ESKOM on SCOPA recommendations; with Minister

Public Accounts (SCOPA)

18 June 2020
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary

Video: Standing Committee on Public Accounts, 18 JUNE 2020

The senior management of Eskom, and the Minister of Public Enteprises, appeared before the Standing Committee on Public Accounts to report back on the progress the entity had made in implementing the Committee’s earlier recommendations.

Most of the Committee’s questions were focused on incidents of fraud, corruption and negligence which had cost the utility billions of Rands. A Member criticised the “take or pay” method which had cost Eskom more than R9 billion as a result of the Medupi and Kusile power stations not being completed, and asked if there was not a better way of structuring such a contract. It was argued that the objective of recovering lost funds was not enough – the Committee wanted criminal charges to be laid against implicated officials.

Members wanted to know what was being done about former Chief Executive Officer’s, Mr Brian Molefe, pension payout, and whether the allegation that the current Chief Operating Officer had been awarded an irregular contract by Eskom, had been resolved. How would the R76 million loss from the Wilge housing project – which had never been completed – be recovered?

A Member asserted that employees who had given evidence before the Zondo Commission had been victimized by being moved from their jobs, and into inferior positions. The Minister and the Department said they would investigate this. The Minister also said it may be beneficial for the Committee to call the accounting firms and the coal suppliers to address it on the issues that had been raised at the meeting.

Eskom said it would provide a list to the Committee of the ownership of the companies that had been involved in over-payments made by the entity. It would also be furnished with a comprehensive list of the corruption and criminal cases, as well as those cases that had been registered with the Hawks.

Meeting report

The Chairperson said the Committee would like an update on the Report adopted on Medupi and Kusile projects, including the recommendations and the decisions made around consequence management. Some Members of the Committee had been affected by electricity outages. Similarly, in Mamelodi, there had been protests, as there had been electricity outages or excessive load shedding in the area.

The Committee would like an explanation on the R5 billion transaction which had been a cause of discussion, as it brought into question the controls which were often emphasised by the Committee. 

Minister’s opening remarks

Mr Pravin Gordhan, Minister of Public Enterprises, said there was no load shedding at the moment, although the system was under strain given the cold front in the recent days. He said Eskom would present an extensive, 65-slide presentation to the Committee.

Eskom Presentation

Mr Andre de Ruyter, Group Executive Officer: Eskom, Mr Dan Mashigo, General Manager: Primary Energy, and Mr Jan Oberholzer, Chief Operating Officer, presented a detailed 65-slide presentation,

(See attachment)


Mr M Dirks (ANC) said he had raised the issue about “take or pay” during the Committee’s oversight visit. He asked if was there no better alternative to the take or pay method.  Take or pay had cost Eskom almost R9.2 billion, which was a result of not completing the Medupi and Kusile power stations. The R9.2 billion should be added to the project costs to more accurately show how much the budget had been overrun on this project.

The irregular contracts with Deloitte and PricewaterhouseCoopers (PWC) would see some money be recovered. However, the Committee wanted to see criminal charges against those who had awarded these contracts and the officials responsible at Deloitte and PWC. It was not good enough to say R150 million would be returned.

He requested clarification of the circumstances around Mr Brian Molefe’s (former Eskom CEO) pension payout which was being investigated. It was understood that the matter had gone to court, and it had been ruled that he must pay back an amount of R17 million to Eskom. However, Mr Molefe was yet to pay this money, and he claimed he was never paid this amount. He said that he got only R7 million, which included the pension from his previous employment.

There were allegations that the Chief Operating Officer (COO) was a director of a company that had been awarded an irregular contract from Eskom. Could this be clarified? He encouraged Eskom officials to address South Africans with regard to the alleged corruption at Eskom.

Ms B Van Minnen (DA) referred to the R76 million loss that had been incurred through the negligence of the former general manager at the Wilge housing project, where Eskom had stated that he had been ordered to pay this money back. Did Eskom actually expect to retrieve the money, or had this statement been made as a matter of principle? She commended Eskom for appointing qualified project directors at Kusile, and asked how this would ensure that there would be stability going forward. The issue in the past had been that project directors had not lasted.

