In this virtual meeting, Eskom briefed the Standing Committee on Public Accounts on deviations and expansions for the 2019/20 financial year. The Minister of Public Enterprises and a delegation from Eskom were present in the meeting. The presentation detailed the deviations and expansions not approved for quarters one, two, three and four. The deviations and expansions were requested for projects that dealt with maintenance of equipment like oil flame scanners, the provision of transformer and earthing equipment and the continuation of health and professional services. National Treasury’s recommendation to a number of the applications was for Eskom to test the market.
The Committee said Eskom needed to take the process of deviations and expansions seriously. Deviations and Expansions were not the norm but were exceptions. Members said that if there was anything that Eskom needed to take away from this meeting it was that the Committee was not going to accept Eskom wanting to bypass testing the market and expect National Treasury to condone this.
The Committee noted that in October 2020 Eskom reported on R4 billion worth of overpayments. Among the companies paid was ABB. ABB was paid around R1 billion in overpayments. Did ABB pay all of the overpayment back? The Committee raised a concern that whenever National Treasury rejected Eskom’s proposal for a deviation or expansion National Treasury instructed Eskom to test the market. Why was the market not tested before? Why was Eskom forced by National Treasury to go to the market? Eskom even found a lesser price for many of its services. Why was that not done before requesting for a deviation? The Committee asked Eskom to provide an explanation as to how the deviation operations were processed within Eskom? Who were the executives responsible for the deviation process?
The Committee raised many questions on the South32 contract. Eskom provided the original contract value, however, the value of the contract extension was not mentioned. It was also noted that it was not supported. When did Eskom apply for a deviation for the South32 contract? According to the Eskom presentation early warning signs were supposed to indicate which contracts were going to expire six months before the expiry date. The Committee wanted Eskom to provide more information on the matter because it sounded very suspicious. The Committee claimed that South32 was receiving special and extraordinary treatment from Eskom. Eskom could not claim that South32 was the cheapest supplier of coal because Eskom had not actually tested the market.
The Committee raised that the contract with Actom had been declared irregular by the AG. The contract had also expired by the time of request. Why did Eskom wait until the contract was expired to apply for the expansion? The Committee noted with concern that there was poor contract management within Eskom.
The Committee noted that it would be meeting with the power utility the following week to discuss deviations and expansions for 2020/21. Outstanding questions would be responded to in writing and addressed at this meeting.
The Chairperson said that Eskom would brief the Committee on deviations and expansions. Thereafter, Ms Mente would lead the question-and-answer session on deviations. The Committee would then deal with expansions and that would be led by Ms Tolashe. The Committee would deal with the two matters separately. The presentation should cover the salient points on deviations and expansions. After Ms Mente asked her questions to Eskom then the other members would come in and ask their questions. The Chairperson handed over to Eskom.
Professor Malegapuru Makgoba, Board Chairman, said that Eskom welcomed the opportunity to present to SCOPA on the matter of deviations and expansions. The presentation would be given by Mr de Ruyter and his team. He handed over to the Minister to make a few comments before the presentation.
Mr Pravin Gordhan, Minister of Public Enterprises, said that he was present in the meeting. If he was pushed to attend another meeting, then he would inform the Chairperson.
Briefing by Eskom on deviations and expansions
Mr André de Ruyter, Group Chief Executive (GCE), Eskom, briefed the Committee on the entity’s deviations and expansions for the 2019/20 financial year. He was joined by several members of the Eskom Board of Directors as well as a number of executives who would answer any questions the Committee had. The presentation detailed the deviations and expansions not approved for quarters one, two, three and four (See presentation for details on each project, National Treasury’s recommendation and Eskom’s action).
• Procurement through deviations compromises the principles of fairness, equitability, transparency, competitiveness and cost efficiency.
• National Treasury introduced instructions on procuring through deviations because some organs of state were abusing this mode of procurement.
• Single source procurement may occur when more than one supplier exists in the market that can perform the contract, but a particular supplier is identified as the preferred supplier for various reasons, e g continuation of service prior approval is required from National Treasury for single source procurement.
• Sole source supplier is where one supplier possesses the unique and singularly available capacity to meet Eskom’s requirements National Treasury approval is not required for sole source procurement.
• Motivations must also be provided as to why procurement should be done through deviation as opposed to testing the market and concluding a new contract.
• Ministerial Equity Conditions require Eskom to monitor deviations, expansions, tender cancellation, procurement plans and management of budget performance.
