ESKOM oversight report

Public Accounts (SCOPA)

09 October 2019
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary

The Committee met to consider and adopt its report on its oversight visit to the Medupi and Kusile power stations. The Chairperson went through the report with the Members and the draft report was amended substantively.

The Committee had met with ESKOM’s board and management, and had engaged with the issues that had arisen at the power stations. The Members committed themselves to monitoring ESKOM while they worked on overcoming the entity’s challenges and getting rid of corruption. When ESKOM’s financial statements were submitted to Parliament, the Committee would scrutinise them, because ESKOM had incurred a loss of R2.3 billion, R19.6 billion in irregular expenditure and a debt of R380 billion in 2017/18, and the Committee wanted to see this situation turned around.

The draft report had been amended, and the formal adoption would take place on Tuesday, 15 October 2019.

Meeting report

Committee oversight visit to ESKOM and Medupi and Kusile projects

The Chairperson said the Committee would first be going through the ESKOM report. Ms B van Minnen (DA) had made a comprehensive submission labelled Draft-3A, and would be given the opportunity to go through it. He would go through the master draft (draft 3), and when a matter arose, the Committee would refer to Draft-3A.

Ms B van Minnen suggested that the citation of the legislation used should be added into the introduction of Draft-3.

The Chairperson asked if the Committee could come back to that, as he had made a note about it.

Ms Van Minnen said that coal supply concerns needed to be added into the background of the report because coal supply issues were evident at both sites. All the Members agreed.

The Chairperson suggested that it should be expanded to coal supply, quality and management.

This was also agreed to.

Ms Van Minnen added to the background of the report that ESKOM’s two new power stations, Medupi and Kusile, were behind schedule and also had labour problems.

Mr M Dirks (ANC) asked whether, when the Chairperson included coal management, it would include all aspects of coal, including the take-and-pay system.

The Chairperson said it would.

Mr S Somyo (ANC) questioned whether it was necessary to add “towards the 2010 World Cup” in the last paragraph of page 2.

The Chairperson responded that it needed to be explained in terms of its context, otherwise it would lose its significance, because the issue of 2010 was the need for speed. The reason 2010 was mentioned was because South Africa had the World Cup, and so they had to try and get an additional electricity supply quickly. The particular sentence suggested that the project was for the World Cup, but it just so happened to coincide with it, so the sentence needed to be reconstructed.

Ms Van Minnen added, “without adequate design planning and execution,” to the end of the sentence that read “decisions are made at a high level to get some plants up and running,” on pages 2-3 of the report. Some of the issues in the third paragraph of the background to the report were only partially responsible for what led to load-shedding, because load-shedding was a result of several different factors, and not just as simple as one issue.

The Chairperson said that she was correct.

Ms Van Minnen said that in the fourth paragraph of the background to the report, a sentence should be added that states that load-shedding had had a negative effect on the economy.

All Members agreed.

Ms Van Minnen said that the deep concerns about further spending being concealed in the operating budgets -- with particular reference to the coal supply for Kusile and the issue of trucking -- should be added to the final paragraph of the background to the report

The Chairperson responded that it must be amplified in the sense of what the concern was about, because the concealment was not just confined to trucking -- it was also confined to contract management, because there were contracts that they were doing away with in Medupi. However, they were still trying to salvage that particular contract, the Clyde Bergemann Africa (CBZ) contract in particular.

The Committee concurred.

The Chairperson asked Mr Ben Kali, Committee Secretary, to add the issue of investigations and consequences, and to flag it as an issue that may trigger costs. There was also a question of whether these costs would form part of the project’s budget or if it would just form part of ESKOM’s normal spending.

Committee findings

Medupi

Ms Van Minnen said that Mr Kali needed to clarify what the fabric filter was on page 5 (4.1.16) of the report for people who were not on the site.

Mr A Lees (DA) said that the Committee needed to define what “CBZ” stood for.

The Chairperson said that it was “CBZ Contractors.”

Mr Lees said that he had asked because the ash handling equipment was handled by three different contractors. The bag filter plant was one contractor, the ash processing plant -- which was below the bag filter plant -- was handled by a different contractor, and it was the contractor which was in business rescue that was being referred to, and that contractor was Clyde Bergemann Africa (CBZ). Therefore the Committee needed to make sure of who it was talking about here, because he seemed to remember that the bag filter plant was already in place but it was the plant below the bag filter into which the ash falls which was not there, and that plant was supplied for the other five units by CBZ, which was supplying the same plant for Kusile. It was important that the Committee got that detail correct.

