggest? Since the country’s sovereignty is under threat, any advice is welcomed.

Mr Carrim said he had no idea the CEO of Eskom has more power than the Minister of Public Enterprises but this is not something that needs to be immediately on the agenda. The Committee does not need to consider amending it now. The presentation provides the Committee with concrete proposals and the Commission is encouraged to continue doing this. It is up to the Committee to decide whether to accept such proposals or not. On the proposal to reduce the costs of current contracts, members will have to think about this. Eskom is not involved in IPP contracts. On the proposal of accelerating the outsourcing of non-core services, the Select Committee on Public Enterprises should get this going and engage with the trade unions too.

Mr Carrim said a performance management framework can not be put in the Bill but this Committee can put some pointers in the report to Parliament. On Eskom executive and non-executive performance contracts, the Select Committee on Communications and Public Enterprises should hear this. There is no need for an Ad Hoc Committee. On performance indicators, it can be done but who is going to monitor that? This is an over-regulatory reach and is not doable. On the proposal of a detailed legislative and regulatory framework, there should rather be a pleading for delicate negotiations with trade unions. Trade unions might settle but if they see other unions making a lot of noise they might employ a different tactic. These things can’t be regulated. There is no need for regulatory and legislative solutions to what are actually problems of negotiation. Trade unions know if that if there is no settlement with government and Eskom management, there is no other alternative but to restructure itself.

The Chairperson said the issue of the power of the CEO of Eskom speaks to the governance of the institution. The Committee has received a report indicating a process has started to deal with this. On government guarantee exposures, what were the main cost drivers that led to such an exposure and how can this be rectified going forward? The Committee can not relegate its responsibility to the executive alone. The Committee has a role to play. Members have made recommendations that checks and balances are of great importance in the Bill. What is the view of the Commission? Everyone agrees Eskom is a critical entity to the economy, people’s lives, job creation and economic growth. The high level of the unpaid amount by municipalities such as Soweto is a huge problem. The issue of municipalities is taken seriously by members because it contributes to Eskom’s problems. What is the impact of monies owed by private companies to Eskom? How should it be addressed? The problem is not only in the public sector, there also needs to be a focus on the private sector. The market response to the Bill is a concern.

The Chairperson said relying on borrowing money impacts the loss of sovereignty. It shows the importance of making an intervention. What is the cost of IPP’s in the overall production costs? Eskom is financing its operations through debts. Is Eskom still able to pay from its own revenue collection? Does Eskom’s personal expenditure impact on the bailouts government gives to the entity? How does the Commission advise the Committee, together with other stakeholders, to improve spending efficiency and turnaround the situation? Conditions are important but certain things can’t be put in the Bill and will have to be in the report. The recommendations made by the Committee are not just for compliance sake. The Committee recommended the Special Paper on Eskom be published and not only presented to the Portfolio Committee on Public Enterprises. There is a need to convene quarterly or bi-annually with the Portfolio Committee on Public Enterprises. On consequence management, trade unions have codes of conduct. The situation of Eskom is where it is now because of no consequence management. Only because of the Zondo Commission things are becoming known. There should be accountability and whoever is implicated must let the law take its course. The law needs to be respected and enforced. The Committee needsto follow up and track its recommendations with government entities, especially those who receive bailouts.

Mr Carrim asked for responses to be provided in writing.

Mr Ryder agreed with this. The Commission should be invited to the joint meeting to provide guidance on the conditions.

Mr Carrim replied the Commission has already provided concrete proposals and clear measures to improve the sustainability of Eskom.

The Chairperson replied the Commission can provide additional responses in writing and nothing stops them from being present at the joint meeting.

Prof Plaatjies highlighted the President’s remark that Parliament will have to increase its role of accountability against the executive. Parliament can’t be executive-driven. There is a need to increase clear guidelines on how Parliament must keep companies accountable. Through the special appropriation, the Commission wants to achieve the protection of the country’s sovereignty and an efficient and cost-effective system. The Commission advises Parliament to have an unfettered concentration on Eskom, government guarantees and the process of bailouts. Whether this is done by an Ad Hoc Committee doesn’t matter. Law-making is part of Parliament’s oversight. Having conditions built into the appropriation is important for strengthening the institutional arrangement on government guarantees and bailouts, oversight of state-owned entities and developing institutional requirements. The rest of the responses will be circulated to members in writing.

The Chairperson said the Committee expects the Commission to work together with all stakeholders to ensure the conditions serve the interest of South African citizens and there is value for money at the end of it. The conditions can’t be separated from the Bill.

The meeting was adjourned.

 

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