• Roadmap deliverables are reported on a monthly basis in a forum that is attended by DPE, Eskom NT.
Ms V Mente (EFF) discussed the ABB deviation. The ABB deviation was not supported. She heard the explanation. She reminded Mr de Ruyter that applying for a deviation meant that there was some kind of pressure and therefore the entity required some services. Or the entity already had a contract in place with the company and wanted that to continue. She discussed ABB. In October 2020 Eskom came to the Committee and reported on R4 billion worth of overpayments. Among the companies paid was ABB. ABB was paid about R1 billion in overpayment. Eskom then continued to issue variations on four areas for ABB. Did ABB pay all of that overpayment back?
Mr de Ruyter responded that ABB did pay back the money that was overpaid. ABB repaid on 23 December 2020. ABB paid an amount of R1.577 billion back to Eskom as part of a settlement agreement concluded between Eskom, the SIU and the company itself.
Ms Mente asked if the official involved in the overpayment was the same official involved in recommending the deviation, reference number 31? Or was it a separate official?
Mr de Ruyter responded that the ABB project for Kusile Power Station, in which untoward payments were made, was part of the Kusile Construction Project. The work undertaken by ABB, in terms of that contract, was administered by Eskom’s Group Capital Division which was in charge of projects. This was for the control and instrumentation of the Kusile Power Station. The contract was not yet complete. It was very close to completion. If further information is needed Eskom would share it with the Committee. He then discussed the deviation, reference number 31, for the maintenance services of Oil Flame Scanners. That was done through the Generation division. It was a separate division. He could ask his colleagues if they had any reason to believe that it was the same official. His understanding was that it would have been dealt with by the two separate divisions using separate procurement processes.
Mr Avin Maharaj, Project Director: Kusile Power Station, said that Mr de Ruyter was correct. Separate teams administered these contracts. The ABB contract, from a Kusile perspective, was handled by the Group Capital team at the time. Those officials were no longer around in Eskom. The ABB deviation for the maintenance of the Oil Flame Scanners was a more recent transaction than the Kusile control and instrumentation contract. The officials involved would have been different.
Ms Mente said that Eskom was not sure if the officials were the same or if they were different. But by virtue of it being two different divisions there was a possibility that different officials were involved.
Mr de Ruyter said that was correct.
Ms Mente asked if the official who made the overpayment was dealt with by Eskom.
Mr de Ruyter wanted clarity that she was talking about the overpayment to ABB for the Kusile project?
Ms Mente said that was correct. She was talking about the overpayment of R1 billion for the Kusile project where there were four variations.
Mr Maharaj said the particular individuals involved in that particular transaction were no longer part of Eskom. The SIU was pursuing those particular proceedings together with the NPA. None of the individuals were currently a part of the organisation.
Ms Mente said that meant that there was no possibility that it was the same official who asked for this particular deviation, reference number 31.
Mr de Ruyter said that Eskom could confirm that but his understanding based on the facts was that it would have been a completely different procurement team doing these two separate contracts. To make absolutely sure and to ensure that Eskom did not unintentionally mislead Parliament Eskom would clarify that and revert back to the Committee.
Ms Mente discussed deviation, reference number 31. National Treasury said two years instead of five and Eskom eventually found a contract for five years for a lesser amount. Why was the market not tested before that? Why was Eskom forced by National Treasury to go to the market? Eskom even found a lesser price. Why was that not done before requesting for a deviation?
Mr Phillip Dukashe, Group Executive: Generation, Eskom, responded that it had been done. It was divided into two processes. The first process was to test a scanner that would work. It was an open process but when the scanners were tested of all the companies, ABB’s scanners were selected. Therefore, a second process was started, having tested the market, to ask that ABB be negotiated with on a single source basis. That was what happened. Eskom had tested the market and the market yielded ABB as the company that had the successful scanner. When Eskom went to the market again after National Treasury said no there was another company that also succeeded. That was the company that had the five-year contract.
Ms Mente asked if this particular company did not participate in the first round?
Mr Dukashe responded that the company did not participate in the first round.
Ms Mente asked if the company was aware of the bidding process?
Mr Dukashe said he was not sure if the company was aware of the bidding process in the first round. The two processes were a year apart. One was in May 2019. The second contract was placed in May 2020. Eskom could check what the status of the other company was at that time. Unfortunately, he did not currently have those facts.