The situation in which Kusile found itself, was due to the Seriti and New Largo coal fields.  The delivery date for coal had been pushed to 2026. How had it been allowed to stagnate for a decade? The history was distinctly dubious -- was there no way to expedite this? There were environmental, security, quality of coal and budgetary implications, having hundreds of trucks going in and out of there.
She asked Eskom to expand on the stability and liquidity of contractors, considering the economic implications of COVID19. What was being done to mitigate the effects of the pandemic on contractors?

Ms V Mente-Nqweniso (EFF) asked Eskom to explain the payment of R4 billion, and another of R5 billion, that were being talked about. Who was it paid to, and who had made the payment?

Why was the report on the COO not accessible to the relevant Committees?  The recommendation had been for Eskom to perform vetting on all staff, especially those leading the business. The COO was a part of those people, so had he been vetted? The report should be given to Parliament, as Eskom was a State-Owned Entity (SOE). Some were still awaiting outcomes from the body that vets employees. From the outcomes that had been received, was there anyone that had been rejected due to security clearance, or other reasons? In terms of declarations, did anyone have a business that was doing business with Eskom? If so, who were they, and why were they allowed to be employed at Eskom?

In cases where people had resigned to avoid the consequences of corruption, what was the Rand value of these cases? Were these people employed in other state departments? Eskom investigations were not clear as to what the outcomes of the investigations were. How many people were willing to pay back funds, and how much was Eskom demanding? This had not been stipulated.

Funds given to Eskom needed to be traced, especially considering the state of Eskom. If corruption was not dealt with, Eskom would never work. The Committee had been given new timelines for the two power stations, and these would shift again if corrupt people were once again involved. Eskom therefore needed to go back and give a more detailed approach.

Why were there cases that were under investigation for over 90-days? This gave those involved the opportunity to leave with money.

What were the phases that were going to be implemented for servicing the electricity generating units at Kusile and Medupi? Were they giving satisfactory electricity generation? Units would be taken down one-by-one for servicing, but could it be guaranteed that the costs would not be increased? According to the presentation, one of the projects would be completed at a lower cost than budgeted for -- could this be assured? What would happen to executives if this did not materialise?

Ms O Maotwe (EFF) said the Committee had been promised the report on the COO, but was yet to receive it. On 16 April, a letter had been sent to Eskom requesting the report. She asked for this to be furnished to the Committee.

With regard to the four companies handpicked by the CEO and introduced to Eskom, had this been reversed? This was not reflected in the report as an irregular process. What consequence management had been taken against the CEO?

Eskom executives who had made disclosures to the Zondo Commission were being victimized, as they had been removed and put in positions they had not applied for. This was affecting their families. What was the Minister doing to prevent the victimisation of whistle blowers?

Ms B Swarts (ANC) said that the entities were abusing the provisions of procurement deviations even in cases where normal procurement processes should be followed. The Committee should be provided with the clear practical process for contract management. Was there a dedicated unit for contract management? If so, was it fully capacitated and who did it report to?

According to Eskom, all defects were being dealt with in accordance with contractual conditions, with specific reference to the Mitsubishi Hitachi Power Systems Africa (MHPSA) boiler defects. The contract level discussion had been followed under the guidance of Eskom management and the MHPSA executives. Did Eskom’s management have the required expertise to address these defects? The response from Eskom painted a picture that the entity had control over managing these defects. If this was the case, what were the delays in the Kusile and Medupi construction? Could the Committee be furnished with the detailed process of how Eskom verified the quality of its coal? Had there been any major challenges or disputes with these different laboratories? Was the completion of weighbridges scheduled for August 2020 still feasible, considering the lockdown? 

Mr S Somyo (ANC) said there was a view that the take or pay method was more favourable where Eskom was concerned. If that was the case, he asked for a cost benefit analysis in financial and management benefit terms to be provided. To the Committee, the loss incurred due to this method was huge.

The investigations involved about 130-plus people, and it seemed as if there was an outsourced investigator. Could there be more clarity on this so the Committee could get a sense of the progress.

