Eskom, SAA, SA Express financial challenges; with Finance & Public Enterprises Deputy Ministers

Standing Committee on Appropriations

27 May 2020
Chairperson: Mr S Buthelezi (ANC)
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Meeting Summary

Video: Standing Committee on Appropriations, 27 May 2020

Statement on discussions at parliament’s appropriations committee on the R5 billion question

The presentation was a joint one by the Department of Public Enterprises (DPE) and National Treasury. They covered Eskom spending of the 2019/20 special appropriation and conditions, finance and liquidity challenges including the municipal arrear debt, interventions to improve its business model, what the unbundling would mean, as well as the impact of COVID-19. The presentation on South African Airways dealt with the spending of the 2019/20 special appropriation, its finance and liquidity challenges, the reasons for its high cost structure, its planned interventions around business rescue and its prospects for the future as they related to the incomplete business rescue plan. The presentation on South African Express (SAX) spoke to its special appropriation, a business plan not being implemented and the pending finalisation of its liquidation on 9 June 2020.

Concerns raised by the Committee were the non-payment of SA Express employees for the last two months and the cause for the complete breakdown of SAX so that it could not even pay salaries; the lack of a business rescue plan for SAA after five months despite the Companies Act requiring that it be published within 25 days; if the business rescue practitioners would take action against Ms Myeni in response to the recent court judgment; the leasing of aircraft; the full details on selling off the SAA aircraft; comprehensive report on the expenditure of the 2019/20 special appropriations and timeline for unbundling Eskom. Further questions were posed to Eskom about the re-structuring of debt, the appointment of the Chief Risk Officer; and if the lockdown had been well utilised by Eskom to do maintenance. It asked about Eskom’s plans to ensure power supply and all the entities were asked what they were doing to address their high cost structures.  Many of the questions were responded however detailed responses were promised in writing. Eskom did note that there should only be three days of Stage 1 load shedding over the next three months.

Meeting report

Opening Remarks
The Chairperson noted that the Deputy Minister of Finance, and National Treasury, Mr Dondo Mogajane, were still struggling to join the meeting. However the meeting would continue and they would join in due course. Apologies were noted from the Public Enterprises Minister as he was in another meeting. He welcomed the Deputy Minister of Public Enterprises, Mr Phumulo Masualle and the Public Enterprises team; Deputy Minister of Finance, Dr David Masondo, and the National Treasury team; Interim Eskom Board Chairperson, Prof Malegapuru Makoba, and the CEO, Mr André de Ruyter and his team; and the SAA Acting Board Chairperson, Ms Thandeka Mgoduso, and the SAA business rescue practitioners (BPRs).

Mr Bongani Mkasana interjected to note that SAA was not being represented by its BRPs as they were working on the business rescue plan due on 29 May. He is representing SAA on behalf of the BRPs.

Chairperson welcomed Mr Mkasana. He continued to say that the Standing Committee on Appropriations (SCOA) is the product of the Money Bills and Related Matters Act, popularly known as the Money Bills Act. The Committee is interested in anything and everything which receives money from government. As the name indicates, it is an appropriations committee which appropriates funds to government departments and its agencies and state-owned companies (SOCs). The reason these parties are present is because there were special appropriations made towards the end of last year. He noted that before Eskom received a bailout from government, it had not interacted with SCOA. However after receiving that money, it became an indication to SCOA that Eskom move closer to the Committee. The Committee had written to the Departments detailing exactly what they are looking for and he asked the Deputy Ministers to indicate how they want to deal with the presentations.

Public Enterprises Deputy Minister, Mr Phumulo Masualle, suggested that each entity presents separately.

Deputy Minister of Finance, Mr David Masondo, said that as DPE worked with National Treasury on the presentation, DPE would begin, then Treasury would follow.

Deputy Minister Masualle said he really appreciated the opportunity given to engage with the Committee on the financial challenges faced by these entities. The DPE Acting DG will make the presentation and the team would make additions if needed within the time provided. He noted that the CEO and Acting Chairperson of Eskom along with the teams from SAA and SA Express were also present.

Financial challenges facing Eskom, SA Airways and SA Express: DPE & Treasury briefing
DPE Acting DG, Mr Kgathatso Tlhakudi, presented.

Special appropriations and conditions
The appropriation given was for R26 billion and R33 billion, bringing it to a total of R59 billion for the 2019/20 year and the 2020/21 financial year. There were 29 conditions attached to the appropriations, all of which had been complied with except the selling of the Eskom finance company which provides facilities to employees. Compliance with this condition has been deferred to 2020/21. Eskom indicates that interest in the market and the lockdown had not helped to ensure the disposal of that entity. The conditions for the 2020/21 appropriation are being finalised.

Finance and Liquidity Challenges
Challenges include declining revenues, high cost structure, high debt levels, regulatory uncertainty and over-reliance on government support. Despite these challenges, revenue has been increasing, driven mainly by tariff increases. Volumes have not been moving due to a number of factors, including the economy, which has been rather stagnant over the past few years. It has experienced a profit loss of R16 billion in 2020 versus R20 billion in the 2019 financial year. Cash generated from operations is insufficient to meet its debt obligations and the business remains under pressure.