The Chairperson said that some things needed to be clarified. He wanted the CEO to provide an explanation as to how the deviation operations were processed within Eskom. Who were the executives responsible for the deviation processes? He wanted Eskom to explain how they did deviations and who was responsible for it? He said there was an issue of recordkeeping at Eskom. The Committee needed to be taken through the procurement process so that everyone was on the same page on how Eskom processes deviations. It would help the Committee understand how Eskom works.
Ms Mente said she agreed with the Chairperson’s question. Her next question was what were the timeframes that Eskom used for advertising so that all companies were aware of the processes?
Mr de Ruyter asked if a certain official, involved in the procurement division, was on the call to answer the questions posed by Ms Mente and the Chairperson.
The Chairperson asked what position the official held. It was important to know in terms of protocols and line functions.
Mr de Ruyter said that she was involved in the procurement process but that he would have to look up her exact position and title. The official was not in the meeting.
The Chairperson asked if the Chief Procurement Officer or the Head of Legal could provide detail on how a deviation at Eskom would be carried out? Who would be transmitting it to National Treasury? It was that level of detail that he and Ms Mente wanted to get into. It could not be that the people not in the meeting were the only ones familiar with this process.
Mr Pieter le Roux, General Manager: Procurement Generation, Eskom, said that deviations related to the request of single sources for confined markets. Usually the process started with the procurement team that drove the transaction and specifically when the strategy of the specific transaction was starting out. When there was a request for these deviations it needed to be well-motivated within the organisation. The normal process was always a process of open tender as prescribed by National Treasury and all the other regulations. Any process that was not an open process was then seen as a deviation and very specific motivation needed to be provided. That motivation was provided in the request that was sent to National Treasury. That request was written up and provided to the Office of the CPO. The CPO then looks at the request for deviation. Before that request was sent to the CPO it was also internally debated in the different procurement and tender committees that operated in Eskom. This was done so that any reason for a single source was scrutinised and that it was well motivated. A deviation process was not started by a specific individual. It was done by the cross functional team as defined in Eskom’s policies and procedures. There had to be good motivation for it and it passes through the internal governance as well as the Office of the CPO before it reached National Treasury for approval. That was in line with the regulations from National Treasury.
The Chairperson said he had answered the question but the Committee wanted to attach faces to these responsibilities and this process because that was all that matters. He would come back to the matter shortly. He still wanted to substantively deal with it.
Ms Mente said that when a deviation was requested there was always a signature of the person who requested it. That person would normally come from the office that was requesting for deviation. Ordinarily procurement would be the ones processing all of the deviations between Eskom and Treasury. However, the buck stopped with the CEO. He was the only accounting officer there and then there was also the Board. When there was not anyone in the meeting to help it was the CEO who had to provide the details because he was the overall accounting officer. The reason why the Committee wanted to know so many things concerning ABB was because Eskom said there was one deviation in quarter one. During the presentation she noted that there were two deviations in quarter one. It seemed as if Eskom did not report everything. There was a deviation made to Treasury recommending the same ABB. She hoped that the particular official was on the floor because the process seemed to be the problem. National Treasury told Eskom No and to go and test the market. The reason Eskom was in the situation it was in was due to the fact that it did not test the market. Many things happened where prices were inflated. She found another letter Eskom had sent the Committee when it came in October. It also concerned ABB and it was a request for approval to solicit services from a single source for the transfer of all generator and transformer protection functions to a new digital protection system project. That was not the same service for the Oil Flame Scanners. She asked Mr de Ruyter if it was it the same.
Mr de Ruyter responded that it was not the same. He reiterated that what is reflected in the presentation are deviations for the 2019/20 financial year. It may be that the document Ms Mente was referring to was for the 2020/21 financial year and that was why it was not reflected in this presentation.
Ms Mente asked if Eskom left that one for the next batch of deviations.
Mr de Ruyter replied that was correct.
Ms Mente said that the Committee would deal with it in the presentation for the following financial year. She then discussed the next deviation which was in quarter three. Eskom’s status on that deviation was that it was finalising the project after National Treasury rejected the deviation and directed Eskom to the market. What forced Eskom to go through with a deviation route instead of doing what was prescribed by National Treasury. A deviation was used in an emergency situation. Treasury said no and told Eskom to test the market. Eskom tested the market and the process was being finalised. Would the process not have been finalised sooner if Eskom did not waste months of to-and-fro between themselves and National Treasury? Eskom should have known that the deviation it was asking for was not in line with the deviation prescripts. Why was there an insistence on asking for a deviation instead of doing the right thing?
