The Standing Committee on Appropriations (SCOA) heard that Eskom had allocated the R49 billion of government equity support in 2019/20 in conjunction with Eskom’s R36 billion operational cash surplus to service R70 billion in debt repayments. It would do the same with the R56 billion of support in 2020/21. Its gross debt at the end of March 2020 was R488 billion, an increase from R440 billion in March 2019.
Eskom stated that load shedding would continue at least until March 2022. It said electricity tariffs needed to increase to service its growing debt instead of relying on government bailouts. Eskom needed a 25% tariff increase in real terms although this could not be immediately enacted due to the economic impact. It noted that the National Energy Regulator of South Africa (Nersa) lost the court case against Eskom over electricity tariffs in July 2020, with the High Court judge ruling that Nersa had incorrectly included a R69 billion equity payment from government in its calculation of Eskom’s allowable revenue for the period 2019-2022. This affected Eskom’s fund recovery ability through the regulatory clearing account (RCA). It was determined that the R69 billion had in fact been allocated by government to service Eskom’s debt. Nersa would be appealing the ruling.
National Treasury spoke to Eskom’s compliance with the conditions attached to the Special Appropriation Bill, 2019. Although not all 36 conditions of the R49 million bailout for debt servicing had been met within the specified time limits, Eskom had complied sufficiently to enable payment. Two conditions had not been met and another two had been partially met. One of the conditions was the disposal of the Eskom Finance Company by the end of March 2020. The revised deadline was end of March 2021. The second condition was the implementation of remuneration standards although these had been approved by the shareholder.
Of the conditions that had partially been met, these were assurances about the overall costs and completion time for Kusile and Medupi power plants. The information had subsequently been provided by Eskom in a report in June 2020. The costs of Kusile power station had risen to R161 billion, while Medupi had risen from an initial R68 billion to R145 billion.
Two conditions that the Ministry had not met had included strengthening the board composition and stability.
Committee members were particularly concerned about the billions in overpayments on past contracts and the mechanisms put in place to ensure this did not reoccur and if recovery of these amounts was likely. They asked about the status of the board which was missing six board members. Concerns were raised about how the forensic audit red-flagged certain contracts and about transformation and localisation of contractors. Another much discussed item was the finding about the Eskom Chief Operating Officer.
Other discussion topics were measures to prevent electricity theft; credible electricity tariff comparisons with other countries; IPPs in the renewable energy space; why Eskom was not moving from coal; prepaid meter campaign progress; how much big business and neighbouring countries owed Eskom; engineers headcount; domestic market price for coal; pre-1994 coal contracts; completion of Medupi and Kusile and consequences for poor contractor delivery and cost escalations. Members were not satisfied with the contract renegotiations with seven suppliers. A Member suggested Eskom's problem was not low electricity tariffs but poor management and lack of cost efficiencies. The Chairperson insisted that there could not be such large cost overruns and no company was held responsible.
The Chairperson said the Committee could not have chosen a better time to interact with Eskom given the chilly weather. He said the Deputy Minister of Public Enterprises, Mr Phumulo Masualle, was present, along with the Eskom delegation. A letter had been sent to the Minister of Public Enterprises, Mr Pravin Gordhan, on the areas to be dealt with. It was a follow up to previous meetings.
At the Standing Committee on Appropriations (SCOA), everyone who got money from government was considered the Committee’s client. The Committee had read the detailed presentation. This meant that, for example, the slides that spoke to what had been applied for at the National Energy Regulator of South Africa (Nersa) and what had been received, had been seen by Members. He asked the presenters to summarise what had been asked for and what had been given in terms of tariffs. There was no need to provide specific amounts of kilowatts, for example.
Deputy Minister Phumulo Masualle said the absence of Minister Gordhan had been noted. There were several meetings being sat concurrently which required representatives from the Department of Public Enterprises. Therefore, responsibility for attendance was being shared. He handed over to the Interim Chairperson of Eskom, Prof Malegapuru Makgoba, who was present with the team from Eskom.
Prof Makgoba said that Eskom had been given a mandate. It was important for the Eskom team to highlight relevant issues in the presentation; the details were in the slides. The team would be led by the Eskom Group Chief Executive, Mr Andre de Ruyter,
Eskom Submission to Standing Committee on Appropriations
Mr Andre de Ruyter, Eskom Group Chief Executive, said that the presentation answered the questions raised by SCOA previously. He handed over to the Eskom Chief Financial Officer.
How allocated funds were used:
Mr Calib Cassim, Eskom CFO, gave a summary of government support from 2008/09 to 2020/21 which totalled R188 billion which was appreciated. This allowed Eskom to meet its debt service commitments. A slide was shown of Eskom’s cash-flow statement as at 31 March 2020
For 2019/20, Eskom had paid R31.5 billion towards principal debt, and R39.1 billion towards debt interest servicing. The bulk of these payments had been made using the R49 billion Eskom had received from government. Eskom had generated a positive operating cash flow amounting to R36.2 billion for 2019/20. Eskom’s gross debt at 31 March 2020 was R488 billion, having increased from R440 billion at the end of March 2019.
According to the cash flow statement, it was evident that without the recapitalisation provided to Eskom by government, it would have been unable to service its debt obligations. Additionally, the R56 billion appropriated for 2020/21 would be used to assist in servicing Eskom’s R95 billion interest and capital debt repayments that would be due in 2020/21.
Progress on Committee Recommendations:
1. On implementation of policy and legislation for sustainability - these had not been properly implemented.
Electricity Pricing Policy (EPP) tariffs would not currently meet the requirement by 2023.
Nersa had been expected to annually provide a 10-year electricity price path. The last indicative five-year price path had been published in 2009.
The Electricity Regulation Act stated that Nersa needed to enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin of error. Eskom had shown that this had not been done for many years.
The Multi-Year Price Determination (MYPD) Methodology sought to ensure Eskom’s sustainability as a business was balanced with the impact on the economy. Objectives were to ensue Eskom’s sustainability as a business and limit the risk of excess or inadequate returns, while providing incentives for new investment. Other objectives included the appropriate allocation of risk between Eskom and its customers, the provision of efficiency incentives without causing unintended consequences of regulation on performance, the provision of a systematic basis for revenue/tariff setting, as well as ensuring consistency between price control periods. Recent decisions had not considered Eskom’s sustainability.
Moreover, the Integrated Resource Plan (IRP) 2019 had referred to the necessity for a rapid increase in tariffs to support further investment in the industry. The latest Nersa decision had not facilitated such a transition.
2. NERSA’s Decisions from MYPD 3 to MYPD 4 Have Resulted in a Revenue Shortfall of ±R350 Billion
The slide illustrated the difference between applications made by Eskom to Nersa and Nersa’s decisions.
3. Debt Continues to Increase Even Though Price Levels Are Increased – Indicating Too Low Prices
In terms of tariff adjustment, the average price had increased five-fold. In the same period. Eskom’s debt on its balance sheet had increased from R50 billion in 2008 to over R400 billion, meaning debt had increased nearly 10-fold over the same period.
4. Even the Phased ROA Would Have Contributed Significantly to Migration to Efficient Cost Reflectivity
The slide showed the Nersa determined return on assets (ROA) for the period 2014-2019, and 2020, as well as future predictions. The graph showed that Eskom had essentially not been recovering any ROA. The number was hovering around 0%. When Eskom was making losses; this went below zero.
In the Nersa decision of MYPD Four, the effective returns went below zero. This did not allow Eskom the opportunity to generate enough cash to cover the costs of capacity.
5. Attempts by Eskom to Reach NERSA Efficient Price Level Were Not Supported by Reasonable Price Increase Decisions
Various studies by entities such as Business Unity South Africa (BUSA) and the Integrated Resource Plan (IRP), had indicated that the price of electricity should be between 108 – 116 cents per kilowatt hour. By the end of 2019, the number was around the 80c level. The gaps created cash flow pressures for Eskom.