Municipal and Arrear Debt
The municipal debt remains a big challenge with arrear debt being R28 billion at the end of the last financial year which increased from R19 billion. Despite certain concessions made to municipalities, the situation is not improving. There are measures that Eskom has put in place to try and reduce the burden on municipalities including putting the debt in suspense accounts, reduced interest rates, extended payment terms that have been agreed on and payments first being allocated to capital. Unfortunately, these measures are not having the desired effect.

These interventions have been made by government to try and assist Eskom. They include the well-known support package, as well as the NERSA Regulatory Clearing Account (RCA). Engagements together with the Department of Mineral Resources and Energy, coal suppliers and independent power producers (IPPs) to try and reduce primary imaging costs are happening but are moving slowly. There are pricing and competition concerns which are causing discussions with coal suppliers to run slowly. There is an inter-ministerial task team set up on municipal debt and also an Eskom task team has been set up, looking at Eskom overall, of which municipal debt is a focus area. Eskom has made some efforts to help itself and has accordingly made cost savings of R9 billion in 2020. It has also made a borrowing plan and begun disposing of non-core assets.

Eskom unbundling
This has been conceptualised and the plan has been approved by the Eskom board. Broad consultations have happened and the lenders have shown support. Divisional boards have been established, which are currently filled by Group Executives who have been appointed as managing directors of the entities. The operational strategies have been developed and the functional leadership of these entities has been approved by the Executive Committee.

Impact of COVID-19 on funding
Eskom has seen lower demand due to the lockdown and the halting of the economic sector. This has impacted revenue and there is an increase in municipal non-payment. A positive was the lack of load shedding. Eskom is currently calculating the impact of COVID-19 as well as the downgrade. It will also continue to calculate additional cost saving.

Special appropriation and conditions
R5.5 billion was allocated in 2019/20. There have been regular engagements with SAA both before and during the business rescue. DPE is looking into the best shareholder model that would ensure that there is an injection of capital going forward and is looking for assets to dispose of and for assets that lend themselves towards strategic partnerships. There has been an effort to ensure that deducted taxes are paid timeously and that the R3.5 billion guaranteed debt is settled going forward. National Treasury came forward and provided support to settle this debt in its 2020 budget.

Finance and liquidity challenges
These include SAA's high cost structure and failure to implement strategies to address this. Additionally, there has been a high turnover of leadership, with 10 CEOs in the last 15 years. Support business has not been properly leveraged in the past and has ended up being a drag to the main business especially maintenance costs of the business relative to its peers. The fifth freedom right given to foreign airlines has meant that market share has been taken away from SAA. It has also been in technical insolvency since 2013 and has relied too heavily on government to prop it up as over the last 13 years it has accrued a net loss of over R34 billion.

Reasons for high cost structure
The hope is that the following will be reflected in the new business model:
• Improved fleet utilisation
• More modern fleet deployed, especially on international routes.
• Better airline costs
• Improved turnaround time so that aircraft do not remain in the hangars.
• Improved IT system.
• The number of people employed per aircraft as well as the benefits being derived from the airline will be getting particular attention. A "leadership compact" forum was held with trade unions to ensure that the numbers and benefits are addressed and to ensure that those employees that need to be let go are dealt with appropriately.

Business Rescue Plan: negotiations with government and various fundraising options are being considered.

Impact of COVID-19
This has affected the industry very significantly. Virgin Australia will be no more, Lufthansa has approached its government for assistance and in the US, government has had to provide $25 billion to airlines with another $25 billion to be given later. On the continent, BA COMAIR has gone into business rescue. Other airlines are negotiating mergers and other drastic action to reduce costs and pay employees. According to the International Air Transport Association (IATA), the industry is likely to see about 50% of air traffic revenue disappearing, which means the world will end up with a much smaller airline industry than before.

SA Express
Special appropriation and conditions
It has been provided with R300 million in 2019/20. There was a directive that DPE share with National Treasury the proposal for consolidation. This was done but it was not achieved due to the business rescue that took place.

Finance and Liquidity Challenges
These challenges were no different to SAA. Internal controls in SA Express were a major challenge as reflected in its qualified audit outcomes. The strategy was not implemented and the Air Operator Certificate was suspended in 2016 and 2018. Another challenge was that the airline could not put enough of its aircraft on the line. On any given day, of the 15 aircraft that it had, it struggled to put even five or six on the line, especially towards the last days. The entity had been incurring losses.

Business rescue was applied for by one of the creditors who showed that the business was in distress. A business plan was prepared to obtain funding, but it was not implemented. On 28 April 2020 the company was put into provisional liquidation and final liquidation is expected on 9 June 2020.

Impact of COVID-19 on funding
The lockdown resulted in the grounding of all planes. All cash was depleted within a short period following this grounding. The 9 June 2020 will be D-Day unless some miracle arises.