The Chairperson said that it was CBZ which was under business rescue.

Mr Lees said that he was absolutely clear that Clyde Bergemann Africa was under business rescue and CBZ, if it was a separate company, may also be under business rescue. He was not sure, but he did know about Clyde Bergemann Africa.

The Chairperson said that it was fine, and it would be checked.

Ms Van Minnen said that this was linked to 4.1.18 of the Medupi findings in the report, and she thought that the sentence at 4.1.18 needed to be expanded because the Committee had been there and knew what it meant, but that did not mean that anyone else reading the report would know what was meant.

The Chairperson said this was a valid observation, and she should supply the expansion of the sentence.

Mr Lees said the paragraph needed clarification, because his understanding was not that the bag quality was a problem, which was why there was mention of the boiler in the sentence. The problem was that the heat at the exit of the boilers was too high, and that was causing the bags to fail prematurely, so there had been a lot of discussion about why they could not reduce the heat. The power station was working with Mitsubishi and were seemingly getting nowhere, because the boilers were 13m too short. Had they been built 13m higher, the exit temperature from the boilers would not be too high and there would not have been the degradation of the bags. He did not recall ever hearing about the quality of the bags being the problem, because that was really quite an easy thing to fix as the bags were consumables and one could make new ones which were of the best quality. However, this was an ongoing long term problem which had been encountered at the Kriel Power Station in the 1970s, and ESKOM actually had no excuse for making the same mistake at these two power stations that was made at Kriel. At Kriel, the problems had been solved with water cannons inside the boilers, which they had installed at Medupi and Kusile, and as far as he was aware, they still had not solved the problem. He did not want to go into technicalities, but he did not think that the power station should blame the quality of bags, because as far as he knew it was the temperature of the exhausts from the boilers that was the problem.

The Chairperson asked Ms N Cenge, Content Advisor, to tie that point down.

Mr Somyo said that he agreed that the main problem was the boiler, which then led into the heat in the furnace and that itself was as a result of the design, leading into a number of other problems. Although the Committee did not think that the quality of bags was the problem, the fact remained that they had indicated at the meetings that they had a problem with the bags, and because they did not run tests themselves on the quality of the bags, the reports were on the basis of what the power stations had indicated to them, so they could not state otherwise.

The Chairperson said that both points were correct. It was just that the other challenge was that there had been parallel briefings, but he did recall them both, so the Committee just had to merge them because there was a problem. He thought some officials had cited the bags, and that was why Mr Kali had included this. Mr Lees should add his sentence, because it did fit in.

Ms Van Minnen said that maybe a way to merge it was to link 4.1.18 to what was stated in paragraph 4.1.21, because it referred to the same thing.

The Chairperson agreed.

Ms Cenge pointed out that CBZ was Clyde Bergemann South Africa, also known as CBZ.

Mr Lees said that his issue was therefore significant, because CBZ had not supplied the piping.

The Chairperson said that they should put the name in full.

Ms V Mente (EFF) said she had not been part of the oversight visit, but she was wondering about, as they were going along, where the gas boiler was and everything else that was not right. Where did the cost factor go into their findings? For instance, there were things that had deliberately been made to cost more, or others that had been changed unnecessarily so that they could cost more, just for the sake of spending.

The Chairperson said that when they got to “recommendations,” that was the one recommendation that he wanted to add, because the Committee would recall that after the oversight visit, one gentleman had had other projections as to what these projects would cost.

Ms Van Minnen said that the gentleman was named “Chris.”

The Chairperson said that was correct -- he had had other projections that he was placing right in the middle of his projections and what ESKOM was giving. However, what the Chairperson thought was important was that whilst there were other people doing work on this and analysing ESKOM, the Committee’s job was to hold ESKOM accountable and liable for its own commitments so that if there were escalations, they could not be in a position to project those escalations. If they had given the Committee a figure, it had to hold them to that figure. The Committee would take note of the possibilities Ms Mente mentioned, but it could not add it in the project as it was not in that position. That was where the challenge would come, because the Committee could not hold ESKOM accountable for figures that were not ESKOM’s. Of course, the Committee could consider the other work that they had done and noted, but what ESKOM had put in their books and records was what the Committee had seen. The Committee would come to this point in the recommendations, because it captured the whole argument at the end as to whether ESKOM would complete the project within the time they said they would, and within the costs they projected.

