The Standing Committee on Appropriations met with the Eskom Executive Board to discuss challenges facing the power utility following an oversight visit to Eskom. This meeting also came at a time when Parliament has passed the Special Appropriation Bill [B10-2019], which allocates an additional R59 billion bailout to Eskom over the 2019/20 and 2020/21 financial years.
The Committee had also been briefed by the Auditor-General, the Department of Public Enterprises and National Treasury on the matter. Issues had come up and the Committee had a number of questions for the Board and the executive team. The meeting took the form of a question and answer session.
Committee Members stressed repeatedly that they were walking alongside the Board, they had supported the Board during the debate on the Special Appropriation Bill and they would provide all possible support. Everyone was swimming together and they all had to remain afloat. Anger over some issues, including not being informed in advance about load shedding, was dissipated by informative explanations from members of the Executive Board and details of action taken to date.
Members began their questions with the issue was about governance and leadership. Was the Board fully capacitated with the necessary skills to do the job? Did the Board believe that it could save Eskom? To what extent was the Board aware that Eskom employees had refused to hand over certain information during the audit. Were any Eskom employees supplying Eskom as service providers? Were there any declarations by employees? How effective was governance at that level as there was a possibility that Eskom employees were Eskom service providers? A Committee Member asked the members of the Board directly if anyone was doing business with Eskom, particularly the Chairperson.
Members asked the Board to share with the Committee the issue related to restructuring as it appeared that there were issues related to employee retrenchment and worsening employee relations. There was poor consultation with labour at Eskom, despite labour being a key stakeholder and if Solidarity, the National Union of Mineworkers (NUM) and the National Union of Metal Workers of South Africa (NUMSA) all equally agreed that there was something wrong in the way Eskom dealt with labour, then there was a problem. What would happen to employees where Eskom plants were being shut down?
Members had a question related to load shedding. Even though the Portfolio Committee had been on site on the day when load shedding had occurred, no one had been sufficiently courteous to brief the Committee Members. It had been disrespectful towards them and had made them appear toothless. To make matters worse, the Board had been unavailable to meet with Members during the site visit. Members expected an explanation.
The financial situation was a key concern to Members. Where did the Eskom Board expect the debt level to be in five years’ and ten years’ time? Members asked about the R285 million that Eskom expected to spend to address the defects at Kusile. Of that R285 million, how much was Eskom’s responsibility and how much was the responsibility of the service providers? The issues around the R147 billion budget over-run at Medupi and Kusile had to be explained. The Committee had also learnt that a supplier had been overpaid by R4 billion. How many others had been overpaid? Did the Board appreciate the problem? Who was responsible for that? What was the role of the supplier in that and what was happening about that? The Board should consider a full-blown forensic audit into R147 billion overspend and the Committee wanted a report on that.
Members noted that Eskom had received an audit qualification on irregular expenditure and fruitless and wasteful expenditure for the past three years. They were concerned that auditors could not determine the extent of irregularities. What was happening about the irregularities? Had there been consequence management and what had been the consequences for employees who had been found guilty of fraud and corruption?
The Committee reiterated that Eskom was too important to be allowed to fail. What did the Department of Public Enterprises and the government need to do to make sure that the Board could implement the turnaround plan? What did the Board expect from the shareholder? Was the Board prepared to work with the Chief Operating Officer and turn Eskom around?
If Eskom felt strongly about the rates agreed to by NERSA, why was Eskom not taking the matter through the relevant dispute mechanisms? How did Eskom see itself getting consumers to pay for electricity? What was being done to get money from municipalities? Was Eskom being abandoned as a supplier of choice in the Southern African Development Community? Could Eskom not look to increase sales in the region? Could the directors justify buying electricity from IPPs, even though it had been a shareholder decision? Was it good for the company? What had the Board done about the contracts with renewables?
Members were generally satisfied with the responses. The Chairperson of the Eskom Executive Board explained the position regarding security protocols when it came to load shedding and informed Members that he was not conflicted with Eskom; he was not doing business with Eskom. The Chief Operating Officer responded positively about progress being made in respect of operations and sales of electricity in the Southern African Developmental Community.
In response to the request by the Committee for the Board to be candid and honest, one of the Board members made an impassioned plea to the Committee to give the Board space to run Eskom. Running Eskom as a commercial entity but also as a part of the developmental state meant excessive interference by the stakeholder in business decisions made by the Board members. That made it very difficult to turn the entity around.
The Chairperson of the Committee advised the Board that political responsibilities came with being on the board of a state-owned company but that, where the members were particularly uncomfortable about a decision of the stakeholder, they should request the instruction in writing and that should absolve the board of responsibility for the decision.
It was a process and not an event and the next step would be for the Committee to get all the role-players together to deal with the issue of non-payment of Eskom services.
The Chairperson welcomed the Members and the Eskom Executive Board.
The Committee and the Board introduced themselves.
The Chairperson indicated that the Chairperson of the Eskom Board would have to leave at 18:00 but his team would remain and they were perfectly capable of handling any questions that the Committee might have for them.
In recapping events, the Chairperson stated that two weeks previously the Committee had visited Eskom and had met different role players, including various executive teams and the heads of different divisions. The intention had been to start with the Chairperson of the board, as in the African culture one should address the senior person and tell that person what one was going to do. Unfortunately, that was not possible as the Chairperson was busy. However, the other members of Eskom that the Committee had met were very helpful. The intention had been to start and to end with the Chairperson and his board. The meeting was the end part.