Other information
Salaries were not paid in March 2020 due to liquidity challenges. A portion of April wages was made from the Unemployment Insurance Fund.

Mr Tlhakudi asked if National Treasury would like to add anything or they could respond when answering.

Ms Tshepiso Moahloli, National Treasury DDG: Asset and Liability Management, said that he had covered everything sufficiently in the joint presentation.

Ms E Peters (ANC) thanked them for the presentation. As per the Companies Act, a business rescue plan must be published within 25 business days after the business rescue practitioner appointment. She asked why there has not yet been a report five months later. She asked DPE and Treasury for the cost to the state in the lengthy business rescue process the BRP is engaging in as it seems like they are running the company instead of producing a plan. Secondly, she asked DPE about the non-payment of 691 SA Express employees and asked if DPE is cognisant of the personal implications of this non-payment on employees who have not been paid in March and April, and possibly May. She asked if third party payments have been done on behalf of these workers if they have not been paid their own salaries. She asked for the total liabilities of SA Express.

Ms Peters said that Eskom has become almost the spoiled brat of family. There has been over-emphasis of Eskom’s importance as an institution serving the state, which is how it has become so spoiled. SCOA is expecting a comprehensive report from Eskom and the departments about the special appropriations. She asked if any coal contracts have been re-negotiated. She asked what has been done about communities and if the 'one meter, one household' intervention has been implemented. She asked if the private sector debt to Eskom has been addressed. Eskom was saved by the bell by the lockdown and asked if Eskom used the two months handed to it on a silver platter to deal with the maintenance challenges it claimed to have.

Mr A Sarupen (DA) asked what the odds are of finding a strategic equity partner for SAA considering the global airline crisis. The business rescue practitioners have made a way for SAA employees to be paid, but what about SA Express? He asked if SA Express has paid over PAYE to SARS for its employees and if it has been meeting its pledges for employee funeral plans and other such commitments and if not, why not. He asked about the prospects of an SA Express-SAA merger succeeding. He asked if SAA is going to continue flying and commented that quite frankly both companies should be private. He asked for the cause of the complete breakdown of SA Express to the point that it could not even pay salaries. What happened to the bailout from the previous financial year? He asked if SCOA can expect a report on its utilisation. Since liabilities exceed assets for both SAA and SA Express, he asked the likelihood of a successful winding down that would not trigger further cross defaults in other debt owed by the state.

Mr X Qayiso (ANC) asked to what extent the BRPs and liquidators are involved in decision making at SAA and SA Express in the context of the country's economic situation and the huge dent COVID-19 has had on it. Since government is the shareholder in both entities, he asked if it cannot do anything to stop the retrenchments or give a proposed new direction to avoid job losses for workers. He asked if the two entities received anything from the COVID-19 relief package.

Mr Qayiso said that according to Treasury, South Africans problems have overwhelmingly been created by Eskom. Treasury says that in its assessment, the government has little fiscal policy space. He asked if Eskom’s business model has changed to a new kind of business model so SCOA can know there is progress. Eskom tariffs have been a burden to consumers as they have doubled four times above the consumer price index. Eskom has seemingly been assisted through the taxpayer and has benefited from being financed by the people and yet the situation has not improved. There has been a promise of a report on what has been happening at Eskom since the arrival of the Chief Restructuring Officer (CRO). He asked if the report has been completed so Parliament can exercise oversight over the entity. What are the options for the restructuring of Eskom's debt. On the COSATU proposal for the reduction of Eskom’s debt to a more manageable R200 billion, he asked for government's attitude to that proposal. It is important to understand the attitude of government as it has never been made clear.

Ms M Dikgale (ANC) asked about the debt the municipalities owe Eskom. She asked if some municipalities can pay, why can others not? She asked for Eskom’s plan. What was Eskom doing about this? Among Christian society, when faced with a serious challenge, they go deeper into fasting and prayer so that at the end of the day they get what they want.

Ms E Ntlangwini (EFF) was not sure if the Acting DG was indicating that there was no hope for all these institutions. Eskom has identified procurement as a potential lever to drive cost savings. What progress has been made in renegotiating coal contracts and overhauling the coal procurement system in Eskom? Secondly, what internal cost-saving measures are in place to compensate for loss of revenue due to COVID-19? She asked Eskom to enlighten the Committee on its plans. She asked for clarity on the business rescue plan and why it has not been publicised.

Mr D Joseph (DA) asked for clarity on the term ‘new airline’ being used. He heard 9 June for SA Express and asked for clarity on what this means. His party’s position is that these airlines should be closed; therefore he does not want to venture too deeply into questions on business rescue aspects. However, the presenter made a serious statement when he said that the business rescue practitioner failed to present a valuable business rescue plan. As this was a serious statement, he asked why the presenter used it, what it means for those who were appointed, and what it means for the outcome of the expected rescue plan. He noted that it was stated that South Africa needs a national carrier to fly passengers and cargo. He asked what the solution is going forward if the business must continue. He asked what proposal has been made to meet the country's needs post COVID-19 so that tourists can come and cargo is covered.