Kusile

Ms Van Minnen said that the team had done a very good job in putting together the context as to why Medupi was located where it was. This was why it would be a good idea to add a piece about the location of Kusile, as the report had done for Medupi, particularly because it had a bearing on the Seriti Resource Mine across the road. A very important point about Kusile was that it was sited there specifically because of the coal fields.

The Chairperson agreed, and said that the other issue of Kusile was that it was built on top of a coal mine, but they were bringing coal in from somewhere else. There was also the consideration of the conveyor belt. The introduction had to be edited.

Mr Somyo said that in the initial stages, Kusile had not been located where it was now. It had been based on the agreement they had with the mine itself to provide the coal. The problems that they had now were based on the fact that that same contract had been cancelled, and this had led to other things, such as trucking the coal in and other failures like the changes in management.

The Chairman said that he thought the Committee should move this into an introductory context.

Mr Lees said he did not mind where it went, but thought it was important that it should be there. In the second draft that they had submitted, they had drafted quite extensive additions to cover that. They had fallen under 4.2.43, but could easily be moved up. As they spoke, the Kriel power station had a queue of about a kilometre of trucks feeding coal into Kriel instead of from their conveyor belts. For some reason there were massive problems at Kriel, and whether that was going to lead to loadshedding, he did not know. However, from his information, the trucks were standing two deep along the side of the road trying to get coal into Kriel. It was not part of the report. but it did lead into the issue.

Mr Somyo said that they had had a meeting with ESKOM’s top management. They had gone to Kusile where they could see the trucking of coal and the matter of security as such. They could also see that it would have been better if the contract between the mine and ESKOM had gone through, but unfortunately it had been cancelled. The Committee had been told that there was a new negotiated agreement between ESKOM and Seriti, and that some kind of contractual discussions wre taking place that would then assist in taking the initial form of that agreement. ESKOM’s top management had confirmed the situation, which began to affirm the fact that the current arrangement was not cost effective, did not prove to be secure and it also disturbed the entire social environment. From the economic viewpoint, it took into account the macro industry in terms of the trucking of the coal, but for cost effectiveness and efficiency they agreed that a conveyor belt from the mine to Kusile would have worked better if the contract had not been cancelled. The explanation went as far as to the point that they should insist that a better, formidable effort should be made to put a squeeze on a contractor or contract between the coal mine and ESKOM for both financial reasons and for security and the quality of the coal.

Ms Van Minnen said that her concern at that meeting had been that there was a need for a sense of urgency, because the board had said that negotiations would be entered into again only in the first part of next year, and it was actually quite urgent that it moved ahead.

The Chairperson said that this would be captured.

Meeting with ESKOM officials

Mr Somyo said that there was no indication that there had been a meeting between the Committee and the auditors

Mr Kali said that there had deliberately been no mention of that, because the auditors were not part of the oversight.

The Chairperson said that he agreed initially, but maybe there was merit in indicating that the Committee had met with the auditors, because one issue in particular was that the quality of the coal was not good, so he thought that the report must reflect this. Whilst it was not an auditor’s opinion that they had been given, the issue had finally come up and they had seen it for themselves when they had spent 15 minutes standing on a pile of coal analysing its quality of coal -- and the answers were 6s and 7s. It was agreed to add into the background of the report that they had met with the auditors.

Recommendations

Mr Lees said that contracts needed to be managed properly by suitably skilled and qualified people, because sometimes that was not the case. For the record, it had been made known that the project manager at Kusile, who had been there for less than a year, was leaving in two weeks’ time and going to the Philippines. This meant that Kusile needed another project manager, and there had already been four different ones.

Mr Lees proposed adding in a new sentence/recommendation that said: “There must be no restrictions, whether imposed by the ESKOM board, made for ESKOM to employ suitably qualified and skilled employees and contractors, to ensure that the Medupi and Kusile projects are completed on time and are operated at maximum efficiency”. This was an important recommendation, given the history of the problems that they had seen at ESKOM.

All Members accepted this proposal.

Mr Lees said that it was important for them, as Parliament, to be prescriptive.

The Chairperson agreed.

Mr Lees said that the vetting of all supply chain practitioners employed by ESKOM must be implemented immediately, without delay.

Mr Somyo said he agreed fully, and the Committee had to set a time frame to it so that it could be followed up.

Mr Lees said that they should state that it must be implemented within 30 days of the report’s adoption.

All Members agreed.

The Chairperson said that he was not sure why the board had not been meeting at ESKOM, given the magnitude of the projects and the gravity of the situation that ESKOM faced.

Mr Somyo said that he agreed with the Chairperson -- it had to follow a sequence that everybody at ESKOM, including government structures, must be vetted.