6. IRP 2019 Indicates Increasing Electricity Prices Even with Renewables in the Mix
The IRP had calculated the electricity price to be in the region of 25% of where it was found in MYPD4, which was around 100 cents per kilowatt. There was a price migration that needed to be closed to contribute to Eskom’s sustainability.
Eskom’s cost base in terms of the total primary energy cost using the compounded average growth rate was around R1 billion in 2019. This showed a 7.4% growth compounded over the period.
Eskom’s operating and maintenance costs (which included employee benefits) were around R52 billion. This showed an average compounded growth rate of 2.4%.
Eskom's average capital spend in the initial period was R55 billion per annum. This peaked at R60 billion in 2017. It was R48 billion in 2018 and R34 billion in 2019. The unaudited number for 2020 was R24 billion. This showed Eskom had reduced expenditure significantly in line with inflation.
7. High-Level Cost and Price Benchmarking (World Bank’s 2016 Report)
Eskom was at the lower end of the World Bank’s analysis of 39 countries in Sub-Saharan Africa on price of electricity. Eskom’s unit costs were the third lowest, while Eskom’s average price was also very low.
8. NERSA RCA Decisions Based on Incorrect Application of MYPD Methodology Led to R41.2bn Shortfall
Eskom had reviewed the recent decisions and did not believe Nersa had applied the correct methodology for the ICAs for the period 2016-17. The principle of the 2018 review was the same as in 2016-17. Eskom then only recovered ICA in the future; the period of which varied between three to six years. As a result, Eskom did not recover the time value of the money in the cost of borrowing.
Eskom was striving for the “User Pay” principle as laid out by President Ramaphosa and Minister Mboweni.
Eskom’s average price per kilowatt hour was very low by international standards. This was well below cost-reflectivity and was the main cause of Eskom’s financial troubles.
Eskom’s short-term sources of funding were: revenue, debt, and equity. Revenue was the only longer-term source. It had been increasingly dependent on borrowing and shareholder support which was not sustainable. The missing link had been electricity tariffs that reflected efficient costs. Progress was needed – this could not be done by a once-off raising of prices. Government needed to develop policies to protect vulnerable communities and sectors during this price rise.
Eskom could not meet debt service commitments with the amount generated through its operations. This was leading to it continually approaching government for assistance. This was reflective of the IRP referring to a competitive electricity price that was at least 25% more than Eskom’s price.
9. To Contribute to the Easing of Eskom’s Financial Challenges by Cutting Coal Costs the Entire Portfolio of Eskom Coal Contracts Were Reviewed (Recommendation 9.1.3)
Eskom’s Acting Senior General Manager: Primary Energy Division, Mr Daniel Mashigo, said that in line with the conditions set by Special Appropriation, Eskom had undertaken a bottom-up cost evaluation of mining exercise on all its existing short- and medium-term coal contracts.
Due to the low stock experienced in the 2019 financial year, several short to medium term coal contracts had been concluded using urgent and emergency procurement activities. As the desperate supply situation had been known to coal suppliers, Eskom had had very little negotiating leverage, resulting in some contracts that were sub-optimally priced.
Engagements had been held with seven suppliers with high profit margins to explore opportunities to reduce the contracted prices. The suppliers had only been willing to negotiate on a portfolio basis, not on individual contracts. Lower priced contracts were therefore included in the price re-negotiations. This result in higher overall costs to Eskom.
The suppliers had seen this as an opportunity to increase their overall supply to Eskom by offering additional volumes or new resources as a condition for price reductions sought by Eskom. This had not presented cash saving for Eskom as the additional coal volumes had not presented cash savings for Eskom as it was not the cheapest option.
While most suppliers were amenable to engage with Eskom, unfortunately the majority of these engagements did not achieve the intended result of cash savings for Eskom
One of Eskom’s cost reduction levers was the optimisation of its coal inventory by reducing coal deliveries to minimum contractual levels for all contracts without compromising the station grid code levels. Additionally, as a result of the low demand experienced in the first half of 2020, letters had been issued to suppliers to begin engagements to reduce coal deliveries below the minimum contractual levels.
These operational requirements had posed challenges to the re-negotiation process as some suppliers had wanted resolution of operational issues as a pre-requisite for any engagements on cost reduction initiatives. As a result of the current high stock levels, an increase in the suppliers’ monthly volumes was not feasible.
From the negotiations with the seven identified suppliers, only one negotiation had resulted in a viable and beneficial offer for Eskom. This was currently undergoing governance processes for approval.
Feedback was provided on the negotiations with each of the seven suppliers.
10. Filling of Critical Vacancies to be Expedited at Eskom (Recommendation 9.1.5)
Ms Elsie Pule, Eskom Group Executive: Human Resources, said over the past 12 months Eskom had implemented two levers to fill critical vacancies. One was the re-linking of resources from Head Office to Operations. The second was a special dispensation provided for Transmission, Generation, Eskom Rotek Industries, Distribution and Group Capital to fill critical resources through internal sourcing processes or external recruitment. These processes had greatly contributed to the filling of critical vacancies.
Ms Pule detailed the Eskom workforce profile, including its Rotek Industries subsidiary, according to gender, occupational levels, race, age, provincial distribution and rate of attrition.
Eskom Undertook a Process to Relink Staff to Operations in 2019
The aim of the re-linking process had been to strengthen operations, maximise decision making, improve accountability at the right levels of business, improve operational and financial efficiencies, as well as maximise the execution of strategy.
Over 8900 employees had been re-linked from service and support functions back to line. This had included the integration of over 2300 Customer Services personnel into Distribution, as well as over 1500 employees from Group Technology to line divisions.
The process had provided positive results in dealing with the shortages of engineers in the line divisions. Distribution had received over 4100 employees, Transmission had received over 1000, and Generation had received over 3000.
Since the process had begun, Group Technology (comprised of highly experienced technicians and engineers), Revenue Services, and Fleet Services, had been migrated to Operations.
Breakdown of Personnel by Role
The breakdown of the re-linked employees included operators, technicians and artisans. There had been questions of whether Eskom had insufficient resources where they were needed. In terms of technical officials, in 2013 there had been 7200, in 2020 there were 6600. This was in line with attrition and efficiencies. Ms Pule did not believe it was a crisis. Other deficient areas had been addressed through the 2019 Special Dispensation.
Review of Contracts:
Eskom General Manager: Procurement, Mr Solly Tshitangano, said during the 2019 SCOA oversight visit, Eskom had reported that it was reviewing all contracts to determine if it was receiving value for money.
Contracts with major suppliers had been identified, reviewed, and renegotiated. In the absence of confirmed volume or demand, no discounts could be provided. The suppliers had proposed sliding scale discounts linked to specific volumes. Some suppliers were in the process of introducing the renegotiation of other contract conditions which included the price adjustment formula. The savings that had been achieved were therefore mainly in new contracts.
Eskom had therefore experienced difficulties as the suppliers had been demanding greater volumes for the condition of renegotiation. This would have meant Eskom was contravening preferential procurement regulations.
Clarity On Overpaid Contracts:
• Contracts implicated in R4bn Overpayment, Kusile Project Director, Mr Avin Maharaj, said that these were: 1) the ABB SA contract (Package 21A) valued at R1 billion; 2) the Tenova Mining and Minerals SA (Pty) Ltd contract (Packages 24B, 24C and 24E) valued at R735 million; 3) the Tubular Construction Projects (Pty) Ltd contract (Packages 11A & 17A) valued at R1 billion; 4) the Stefanutti Stocks Basil Read JV contract (Package 16) and Stefanutti Stocks Izazi JV contract (Package 28) valued at R1 billion; and 5) various site service contracts that were not in the Special Investigating Unit (SIU) scope valued at R180 million.
The first two contracts were being investigated by the SIU and the NPA and were still under investigation. The SIU had consulted and briefed senior counsel. One contract had resulted in arrests. The contract in question was with Tubular Construction Projects.