Mr de Ruyter replied that there were two original equipment manufacturers for the particular Pulse Jet Fabric Filters. These were very large filter bags that were used for emission control in the power stations. From a technical perspective, Eskom deemed it appropriate to use the same fabric filter bags that had been issued when the original emission control equipment was commissioned. DTI suggested that Eskom look at alternative suppliers including local content. That was what Eskom then did.
Mr le Roux responded that the DTI issued an instruction to say that Eskom should buy the fabric filter bags with 100% local content. DTI then had to approve the suppliers that could do the 100% local content. That 100% local content, at that time, only included these two suppliers so DTI only approved these two suppliers. It was with the backing of the DTI request that Eskom asked for a deviation to go out to the confined market due to the request to procure 100% local from the market. The response that Eskom got from National Treasury was that it should test the market and go on an open enquiry. Eskom did so after the request from National Treasury. The initial tender was issued on 7 May 2020 and closed on 3 June 2020. Five responses were received from the market. Unfortunately, all of the five responses were non-responsive. The reason why they were non-responsive was because the material for the fabric filter bags still needed to be imported and there was no capacity in South Africa for that material. DTI needed to provide exemption letters to all potential suppliers for that portion. This accounted for almost 30% of the total tender value, and none of the suppliers, not even the two that were approved by DTI at the time, had the necessary exemption letters. After meetings with DTI on this matter the tender was reissued to the open market again on 19 June. It closed on 20 July. In that particular process there were two successful bidders that were currently under evaluation for the potential to be awarded this contract in the coming months.
Mr M Dirks (ANC) said that Ms Mente had raised very important issues about these deviations. He did not think the answers that the Committee received were satisfactory. He did not see the Chief Procurement Officer of Eskom in the meeting. Surely when important issues, such as deviations, were being dealt the Chief Procurement Officer should be present to answer some of these questions. What was going on? Where was the Chief Procurement Officer? The Chief Procurement Officer should be answering these questions and had not responded to any of the questions.
Mr de Ruyter responded that the Chief Procurement Officer submitted a medical certificate saying that he was unable to attend. Secondly, Eskom had issued, as of yesterday, disciplinary charges against Mr Solly Tshitangano. In terms of those charges he has been provisionally suspended.
Mr Dirks had a serious problem with the response. The Chief Procurement Officer conveniently had a medical letter and now there was a disciplinary hearing. He wanted to hear from Mr Tshitangano. Mr Tshitangano had been in charge of the procurement. He did not like one-sided stories where the Committee was fed one narrative. He wanted to hear what was happening in that department. The answers that were received from Ms Mente’s questions did not give him any comfort. He needed to hear what Mr Tshitangano had to say because he was in charge of that department and needed to come and answer.
The Chairperson said that the Committee was put in a very difficult position. It also explained why he was uneasy about the manner in which the responses were coming.
Ms O Maotwe (EFF) also wanted to voice her disappointment with the way in which the answers were given by the officials. She wanted to discuss ABB. She did not hear the reasoning behind the value changing on the presentation. The figure changed from R8.5 million to R38.5 million. Overnight the amount changed on the presentation. Who prepared the presentation that stated R8.5 million? Who changed the presentation and why did they change the presentation?
Mr Dukashe replied that the number of the screen was the correct number. The number that was there before was an incorrect number. He assumed that it was a typo. The final amount of R38.5 million was checked and it was correct.
The Chairperson said it was quite a significant discrepancy.
Ms Maotwe agreed with the Chairperson. She said the Committee should not accept it. She asked if Eskom could confirm, with absolute certainty, that the specification for these tenders were not done by the very same suppliers. Could the Committee get confirmation that the specification that was written was written by Eskom employees and not by ABB or any other company?
Mr Dukashe responded that the specification was done by Eskom employees and not by ABB. ABB had been part of the companies that tendered. At first the intention was to test for these Oil Flame Scanners from two companies. ABB was then selected in the first part. In the second part ABB did not get the tender. He confirmed that the specification was written by Eskom employees.
Ms Mente said that she did not understand Mr de Ruyter’s answer to Mr Dirks. Firstly, he said that the Chief Procurement Officer had submitted a sick note but also that there was a disciplinary hearing. Those cannot both be the reasons. If someone was undergoing disciplinary action, then that person could not issue a sick note. She wanted a direct answer. What was the reason for the Chief Procurement Officer not being in the meeting? If the reason was because of the sick note, then the Committee could call the Chief Procurement Officer to a meeting next week to answer the outstanding questions.