The Chairperson said that the vetting of all employees was not feasible.

Mr Lees said he knew that it sounded impractical, but the fact was that all employees were precluded or not allowed to do business, so how could they say that a certain level of employees had to do be vetted.

The Chairperson said he accepted this could open a loophole, so he agreed on including all employees.

Mr Dirks said vetting could be an extremely detailed process, and asked if this would not be in the form of very detailed vetting.

Mr Lees said that was why it had been split. 6.5 (supply chain practitioners) was vetting, and 6.6 was compulsory declarations for all employees.

All Members agreed.

Mr Lees said that internal investigations must be speeded up and finalised by 30 April 2020.

The Chairperson suggested 31 March 2020, because it was the end of the financial year.

All Members agreed.

Mr Lees said that he did not know how the other Committee Members felt, but personally he had the view that there was not enough effort being put into recovering losses from those who had been responsible for the wrongdoing.

The Chairperson said he was not comfortable with the auditing arrangements, and who it was being done by, given the fact that ESKOM was a strategic element of the state’s machinery. He asked Mr Siyanda Saki, from the Auditor General of South Africa (AGSA), what the plan was with the auditing ESKOM.

Mr Saki said that the challenge was that ESKOM’s auditors had different auditing methodologies to thos of AGSA, because the private sector was different to the public sector and their procedures did not go as deeply as the Committee would expect them to in the case of the public sector. There were certain Acts that they were protected by, which did not allow the auditing of certain entities if they did not have the capacity to do so, and that was where the leeway of AGSA not being able to audit certain entities came from.

The Chairperson said that the problem arose where he had indicated that the auditors did not go deeply enough.

Mr Somyo said that he thought this problem with the auditing must remain a matter that they should insist AGSA must look into.

The Chairperson said that they must find a way for the AG to begin a process of transfer, because auditors could not certify another audit because there was no peer review mechanism of some sort. Looking at the problems at ESKOM, it needed to be flagged that the Committee had to set into motion a process of transferring ESKOM to AGSA, because the current arrangement did not sit well with him.

Ms B Zibula (ANC) said she thought the Committee needed to look at the issues involving the judiciary. The Committee could say the judiciary should deal with the people accused of corruption, and demand the return of whatever had been taken inappropriately, but it would find that the judiciary would say something else. They needed to get clarification of what they could do when they find that a certain amount of money has been taken and must be paid back, but the judiciary had contrary opinions.

The Chairperson said that if the Committee were to look at the terminology, it would probably be on the basis of legal advice to defend their position in court. The Committee would be flagging Ms Zibula’s point and the action it needed to take to ensure that it was in sync with the law.

All Members agreed.

Mr Lees added that consequence management including dismissals, and the recovery of damages must be implemented where wrongdoing had been proven. This process had to be completed no later than 31 December 2020. A deadline was critical and the given deadline was a long time away, so it was reasonable.

The Chairperson said he thought it gave them sufficient time to process everything, and suggested there should be a quarterly report on the consequence management.

Mr Lees said that all previous employees of ESKOM who had engaged in any wrongdoing must have criminal charges laid against them if there was sufficient evidence and grounds for it.

All Members agreed.

Mr Lees said before suppliers received payment, proper controls had to be in place in order to ensure that payments were made for value received, and were not advance payments for which non-commensurate value, or no value at all, was received.

Mr Somyo said that proper controls had to be implemented, as they should be in place already.

The Chairperson agreed.

Mr Lees said that the extension of contracts through variation orders must at least have a due diligence process carried out and put on file for auditing purposes. Any contracts of R50 000 also needed the due diligence process, but must also have the ESKOM board’s approval.

The Chairperson asked if variations would refer to both to expansions and deviations.

All Members agreed.

Mr Lees said that there seemed to be a delay at both projects. The Committee had been told about problems, but he did not recall being told about any successful interactions with the contractors or suppliers for damages or corrective action.

The Chairperson said that it was always ESKOM having to pay, and the contractors did not take responsibility.

Mr Lees said that the contractors were not being forced to take responsibility.

The Chairperson agreed.

Mr Lees said negotiations with the New Largo coal field must be fast tracked.

The Chairperson asked if there was a timeline for it.

Ms Van Minnen replied that it was very vague.

The Chairperosn asked if the Committee could stipulate a reporting mechanism, because without further delays it would be included in quarterly reporting on progress

Mr Lees said that they needed reports on negotiations monthly because it was critical, even though quarterly reporting was usually what happened in Parliament.