• ABB Estimated Overpayment of R1 billion: During the tender between Siemens and ABB, the ABB price had been higher than Siemens had submitted. However, technical price adjustments had been made to the Siemens tender, with ABB emerging as the cheaper option. Siemens’ price had been adjusted due to the fact that it was unable to meet the synchronisation date for Kusile Unit One. Eskom suspected that the dates that had been used during the tender process had never been realistically achievable. However, this criterion had been used to award the contract to ABB.
With ABB, there were two key matters under investigation. This involved a forensic planning exercise to prove the irregular award of the contract. Between 2016-2017, ABB had been issued with four major variation orders with no substantiation of documentation or records.
• Tenova Mining and Minerals SA (Pty) Ltd with Estimated Overpayment of R735m: Tenova had made claims for extension to completion time due to delayed access to the site and disruptions. In 2015 there had been a series of negotiations, resulting in a settlement at R700 million in 2016.
Mr Maharaj said a settlement value estimated at R735 million was being dealt with. This did not have the requisite particulars to assess or verify the delays or costs that had been claimed.
In August 2019 SIU informed Eskom they were investigating the contract for potential overpayment. In October 2019 SIU confirmed there was evidence to support criminal charges. This was referred to the NPA.
• Tubular Construction R450m Estimated Overpayment; General Electric R400m Estimated Overpayment:
In the case of Tubular Construction Projects, arrests had been made in December 2019. There were cases ongoing and additional investigation was undertaken by SIU.
Treasury had requested an independent audit undertaken by Harvest. This resulted in items included in Tubular’s modification proposal found to be questionable about providing value to Eskom.
The contract stemmed from a de-scoping exercise concluded through a settlement agreement in February 2017 made with Alstom (since become General Electric), the main contractor originally appointed to conduct the air-cooled condenser work. This had subsequently been awarded to Tubular.
The advance payment had however not been recovered due to a R495 million claim lodged against Eskom. This would have offset the advance payment had Eskom lost the claim. Eskom had however successfully defended the claim and the advance payment bond of R163 701 263 had been encashed in April 2020.
An investigation into the settlements that had been reached and paid to General Electric in the de-scoping exercise amounting to R400 million had also been launched.
Tubular had also been awarded a contract for a waste water treatment plant in December 2012 which had been de-scoped and awarded to it from a contract originally with Mott McDonald. This was also under investigation.
• Stefanutti Stocks Basil Read (SSBR) & Stefanutti Stocks Izazi JV (SSIJV) R1bn Estimated Overpayment: SSBR had made claims for additional preliminaries and general due to prolongation and stacking – working in multiple areas at the same time. The claims had not been substantiated as required by the contract.
Payments had however been made between June 2015-December 2018 without requisite substantiation. There had been no consistency or verification of being paid on a monthly basis. These had varied from R15 to R50 million monthly. No settlement had been reached. In 2018 the interim payments had been stopped. SSBR had referred this non-payment to the Dispute Adjudication Board. This had been successfully defended by Eskom and discussions with SSBR were underway to determine the actual settlement claim they were entitled to.
The contract with Izazi had seen certain compensation events agreed upon and paid without final measurements being done. Other compensation events had been claimed on the basis that the work had apparently been completed. The contract had subsequently been terminated as the claims put forward by the contractor were refuted by Eskom. The matter was under SIU investigation.
• General: R180m
Other contracts in place that had been red flagged in multiple audits or reviews were captured under “General”. These findings did not fall within the overpayment category but had been referred to Eskom Assurance and Forensic, Legal, as well as SIU for further investigation. SIU assistance was being sought to pursue civil claims against former employees as well as implicated companies.
• R5 Billion Tegeta Resources & Exploration
There were two very different matters being dealt with which had commonly been reported interchangeably in the press. One concerned the overpayment around R4 billion. The other concerned the R5 billion matter with Tegeta for non-delivery of a contract. It was important to distinguish between the R4 billion overpayments at Kusile, and the R5 billion business rescue matter at Tegeta.
R5 billion was the total value of Eskom’s claim against Tegeta, which was in business rescue. The Tegeta contract had been concluded years ago and had been set aside by the High Court earlier in 2020.
Eskom had previously been asked by SCOA who the contractor was that it had allegedly erroneously paid R5 billion to, as well as the circumstances leading to the overpayment and the progress towards recovery of the funds. Eskom had awarded a coal supply contract to Tegeta originally valued at R3 billion. Eskom had levied several penalties on the supplier for a variety of performance failures, resulting in the value of its claim against Tegeta rising to R5 billion. Tegeta had been in business rescue since 2018 and Eskom’s claim against it had subsequently been reduced to R1.25 billion.
Reasons for Kusile and Medupi Power Plants Cost Overruns:
The slides provided a high-level summary of the cost overruns of Medupi and Kusile, as well as the measures Eskom had implemented in trying to curb cost overruns.
Given the inadequate time to plan for the power plants, the absence of suitable resources in South Africa (both in terms of quantum and skills), as well as other consequential issues, Eskom had in an overly optimistic way endeavoured to manage the large scale programme of Kusile and Medupi for the benefit of the country.
Eskom had intended to partner with “the best in the world” to assist with engineering and integration issues. The governance process within Eskom as an organ of the state was seen to be onerous and inhibiting by these contractors. This had left many engineering and integration processes deficient, with difficult contract integration.
The choice of suppliers for key contracts was limited. Prices had been provided based on fast-tracked schedules. As the schedules had “moved out and the designs completed” these costs had increased. The designs for the plants had not been complete at the time of contracting and project managers and developers had been designing and managing the risks after the contracting took place.
The key drivers for cost movements had been the set up and development processes. There had been underestimations due to time constraints, resulting in insufficient up-front work being done on the projects. This had resulted in incomplete scoping before contracts had been awarded.
Key Issues That Led to Cost Movements / Cost-Escalations / Under-Estimations
The pressure to bring new capacity online had not assisted with the resulting time constraints.
Execution of the projects therefore began without a firm design to meet the fast-tracked schedule.
Project integration issues resulting from using the Majuba design as a project proxy rather than having a firm design were a major contributor to the cost overrun. However it had been necessary to fast-track the project.
Contractor performance and productivity had also been sub-optimal. Specialised welding on the boiler had been of poor quality, the control and instrumentation of factory acceptance test, as well as substantially lower than anticipated productivity had delayed schedules and increased costs.
There had also been resource constraints from insufficient supply in terms of the market. It had been recognised from the beginning that there were insufficient competent engineering practitioners to execute the projects simultaneously. A strategy had been formed involving partnering with multinational engineering companies for assistance. Performance had not been satisfactory due to duplication of efforts.
Corruption investigations had delayed the integration effort as contractors were unable to continue working.
Current Status: Budget and Expenditure, as at April 2020
The budgets for Medupi (R145 billion) and Kusile (R161 billion) had not changed since 2015. This was the last time the overall business cases for the projects had been reviewed. The indications were that Eskom would complete the projects within these budgets.
Whether Contracts That Have Increased In Value Were Legally Sound:
Mr de Ruyter said that Eskom was investigating 39 different contracts with significant overruns. Due to the numerous contracts, irregular contracts had been identified using R1 billion as threshold with an increase exceeding 200% to distinguish them as significant increases over time compared to the general contract population as well as the original values of the contracts. From these criteria, the 39 had emerged. These would be referred to the Eskom Audit and Forensic department to determine their legal soundness.
Update on Illegal Contracts:
Mr Bartlett Hewu, Eskom Acting Group Executive: Legal and Compliance, said that in terms of the cost recovery update against suppliers and former employees, Eskom was working with SARS, SIU, Directorate for Priority Crimes (DPCI / Hawks), as well as Head of Investigations at the Office of the National Director of Public Prosecutions. These matters were:
1) Trillian Management Consulting (R600m)
2) Tegeta Exploration and Resources (R5bn reduced to R1.25bn); Eskom had recently issued summons against its former executive, former board members, Gupta Brothers and associate Salim Essa (R3.8bn)
3) Deloitte Consulting (R171m)
4) PriceWaterhouseCoopers (R95m)
5) Wilge Housing Project (R76m)
6) Meagra Transport (R35m)
7) Africawide Consulting (R17m)
8) Impulse International.