He explained that the Committee was responsible for all monies appropriated by Parliament. It was like a subcommittee of a board. The Committee had to approve all monies that Parliament approved before the monies could be spent by National Treasury and other entities like Eskom. When the Minister presented a budget, it was a proposal to Parliament and it became an Appropriations Bill. Only when both Houses had voted on the Appropriations Bill, did it become an Act and people could start spending money. Those who had been with Eskom for a long time, would know that there had been little engagement between Eskom and the SC on Appropriations. However, since Parliament had started recapitalising Eskom, the Appropriations Committee had become important to the Board because it had to follow the money and ensure that the money was being used efficiently and used for the purpose that Parliament had been told that it would be used for. When a coach wins, everyone accepts the coach’s team but when there were problems, everyone had an opinion. The Committee, too, had opinions because of the challenges.
The Eskom Chairperson and Acting CEO had previously made a presentation to the Committee. The Committee had conducted an oversight visit to Eskom and had been briefed by the Auditor-General, the Department of Public Enterprises and National Treasury. The oversight visit was prompted by the Special Appropriations Bill, which allocates R59 billion to Eskom – R26 billion for 2019/2020 and R33 billion for 2020/2021. Issues had come up and the Committee wished to put a number of questions to the Board and the executive team. The Committee would raise concerns and its expectations. The Committee would go straight to the questions and straight to the point.
The Chairperson informed Members that he would like them to ask as many questions as possible, but with a maximum four questions per Member in the first round. He invited comment from the Chairperson of the Eskom Board.
The Eskom Chairperson indicated that he was happy with the process and had no comment at that time.
Mr D Josephs (DA) said that in his assessment during the oversight visit, he had realised that the issue was about governance and leadership. Was the Board fully capacitated with the necessary skills? What was the term of office of the Board? He asked for Eskom’s response to the conditions that were negotiated by National Treasury and the Financial Fiscal Commission and the Parliamentary Budget Office. What was possible and not possible? What needed to be reviewed? He was of the view that he and the Committee, and, in fact, the whole of South Africa, was walking the road with Eskom.
Mr X Qayiso (ANC) stated that the issue of Eskom raised a number of depressing matters. Members had interacted with a number of people during the oversight visit. To what extent was the Board aware that Eskom employees had refused to hand over certain information during the audit. That was a serious statement. Were any Eskom employees supplying Eskom as service providers? Were there any declarations by employees? That level of governance was a concern as there was a level of possibility that Eskom employees were Eskom service providers. They wanted the board to share the information so that the Committee could take a view on the issue.
He asked the Board to share with the Committee the issue related to restructuring as there were concerns related to retrenchments and worsening employee relations. Employee relations were deteriorating and issues at the level of production would affect Eskom directly. Bad employee relations affected Eskom negatively. What interventions had there been by the Board?
Mr Z Mlenzana (ANC) agreed that that the meeting was a continuation of the meeting in Johannesburg. He had a concern, particularly with the Chairperson of the Board. The question related to load shedding. Even though the Portfolio Committee had been on site, no one had been sufficiently courteous to brief the Committee Members that there would be such a thing as load shedding. Even as a layperson, he did not believe that load shedding was a two-minute decision. Eskom should have had the courtesy to tell the Committee about the decision. Members had been getting phone calls and people were asking questions, and the Committee Members were seen as toothless. He asked whether the Board respected the Committee.
Mr Mlenzana said that the Committee had received a report that there had been a refusal to provide information to the auditors and that had taken place, not just in the current financial year, but had happened over a couple financial years. However, the morning after the question had been raised with Eskom management, the auditors had told the Committee that they had not meant that. That was suspicious. When the Committee had asked the auditors to make a statement, it was made on the Chairperson’s letterhead. That was a concern. The Committee needed proof that documents had been submitted to the auditors, and timeously. The response from some of the management and the auditors was that the internal audit was not effective and there was instability in the unit. What had happened to the advice and red flags usually raised by the internal audit and the compliance committees. Did the Board respond to those concerns or was it just more of the perpetual abuse that the Committee saw in Eskom?
Mr Mlenzana stated that in terms of labour relations, the Committee had received a negative response from all unions regarding the recruitment style at Eskom. There were permanent employees, contracted employees and some who did not whether they were casual or not. The staffing was bloated. They did not know which positions were budgeted for and which were not. The unions were concerned about what would happen to employees where Eskom plants were being shut down. They did not know who was being considered for retrenchment. Were the workers comfortable and not at the stage of panic about what was due to happen? Were workers taken into the Board’s confidence about the Board’s plans. He was not talking about restructuring but about the Board’s original approach to taking Eskom back to where it should be. With a R430 billion debt, he recognised that the appropriation figure was drop in the ocean. Where did the Eskom Board expect the debt level to be in five years’ and ten years’ time?
Ms R Komane (EFF) agreed that the discussion was an extension of the oversight visit. The point of the oversight was to ask everyone at Eskom and the Board to come up with an intervention. The sentiment of the Committee was not the same sentiment as that of the Board. If it were the same sentiment, the Board would have prioritised the oversight visit because it was of very serious importance. Not to mention, that no one saw it fit to inform the Committee of the load shedding, as her colleague had said. She asked if the Board had the interest of the country at heart. The Board members were only serious and concerned when it suited them. The Committee needed to have engagement and needed interventions and a plan to move forward.
Ms Komane said that she had some questions following the oversight visit. During the oversight visit, she had asked about capacity. The secretary had failed to complete the minutes of the Board meetings and had not supplied those minutes to the auditor. That was a requirement of section 88(2)(d) of the Companies Act. So why had the minutes not been done and what had the Board done as a recourse to that situation? She stated that presentations had shown that Eskom did not follow the Public Finance Management Act (PFMA) so one asked how accurate the entity’s debt book was. How could it be accurate if the company did not work in line with PFMA?