Mr Z Mlenzana (ANC) said that he could sense that the presenters were rushing for time and even finished before the time allocation given. He asked what internal cost-saving measures will be made at Eskom in the short-to medium term to compensate for loss of revenue due to COVID-19. He asked if Eskom was ready to meet the increased demand in electricity with the colder weather. Load-shedding had started in Kokstad and he asked how long load shedding will be taking place. He asked for the current status of the maintenance backlog. He asked if the conditions attached to the Eskom special allocations were legislated or directives. He asked for an explanation so the Committee can follow what the Department presents. On SAA, he asked about its current cash flow situation considering its lack of revenue, its contractual obligations for maintaining the fleet and other fixed costs.

Mr A Lees (DA) asked how Eskom’s debt would be restructured. He asked about the status of the role of the CRO, if the appointment has been made and what role the officer is playing in the restructuring. The North Gauteng High Court declared Ms Myeni a delinquent director and banned her from being a director for life. He read paragraph 278 of the judgment which spoke of the breach of fiduciary duty and recklessness of Ms Myeni. He was sorry the BRPs, as the SAA accounting officer, are not present in the meeting. Perhaps Mr Mkasana may be able to shed light on whether the BRPs will be instituting action against Ms Myeni for damages incurred during her tenure at SAA. Mr Mkasana may be able to answer his question on the media statement issued today which said there was still a reasonable prospect of rescuing SAA subject to the requisite funding. He asked how much the requisite funding is and from where it would be coming.

On SA Express he noted that despite the majority of employees not being paid, there is one employee that got everything out of SA Express that she could have and she had been promoted to CEO of Transnet. He asked how just one out of all the SA Express employees has been given a very nice new job at a state-owned entity when the rest have been scrapped.

Mr O Mathafa (ANC) thanked them for the presentation as it will assist in conducting oversight on appropriations. He started with his concerns on SAA although there is a prospect of rescuing the airline. That being said, the presentation notes that a rescue plan was not submitted and that the available funds will be exhausted after June 2020. He asked what will happen after June when funds run out. Secondly, R5.5 billion was allocated to the BRPs in post-commencement finance. He asked how much of this has been drawn down and if an indication can be given on how these funds have been spent. He asked if there will be costs associated in the termination of the contracts mentioned. He asked if there has been a skills audit of SAA top and executive management to assess their capability to turnaround the airline. On R1.2 billion allocated to SA Express in 2018/19, he asked if a report has been submitted to the Finance Minister on how it was utilised and if not, why not. What is the timeline for when it will likely be submitted? In terms of the Municipal Finance Management Act, National Treasury is required to assist municipalities to make payments to bulk supplier service providers. He asked if Treasury has provided any means to assist municipalities in meeting their obligations to Eskom which is a bulk service provider.

Mr A Shaik-Emam (NFP) said there is R28 billion in municipal debt to Eskom and asked what intervention has been made thus far by the Department of Cooperative Governance & Traditional Affairs (COGTA), who assured the Committee that they would intervene. During the lockdown, most businesses were closed but are now coming back into operation from 1 June 2020. He asked if Eskom had dealt with its maintenance challenges during the lockdown period. He asked what the impact on Eskom will be now that municipalities will be able to procure their own electricity from independent power producers. He expressed concern about the lack of a business rescue plan. How much of the money given to BRPs has already been spent and yet there is no plan yet? He asked if there was a belief that equity partnership will solve the problem within SAA. His understanding was that the problems included internal interference, political interference and high levels of corruption. He asked if it mattered who the partners are. He asked if those gathered should not be identifying the crux of the matter and dealing with the causes. What is the annual cost of leasing the aircraft which were previously owned by SAA? He asked what investigations were taking place about the sale of the aircraft, what the figures were and the parties to that sale, including where the money from the sale went. He asked for comment on reports that that one third of SAA employees are on sick leave as they can be called at any time of the day or night. He asked for comment on the reports that if SAA reduces 50% of its staff load, it would still operate normally. What measures are being put in place in procurement to guard against over-pricing? With the aviation policies, what is the impact of giving out routes to international airlines?

Mr N Kwankwa (UDM) asked for feedback on the results of past discussions by the inter-ministerial task team led by COGTA assisting Eskom to recover money from municipalities that are defaulting on payments. He asked how Eskom intends restructuring the debt owed to it. When the Committee visited Eskom, they were informed of supplies that were overpaid to the tune of R4 billion at some point. The Committee was informed that steps were being taken to recover some of this money. Considering the cash-flow constraints Eskom faces, he thought it was important for the Committee to remain abreast on that recovery.