Clarity on Loadshedding:
Mr Rhulani Mathebula, Eskom Acting Group Executive: Generation, said that the primary cause of the July-August 2020 load shedding had been the high levels of unplanned losses throughout the Generation fleet. These resulted from trips, units being forced offline, the late return of units, Camden not being available due to ash dam constraints, Koeberg Unit Two being on cold reserve/outage, as well as the unavailability of non-commercial units at Kusile and Medupi.
• Capacity Outlook: July 2020 – March 2021: demand and available capacity would be constrained.
• Capacity Outlook: April 2021 – March 2022: the same constraints continued.
The future focus was on unplanned load losses being kept well below 11 000 MW to minimise future load shedding. Another focus was to keep diesel supply maintained at healthy levels through deliveries and adequate funding. Work was being undertaken to ensure the safety of the Camden ash dams to expedite the return of the units taken offline there. Work was being done to bring back reliability to Kusile and Medupi non-commercial units.
Due to time constraints, the rest of the presentation was taken as read.
Prof Makgoba noted the presentation had provided a snapshot of the issues at Eskom. He valued the support and guidance of the democratic processes of Parliament.
The Chairperson thanked the Eskom delegation. He said National Treasury was a stakeholder in the matter. SCOA had interacted with Treasury the previous day.
National Treasury on Compliance with the Conditions Imposed on Eskom
Mr Ravesh Rajlal, National Treasury Chief Director: State-Owned Enterprise (SOE) Sector Oversight, said that to monitor progress towards compliance with the 32 conditions, a monitoring task team comprised of Treasury officials, members from Department of Public Enterprises (DPE), and Eskom had been established. The team worked on a weekly basis. As of 31 March 2020, Eskom had complied with most of the conditions except for three conditions which had been partially complied with and two had not been complied with.
• There had been partial compliance of Conditions 3, 9, and 12.
• There had been non-compliance of Conditions 6 and 16.
DPE had complied with two of its four conditions.
Despite Eskom non-compliance with two conditions, the information that had been submitted, as well as the weekly progress updates that had been provided had been sufficient to allow the disbursement of the approved equity allocation of R49 billion for 2019/20.
Proposed Conditions for 2020/21
Treasury had developed proposed conditions for 2020/21 in consultation with DPE. Letters had been submitted to the Chairpersons of the Standing and Select Committees of Appropriations for consideration of the proposed conditions signed off on by the Minister of Finance.
At that point, Eskom was reporting on the 2019/20 conditions and had been diligently reporting on compliance. Eskom had submitted all outstanding information for the conditions that had been labelled as partially complied with after 31 March 2020. R6 billion had been disbursed by 27 August 2020. R50 billion remained for 2020/21.
The Chairperson thanked Mr Rajlal. He noted that Committee members were having trouble connecting to ask questions due to load shedding. This reminded everyone how important this meeting was.
Ms N Ntlangwini (EFF) asked for clarity on overpayments where the amount of R180 million had not been considered in the scope of the SIU. What was the scope of the contracts?
On the matter of overpaid contracts, the cases were with law enforcement agencies. The Committee also needed an update from Eskom’s own internal processes. When would the internal processes be wrapped up? One was talking about billions of Rands, what internal measures would be in place to ensure this did not occur again at Eskom?
Within which positions were the 30% of Eskom’s female composition? Were these at the top level; the positions needed to be filled at senior level such as CEO and CFO.
What was the current state of Eskom’s cash flow position, taking the impact of COVID-19 into account? How had the numbers changed due to the impact of COVID-19 on Eskom’s revenue?
On Slide 36 Eskom had shown its employment equity achievements. How did this compare to its targets? How would Eskom nurture young talent in succession plans?
Mr O Mathafa (ANC) said that the last time the Committee had gone to Eskom for oversight, they had experienced load shedding. It was happening again. He was happy with the detail of the presentation. The Committee had asked for a forensic investigation of the cost overruns. Was Eskom likely to recover the stolen amounts mentioned?
On overpayments, and the continued use of the three-way verification process in the Finance Unit of Eskom, could overpayments be related to this particular process? Was it still being used? What were the safety nets around the particular processes?
On the forensic audit and investigation, 39 contracts had been red flagged. He was interested to know, without discussing the merits, how the contracts/companies had been identified? When public representatives accounted, it was to the public. The details should be available. He wanted to clarify the perceptions around contracts to Africans and women being cancelled. When the process of red flagging was done and Eskom clarified the demographics of the companies, how would this impact on the B-BBEEE status at Eskom?
On cancelled contracts, there had been public debate on the stability and differences within the Eskom board. This had been spurred with one board member resigning and going public. He asked Mr de Ruyter to take the Committee into confidence and reassure confidence in top management. This spoke to oversight and top management.
What was the status of the board? Was Mr de Ruyter satisfied with the board? One of the requirements put to Eskom was to strengthen the board composition and stability.
On slide 86 speaking to transformation and localisation of contractors deployed to Eskom programmes, there was a statement about partnering with “the best in the world”. How was Eskom ensuring assistance to develop local talent and those who had been excluded historically? This spoke to a role for Africans in the management and specialised personnel at Eskom.
Mr A Shaik Emam (NFP) said that electricity theft was major problem in the country; both in terms of cables and electricity. What measures were in place to prevent this?
On loans/bailouts from government being used to pay off debt, this was not sustainable. This signified that Eskom was not viable. Independent Power Producers (IPPs) were soon expected to supply electricity directly to municipalities. This meant less demand for Eskom. Yet costs remained the same. How would this impact Eskom? It would be generating less income. Would Eskom not move into more trouble?
On procurement and contracts made pre-1994, these were 20-year-old contracts. Was Eskom getting value for money for these given current market prices?
On overpayment, where had internal audit and oversight been when this had been occurring? Where had the CFO and others responsible for such matters been when the overpayments had been made? How many would be held to account for not protecting Eskom finances?
On Kusile, it was clear from the report that the capacity was not present to implement the projects. Eskom had been running in circles since the project had been announced. He asked for the original costs versus the expected costs. When could completion of the projects be expected?
On load shedding, he asked for an update on the border project with the DRC to generate more electricity.
What was the percentage of compliance with contracts? Was the Committee dealing with people who lacked the capacity to deliver the supply of goods but had to continue due to already being contracted?
Mr D Joseph (DA) said he had not heard much about state capture or corruption in presentation. Was Eskom free of this or part of the State Capture history?
On Slide 5 referring to the 2020 draft pre-audit statement, would the figures provided remain the same or change? If so, why?
On Slide 9, he asked for clarity on the cost of tariffs and being cost reflective.
Slide 13 spoke to fivefold electricity price increases versus tenfold debt increases for Eskom. What did the Constitution say about provision of electricity at local government level? There was clear guidance as to why Eskom and local government existed.
On Slide 24 and the issue between Nersa and Eskom, Nersa had taken into account the appropriations given to Eskom by the current Parliament, resulting in a deduction. He was sad this had occurred in the process.
Slide 28 had made reference to filling the 25% tariff gap. This could not be shifted to consumers. What was being done to restructure it constructively?
Who was negotiating on behalf of Eskom given the contracts under review? Was Eskom doing the reviewing themselves or using consultants?
On Slide 35, where did the artisans fit in? He had seen the 1 800 figure for artisans. Where did internship trainees fit in? He asked for clarity on the 4 085 figure marked “Other”. This was a huge amount. Where did the pilots fit in at Eskom?
Did Eskom need further funding from Parliament for the completion of Medupi and Kusile,?
Mr N Kwankwa (UDM) said that perhaps the time had come to conduct an analysis on each instance of overpayment. During its Eskom oversight visit in 2019 SCOA had spoken about overpayments. He suggested the Committee be provided with an age analysis and reports of each overpayment stating what had happened, what was being done to recoup money, and time frames, to monitor matters on a regular basis.