Ms Komane asked about the R285 million that Eskom expected to spend to address the defects at Kusile. Of that R285 million, how much was Eskom’s responsibility and how much was the responsibility of the service providers? She asked members of the Board directly if they were they doing business with Eskom. It was a serious problem that managers had raised. Lastly, there was a perception that Eskom’s poor generation revenue was due to the low increase approved by NERSA. What had not appeared in the Eskom presentation was to what extent the Eskom inefficiencies had resulted in the poorer generation capacity of the entity.
Ms E Peters (ANC) was pleased to hear that the Chairperson of the Audit Risk committee was there as she should realise the magnitude of the responsibility on her shoulders, especially in view of the report received from the auditors, SNG Grant Thornton, that had given an indication that Eskom had received an audit qualification on irregular expenditure and fruitless and wasteful expenditure for the past three years. That was worrisome. If auditors could not determine the extent of irregularities, then it said a number of things. Eskom had received repeat findings; despite being told that there was a lack of internal control. The Board did not exercise oversight over compliance, the Companies Act or the Eskom establishment legislation. It was important to determine the skills set. She believed that there had to be a skills audit of the Board. The Committee had been told that the company did not keep proper records. The company’s own employees stated that there was no consequence management. The supply chain procurement team acknowledged the lack of consequence management. No one had even worn orange overall because none of them had been arrested for wrong-doing, hence the particular challenges.
Labour relations was another concern for Ms Peters. There was poor consultation with labour at Eskom despite labour being a key stakeholder and if Solidarity, National Union of Mineworkers (NUM), the National Union of Metal Workers of South Africa (NUMSA) all equally agreed that there was something wrong in the way Eskom dealt with labour, then there was a problem. A poor relationship with the workforce led to poor production. It was worrying to hear that Eskom did not adhere to its agreements.
Ms Peters stated that there was a need for a lifestyle audit as there were serious issues of conflict of interest at Eskom. Workers and executives were doing business with Eskom. The elephant in the room was the issue of ever-green contracts – some of which still had 32 years to run. Was there an intention on the part of Eskom to re-negotiate the contracts as the economic situation demanded that and the situation had changed from the time that the contracts had been signed.
Another concern for Ms Peters was the cost overruns at Kusile and Medupi that were under construction. The Committee was not given the full picture about assets under construction. Many years ago, there was talk of Eskom’s interest in “Ndula” or something similar. There was currently talk of Eskom’s investment in the concentrated solar power plant and new projects that were under construction but the Committee had not been told about them. Maybe the Committee would be told about them when there were problems. It was worrying that Eskom was one of the biggest world-acclaimed power plants and the Committee was being told about the defects, and the cost of those defects in new plants. Why was Eskom not investing in its own renewable energy plants to reduce emissions? It was the biggest emitter in the country and the continent. It had to take responsibility for its emissions.
Ms Peters asked whether the Eskom Board saw themselves as potential savers of Eskom. Every time the Committee met, the Committee said that Eskom was too important to be allowed to fail. The Board had to realise that they had the fine china of the family in their hands. What could they do to sustain the company?
Concerning load shedding and the cost of diesel to run Open Cycle Gas Turbines (OCGTs), she asked if it was fair on the SA taxpayer to carry the burden of low quality coal and to allow the taxpayer to pay for the R6 billion in the cost of diesel, accumulated in the two days that the Committee was on the oversight visit, to keep the lights on. It was not efficient for Eskom to continue in that way.
Ms Peters asked what the Department of Public Enterprises (DPE) and the government needed to do to make sure that the Board could implement the turnaround plan? What did the Board expect from the shareholder? Was the Board prepared to work with the Chief Operating Officer and turn Eskom around?
The Chairperson clarified the issue about the cost of diesel – the R6 billion cost of diesel was the year-to-date cost. Regarding the refusal to provide information, he explained that SNG had come to him during a break and he asked the auditor to write down the point so that he could ask the Board to clarify. The Committee had also asked the CFO and SNG to write to the Committee formally. The auditor wrote that the Committee should clarify the “refusal to provide information”. “Eskom’s system of identifying, monitoring and reporting irregular expenditure and fruitless and wasteful expenditure was inadequate”.
The Chairperson told the Eskom Chairperson that when the Committee went to Parliament to argue for re-capitalisation of Eskom, one would think that the Members were from Eskom because they had been bashed like never before, but they were just bearers of bad news. When the Members went to plead Eskom’s case, they were asked how they could expect South Africa to re-capitalise Eskom when there were those issues around governance, and accounting was not happening. Members of Parliament asked how they could defend such expenditure to the electorate. He explained that once the Minister had presented the proposal, it became the Committee’s Bill. The Board had to understand that context.
The Chairperson asked the Board to address the points raised and explain what was being done about them. The non-executives had to understand the gravity of the problems and give the Committee some assurance that they had a plan to address the problems. The R147 billion budget over-run at Medupi and Kusile was more than an “overrun”. The Committee had also learnt that a supplier had been overpaid by R4 billion. How many others had been overpaid? Did the Board appreciate the problem? Who was responsible for that? What was the role of the supplier in that and what was happening about that? The things could not be co-incidental. The Board should consider a full-blown forensic audit into the R147 billion overspend and the Committee wanted a report on that. What about the progress regarding the appointment of the CEO? He did not need to go into the problems of acting personnel.