Mr Kwankwa commented that the situation at SAA is very problematic as the first deadline for the business rescue plan was March 2020. That plan was to be made produced in front of the Portfolio Committee. He recalled that there was a briefing held on the issue with the relevant Committees. He asked how money given to the BRPs has been spent so far. There had been no financial information presented to the Committee about SAA since approximately 2017. It was difficult for the Committee to have a good understanding of the financial challenges faced by SAA without this information. He asked for a full report and not just a response to questions. He asked that the report be a proper breakdown of how the R5.5 billion has been spent so far. He asked how it can be said that SAA can be saved if there is no business plan and SAA does not even own its aircraft. He asked if it is not time for SAA to present to the Committee a business model that will actually work and make financial sense. It might be that the leasing of aircraft may not be as bad an idea as it seems but currently there are cost drivers contributing to the current state of affairs. The Committee needs proper and full explanation as it is difficult for the Committee to have a discussion about how to save SAA and engage with the prospect of SAA running out of money by June without proper documentation on the full state of the challenges facing the entity.

The Chairperson thanked the Committee for their questions and asked the Committee secretariat to note major questions so the Committee can write to the entities asking for full reports. He asked if Mr Mkasana was fully delegated to speak on behalf of BRP, to which Mr Mkasana responded in the affirmative. The Chairperson continued that next time he references a BRP statement, he does not want to encounter the refusal from the BRPs in saying that Mr Mkasana was not fully delegated.

The point of meetings such as this were to make progress rather than mark time. He asked for Eskom to identify their top five cost drivers, specifically, on the question of coal contracts. He asked what the market price for the contracts are and what Eskom is paying for them, so that they can see why the people of South Africa are paying. He asked when the contract negotiations are going to come to an end as the contractors do not benefit from them coming to an end but this is in the interest of the people of South Africa. As there is no incentive for them to end negotiations, he asked for these negotiations. We are now paying for the defects of power stations for which South Africans are already over-paying. He asked if the Committee could be taken into confidence about that. There was a contractor that was overpaid to the tune of R5 billion. The Committee was informed that it was agreed with the service provider that it was erroneously paid. He could not accept that someone can be over-paid R5 billion by accident. He asked who the lucky contractor was and noted that this cannot be the only such transaction and asked who else had been overpaid. He asked for the Eskom board to account for these questions.

The Chairperson said it seems to be the practice at Eskom that certain big companies only need to approach Eskom to say they will pay the money back and yet the consequences would be more dire for smaller companies. He asked what the circumstances of those payments were and the Eskom board should report back to the Committee on these points. He also asked for Eskom to present a plan about its planned end state and what the financial implications would be for getting to that state as well as to list the benefits.

The Chairperson said it sometimes seems that calling SAA a company is a misnomer as it has no assets since its assets were sold. He argued that it may be a management company of some sort as it is now managing leases and so forth. There have been about three reports by reputable companies about the wrongs occurring at SAA. He does not know what has been done about the reports as both Parliament and the Departments seem not to be doing anything about the reports. He asked what exactly the reports said. As some point the Committee was told that payments were being made to companies in destinations where SAA was not flying to. There were challenges around contracts and the Chairperson no one knows what transpired in those contracts, why they were entered into and who they benefitted. It was very important to know what is happening with these reports as going forward to the new airline the risk is carrying forward the same problems. The reports must be shared with the South African people through their parliamentary representatives.

The Chairperson said the workers are the biggest losers at SA Express. He stressed the importance of this concern for the Committee as it deals with the very lives of people. He asked the Committee to imagine what would happen if they had not been paid for the last two months. More time needed to be spent unpacking that problem. He asked that the written report go into detail about the implications of non-payment for the workers and what the plans are to cater for the workers going forward in these companies.

If is memory served him correctly, BRPs were paid about R30 million, which he knew the Minister of Public Enterprise took issue to, and yet there is no plan. He asked why BRPs are being paid to tell the country that the company will be wound up. What benefit is being gained from the payment of the R30 million? He asked BRP when the Committee would see the plan, especially as R5.5 billion has already been allocate toward it.

Deputy Minister Masualle asked if a written report may be given as they may not be able to answer all the questions as thoroughly as required.

Eskom response
Prof Malegapuru Makgoba, Interim Chairperson of Eskom, thanked the Committee for the questions as they speak to what it needs to hear. He clarified that the assumption that the lack of load shedding during lockdown is only due to less demand is not the full picture. He insisted that people at Eskom have changed the manner in which they work. A lot of hard work has been done and maintenance repair work has also been done during the two months of lockdown. More importantly, relationships between the Eskom Executive Committee and Board with the Department and Presidential and Ministerial task teams have changed. This improved relationship has created a different culture at Eskom.

End-stage timeline and unbundling
On the end-stage to be reached, the unbundling is presently being worked on and there is a timeline for this to be achieved. It will be made available to the Committee as the executive and the board are still working on how to present the unbundling to the Committee in pursuit of an end state. A list of the payments that were over-paid on contracts will be gathered and presented to the Committee for their advice. He urged Members of Parliament to visit Eskom because at times when the Committee was talking, he could not recognise the entity spoken of as things are changing all the time at Eskom for the better.