Minister’s response

Minister Gordhan said it may be beneficial for the Committee to call the accounting firms and the coal suppliers to address it on the issues raised today. Direct interaction may be beneficial, considering that they were private institutions that dealt with public entities and should be held accountable, as they consumed public funds in some ways.

The Committee would be furnished with a better list of the corruption and criminal cases. Not all corruption cases were criminal cases. A list of cases that had been registered with the Hawks should be given to the Committee. Law enforcement agencies should be called to address the Committee to provide it with details on the progress of the cases, as Eskom did not have access to this.

In relation to the claims of victimisation, the Minister asked that names be provided to him. In the past, engineers and experts of that nature who were best utilised at power stations had been brought to the head office. The Committee had been informed of the relinking process, which the Eskom CEO would explain further. To improve the performance of power stations, it was important for experts to be redeployed to the power stations. This may have caused inconvenience, but it did not amount to victimisation. If there were indeed cases of victimisation, names should be brought forward and it would be looked into.

The report on the COO had been given to him today. Once the board had approved it, it would be sent to the Committee. However, they had not had time to peruse it. Eskom would seek legal advice regarding the names mentioned in the report to avoid litigation.

The suggestion for an analysis of the Take or pay cost benefit analysis was a good one. Atypical examples could be used without reference to a particular mine and supplier, as this would have commercial implications.

The Minister said he shared the Committee’s frustration over people resigning. This had become a common feature in SOEs and the public service. Blacklisting had once been considered to ensure corrupt individuals did not end up back in the public sector.  Additional mechanisms should be put in place, and perhaps the Minister of Public Administration should ensure that these individuals did not find their way back in the public sector. If they had committed criminal acts, they should have criminal cases brought against them. This needed to be pursued if it had not been already.

Prof Malegapuru Makgoba, Interim Chairperson: Eskom Board, said that he agreed with everything the Minister had stated. He agreed with the principle of releasing the findings of the COO report, but the points mentioned by the Minister must be taken into account. He urged the Committee to bear in mind that transparency was not the same as being naked. Being transparent needed to be done in a responsible manner. In due time, the report would be released in a manner that made everyone proud, and which would support the Committee.

Further discussion

The Chairperson requested that Eskom’s concerns and considerations be tabled in writing for the Committee. He would engage with Parliament’s legal team. The impression must not be created that things were handled differently for some, compared to others. The principle was that people must be named unless the correspondence from the Minister and Prof Makgoba establishes the extent of these reservations. The Committee would then satisfy itself if there was merit or not. It raised an eyebrow when a special dispensation for a report was requested.

Ms Mente said the rules of Parliament state that anything that comes to Parliament for its accountability of tax funds, had nothing to do with suing. This was unless a report had involved questionable methods or processes that the SOE did not want Parliament to see. The COO was allegedly involved in doing business with Eskom, and he must clear himself. The report could not be held against Parliament when it was accounting for taxpayers’ money.

The Minster said he did not want his statement to be misconstrued as non-transparent. He had not had time to go through the report, as it had been made available to him only on the same day that he was addressing the Committee. The normal cautions applied. He would ensure that the report would be made available to the Committee as soon as it had received clearance from the board. This should be by 23/24 June.

The Chairperson said he had adopted his approach on this matter to safeguard the Committee. If the report gave birth to other investigations, it must not be compromised.

Eskom Response

Mr Dan Mashigo, General Manager: Primary Energy, Eskom, said that the estimated R5 billion amount was related to the penalty claim for the Tegeta Optimum contract. In February 2018, the Tegeta board had placed three of its collieries, which all happened to supply coal to Eskom, under business rescue. The three collieries had followed individual business rescue processes. There had already been penalty claims prior to the mine being placed under business rescue with regard to quality and supply. Post-business rescue, on a monthly basis, when the mine failed to supply coal which was part of the take or pay principle, there were clauses in the contract that quantified what Eskom could claim. These claims had accumulated for the Optimum contact to an amount of R5.6 billion. It emanated from penalties prior to business rescue that were levied against  the supplier for both quality and quantity, as well as the post-business rescue, where the colliery had failed to provide coal despite the contract being active. Like other creditors, Eskom had staked its claim on the settlement once the colliery had been sold. It had been placed under business rescue with the intention for it to be sold.