The Chairperson said that he agreed with monthly reporting because of the circumstances and because they had been unable to explain properly what was happening. They were not looking for a detailed report -- just a monthly executive summary report regarding the progress. They would get the details at the end.

Mr Lees said that the Medupi and Kusile power stations must be completed by the revised deadlines of 2020 and 2023, respectively. The ESKOM board must be held accountable for any further delays.

All agreed.

The Chairperson said that Mr Kali would effect the changes to the report, and they would receive them tomorrow.

Mr Kali said that he had to check with Ms Van Minnen and Mr Somyo on their submissions.

The Chairperson said that submissions had to be made by 4pm that day so that Mr Kali could finalise them and circulate them to Members by Friday so that they could have a look at the final draft. The Committee would make time on Tuesday for the formal adoption, as the draft had been amended substantively, and they would forward it to the Announcements, Tablings and Committees (ATC) by the end of the week.

The Committee agreed on quarterly reports on the specific expenditure of Medupi and Kusile in order to track whether they were within their own commitments.

Mr Lees said that he did not know if it could be added into the report, but the fact was that the Special Appropriation Bill had not yet been passed by Parliament. Therefore, the time given in law for that approval by Parliament had been exceeded, so it now became illegal expenditure -- the payment of R17 billion was actually illegal.

The Chairperson said that Standing Committee of Appropriations was going to ESKOM next week to deal with this particular matter, so they should wait for the outcome of that.

Discussion

Mr Lees said he wanted to put on record the Committee’s thanks to Mr Kali and Ms Cenge, who had drafted the report. While they had made changes, the body of the work had been done and this was appreciated.

The Chairperson said that he had to thank the team. He thought that they were off to a good start with their first report and he appreciated the team’s guidance.

The Committee went through a draft programme of the term, which covered the dates and what the meetings would be about.

The Chairperson said there were departments that have not tabled their financial reports yet.

Mr Lees asked for clarity on the list of entities that were late with their submissions. He wanted to know if the 2017/2018 list of entities which had not produced their reports for that year, or had been late, had since reported for that year. He added that that as far as he knew, South African Airways (SAA) had produced their report for 2017/18, and had eventually received their bail out funding.

Ms Cenge said the list was just a comparison to see which ones had been late in the financial year, so the Committee might find that the ones that were late in 2017/18 had now submitted -- it was just to see the trend of which entities were submitting on time.

Mr Saki said that last year SAA had originally not submitted on time, but subsequently had done so. However, it had been for the purpose of being able to secure the bail out. The data he had for this year was that no financial statements had been submitted by SAA for auditing for this financial year, so currently AGSA could not express an opinion. In 2017/18, the financial statements had not been submitted on time, but they had eventually been submitted. For this year there was nothing, and so there was a chance that it might not get anything until later, as was the case in the last financial year.

Mr Lees thanked them for that clarity, and asked why the going concern issue had stopped the audit.

Mr Somyo said that he saw the same trend, and had the same concern

The Chairperson said that the Committee should flag this issue of the fundamental question as to what had stopped the audit by the AG, so that when the Committee met with those involved they had clarity on the issue. The AG must be advised on 23 October that the Committee wants to have a thorough discussion of what was preventing the audit, because it would be substantive for the hearing.

Mr Saki said that it would be perfect like that, but he wanted to qualify that the information that the AG had released with regard to SAA was that management was delaying the signing off of the audit. However, the audit report had been signed off on 17 September -- it was just the annual report that they were not publishing.

Mr Lees asked the list was the complete, because he did not see the South African Broadcasting Corporation (SABC) on it, and he did not think it had submitted a report yet

Ms Cenge said SABC had tabled its report.

Mr Lees suggested that the meetings should start at 10am instead of 9am, because if the meeting started later Members would not have to waste money on staying in hotels, and could just take a flight to Cape Town in the morning instead of the day before.

The Chairperson said that he noted the comment.

Mr Lees said that with regards to the oversight visit, he did not see the need to leave the Sunday and return the following Sunday, and did not see why the Committee couldnot do it in the normal period of an oversight visit, which would be from the Tuesday to the Friday.

The Chairperson said that it had been a mistake, and should be Friday and not Sunday. The reason for leaving on the Sunday afternoon was because the Committee was trying to avoid a mad rush. He knew that Mondays were for constituency work, but he would be asking for an exemption for that specific Monday.

Mr Lees said that he was entirely happy with the explanation.

The meeting was adjourned.

 

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