The Chairperson said that the Committee needed to get clarity on that matter. Was the CPO not part of the meeting because he was on sick leave? Or was the CPO not part of the meeting because he had been suspended?
Mr de Ruyter replied that the CPO was not part of the meeting because he was suspended.
The Chairperson said that the CPO was not present because he was indisposed.
Mr Dirks said that the way he understood it was that the CPO was not present because he was suspended. The CPO was suspended yesterday. He was not prepared to accept this kind of thing. The Committee had the right to call any citizen of South Africa to appear before it. Whether the individual worked for Government or was an ordinary citizen the Committee could summons the individual to appear before it. He wanted the CPO to appear before the Committee. Suspension did not give him the right not to appear before the Committee and answer some of the issues that arose while he held the position. The Committee wanted to hear all sides of the story of what was going on at Eskom. The issues that Ms Mente raised were very critical and he was not happy with the answers provided. He did not want to go into those answers that were given. He did not think that the answers given to Ms Mente’s questions were satisfactory. The procurement officer, whether suspended or not, must account before the Committee and respond to some of the issues that were raised.
The Chairperson said the Committee would look into that matter.
Ms N Tolashe (ANC) had a question on the South32 contract. Eskom provided the original contract value, however, the value of the contract extension was not mentioned. It was also noted that it was not supported. Even the time was not mentioned. When did Eskom apply for a deviation for the South32 contract? According to the Eskom presentation early warning signs were supposed to indicate which contracts were going to expire six months before the expiry date. She could not make sense of what was taking place in quarter two under the South32 contract. She wanted Eskom to provide more information on the matter because it sounded very suspicious.
Mr de Ruyter said that the reason why Eskom did not deal with the South32 contract was because it was an expansion and not a deviation.
The Chairperson said that the waters had been muddied by what the Committee had just been told. He said that the CPO not being present could have been indicated at the beginning of the meeting. Were there any other officials who were suspended who would have been a part of this meeting? Was the suspension of the CPO materially linked to the issue that was being dealt with in this meeting? The matter needed to be cleared so that the Committee did not compromise the process.
Mr de Ruyter responded that there were no other officials that were suspended who would ordinarily make submissions or presentations to the Committee.
Minister Gordhan said that the questions the Committee asked were very useful because it guided Eskom on what the level of information that was required. He said he would ensure that processes, individuals involved and how procurement works within Eskom would be set out in a transparent manner in a document. That document would then be made available to the Committee. The questions were useful and he assured the Committee of maximum transparency. He noted that the suspension of the CPO was a separate disciplinary matter. He was not aware of all the details but it was a process that any organisation was entitled to pursue within its own right and in accordance with the law. The disciplinary processes should be allowed to finish and then the Committee would know the results of that. He was sure that neither he nor Government would want to be seen as interfering with that process. In the next engagement Eskom would be better informed and that the entities needed to be guided to prepare at the level that the Committee required. The Chairperson’s guidance on the level of detail the Committee required would be helpful. Mr Dirks was correct that anybody could be called before the Committee. Perhaps the Committee needed to call the culprits who left Eskom in the mess that it was in? There was a report from the old Public Enterprises Committee in 2017 that discussed the matter. If there were further issues, then the culprits needed to account for what happened. There were people appearing before the Zondo Commission and people appearing in court looking into these processes as well. Eskom was much better informed with what the Committee required now and the Department would guide other SOEs in a similar direction.
The Chairperson said that the Committee and Eskom were not speaking past each other. The Committee did not have a view to interfere with Eskom. It was just that some of these things should not have been unearthed during the course of this meeting. The CPO was not present and the Chairperson was not aware of it. The Chairperson also did not like the responses that wear being received. The Committee was not going to interfere in the disciplinary process. He was sure that when the State Capture Commission concluded its work the Committee would fill in the gaps if there was a need for further inquiries into Eskom. The Committee was in agreement with that matter. The Committee did want to get to the bottom of all the issues and build on the work the previous Public Enterprises Committee did and what the State Capture Commission will come up with. It would have been easier if Eskom informed the Committee that the CPO was not present in the meeting and the Committee would have moved past it.