CEO of Eskom, Mr André de Ruyter said that he agreed that a time may need to be set for Eskom to come alone to present.

Coal supplier contracts
The CEO said that good progress is being made in negotiating the contracts and when they come back to present more comprehensively, he committed to giving a timeline as to when these negotiations will come to an end. They are owed R28 billion in municipal debt. This is an element of concern to Eskom. The top 20 municipalities constitute about 81.25% of the total invoiced municipal debt. There are currently 48 active payment agreements with defaulting municipalities, and 19 of those agreements are being fully honoured. Regrettably, only one municipality in the top 20 is honouring its agreement and the remaining municipalities are defaulting. Eskom does not have the same levers to collect debt from municipalities that it has with private customers—for whom they can cut off supply. In those cases, this acts as a good incentive to pay their arrear debt quickly. With municipalities, however, Eskom has been interdicted from cutting off supply to municipalities which has a bearing on the 16 municipalities out of the top 20 defaulting municipalities. This interdict is an important constraint on Eskom as it seeks to recover the outstanding debt.

Improving supply to lower income households
During the 2020 financial year Eskom set the target of electrifying 157 900 households. This target was exceeded as they electrified 163 073 households, which was better than anticipated. It is part of their continuing drive to provide electricity as a basic necessity to the country.

Impact of COVID-19 lockdown
During lockdown, the lower demand allowed Eskom to perform corrective maintenance. Mr de Ruyter stressed that this was not the long-term maintenance needed to restore its generation system to full reliability; therefore, there has been short term, opportunistic maintenance. This maintenance has added some 2000 megawatts to reliable and available capacity; this is about two-thirds of an average power station. Eskom’s current guidance, with an 80% level of confidence for next 3 months ahead, is that Eskom anticipates only three days of stage 1 load shedding during the winter period, which is a significant improvement from its previous forecasts. During the peak of electricity usage this evening in response to the first cold front of the winter, Eskom needed 31 000 megawatts to meet the demand and they had 34 000 megawatts available. Although usage was higher than expected, it was more than capable of meeting the demand.

Business model changes
Eskom is in the middle of changing its business model to become one with a low cost and it has a small, lean and efficient Head Office that is geared towards the delivery of electricity through its three major divisions: generation; transmission and distribution. The divisionalisation process is going very well as divisional boards have already been set up. All three of these boards have had two meetings each and are chaired by the CEO himself. They play an important role in driving the culture change in the organisation to be far more focused on cost, profit and operating discipline as it moves forward to becoming a more self-sustaining business.

Tariff increases
There are a number of areas where Eskom is in disagreement with the energy regulator. It has engaged with the newly appointed energy regulator at National Energy Regulator of South Africa (NERSA), Mr Nhlanhla Gumede. Eskom is endeavouring to reset the relationship between itself and NERSA in order to conduct their mutual affairs in a more constructive ways than through court challenges, which unfortunately seem the only way of resolving challenges at this point in time.

Restructuring debt
The CEO said that the term needs to be used carefully as bankers get very nervous when it is used. Eskom prefers to look at its debt maturity profile, which is approaching in the next number of years and as the debt matures, it will use the debt maturity to re-negotiate and potentially lower the outstanding debt. It is engaging with its lenders on that point with the assistance of National Treasury.

Status of the CRO appointment
He asked that this be answered by National Treasury or the DPE. The question about whether Eskom is a bulk service provider also falls within the domain of National Treasury.

COSATU proposal
Eskom welcomes any and every constructive proposal. It does not necessarily have a position on the substance of the proposal. It welcomed what COSATU has done in proactively coming forward with a solution seeking to address an intractable problem – the R450 billion owed by Eskom.

Municipal debt
The intervention of COGTA has not yielded the results that everyone anticipated. He commented that this may be the result of the governmental structure being a constitutional democracy dealing with spheres of government rather than a hierarchy. As he is advised, the influence of central government to give instructions to local government is limited. Therefore, the intervention of the inter-ministerial task team has not been as effective as one would have wished for. Eskom is strictly administering access by these municipalities but, as already noted, it is interdicted from completely cutting off supply.

Maintenance backlog and continued capacity
Eskom has dealt with some of the maintenance backlog, but it still needs to conduct some of the longer-term reliability maintenance which is a very deep level maintenance. This involves taking units off sequentially. The units will then be repaired over a period varying from 60 to 140 days. This is a very thorough maintenance and will be done after the end of lockdown. It was unable to carry out this maintenance during lock down because of the medical inadvisability of concentrating large numbers of contractors and Eskom employees at its sites. Good use of the time has been made, however, and it has ensured that teams have been mobilised and properly resourced and agreements have been entered into with contractors so that the reliability maintenance begins from 1 July 2020 and should be completed by August next year if they work hard to be successful, which they will. Eskom is comfortable in saying that it foresees three days of stage 1 load shedding for the next three months and the rest of the year, although the generational power is still unreliable.

Municipalities procuring their own electricity
The CEO said that this question would be best responded to by the Department of Mineral Resources and Energy based on policy announcements made recently on that.