The R1.26 billion that was being referred to was due to other creditors. There was a voting block that had to determine the business rescue process, and it had decided on the amount which should be repaid to Eskom. This was the claim related to the damages suffered by Eskom. When it did not supply coal, Eskom had to source coal at a price much higher than what the mine could have supplied it at, until the contract lapsed at the end of 2018. The other two mines had their own processes -- this was mostly in reference to the Optimum contract.

Mr De Ruyter said that during a meeting with Eskom and the Standing Committee on Appropriations (SCOA) in October 2019, it had reported that there were on-going investigations by the Special Investigating Unit (SIU) and Eskom into the over payment of contractors that were operating at that time and, in some instances, were still operating at Kusile. The contractors were:

  • ABB South Africa. On package 21A there was an estimated over-payment of R1 billion.
  • Tenova Mining and Minerals South Africa. On packages 24B, 24C and 24E, there was an estimate over-payment of R735 million.
  • Tubular Construction Projects. On packages 11A, 17A, there was an estimated over-payment of R1 billion.
  • Stefanutti Stocks and Basil Read joint venture. On package 16 and another Stefanutti Stocks joint venture package 28, there was an estimated over-payment of R1 billion.
  • There were various site service contracts that were not in the scope of the SIU, where the estimated over-payment amounted to R180 million.

It was not an agreed amount, and was subject to contractual negotiation, and in some cases subject to dispute resolution through a variety of forums. These amounts came just under R4 billion. A document had been prepared on this, which Eskom was happy to share with the Committee.

The Chairperson stated that the Committee did not want to interfere in the SCOA’s process. He suggested that Eskom send a copy to SCOPA when it sends the document to SCOA. The Chairperson would engage with the SCOA Chairperson to keep track of the deadlines.

Mr De Ruyter said that criminal charges against Deloitte and PWC could not be pursued by Eskom. There was no indication that there was criminal activity involved. These contacts were unlawful, which entitled Eskom to reclaim the funds paid. In the case of Deloitte, an agreement had been reached and R171 million had been repaid. The R95 million was still subject to dispute with PWC.

The Eskom pension fund had taken Mr Molefe’s matter to the High Court for a declaratory order. A letter of demand had been sent to the Eskom pension fund following the court order, demanding the payment of the R3 million. The rules of the Eskom Pension Fund were silent on refunds. The respondents in the matter were the South African Revenue Service (SARS), Eskom and Mr Molefe. SARS was involved, as tax had been claimed. The initial finding affidavit had calculated various returns on the pension fund and various supplementary affidavits had then been submitted. SARS and Mr Molefe had opposed the relief, and the answering affidavits from SARS and Mr Molefe had not been filed due to the national lockdown. The matter was still therefore in front of the courts for further consideration.

Mr Jan Oberholzer, COO: Eskom, said negligence did not constitute criminality -- it may rise to a right to reclaim damages, founded on the Law of Delict, which was a civil matter. When Kusile started, accommodation had been needed for contractors and artisans. It had been decided that nine blocks of flats, with 336 units, would be built about eight to ten kilometres away from Kusile. This had gone out to tender in 2013, and was awarded to a contractor for a large amount. The building project was not yet complete, and nobody had occupied the units. The furnishings such as TV sets, beds and cutlery for the units had been bought and were being stored. Thus, a large amount had been invested into putting the accommodation together -- 300% more than the initial tender. Over and above that, the artisans and contractors still required housing, so alternative accommodation had been procured. This project had been managed by a general manager facility. The individual had been subjected to a disciplinary process due to everything that had happened. Based on the recommendations of the external council, it had been determined that the individual should be dismissed and an amount of R75 million should be recovered. It was a legal process that was taking its course.

Mr De Ruyter said that a highly experienced project manager had been appointed at Kusile. There was no reason to believe that his departure was imminent. The tenor of the project would result in the successful delivery and conclusion of the project.