He stated that the debt of Eskom was growing at an exponential rate. What was the Board doing about the cost of Independent Power Providers (IPPs) and the coal price? What was happening with evergreen contracts? The Committee had been told about companies making super-profits of 50% to 100%. Why should a Gogo Nkoena in North West subsidise people making obscene profits? Those things should be re-negotiated and the Committee wanted to be appraised of those developments. It could not justify those things to Baba Nguni. He should not continue subsidising them. Project management and contract management was extremely urgent and could the Board tell the Committee exactly what interventions there had been? There were none if there were 80% and 100% over-runs of the budget. The Committee knew that the Eskom Board could not solve all the problems overnight but it should be able to monitor progress.
Mr Jabu Mabuza, Chairperson of the Board and Acting CEO, Eskom, said that he had taken copious notes of the questions but he thought that his Board Members could answer some questions as well.
First, he addressed the comments that Eskom had refused to provide information. The Board had meetings with the auditors to check that they received all of the necessary information they needed from management. He had made enquiries on hearing about the issue and he was told that the word was “unable” to give information. The systems at Eskom could not always give the information required.
He stated, ash he had mentioned elsewhere about load shedding, Eskom should have, and could have, communicated earlier but, at the time that the Committee was at Eskom, he was dealing with the problems of what had happened over the weekend regarding the conveyor belt in Medupi. Management had been of the view that there was enough in the reserves to meet the demands of the day. However, as the evening peak came closer, it became clearer that they were not going to be able to meet the demands. It was at that point that management had had to make the call. It was in no way being discourteous and he hoped that Members would appreciate that there were certain protocols in Eskom that had to be followed in communicating a decision such as that. It was not possible, in the light of the security measures around supply, to whisper to Committee Members that Eskom was going to be load shedding. The protocol was governed by law and it was not out of disrespect for the office of the Members that he had not told them.
The R6 billion was money spent for the year on diesel until the end of March 2019. It was an expensive exercise to burn diesel. They were not meant to be the base supply but to top up at peaks. However, they had been used in the continued days of load shedding. The R6 billion was a very big part of the R20 billion loss reported for 2018/19. He informed Ms Peters that the Eskom Board had just had a meeting and a Paper had been presented on where Eskom could play in the renewals space, especially in respect of wind. Eskom could not do so without the permission from the Minister but he had offered support and the Board had now determined to take the issue of renewables forward.
Ms Sindi Mabaso-Koyana, Board Member and Chairperson of the Eskom Audit Committee, was pleased to hear that the matter of the “refusal” to give information had been resolved because it had not come up in the time that she had been there. If a company refused to give information, it was disempowering the auditors and would result in a disclaimer from them. The auditors would not even have been able to issue an opinion and that was the worst audit result.
Ms Mabaso-Koyana said she was aware that one of the major challenges was in the area of contract management. That was an area where Eskom had taken a long time to deliver information to the auditors. Contract management had been all over the show as there had not been a central repository so it took a long time to find contracts. In the previous year, the group had collated all contracts into a central repository so there was a central record of all contracts but the challenge was that the physical contracts were still at power stations. A system was being put into place so that, at the press of a button, a contract could be called up. As a result of that issue, a number of the variations had been the result of contracts expiring without the team being aware of the expiration date. It was both a system issue and a discipline issue. When the Board had started, it had been called the “no board” because when contracts were brought to the board for extensions, the board had refused to extend the contracts. That meant that teams continued to spend on contracts long after they had expired. The Board had decided to live with the irregular expenditure but it had made a difference and the CFO had a graph which demonstrated that.
Ms Mabaso-Koyana stated that when she had started at Eskom, the Board had to release the 2017/18 results which were overdue. Irregularities were about R3 billion but the team had worked back to 2015, finding irregularities that had come to R21 billion. That was down to R6 billion in 2018/19. That meant that the year had closed on R25 billion in irregular expenditure. The swat teams were cleaning up and could provide the auditors with the information. The issue of not providing information had arisen from the previous year when Eskom could not even give the auditors the information about irregularities and they had said that they would come in and find it themselves.
The Chairperson interrupted Ms Mabaso-Koyana to ask the staff if someone could find water. He explained that the bottle on the table were empty bottles from the previous meeting and he was not trying to torture board members as the security police had tortured people in detention by having blankets on hand but not allowing the detainees to go to sleep.
Ms Mabaso-Koyana continued. Note 51 of the Annual Financial Statements of 2017/18 which was when the Board had put a lot of effort into the clean-up. In 2018/19, the additional irregular expenditure was only R6 billion. She was not trivialising the amount but showing a comparison. Eskom had spent the year talking to National Treasury because those irregularities would remain on the books until National Treasury condoned them but it would not condone the expenditure until the contract had been cancelled and consequence management of staff had taken place. She said that the Committee could assist by asking National Treasury to help Eskom by condoning the expenses. Cancelling a contract was very difficult.
Mr Mabuza reiterated that an irregular contract continued as irregular until that contract was cancelled. Sometimes there was a single supplier and that contract remained irregular.
Mr Mlenzana stated that the audit showed irregular expenditure at Eskom for the past three financial years. The one irregularity that raised concern was separate from the contracts. The auditors stated: “We were unable to determine the full extent of the irregular expenditure noted in the footnotes.” He was not a financial expert but he could add one plus one. He had said to the auditors that they were cushioning what should be a disclaimer because they did not have documentation. It was then that they said they had been trying to get documentation but Eskom was refusing. As the Committee listened, maybe it would get the real reasons behind the escalation of costs to the power stations. The feedback that the Committee was getting responded to the need for proper record keeping, but the duplication of payments etc., triple payment etc., that was different. When one saw how Eskom was run, one could see what was happening. In 2010/11 the construction figure for Medupi and Kusile was at R71 billion for Medupi and now it had escalated to R141 billion or something and Kusile that had been at R80 billion had rocketed to R161 billion. The Committee should not mince its words. He knew that auditors would request documents and when all had been tried, they would come up with an audit opinion. It did not assist to politicise or brush away the matter.