Recovery of funds
He echoed the Eskom Chairperson by saying that it is very aware that it has an obligation to recover money that was paid incorrectly and unlawfully to various organisations. It is working closely with the South African Revenue Service (SARS), the Special Investigating Unit (SIU), the Directorate for Priority Crimes (Hawks), the Johannesburg Stock Exchange—for those companies that are listed, and the Head of Investigations at the Office of the National Director of Public Prosecutions. It is seeking to recover some R600 million that was unlawfully paid to a company called Trillion which was in partnership with McKinsey and Co. The Committee may be aware that Eskom recovered a sum of R1.1 billion from McKinsey and Co itself. Eskom is participating in the business rescue process of Tegeta Exploration and Resources Pty Ltd and where Eskom had a claim of R5 billion against the BRPs, it thinks that based on the available money, it is unlikely that the full R5 billion will be received and will likely receive a significantly smaller amount. Proceedings have been engaged in with Deloitte Consulting and in an out of court settlement, they have received R171 million from Deloitte. Eskom has also issued a letter of demand to another consulting company. There are various Special Investigating Unit investigations. As this has not yet been made public, he preferred not to disclose which company it is. Eskom continues to pursue these funds, but it is difficult, particularly where companies have become insolvent or fallen into business rescue.

Top cost drivers for generation
Generational costs include: coal, 57%; materials, 4%; labour, 10%; environmental levies and taxes, 10% and contracts for the generation and maintenance of a generation system comprise 20% of the overall cost base.

Progress on design defects at Medupi and Kusile power plants
After a 75-day outage at Medupi Unit 3, Eskom was pleased to announce that it was able to ramp up production at the unit to reach full capacity for the first time as it made various modifications to achieve this.

The CEO was cut off and the Deputy Minister Masualle asked if more detailed information could be provided in writing considering the time left for SAA and SA Express to respond. The Chairperson agreed.

The Deputy Minister asked Ms Mgoduso and Mr Nkasana to answer high level questions on SAA as the rest would be responded to in the written report.

SAA response
SAA Acting Board Chairperson, Ms Thandeka Mgoduso, said that it was common knowledge that SAA has been in business rescue since the 5 December 2019, when the Board appointed the BRPs and therefore had to step back. Since then, the Board has not been involved. Mr Nkasana can account for the six months from the onset of the business rescue programme. As a board, because they retain their fiduciary responsibilities, it is still waiting for the business rescue plan. The Board is looking forward to participating in the aviation sector once regulations allow. If there are hurdles at SAA, which she hoped would not be the case, there are capabilities at Mango. They intend to take advantage of the many possibilities presented by the COVID-19 crisis.

Court Judgment
Mr Bongani Nkasana stated that SIU is currently at SAA premises as they speak. It is conducting a number of investigations to do with a number of offences and contracts engaged with in the past. The BRPs have compared notes with SIU in terms of the scope that SIU has and the scope the BRPs have in performing their duties. In performing their responsibilities as BRPs, if they pick up any suspicious activities, contracts or contracts that are out of kilter with the market, the BRPs ensure that they are brought to the attention of the SIU and they work together in ensuring SIU gets all the information it needs. He was sure that the judgment was already on the SIU radar and would contribute to the ongoing investigations.

Skills Audit
No skills audit has been performed at SAA. This is because the BRPs have been engaging in a Section 189 process which aims at achieving two outcomes. Firstly, a head-count reduction as SAA is over-staffed, and secondly, the process of negotiation for new terms of employment for the staff. This would require that all employees would be retrenched and they would re-apply for their jobs. The terms of employment would be changed. Therefore, instead of doing a skills audit, there would be a re-application for the posts which would be determined by the new requirements needed.

He began by giving the Committee a sense of the scope of SAA. He understood that the Committee had not seen financial statements since 2017. However looking at the draft financial statements presented to SCOPA recently, the total cost of SAA per year is R30 billion at a minimum. The accumulated losses over time of R34 billion must be contrasted against the yearly expenditure. This figure means that the organisation spends about R2.5 billion a month. In the R2.5 billion per month, R500 million is paid to employees—with R300 million going to salaries and R200 million for allowances paid to the staff when they travel such as the pilots. Therefore, of the R5.5 billion given to SAA at the time that the BRPs stepped in, the company only had R118 million in its bank account and the R5.5 billion was intended to last until the end of February at which stage, the government would have made a decision about restructuring options. The R5.5 billion can be accounted for in a detailed presentation which was shared with SCOPA. Another R5 billion has been received in terms of the receipt of funds. In the past 6 months, the BRPs have had to deal with R10 billion in the period of 6 months. However a detailed breakdown will be given in the detailed presentation

Leasing of aircraft
He will leave the responses to these questions to the DPE as the BRPs were not part of this decision. The leases for the aircraft cost R500 million per month.