The company names had been noted, but the Committee did not have the specific details per company and details of the contract. Companies were ripping off Eskom and charging exorbitant fees. The details of these companies were needed to be able to name and shame the companies ripping off the tax payers.
On the electricity tariff comparisons with countries around the world, he felt the discussion should be taken further. It had not provided countries that were providing lower tariffs than Eskom. Eskom needed to account for how these superficial comparisons played out to move the discussion towards a detailed analysis and cost efficiency.
He had recently read an article on incline block tariff purchases per month. It was known that purchasing electricity went according to blocks. Buying electricity at the beginning of month was cheaper than buying over the course of the month. This had been happening for years. He asked for an account in financial terms of this impact on Eskom, as well as the financial impact of a complex pricing structure. Many people were continuing to buy electricity during the course of the month, thereby wasting money and giving it into an entity that was not entirely efficient.
Eskom's problem was not a low electricity tariff in his opinion. The problem was escalating debt and poor management. This resulted in a lack of cost efficiencies.
He said Mr Shaik Emam had spoken about IPPs in the renewable energy space. Once these were connecting to municipalities, Eskom’s overhead and costs would remain the same despite the reduction in revenue. Why was Eskom not moving from coal?
Mr X Qaysio (ANC) said he was covered on the matter of overpayments.
On the Treasury conditions, Eskom had failed to comply with the disposal of its financial company. What were the reasons for this? The remuneration standards had not been implemented, what were the reasons? He referred to stopping performance payments
The R4 billion overpayment had been confirmed but it was unknown how this happened. Prof Makgoba had previously told the Committee that Members of Parliament did not know anything about Eskom when speaking about an overpayment. There had subsequently been a press statement seeking to justify the incorrect perception of Members of Parliament “not knowing anything”. The statement had sought to justify what Prof Makgoba had said. He asked if Prof Makgoba was in a position to retract and apologise for the statement. Members of Parliament took their jobs very seriously. He did not know what had informed the press statement. In the current meeting the members were now receiving details about the R4 billion. He therefore wished the statement to be withdrawn.
Ms D Peters (ANC) asked for an update on the Eskom prepaid meter campaign and payment culture. On the impact of COVID-19, household incomes were reduced. How would payment records for municipalities be dealt with? In particular, how much did business owe Eskom? Especially big business that made money from doing business with Eskom. This had previously been raised.
On negotiations with suppliers, it looked like the negotiations were on “small fry” matters of R135 million and suchlike. Big contractors still remained with contracts for 46 years plus. She could not understand how the contracts had been entered into. The contracts took generations into consideration. The contracting models for Eskom had been raised for many years. It did not look as if Eskom was ready to look at its contract and project management abilities.
On Slide 39 about headcounts from 2013-2020, it looked as if the engineering headcount capacity in Eskom was getting significantly reduced, why?
On the R4 billion overpayment, was anyone from Eskom held accountable and responsible for this? Engaging with the companies was important, but it also needed to be known who at Eskom was responsible for gross incompetence and if they had been charged. In this instance there was no way it could not have been evident that Eskom was overpaying.
Had any of the companies involved in the overpayment saga mentioned in the presentation been penalised by the Competition Commission for fraud and corruption in the construction cartel saga?
On the renewable energy programme, there had been a process around 2013. The proposal and decision had been encapsulated in the Green Economy Accord that had emphasised the need for Eskom to contract to companies who were procuring components having 30% manufactured in South Africa. A number of companies had been beginning to emerge in the field. These included photovoltaic, solar panels, and wind turbine companies. Was it possible that Eskom concluded power purchase agreements with companies that did not procure locally?
The Chairperson asked where the Eskom Chief Operations Officer and Caretaker Group Executive: Group Capital, Mr Jan Oberholzer, was. This spoke to the R4 billion. The amount had been given in a SCOA meeting voluntarily by Mr Oberholzer. SCOA was told that in the investigations, it had been found that a company had been overpaid R4 billion and had agreed it had been overpaid. SCOA had been told the money was in the process of being paid back. Hence the question was what had changed between then and the now?
On the matter involving Mr Oberholzer, he had negotiated with a company in which he held shares as shown in the investigation by Adv Nazeer Cassim. There had been a recommendation from Adv Cassim. What had the decision of the board been on the matter? All the Committee knew was that Mr Oberholzer was still at Eskom. The recommendation from Adv Cassim was that Mr Oberholzer be “cancelled”. Was the Eskom board happy with the Adv Cassim recommendation? Would the board decision be the same if it had been a junior official in the company rather than Mr Oberholzer? Was this good corporate governance?
He asked for the original equipment manufacturers (OEMs) involved in the construction of Medupi and Kusile. What were the original prices and the current prices?
He reminded the board directors of their fiduciary responsibilities to the company. The presentation had Eskom bemoaning the IPPs and having to pay them. Taking into consideration their fiduciary responsibilities, what was being done about the overpayment to other sources? Was that in the best interests of Eskom?
On only one supplier contract being successfully renegotiated, why had the Committee not been given the names of the companies Eskom had negotiating with and were still being overcharged by? This was in the spirit of transparency. SCOA had met with National Treasury the previous day as people wanted to know the companies involved in personal protective equipment (PPE) corruption. This could not be secret, especially when South Africans were paying the companies through public enterprises’ (mis)procurement. Why was it difficult to conclude new contracts?
How much was the market price for coal? How much was Eskom paying the companies? How much would the savings be if Eskom paid the market price?
What power did Eskom have over companies? Did Eskom have capacity to manage contracts? It was clearly poor contract management. Eskom should not outsource its power to suppliers. It seemed Eskom was begging them to agree on prices.
On the overpayment of companies, was criminal activity visible? Apart from the SIU process, had Eskom gone to the police and reported cases? Eskom should know and report independently. How many had been reported?
He asked Mr de Ruyter about the contract price that expanded from R140 million to R14 billion.
The Medupi and Kusile contractors had not delivered according to expectations. What were the penalties for not delivering to expectation? Had the Eskom board not been misled? What were the consequences of this? Eskom was paying for defects at Medupi and Kusile, where were the companies that had been involved?
Eskom board chairperson response
Prof Makgoba replied that there were no divisions within the Eskom board. They were united. The board worked in consultation with one another. Matters were obviously debated but this did not mean there were issues. Differing on a point of view did not signify divisions.
However, he said the persistent issue which Deputy Minister Masualle may wish to address was that the Eskom board was deficient, with six members having left their positions. This was producing overload on the board. He had tried to appeal to the Minister and Deputy Minister to fill positions and asked for an update on the matter. He was aware that President Ramaphosa and Minister Gordhan had often said they wished to restructure, complement and beef up the board at Eskom. The board required additions but was otherwise united.
On the Econ Oil matter, it was under legal constraint. The Eskom board looked at contracts, not at who had applied for the contract. Contracts were not “racialised” when they came to Eskom. The board looked at the quality, value, processes and systems, ethics, and other available evidence applied to contracts to judge and make decisions. He appealed that race was not the issue, empowerment was not the issue, it was the systems, processes and legality of contracts that the board looked at through its committees. This applied to any contract concerned, such as the Econ Oil which was currently under legal constraint.
On what he is alleged to have said about parliamentarians not knowing anything, this was out of character for him. Sometimes it is the interpretation of what someone said. There was more happening at Eskom internally than what outsiders saw. This did not mean that parliamentarians knew nothing about Eskom. He asked where the alleged quotation had been found.
On the COO recommended sanction, the board had been debating this for long time. Two senior counsel had investigated the matter and found nothing against Mr Oberholzer. Mr Oberholzer had gone out of his way to defend Eskom. The board had categorically not found anything against what Mr Oberholzer had done. Three senior counsel had in fact investigated the matter. The board was finalising its own decision. Nothing Mr Oberholzer had done warranted the response that had followed.
The board needed additions in numbers, but there were no divisions.
He respected the Chairperson’s comment about the fiduciary responsibilities of the board.