Ms Mabaso-Koyana apologised to Mr Mlenzana. She was not trying to mislead him. When it came to irregular expenditure, the auditor had asked for the Note 51 in 2017/18. The internal audit team had given them a list but the auditors had found things that the Eskom team had not found. In the 2018/19, the internal audit team had been told to do its own audit using the PFMA. On the auditors saying that Eskom had not provided information, one example was the McKinsey contract. It had taken a long time for the finance team to get the documents because it was at the height of the time that the legal team was working with the documentation. The issue of the delay with a Chinese contract was that it had been moved to the central repository and it had taken a while to get hold of it. There was never a deliberate withholding of documents, but delays there were.
Mr Calib Cassim, CFO, Eskom, responded to the question about the low revenue and the decision of the regulator. The recent regulator decision had differed from Eskom’s request and Eskom believed that the regulator had not applied the same methodology as Eskom in determining costs. There needed to be consistency of the regulator in the process. Eskom was allowed its operating cost, primary energy costs, assets and a return to meet debt service agreements. When the regulator presented its reasons for its decision, Eskom would review how those costs had been arrived at and go through its own governance.
Secondly, Mr Cassim addressed the question of rising debt. The 2018/19 debt was at R440 billion and it was currently at R454 billion. As long as, through the regulatory mechanism of the allowable revenue, Eskom was not making enough to service its commitments, it would effectively be using one credit card to pay another credit card as it could not meet the current debt commitments. Once Eskom had dealt with the element of inefficiency which should not be passed on to the consumer, then Eskom should be getting the full cost of capital to be a sustainable entity. Where the debt would be in five to ten years was an assumption depending on many factors, such as what the regulator would allow, the capital expenditure required over the next few years and how Eskom was able to manage the big cost items.
He explained that one big cost item was the primary energy costs, that is the coal cost and what one was doing about it. It was an issue of coal contracts - the committed long, medium and short term contracts. Eskom was trying to re-negotiate those contracts. It was at least R60 billion. Another production cost was the increased supply from IPPs which came with increasing costs that had stood at R25 billion in the last financial year. Staff and employee costs were at R33 billion. A natural reduction of staff had been factored in going forward but there was a labour agreement of 7% increase per annum. Management increases were below inflation and there had been no bonuses in the past financial year, nor in the current year. Voluntary separations were unaffordable to Eskom. On capital expenditure, he pointed out that R55 billion had been spent on capital expenditure two years previously but it was down to R36 billion in the past year. Eskom was looking at the cost that it could manage. Eskom’s cost base had to be reduced by R33 billion over five years and it had to balance its cash resources with meeting the supply and demand of the country. Eskom was spending the money where it was needed but it could not meet its cash requirements though savings in the short term. Every time a more efficient plant performed, the less coal would be needed and that would reduce production costs. It would take time but Eskom could not say where the debt would go because of the assumptions. If the organisation could not manage to service its debt, the debt would get to a certain level where it started compounding interest.
He reiterated that, as CFO, Eskom was committed to providing information that was available. Going forward, the organisation would address audit findings. He had never said to any auditor that he would not supply information. The Board was transparent and had exposed its financials. It was not easy to stand up and report a loss ten times larger than the previous year but it was important in terms of the journey being taken. He stressed that Eskom needed the support of the Committee, the shareholders and key stakeholders in areas that Eskom could not control.
Mr Mabuza addressed Mr Joseph’s questions about leadership and governance. When the board was put in place, it was intended to address malfeasance, leadership and governance and the Board had done well in that space. The board had to go back to find irregular expenditure but further back than 2015 was impossible. Those were the very auditors who had been there for some time so it did not sit well with the Board when they complained about consequence management and so on. The over-runs had not started in January 2018. And the debt did not arrive in 2018. The over-runs had been there for many years. What had the board been doing? As the build projects came to an end, there was a flood of claims coming in from contractors and Eskom had contracted people to review the claims of about R231 billion, even though the contract was 90% complete and Eskom had already spent R140 billion. The contractors knew that the contract for that company assisting with the claims was coming to an end. They had to be vigilant and go through each claim with a fine tooth comb as there had been double invoicing and Eskom officials had just signed, not only new build invoices but other invoices as well.
Mr Mabuza added that the skills set required by the Board should augment and supplement the current skills set. There were operational issues emerging. There were vacancies and the Board needed more than one CA on the audit committee, and so on and he hoped that the Board would be beefed up. The term of office was three years which took them to about March 2021. Eskom had been engaging National Treasury regarding the conditions and it had gone back to National Treasury and shown that some conditions were more pertinent to DPE but Eskom could meet all the conditions, even though reports would have to be more frequently.
He took the point that the first issue had to be the contracts. As acting CEO, he had asked each of the managers for the top ten contracts in each business area, where they were with the contracts, whether they were happy with them and when they expired. Most of the condonations had occurred because no one had managed the contracts and Eskom was then supplied out of contract, which was irregular.
Mr Jan Oberholzer, Chief Operating Officer, Eskom, responded to the question regarding projects. Eskom was getting ready to do battery storage and was awaiting PFMA approval from DPE. The reduction of emissions was being undertaken at various power plants. Eskom was also replacing control and instrumentation at some of the power plants. An ongoing annual project was the transmissions, overhead lines and substations that added up to the annual expenditure of between R30 and R40 billion as indicated by the CFO.