Cash flow
Currently, the airline has about R1.2 billion and of this amount, R600 million is ring-fenced. It is ring fenced because it relates to un-flown ticket liability so that if refunds are requested, the airline can pay these back. The remaining R600 million, despite being in the bank, is already spoken for by the airline’s liabilities. R518 million is owing for the aircraft leases for the month of April and another R500 million is owing to other creditors such as the Airports Company. Therefore, despite having R600 million in the bank, SAA has about a R1 billion in liabilities.

Intention to re-start domestic travel
This announcement was not approved by the BRPs.

Why there is no business rescue plan
A communication was sent to all affected parties speaking to why the plan is not out yet. He would not speak to this too much and asked for the BRPs themselves to respond formally to the Committee. He did however, note that the report was due to be published on 29 May, which is this coming Friday, and that is why they are not here.

The Deputy Minister asked if the Acting DG could respond to questions about SA Express as the team was experiencing technological problems.

SA Express
DPE Acting DG, Mr Tlhakudi, replied that the matter of the salaries does not sit well with them. Resources were limited and he said they would be the first to say that the airline must be helped to restructure itself. Consideration must be had as to the value that could be made to the country. The financial mismanagement had been dealt with extensively in the Zondo Commission. He asked if it would be alright for the rest of the questions to be responded to in writing.

Mr Daniel Terblanche – one of the appointed SA Express business rescue practitioners – asked if he could contribute. He said that the salaries could not be paid due to a lack of funds.

Public Enterprises Deputy Minister response
Deputy Minister Masualle said that the SA Express questions would be dealt with further in writing as there were technological issues with the team. He did, however, respond to the question on the creation of a new airline. Between trying to rescue SAA, there is a conversation about an attempt to achieve a consolidation of the aviation assets into a new entity, which will hopefully attract strategic equity partners. However, COVID-19 has created an environment of uncertainty, and there are attempts being made to get out of an ailing situation. The business rescue plan that will be presented this coming Friday should speak to the elements of what the new situation could achieve. The rest of the questions can be responded to in writing, and there needs to be more time given for discussion with the Committee. He supported the suggestion made by Prof Makoba that Eskom come alone as well as the other entities, to present so that as much information is shared as possible.

The Chairperson asked if Deputy Minister Masondo had anything to add in respect of Eskom.

Finance Deputy Minister response
Deputy Minister Masondo said that the liability for Eskom is quite and that the Eskom capital structure is a problem. As liability is higher than equity and they are not balanced, to fix the capital structure of Eskom, the debt needs to be reduced. He re-iterated that Treasury has said before that government equity injections are not sustainable and debt is a symptom and not a cause of the problem. When running a company, where costs are very high, and income is low, that is a problem. There is a need to get to the real cause. He thought that the new leadership of Eskom was working very hard to ensure that the cost drivers of Eskom are dealt with. He agreed that the Committee was right in asking for more information as to how the cost drivers are being dealt with. As long as government throws money into these entities without dealing with the root causes, it is simply throwing taxpayers' money away. He concluded by saying that cost efficiencies need to be dealt with decisively.

The Finance Deputy Minister responded that the proactive approach of COSATU was appreciated, however, as the Ministry has not yet received a detailed proposal from COSATU; it would be premature to comment at this point. It was important to take into account that the Public Investment Corporation (PIC) invests money on behalf of its clients after receiving a mandate of its clients. The solution of PIC investing into Eskom by transforming a loan into equity will need PIC to get a mandate from its clients. Eskom is not involved with this aspect of PIC.

Deputy Minister Masondo said that they had persuaded the Committee that they should not legislate on the conditions for special appropriations. They should rather work on the basis of strict accountability and the asking of answering of questions and strict monitoring by the Committee to ensure that the conditions are being met. He committed that the rest of the questions would be responded to in writing.

Concluding remarks
The Chairperson said that the Committee would follow up with the questions in writing so that it can receive comprehensive responses. He thanked both Deputy Ministers for their presence; the Eskom Chairperson and his team, and the SAA and SA Express teams for being there.

Mr Mlenzana said the Committee has been to Eskom but further engagement needed to be had to unpack some of their concerns.

The Chairperson said that they would meet with Eskom again. This was the Professor’s first meeting with the Committee. They may visit Eskom again to pick up on some of the issues raised on their previous visit

The Chairperson announced a briefing on the Appropriations Bill by National Treasury Wednesday 3 June and public hearings on the Bill on Friday 5 June 2020.

The Chairperson noted that it was a busy time for the Deputy Ministers, who were still on the call. He knew National Treasury was working on the Appropriations Bill and that it knew the Committee’s thoughts on a number of things including the Land Bank. He wished them luck in dealing with it and said they will meet soon. He excused the Deputy Ministers. He requested that any questions Members did not feel it received satisfactory responses be sent to the Committee Secretary. Before they are sent to the entities, they will be returned to the Committee to check that all their questions are covered. Three hours is not sufficient to deal with three institutions that are all in trouble. He encouraged Members to send the questions through by Tuesday 2 June. He then closed the meeting.

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