He asked the Deputy Minister to supplement on the matters raised. He asked Mr de Ruyter to distinguish between oversight and operational matters.
Mr de Ruyter said Eskom appreciated the oversight role and the scrutiny of the Committee. He asked Ms Pule to respond about race breakdown of senior level appointments, as well as recent appointments at Executive Committee level, artisans, internships, and the 4 085 “other” employees.
Ms Pule replied about the breakdown of the 33% female employees at Eskom, there were 13 000 at different occupational levels. There were 2 800 (26%) at semi-skilled level, 8 000 (35%) skilled, 2 500 (39%) at professional level, and 159 (40%) at senior management. Top management was comprised of 15% female members.
On the recent executive committee appointments, Eskom was 95% of the way to concluding the top structure since the appointment of the GCE. Eskom had appointed five black professionals at executive committee level. The end of October 2020 would conclude the appointments at the executive committee. Top management positions would also be improved with the appointment of a black female by the end of October 2020.
On succession planning, given the fact of instability long term at Eskom, this process was still underway. After October 2020, Eskom could follow an internally recognised succession management programme.
On the number of engineers reducing at Eskom, it was a matter of practising engineers in the organisation reduced, but many engineers were simply moved to management positions. The figure showed practising engineers.
On artisans, some who were trained as artisans were deployed as controllers and operators. If consulting the strategic workforce plan it was clear that this was linked to supply and demand; there were no concerns on the matter.
On providing a learner pipeline to Eskom, artisans, engineers, operators, technicians, as well as non-technicians were part of these initiatives. This was informed by the strategic workforce plans.
Eskom’s remuneration standards had been partially complied with. Since the commitment however, no performance bonuses had been paid. This had halted long term.
Mr de Ruyter asked Mr Cassim to deal with questions on revenue, the matter of the internal audit on overpayment, the internal process in three-way matching to prevent overpayment with internal measures, cost savings, Nersa reductions / deductions, as well as the age analysis profile.
Mr Cassim replied on the impact of COVID-19 on revenue for the financial year. There would be a R10 billion lower revenue impact. There were volumes lost in the price of electricity. Eskom was dealing with changes linked to what Mr de Ruyter had said. Eskom needed to deliver R14 billion savings for Financial Year 2021. This involved decreasing capital expenditure to R20 billion and meeting cash flow requirements. It had been made clear that there was no further support from government and Eskom needed to live within its means. It was important to appreciate that the finances directly impacted Eskom’s operational performance. The more efficiently operated, the better the performance.
On the Nersa decision, it was correct that the matter was in the process of appeal. From Eskom’s understanding, this would take time. On the matter of future price determination; there should be price adjustments to recover the R69 billion.
On overpayments and internal controls, Eskom did make use of three-way matching. It was still used and still worked and was audited. If someone falsified invoices and doubled the amount; this required whistleblowing or contract management needed to include more detail from adjustments to original contracts to address and flag potential overpayments in the future. This would be focussed on.
He did not see the cash flow statement changing after audit finalisation. Adjustments would likely be non-cash in nature if there were any.
On the impact of IPPs, Eskom losing sales to IPPs, and what it meant to Eskom’s cost base, Mr Cassim said Eskom was dealing with it from a savings perspective as it recovered the IPP costs through the MYPD methodology.
On the delay in the Eskom Finance Company (EFC) disposal, the two main reasons for that had been that Eskom had to complete its governance process. This was a tender process that had required approval. It had gone out at the beginning of 2020. However due to COVID-19 it was extended and had ended in July 2020. EFC disposal bids were currently under evaluation.
Mr Cassim replied that there was R539 million in bad debt from businesses due to these debtor companies going into business rescue. Where the debtors were industrial companies, Eskom would send letters requesting payment. If Eskom was not paid, it could switch off their power.
Mr de Ruyter asked Mr Maharaj for a breakdown of the R180 million overpayment, and internal mechanisms to prevent further overpayments, particularly Kusile. He asked him to deal with the question on current contractors and to what extent Eskom exercised control over their compliance.
Mr Maharaj replied that the R180 million overpayments had been for contracts for on-site security, catering, and corporate social investment spending. The matters were with the Eskom Audit and Forensic departments, awaiting finalisation. Eskom management would take action thereafter. Eskom had laid changes at police stations for various issues. With the specific issues, these were handled through Eskom’s Legal department.
On Eskom’s process enhancements, apart from three-way matching, additional changes had been made. It was a matter of dealing with changes to claims with contracts. Eskom had implemented cross-functional teams made up of people not only within the projects. Resources had been brought in from outside of projects to maintain neutrality on issues that were raised.
On recoveries, these were being pursued wherever possible. SIU was engaging with the Asset Forfeiture Unit to pursue recoveries for overpayments.
The original costs for Kusile and Medupi were provided on page 78 of the report. The current approved costs had not changed from the R161 billion and R156 billion approved in 2015.
On the request for an age analysis for each overpayment and the steps and length of the process, Mr Maharaj undertook to engage with SIU to get those details to share with the Committee.
In reply to Ms Peters, the names of companies engaged with Medupi and Kusile were listed on pages 85-88 of the report. It illustrated the contract values at the start versus the current prices. To date, 51 companies had been engaged at Kusile and at Medupi, 37 contractors had been engaged for the execution of the project.
In terms of the contractual remedies exercised by Eskom, there were delay damages (which Eskom was entitled to recover) which had been recovered in excess of R1 billion per project at Medupi and Kusile. Eskom had a right in terms of counter claims to contractors. Eskom was exercising these to the maximum per individual contract. At Medupi the counter claim exceeded R2.2 billion per project. These were the measures available in exercising contractual remedies for non-compliance by contractors.
Mr de Ruyter asked Mr Tshitangano to deal with procurement, the demographics of Eskom contractors and the assistance provided to small, medium and micro enterprises (SMMEs) to enable them to obtain business from Eskom.
Mr Solly Tshitangano replied that 39 companies were indicated to be red flagged. On how these had been identified, Eskom had requested a data expert to look at its system. Two thresholds were used in this analysis. All companies that had been offered contracts above R1 billion were looked at. Abnormal movements of 200% and above had also been looked at. This process had provided the 39 companies. It had not yet been confirmed that there were irregularities within the shortlist. This had been referred to the forensic department to verify. Once concluded, the written list would be referred to the Committee.
On the measures for empowerment of companies, Eskom was complying with the 2017 Preferential Procurement Regulations. The regulations assisted all organs of state to empower previously disadvantaged people through sub-contracting measures. The regulations pre-qualified companies by stipulating which companies could participate. Outstanding information would be provided to the Committee.
On contracts exceeding 20 years, the information was not readily available. He would look at the system and provide the information to the Committees at a later stage.
On whether Eskom had employed external consultants, Eskom officials had been employed to negotiate, not consultants.
Mr de Ruyter asked Mr Mashigo to share the names of the seven coal supply contractors that had been reviewed; contracts dating back pre-1994, the estimated duration and remaining energy to be supplied from contracts, and to touch on the capability of Eskom to deliver contracts.
Mr Mashigo replied the review involved the following companies: Glencore, Mwelase, Arishumeng, Mbuyelo Group, Universal Coal, African Royalty, and Mzimkhulu Mining. The process was similar to what had been done in the supply chain management review and the model building for the cost evaluation had been done internally. Analysis was done within Eskom. It had involved mining engineers and accountants who had come up with the negotiation approach. It was done without consultants. However, Eskom used similar tools used by consultants for the analysis, such as market intelligence. However, the actual work was done within Eskom.
On the number of coal suppliers pre-dating 1994 and other long-term contracts, this would be added to list compiled by Mr Tshitangano on Eskom contracts. Designs used to have the mines and power stations attached. Power stations were built at the mouth of the mine because it was cheaper to transport electricity rather than coal. Power stations were designed based on particular coal fields and were joined to coal fields in a conveyor belt system to ensure consistent supply. There were five remaining of these coal mines, all were contracts that pre-dated 1994. These would be coming to maturity when reaching 40 years. The contracts that were based on a fixed price were the ones supplying Matimba and Duvha Power Stations. Cost-plus price suppliers were tied to Lethabo, Tuthuka and Kriel Power Stations.