Mr Oberholzer explained that the costs to completion of Medupi and Kusile had not been finalised. The 2014 budget was being used. The P50 and P80 budgets were being used. P50 was when 50% of all identified risks materialised. P80 was when 80% of all identified risks materialised. The Medupi P50 budget was R135 billion and the P80 budget was R145 billion but that excluded interest during construction which could be anything between R40 and R50 billion. The flue-gas desulphurisation at Medupi was not finalised and that would be R35 to R40 billion. The planning had been finalised. The Kusile P50 budget was R156 billion but that included the flue-gas desulphurisation. The P80 budget was R161 billion. That excluded interest during construction.
He believed that there were contractor over-payments at Kusile specifically. There were five contractors that he was looking at and was working with the Special Investigating Unit (SIU) and the Hawks as well as Eskom’s own claims specialists and forensic experts to find overpayment. That came to R4 billion at the moment but it was not a final amount. The coal prices and obscene profits were being looked at. Eskom was looking at all contracts and at the cost of mining per ton of coal and then Eskom was looking at what it was paying together with DPE. Eskom had had one session with miners to discuss the cost of coal. Regarding the staff at Grootvlei, Komati and Hendrina, which were end-of-life power stations, he informed the Committee that the staff would be redeployed to other generation posts as units were closed down.
Mr Mabuza responded to the question of staff doing business with Eskom. The Board had found close on 80 people in the entity who were suppliers to Eskom. The Board had informed employees that from 30 March 2018, no one could be employee and supplier. People could make a choice. Then after that date the Board had said that any employee supplying would be dismissed and the company contracts would be cancelled. Eskom would also ensure that no SMME did business with that company.
The Chairperson stated that there was an allegation that the CEO was doing business with Eskom.
Mr Joseph asked if there were people who were doing business after the cut-off date.
The Chairperson asked what the policy had been and what it would be going forward.
Mr Mabuza said that the Chairperson had asked his question in a very nice way and he was going to come back to that. Eskom had introduced lifestyle audits, which had taken a long period of time. Anomalies had been raised and 284 cases were under investigation by SIU and the Hawks. Six executives from Group Capital had to separate from the company following the lifestyle audits. New build referrals had been referred to the NPA. Eskom was engaging suppliers and contractors and had laid charges against a section of an audit firm.
Mr Mabuza stated that he was not conflicted with Eskom. He was not doing business with Eskom. When he was asked to take up the chairmanship of Eskom, he had indicated to the Minister at the time that he was an executive chair of a company called Sphere that owned a company called Babcock which was a boiler server contractor to Eskom. Sphere also owned another company called Honeywell which was part of control instrumentation at Eskom.
Mr Mabuza said he left Sphere and put all his interests in the company in a blind trust. He had no involvement in anything involving Sphere, Babcock and Eskom and he had recused himself from any meetings about those companies. The other matter was his wife and her brother who supplied Eskom but he had studied mining so that was why he was involved with Eskom. He had disclosed that information and had no conflict with Eskom.
He asserted that when it came to employee relations, there would never be a perfect labour relationship. The relationship between Eskom and employees was not good and the Board had tried over the past three months to improve the relationship. Other decisions were those of government. Government had decided to buy from IPPs and to unbundle Eskom and he had to implement those policies but he would not undermine the employees in implementing policies. The President had told Eskom not to retrench and so he tried not to.
Regarding the CEO appointment, he reminded the Committee that the shareholder appointed the CEO. The board had submitted three names and the Minister had indicated that the new CEO would be announced shortly.
Mr Mabuza could not say the Board was the best board but the members were committed and had had 60 board meetings in the past year. The members had done their best. If they failed, it was because they were human.
The Chairperson thanked Mabuza for the input. It was a difficult and painful matter.
Mr Qayiso asked why Mr Mabuza had to leave.
The Chairperson explained that Mr Mabuza had apologised when he had arrived. He said that there should be no question about the commitment of everyone there. The Committee had been given permission to leave the House sitting because of the importance of the issue. The Appropriations Report had been accepted by all Members, although the conditions were viewed differently. The Committee walked the talk and had gone to Parliament to request support. However, it could not only be government that was committed. Management had to be committed and labour should also come to the party. Contractors were not coming to the party and the Committee was not going to allow the contractors, suppliers and original equipment manufacturers (OEMs) to abuse the situation. They had to understand that if Eskom was not there, there would be no business for them. He did not want consumers to suffer but the consumers had to come to the party and pay for the electricity that they were using.
Mr Mabuza left to catch a flight to Johannesburg. He had been unable to re-arrange his diary. Dr Crompton took over leadership of the delegation.
After a short recess the Chairperson gave the Committee 15 minutes to complete their questions as the rest of the Board had a later flight to Johannesburg.
Ms Komane said that there had not been a response to the question about the secretary and the minutes. If Eskom felt strongly about the rates agreed to by NERSA, why was Eskom not taking the matter through the relevant dispute mechanisms?
Mr Mlenzana declared that Eskom was operating in a changing business environment that required continuous development. For example, Eskom’s revenue loss was as a result of many households going off the grid and using alternative energy systems which, in terms of Eskom’s business, would have a negative impact. Eskom was on top of that kind of business. How was Eskom trying to adjust to that situation, coupled with that was the Fourth Industrial Revolution? Was Eskom investing in new technology to reduce costs?