He agreed with the concerns of the Committee regarding New Largo. As a consequence of securing the New Largo contract, Eskom had had a delay in the supply of coal by road. The contracts needed to end before coal could be sourced in quantities from the two pits indicated. Eskom was looking at potentially diverting some of the coal that was being delivered by road to Kusile, to other mines. This was on-going at the moment, and once this was completed Eskom would be able to ascertain what an accelerated delivery date for the New Largo mine would be to deliver coal. Hopefully it would be delivered on a conveyor to get the benefit of cheaper coal.

Due to COVID19 and a general lack of stability in the construction industry, a number of contractors which Eskom was dealing with were in business rescue, or were finding themselves in precarious financial situations. This was an on-going concern for Eskom, and it not only affected the generation business but also impacted on major transmission lines that needed to be built. Creating general capacity in the construction industry was not something that Eskom alone had an answer for, and this was something that needed to be addressed in a wider forum with other government departments.

A stringent process had been put in place to force people to declare their interests. This had been a successful exercise -- as indicated, both the Board and the Executive Committee had complied 100% with declaring their interests. Eskom was being scrupulous with how the vetting of the declarations occurred. Unfortunately, due to the lockdown, some employees had been unable to submit their declarations as quickly as Eskom would have liked.

There was general frustration that Eskom was unable to pursue people who had resigned. The audit and forensic team had now taken a different approach in recovery. Where the amounts that ought to be recovered were large and had been warranted by a cost benefit analysis, the team would pursue to recover money where there was a likelihood that Eskom would be successful. Eskom had too many cases that took longer than 90 days to resolve. This was had been a subject of discussion at the Board committee meeting on 18 June, on the need to capacitate the chairpersons of the disciplinary hearings to train them and to ensure they were aware of their rights and obligations in order to bring these matters to a rapid closure. These issues were being tracked as part of the reporting structure of the divisional boards.

Kusile and Medupi’s mega projects had risks attached, and depending on how these risks manifested themselves, the final budget amount may vary. There was confidence that Eskom would manage to achieve the successful completion of these projects within the budget amounts indicated.

Eskom was following the prescripts of contract management. It was capacitating contract management capability by the appointment of the 150 contract managers. Eskom needed to step up its capability in this regard more significantly than before.

Eskom had the capacity to detect defects, especially under the leadership of Dr Titus Mathe, General Manager for Group Technology. He had assisted Eskom with identifying some of the root causes and challenges experienced at Medupi. The design defects that had affected the units at Medupi had been detected, and unit three was now successfully operational. There was a caveat attached to this -- Eskom now needed to have a trial period where it ensured the design modifications were suitable and that they could withstand the rigours of operation. Unit six had been successfully commissioned on 18 June, and was now ramping up and producing electricity. The prognosis was that the entity had been successful in addressing these defects.

The statement made about the Kusile and Medupi budgets could be applied to the completion dates for the additional feed conveyor belts. These were large and difficult projects, and there were a number of issues that could go wrong, the least of which was COVID19. Eskom was doing its best to complete the projects, but the risks manifested themselves. 

Mr De Ruyter referred to the companies which he had introduced to Eskom, and said that none of the four companies had received any work as they had not been appointed. There was no question that a procurement prescript had been violated in the process. The introductions had been made, and that was where the matter had been left.

The recovery of funds was a long process, in some instances, Eskom needed to go to jurisdictions outside of South Africa. It was working on it and building legal cases. Individuals would be pursued if they owed Eskom money. This would be done from a civil perspective, and not a criminal perspective. A forensic and legal team was making progress on this.

Take or pay was a mechanism which, for better or for worse, had become well accepted in capital intensive projects, particularly where there was a single or a limited number of off-takers. This was where a mining company sought comfort that it would be able to recoup the very large capital investment made in the project in question by being able to rely on a contractual commitment to pay, regardless of whether the customer -- in this case, Eskom -- was in any way at fault. The exact opposite came to Eskom’s rescue in terms of Tageta Optimum, where Eskom was able to put in a claim against the colliery. Unfortunately, being under business rescue, Eskom would receive only a part of its claim.

Follow-up Discussion

Mr Dirks appealed to Eskom and the Minister to brief South Africans in a structured manner on what was happening. In the eyes of the citizens, all Eskom employees were painted as corrupt as they were not given reliable information.