The only long-term contract made post-1994 was the Medupi contract concluded in 2008. Most contracts ranged from one month to 14 years. Additional details would be provided in a written report to follow the meeting.
The 25% profit margin of suppliers was typical in the capital-intensive mining industry.
On long term contracts, there had historically never been an Eskom power station built without a tied colliery. This was the same situation globally. The layout of huge power stations were referred to as “six packs” and were always built at the mouth of the mine. If one wanted a high volume cheap and consistent supply via conveyor, this required capital-intensive construction. This was how contracts were concluded to last over 40-year periods to recover the capital costs amortised over the life of the power station. The details would be provided on how these contracts had been concluded. The assets involved were also very capital intensive. Mines dealt with an excess of 5 billion tonnes per annum, this required huge collieries and funding.
There was no domestic market in South Africa similar to the export market. In Eskom, coal contracts were concluded through the tendering process. Eskom’s preferred pricing model was to look at the cost of the mine and a fair return so as not to drive capital away. It was not preferable to have coal costed using the export price which was always significantly higher. Contracts were bespoke, costed on a case-by-case basis, which was dependent on the characteristics of each colliery, such as whether the coal required washing. It was therefore always a negotiated price. 2018 had unfortunately seen that all the procurement did not yield desired results in the number of contracts that could have been concluded. This had resulted in the need for burning coal from Eskom’s strategic stockpiles. Eskom had also lost three mines due to business rescue, resulting in emergency procurement being undertaken in November 2018. There were very few options of people who could supply coal to Eskom readily, resulting in higher prices.
There was capacity in Eskom. Where necessary, consultants were used for market research. There was no domestic market price; people used the API-4 Export Index to determine parity prices at mine gates.
Eskom Group Chief Executive response
Mr de Ruyter replied about whether Eskom was free of State Capture and corruption, saying the organisation was still dealing with legacy issues and clean up processes. Eskom would not be rid of these overnight, but they were trying their best.
On the Nersa appeal against the High Court ruling on the Eskom tariff increase, Mr de Ruyter replied that Nersa did not grant Eskom tariffs reflective of the appropriate costs.
On the Committee request for a reliable electricity price comparison, a detailed analysis would be done. Benchmarking would be done to determine the relative pricing structure of South African electricity.
On whether Eskom should play in renewables, Mr de Ruyter believed it needed to do so. He had expressed a request to the market to assist in repurposing Eskom’s assets for renewables.
On Ms Peters’ question on progress made on the prepaid meter pilot project in Soweto, Eskom had been interdicted by one household which had delayed the process. However, the process had been recovered and Eskom was 70% advanced with the project. He agreed that it would be an excellent idea for the addition of local content to manufacturing. One could look at the successful examples of how this had been done from the motor industry. This was a policy matter; it was up to government to guide Eskom who would support it.
On the IPP costs, Eskom was engaging through the Department of Mineral Resources and the IPP Office to renegotiate the financing of Bid Window One and Two due to high costs. These had been due to the maturity of technology and the market being uncertain. This matter was being resolved.
The Black and Veatch contract that changed from R114 million to R14 billion, was under forensic investigation. R12.7 billion in irregular expenditure had been determined. The full investigation was underway to target unlawful behaviour. The contract spanned from 2005 and the investigation was a work in progress. It would be investigated and Eskom would report back to the Committee.
Follow up questions
Mr Z Mlenzana (ANC) said he had a question for Deputy Minister Masualle. It was on the challenges relating to person power and transition within Eskom. He asked to be briefed on the Chief Restructuring Officer (CRO) Report.
In October 2019, SCOA had been told that Eskom had a challenge with a lot of payments. What was the state of this now?
If there was no determinant for domestic coal prices, where else could Eskom verify prices? What was the relationship between coal suppliers and Eskom?
Mr Joseph asked if there had been any conclusive positive or negative results in the recovery of money. Many matters seemed to be ongoing continuously.
On the housing subsidy scheme, while he accepted there needed to be benefits to staff, these were costs to Eskom. What was the annual budget to provide the housing subsidy scheme?
On electricity supply to neighbouring countries, was there payment from these countries? Were there any outstanding payments?
Mr Mathafa referred to the Special Appropriation conditions, of the four conditions DPE had to comply with, only two had been achieved. Eskom had not felt the oversight role from DPE. How would compliance be assured?
Mr Kwankwa again asked for an age analysis when it came to overpayment of contracts. The companies and officials responsible for overpayment needed to be held to account.
Ms Ntlangwini said the Committee was dealing with compliance challenges again. The conditions had been put before Eskom. Why was Eskom not adhering to the Treasury conditions?
She was still waiting for a satisfactory response on remuneration standards. She was not sure if this was a matter for the Director-General or Deputy Minister. When would the remuneration policy be finalised?
Ms Peters asked which companies from those overpaid also featured in the Competition Commission’s construction corruption saga. There was no indication of evaluation or scrutiny by Eskom as to the repeated involvement of certain companies in such matters.
She was unsatisfied with the response about contract renegotiation with seven suppliers. Why was there renegotiation with those specific companies? These were “small fry” companies, not the big companies. Why were the big companies not considered for renegotiation – those in the diesel, gas and coal space?
She said her question on the reduction of engineers was not covered. When engineers retired or died, they were not being replaced.
The Chairperson asked Eskom to share the cost escalations at Kusile and Medupi. He asked for their starting, current and expected escalations.
There could not be such large overruns and no company be held responsible. SCOA had been told about the R2 billion recovery. This was nothing in the larger scheme of the R150 billion overrun for example. What was the estimated cost of these overruns? It did not feel as if people or companies had been held responsible for these overruns.
He noted the Eskom board chairperson had said that the Board did not “racialise” contracts when speaking about Econ Oil. Race had much to do with South Africa’s past. How did Eskom deal with BEE if race in contracts were not looked at?
He said that Deputy Minister Masualle needed to get closer to the matter of what Eskom was doing on the matter of B-BBEE. The Department needed to get closer. In terms of de-racialisation, it got a large budget from government. What was the role of Eskom in localisation policies? What part of Eskom’s budget went to black professionals? The Committee wanted to see the role of Eskom “big time” in B-BBEE initiatives. Reigniting the economy of South Africa and de-racialising the economy were not constrained to one company. Deputy Minister Masualle needed to get closer to the matter, it required more interaction.
He had asked earlier about the market price of coal; Eskom’s response was negotiations took place on a contract-per-contract basis. He asked instead then for the average market price of coal, factoring in all matters already alluded to.
On B-BBEE, had those types of contracts been awarded to a company from any of the designated groups?
He had a question for Prof Makgoba. The Committee had seen that two or three senior counsel had been used to deal with the matter of Mr Oberholzer. The Eskom board had then come to a conclusion that there was nothing wrong about the matter of Mr Oberholzer. This was not a personal vendetta; the issue had been raised in public. Mr Oberholzer had declared his interest. Had Mr Oberholzer been involved in the negotiations in the price escalation of the Stefanutti Stocks contract while holding shares in that company? If he had been involved, mere declaration of interest did not remove the conflict of interest. Mr Oberholzer should have recused himself from negotiations. He asked Prof Makgoba and the Deputy Minister to comment on the matter.
The Chairperson said that Prof Makgoba had raised the matter on how he had been interpreted on Members of Parliament knowing or not knowing what was happening at Eskom. Prof Makgoba had explained himself on the matter. He asked Members to accept Prof Makgoba’s explanation and take it as a matter of miscommunication. He considered the matter dealt with.
Prof Makgoba said he would ask the Eskom board's People and Governance Committee (PGC) chairperson and non-executive director, Prof Tshepo Mongalo, to deal with Mr Oberholzer's declaration of interest.