Ms Peters’ question had two legs: firstly, what was the rationale for Eskom to stop training or were they not interested in investing in future expertise; and secondly, Eskom represented the shareholder so what was the Board’s view of the cost of power and electricity to the poorest of the poor. She was aware of concessions for the indigent. How did Eskom see themselves getting consumers to pay for electricity? Municipalities used to be threatened with a total shutdown and assets sold off and provinces used to intervene when municipalities could not pay. What was being done to get money from municipalities? Eskom was being abandoned as a supplier of choice in the Southern African Development Community (SADC). Could Eskom not look to increase sales in SADC?
Mr Qayiso asked if the directors could justify buying electricity from IPPs, even though it had been a shareholder decision. Was it good for the company? What had the Board done about it?
Response by Eskom
Dr Rod Crompton, Non-Executive Director, Eskom, addressed the question about Eskom’s business model and whether the board saw itself as the saviour of Eskom. The fundamental problem was the mandate of Eskom: was it a commercial company or an instrument of the developmental state? Eskom was expected to be both and so was neither fish nor fowl. Separating and clarifying the role of Eskom was one of the most important things that the stakeholder could do. When the two roles were mixed, things became messy and confusing.
He explained that utility businesses were in a death spiral across the world. Eskom had to be aware of the utility death spiral. Utilities lost sales as people went off-grid, so they put up tariffs and more people went off grid and they lost more sales. The world had changed and the business model of the past no longer worked for Eskom. That was why the President had spoken of separating the three components of Eskom. That was not only an Eskom issue: it was an electricity supply of Southern Africa issue. As with all utility companies, Eskom had to embark on the reform process. Eskom was influential in electricity supply in Southern Africa but, like 140 other countries around the world, Eskom had to go through the reform process. Turkey had been at it for 20 years. Namibia was ahead of SA. The 1998 White Paper effort at reform had come to zero. Eskom had to get it right this time. It had to keep changing and moving forward as the technology was changing faster than Eskom could. Even laws and regulatory framework were out of date by the time that those laws had made their way through the parliamentary processes.
He explained that the two new power stations were the most up-to-date possible. The IPP was a government decision and government had concluded the IPP contracts and instructed Eskom to sign the contracts. The fiduciary role of Board members was difficult as they had not made the decision and the tariffs were up to 400% higher than Eskom’s tariff but, in a country trying to attract foreign investment, sanctity of contract was a very important thing. For a big state enterprise to dishonour a contract would be a very big thing. The contracts were expensive but Eskom could not dishonour the contracts. There was currently a discussion with the stakeholder and IPP companies. He added that Eskom was cash neutral when it came to contracts with IPPs, i.e. whatever Eskom paid the IPPs, Eskom was supposed to recover in tariffs.
Mr Cassim explained that in respect of the NERSA decision, there was no other dispute mechanism available to Eskom. When Eskom had first decided to review the 2018/19 decision, Eskom had met with the NERSA board, and both parties as well as the legal team agreed that the only dispute route was through the courts.
Ms Busisiwe Mavuso, Non-Executive Director, Eskom, responded that she would also take the advice of the Member who had suggested that the Board and the Committee should have a candid and honest conversation so that they did not try to manage each other as the thing was falling apart and would sink the economy. Municipal debt was a political decision and had nothing to do with the Eskom board. The Committee asked if the Board members saw themselves as the saviours of Eskom but if one looked at the ten heads, one would realise that it was too big a task for ten heads. It was too big an issue for everyone in the room, too big even for government. It was an issue that affected 57 million South Africans. Eskom was a sovereign risk and its collapse would collapse the SA economy.
If the Board could take decisions without political interference, she could tell the Committee what was needed. Eskom needed to tell SAs that Eskom needed to load shed for the next eight months. She understood that load shedding cost the economy R2 billion a day. Eskom was sitting with units that were nearly at the end of their lifespan. They would simply stop working because there had been no maintenance and they had not been replaced. Decisions had been taken in the past to keep the lights on at all costs because the country was nearing elections. She believed that equity partners had to be brought on board to re-capitalise Eskom. The problem was too big for government to keep pouring in money. The rating agencies had warned that government could not keep raising the debt of the state-owned enterprises. Honest decisions had to be made about how to deal with Eskom.
Ms Mavuso was adamant that labour could not sit on the side-lines with a red pen. When the Board had made the decision the previous year to drop all increases because of the dire situation, it was labour that said that decision would be a declaration of war. The Board had been instructed to revise a decision that it had made as a group of business people who understood the situation and knew the decisions that had to be made. Eskom was sitting with the developmental state mandate and that was going to keep Eskom on the same trajectory.
Ms Mavuso stated that the training was another interesting decision. When one was sitting with a company that had only generated 1% revenue over the past ten years but the costs had gone up by 40% - 50% and the head count had gone up by numbers that were unjustifiable, one had to make a decision about whether one should keep bringing in people in droves. The only cost element that the Board could control was the employee costs but, unfortunately, Eskom was sitting with 15 000 people too many. But if one dared to bring up labour, it became an issue. She did not think that everyone should be skirting around the issue of decisions that the Board had to take. But when decisions were taken, the shareholder quickly came in and told them that things were not politically acceptable. So much money had been spent on OCGTs because the lights were going to be cut off. But at what cost had they been kept on? The Committee would have to appreciate that the Board had to sit with decisions that it had not made. If it were her own company, she would make the hard decisions. Actually, Eskom needed competition to get out of the lull in which it found itself. Unless there were efficiencies at Eskom, nothing could be done for Eskom.
Ms Peters said that she had asked two questions in the first round: what did DPE and government have to do to allow for the successful implementation of the roadmap and the turn-around plan, and that was her answer.
Mr Qayiso said that it was the wrong tone.