Ms Mente referred to the process of Eskom officials declaring their interests, and asked how many had been proven to be doing business with Eskom. If there were any, were they still doing business with Eskom? Who owned the businesses that had been overpaid? What would happen to the people liable for the overpayments, and payments for work not done?

Ms Swarts said that the last time SCOPA met with Eskom, it was stated that Eskom would recover funds from the service provider that had provided the designs which had defects. How far was Eskom with this process? Was Rotek still conducting market research? Why was it that 6% of employees had not submitted their declarations stating their interests? What action had been taken against these employees? What was the rand value of the pending corruption cases? What was the estimated turnaround time of these cases?

Ms Maotwe said that a statement had been issued by Eskom exonerating the COO on 15 April, yet the Minster had received the report on the COO only on 18 June -- how was that? The COO was a very high level executive and it went without saying that the Minister should have seen the report before it was even announced. She would make available the list of employees that had been victimised after the Zondo Commission if the Minister could guarantee that he would protect the individuals on the list. For the sake of clarity, the individuals were moved from operational to non-operational positions, and they had been told it was due to non-performance. 

The Chairperson asked if money had been paid to Tegeta Optimum prior to it going into business rescue. If so, how much had been paid? How much was Eskom pursuing in international jurisdictions? What was the amount which Eskom was pursuing in those cases?

Eskom’s response

Mr De Ruyter said that there was a quarterly system update, but this did not deal with all the business issues and issues of corruption. It did go into a significant amount of detail which was streamed on most TV stations in South Africa, so Eskom did try to keep South Africans informed. However, it could indeed try to improve this.

None of the board members and none of the Executive Committee members were doing business with Eskom. He would get back to the Committee with the details of the ownership of the businesses that were overpaid, after establishing what the shareholding of the companies was.

People who had had issued payments for work that was not done had been subjected to disciplinary hearings. If they had resigned, then Eskom tried to recover the money by means of a civil claim.

Mr Oberholzer referred to the design fault issue, and said that at this time, Eskom was following the commercial process. The contractor, as well as Eskom, had appointed a law firm that was assisting with the information, facts and figures. This would ensure that money would be returned to Eskom that was a result of design defects on the part of the contractor.

Market research was being done, and there was an appetite for the Gypsum products. Gypsum had brought their strategy to the Electricity Regulatory Index (ERI) board recently, which was approved. It would follow the commercial process. Feedback would be given and a decision would be made.

The rand value of cases, as per the written submission, could not be disclosed as it was not the main focus of the criminal prosecution. It was not a matter of the criminal justice system wanting to recover the damages suffered. Mr De Ruyter would establish the rand value of the civil cases and provide this to the Committee.

Money paid to Tegeta formed part of the well known saga. Eskom had made an advance payment to allow certain individuals to purchase the Optimum company from its from owners. It had been about half a billion rand. This was a considerable amount of money. The total amount which Eskom sought to recover was R500 million, which was being pursued. Some of it was recoverable, while some had been extinguished by prescription. Therefore, Eskom had to make haste to pass the post and lodge these claims so that it could stop the clock from ticking past the prescription dates.

Minister’s closing remarks

Minister Gordhan said that the facts should indeed be put together and presented to the public so that they knew where Eskom stood. This would keep people quiet on Twitter. It was interesting that the people involved in malfeasance at Eskom had been leading the Twitter campaigns about Eskom. This would be dealt with at a later stage. There was a report that was lurking somewhere in Eskom for the period of 2018/19 regarding the early lifestyle audits, that showed that a number people in the management tiers had been doing business with Eskom. He said that if he was wrong, he would like to be proven wrong. He would try to recover this information and forward it to the Committee.

He urged Ms Maotwe to send him the list of people who had been victimised following the Zondo Commission, and said that he would deal with that. Having studied the COO investigation report thoroughly and following legal advice, he would ensure it was made available to the Committee.

The Tageta saga was an interesting story that was linked to the Guptas. It had undermined the supply of coal, and certain suppliers of coal had had to close. It was worth recalling that history. There had been an investigation and enquiry which the Department of Public Enterprises had undertaken in 2017, and it could answer many of the questions that had been asked.

The meeting was adjourned


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