Prof Makgoba said he had spoken to not racialising contracts. In South Africa, it was accepted that there was a BEE law. Every company had policies on BEE. In the process of evaluating every contract, this kicked in. When it came to the board, it was the highest level of Eskom where it needed to ensure the contract was beyond reproach. This involved analysis beyond from where the contract came. This was the first component.
Secondly, there was no law in the Constitution that said black people could do unlawful things and get away with it. The board needed to evaluate the legality of each contract that came before it. This was the de-racialisation of contracts he had referred to. He handed to Prof Mongalo.
Prof Mongalo replied that on the matter of conflict of interest, Eskom policy was aligned with Section 75 of the Companies Act. When making decisions, any company or board was required to avoid any member being part of a decision when they were conflicted. Best practice was for the member to declare the conflict and leave the meeting concerned. The investigation had shown that Mr Oberholzer had signed off on a submission to the tender committee on 11 December 2019. On 27 January 2020 Mr Oberholzer had signed off on a submission to the Investment and Finance Committee (IFC). In line with decision making at Eskom, the decision for modification had been a decision of the IFC which was a board committee. It was not an executive committee. The matter had finally to be decided by the board committee. Mr Oberholzer had not been responsible for decision making when it came to modification. He was not a member of the IFC which had the responsibility. He had no role in IFC approval. This was in line with the Eskom board policy and Section 75 of the Companies Act.
Mr de Ruyter said he felt that Prof Mongalo had covered the matter well. He requested the Eskom Chief Legal Counsel respond to other questions.
Mr Bartlett Hewu, Eskom Chief Legal Counsel, replied that two recovery matters had been concluded. These concerned Deloitte Consulting where R171 million had been recouped. The second was McKinsey & Co in the sum of R1.1 billion. Matters of recovery that were still pending could be found on slides 76-80 of the presentation.
Mr de Ruyter said the next matter to be dealt with was the quantum of Eskom’s housing subsidy.
Mr Cassim, Eskom CFO, replied that there was a R3500 monthly housing subsidy from Eskom. On the matter of neighbouring countries’ outstanding debt to Eskom, the only outstanding case was R417 million from Mozambique.
Mr de Ruyter replied that a detailed written report on the overpayment matters would be provided as requested by Members. He would endeavour to cross reference if the companies involved in the Eskom overpayment cases had been involved in the construction saga as well.
The perception of reduction in engineers at Eskom was a matter of nomenclature. Instead of calling someone an “engineer”, they could be referred to as an “operations” or “maintenance” manager. These titles were simply recorded at a different level of nomenclature in the organisation despite still doing engineering work. Eskom was therefore not losing engineers, but some engineers were moving to different working titles.
Mr de Ruyter returned to Eskom’s efforts in the promotion of black professionals. Eskom engaged with the Black Business Forum and the Black Management Council. These organisations worked with Eskom to advance the cause of black professionals. He said a positive and collaborative relationship was enjoyed in this regard.
The average market price for coal in the 2020 financial year was R537 rand per tonne. The actual cost achieved was R527 per tonne. He stressed there were differences in coal quality, mining methods, distance from mines, size of seam, as well as quality of the reserve. These all meant that there was a wide range of prices on the matter within the average number.
On cost overruns, Medupi’s initial price had been R68 billion. It had increased to R145 billion. This did not include the interest incurred during construction, nor did it include flue-gas desulphurisation which was required to be built at Medupi.
The Kusile initial scope of work included flue-gas desulphurisation so R84 billion had been the initial price. The estimated total cost excluding interest incurred during construction was R162 billion. This included flue-gas desulphurisation.
The Chairperson said, with all the cost overruns, no one seemed to have been held accountable. Was this true? Was there not something illegal or wrong in the process that had led to such significant cost overruns?
Mr de Ruyter replied that the issue was twofold. Mr Maharaj had explained the various reasons why the initial cost estimate had been inaccurate and overrun. The construction had begun without the scope of changes being finalised. This always produced cost overruns when this was the case. From the report on potential overpayments at Kusile, where there was concrete evidence of overpayments (R4 billion), Eskom was working with law enforcement authorities to hold those still employed by Eskom accountable. Eskom did obviously not have powers of arrest, therefore once matters were handed to law enforcement, it was in their hands. Eskom had dealt with SIU, the Hawks, and the Asset Forfeiture Unit and had followed up and tried to assist them wherever possible. However, Eskom could not be responsible for the final conclusion of cases.
Deputy Minister response
Deputy Minister Masualle replied on board capacity that Prof Makgoba had made an impassioned plea that the board be returned to full strength in numbers. The matter was at the Minister’s door. Pending the conclusion of the necessary consultations, the board would be augmented as a matter of urgency. He was happy to return to the Committee to revisit the matter of progress on capacity of the board. The board matter was being considered at the highest level.
The Chairperson asked why the six members of the board had resigned.
The Deputy Minister replied that he was not in a position to say specifically why they had resigned. There would be various reasons included in the exit interviews. This meant the matter could be returned to. This could mean he could return to SCOA to present findings on the reasons and circumstances the board members had left.
He confirmed that the Minister had not heard a report of any divergences amongst the board members to extent that they were “at war” with one another. Completing the full complement of the board was a priority.
On the remuneration policy referred to by Ms Ntlangwini, it had since been signed off and approved by DPE. That had been signed off and sent back to Eskom. He assumed it would move through the structures of Eskom before reaching the board. From the DPE perspective, it had been signed off for execution.
If there was a sense from Eskom that the Department’s oversight instruments were insufficient, they would be re-examined. Monitoring of adherence strengthening measures would be done. The shareholder compact and corporate plan were instruments through which performance monitoring were conducted. It would be strengthened.
He agreed with the Committee that it could be said that within the procurement environment there were other imperatives informed by the socio-economic environment. This could not be neglected. Given size of the spend within Eskom, these issues in Eskom would have to be looked at. Perhaps there was too much focus on ensuring cleaner and cheaper energy for the country given the state of load shedding. He said they could not lose sight of “other things”.
The Chairperson said that all questions raised had been addressed; some would be followed up on. The remaining questions raised fell into the shareholder's lap.
On the Mr Oberholzer matter, Adv Cassim had said the board should counsel Mr Oberholzer. What was this counselling for? Had the board done this? He heard that the only involvement by Mr Oberholzer was the matter of signing, however, when putting a signature to something, what did this mean? What was the importance of the signature?
Mr Joseph said he supported the Committee Chairperson on the matter. Whatever Mr Oberholzer had signed off on, was that “above board”? Had Mr Oberholzer signed off on something he was comfortable or not comfortable with – this was the question to be asked. Besides being asked to excuse himself from the decision making, when the information had been put before him, had he acted in a way that adequately represented the company?
Prof Mongalo replied that when it came to decisions made within the board, they were led by different executive members. Mr Oberholzer was not member of the IFC or the board. He could not have made a decision.
The Chairperson said Adv Cassim had recommended that Mr Oberholzer be counselled.
Prof Mongalo replied that Adv Cassim had made a recommendation that Mr Oberholzer should totally not have taken part in the signing. Mr Oberholzer should not have been involved at all. The Eskom GCE had counselled Mr Oberholzer. Someone else should have appended the signature. Mr Oberholzer had subsequently disposed of the equity.
The Chairperson said the conclusion was that Mr Oberholzer should not be involved at all.
Prof Mongalo said this was a technical point of view. The policy aligned with Section 75 of the Companies Act. In the case Mr Oberholzer was not responsible for making a decision, the decision was for the IFC and the board.
The Chairperson was concerned about the wrong conclusion reached about what he had been saying about B-BBEE. It was a misunderstanding that he had been saying that black people should be allowed to participate unlawfully.
He said the Committee would agree that the engagement had been helpful. The matter dealt with the Committee's responsibility in terms of the Money Bills Act. This had empowered SCOA to engage with Eskom in the manner it had been done. The role Eskom played could not be done by anyone else. When Eskom coughed, the whole economy caught cold.
He thanked all present for attending the meeting. The meeting was adjourned.
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