Ms Peters disagreed.
Ms Mavuso apologised as she had not meant disrespect.
Mr Qayiso said that it was the wrong tone to use against the workers. Blaming them was not the right tone.
Mr Oberholzer continued with the responses. The question of why training had ceased was simply a response to the question of where one could save on one’s budget. There were two areas: training and maintenance. It had been a line management accountability but Human Resources in head office had decided that training decisions would be taken there. In a technical environment that did not make sense as only the line management understood what training was needed so the responsibility for training was going back to line managers and they would, correctly, be held accountable for ensuring that staff were properly trained.
Regarding international sales, Mr Oberholzer informed the Committee that the previous day he had had a call from Mr Victor Mundende, Managing Director of ZESCO. Zambia was in dire straits with 16 hours of load shedding a day. He would meet him the following week as ZESCO wanted to buy 300 MW. Eskom was considering a non-firm contract with Zambia which meant that only when power was available, would it be sold. Eskom had a non-firm agreement selling 400MW to ZEZA in Zimbabwe. It was very positive. When ZEZA had approached Eskom for the 400MW, the Authority had owed $26 million and ESKOM had agreed to make it available on a non-firm basis when ZEZA had paid its outstanding debt. ZEZA was paying $850 000 per week and the debt would be paid off by the end of March 2020. The current account was paid within two days. The same payment conditions would apply to ZESCO and that would increase sales. The remaining challenge was with EDM from Mozambique that owed a lot of money but there was no movement in respect of settling that debt.
Dr Banothile Makhubela, Board member, Eskom, responded to the question on the Fourth Industrial Revolution(4IR). She informed Members that 4IR was used in a number of ways at Eskom. One was the introduction of smart meters that could be monitored and which would allow Eskom to deal remotely with issues such as electricity being sold on the black market. The challenge was that smart meters installed in Soweto were being removed so that problem would have to be addressed. The research unit was testing to see how it could manage the coal quality. The intention was to test coal as it arrived at a power station. Those were initiatives taking advantage of 4IR
Dr Pulane Molokwane, Non-Executive Director, Eskom, responded to Ms Peters’ point about no one from Eskom being in orange overalls. She stated that consequence management was being enforced and, where necessary, employees were handed over to the relevant law enforcement authorities: NPA and SIU. Unfortunately, the agencies were taking time to address the issues. That would be continuing for some time.
Dr Molokwane stated that she and the other Board members appreciated the enormity of the task at hand. They were not messiahs and they needed the support of SA as a whole. They needed space to act as directors as the fiduciary duty rested with them and they would be held accountable. It was sad that there was no adequate training, especially for her, as she had come through an Eskom training programme. She was concerned because Eskom was lacking skills and most of her former colleagues had left the country for the Middle East and those skills would have to be imported at a premium. It was even more problematic if the younger ones were not being trained as part of a succession plan.
Ms Sindi Mabaso-Kayana was concerned about the impression that everyone was walking away from Eskom because it was unreliable. She read the numbers of the first six months until end October. Eskom had supplied 104 000 GW. At the same time last year, Eskom had supplied 105 000 GW. Eskom found that more customers, especially the large organisations were returning to Eskom, often negotiating prices, but keen to return as customers. She understood that it was a difficult environment for everyone, so one accepted those deals. Internationally, Eskom had sold 7 400 GW for the first six months of the financial year compared to 6 000 GW the previous year. There was growth, but the repatriation of funds remained a challenge.
Dr Crompton addressed the allegation of a failure by the Board to submit minutes. He explained that it was a misunderstanding and he had addressed that point with the auditors in a Risk Management meeting. The auditors’ view was that the Companies Act required that minutes of the previous meeting be approved at the immediate next meeting. The Board had had 60 meetings in the year. He did not see where in the Companies Act it stated that that was how it had to be done and the auditors had failed to show him where it appeared in the Act. All minutes had been approved, even if some had not been approved at the very next meeting. He thought that the matter might still be an issue with the auditors.
Ms Peters said that Eskom should submit that comment in writing as that was one of the issues where Eskom seemed to be saying that they refused to do it. It should be in writing.
Dr Crompton agreed to submit the point in writing.
The Chairperson reiterated that it was a process, not an event. Everyone had a role to play. At that point everyone was swimming together with one end in mind and that was that everyone had to float.
The elephant in the room of a state-owned company was the dual mandate of development and business. He had sat in that seat. As boards, when things were good they wanted to be evaluated as private businesses but when it was bad, one wanted to be a developmental organisation. The Committee had consistently argued that if Eskom had not had a developmental mandate, the majority of SA would not have electricity today. Eskom did not say that was what they had done. That was largely because people did not know how to measure the developmental mandate, but it was necessary to determine that, so that an entity was not measured only in terms of commercial success.
When he had been at Transnet, board members had said that there were things that could not be done but the stakeholder had insisted that they do certain things, so the board had asked the shareholder to put the instructions to the Board in writing to absolve the members of their fiduciary duties in that respect and so that they could be held accountable for those decisions. That was the space of a state-owned company.
He told Ms Mavuso that she had to be careful about raising an issue with labour and saying what she would do if she were allowed to deal with the workers. She had to juggle the two sides. She did not realise that she would not be able to deal with labour without government. She had to bear in mind the political issues that she had to consider when on the board of a state-owned company. Her analysis would have to take that into account.
It was a process and not an event. Next, the Committee needed to get all the role-players together to deal with the issue of non-payment of services.
The Chairperson thanked the Eskom team and the Members for the opportunity to start understanding where everyone was coming from.
The meeting was adjourned.
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