Mr Dirks said that when he called for the CPO to appear before the Committee he did not want to discuss any disciplinary matters at a SCOPA level. He was not interested in the disciplinary matters. Those matters Eskom must deal with. He needed the CPO to appear in order for him to account for some of the deviations that took place while he was the head of procurement. He was not interested in the disciplinary process. That must be run by Eskom separately. The Committee had no intention of interfering with any disciplinary processes. The CPO was the most appropriate person to account for the things that were being dealt with today. That was why he wanted the CPO to account some time. He agreed with the Minister that maybe the Committee needed to call the previous officials who were in charge. He would love it if the Committee did that. The Committee needed to call Mr Brian Molefe and perhaps complete the evidence that was cut short at the Zondo Commission. He was not sure when Mr Molefe would be called back to complete his evidence because he was still under oath. By all means the Committee could call the previous officials to appear before the Committee. Those officials should be interrogated so that the Committee could get to the bottom of what was happening at Eskom. There were many things currently happening at Eskom that needed to be dealt with.
The Chairperson said that this matter should not be made a substantial part of the meeting tonight. The Committee unearthed it and Ms van Minnen would handle it on behalf of the Committee meeting next week Wednesday.
Mr B Hadebe (ANC) said that he was interested in the unnecessary saga that had just been created of the suspension and the doctor’s note. The thing that came into this mind was who compiled the report the Committee was dealing with? Who was supposed to compile the report? Did the suspended person compile the report? Or did someone else compile the report? Because if he heard correctly the suspension was only in effect since yesterday. He thought the issue of the doctor’s note was not necessary if the individual was suspended. He did not know why it was raised and it created a lot of uncertainty. Since the matter was realised which came first? Was it the doctor’s note or the suspension?
The Chairperson noted that who compiled the report was important. He said that the Committee should not make this matter central to the meeting. The matter should be parked because it might derail the meeting. It would be kept on the radar and maybe in the end the Committee would come back to the matter.
Mr Hadebe wanted to explain where his question emanates from. Ms Maotwe questioned the editing of the numbers of the report at the last minute. Was the report edited by the original author? He wanted to make sure that the Committee dealt with authentic information.
The Chairperson agreed with Mr Hadebe’s line of questioning and asked Eskom to respond.
Mr de Ruyter said that there were about 3000 people involved with procurement in Eskom. It was a large department spread throughout the organisation. The interface with National Treasury was such an important interface that there was a register that was kept up to date and maintained in the procurement team. It contained all the details of the various deviations and expansions. As Eskom received responses on those deviations and expansions from National Treasury that register was updated on a real-time basis. What happened in this regrettable case was that in transposing the information from this register to the presentation a transcription error was made. He apologised for the mistake. The amount of R38.5 million was correct and not the amount reflected on the original presentation. He apologised for the unfortunate mistake.
Mr Hadebe said that his question was not answered. He asked who compiled the report? Who edited the discrepancies? He understood that several departments were involved in gathering the information but there was one author who compiled all the information into the report that was before the Committee.
Mr de Ruyter responded that the report was compiled by Eskom’s Government Relations and Regulatory team. They were responsible for the drafting of the presentation. In view of the information that was provided and the speed at which the presentation was prepared in this one instance there was a mistake that was made. That mistake slipped through Eskom’s quality control processes. As the accounting officer he accepted blame for that mistake. It was something that he should have picked up in his perusal of the documents before they were submitted to SCOPA. He apologised for the mistake.
The Chairperson said that the Committee would park that matter for now.
Ms B van Minnen (DA) said her comment was about the process that unfolded this morning. She raised that the Auditor-General’s recommendations noted the issue of procurement. The Committee needed to deal with that issue extensively next week because it was something that had already been noted.
The Chairperson noted that Ms van Minnen’s issues would be dealt with the following week. The Committee would now move on to discuss expansions and Ms Tolashe would lead the line of questioning.
The Chairperson said Ms Tolashe was right. The last contract in the presentation was a deviation. Ms Tolashe would lead the Committee’s line of questioning and then the other members would pose their questions.
Ms Tolashe discussed the contractor, Actom LTD. When the CEO mentioned Actom she was not sure if he mentioned that that contract was declared irregular by the AG. The contract had expired at the time of request. Why did Eskom wait until the contract was expired to apply for the expansion? Was it because there was no proper contract management that existed in Eskom? The Committee expected Eskom to be able to identify the expiry date in that contract and apply for the extension timeously. Why was that not done? She did not hear the CEO explain the reason for that. She wanted more information on that matter.
Mr Bheki Nxumalo, Group Executive: Group Capital, Eskom, said there was a contract management process that happened within Eskom. Because of the value of the contract it needed to get the Board’s approval. Only after that could Eskom approach National Treasury which was done in October 2018. National Treasury only gave Eskom a one-month extension and then asked for quite a bit of information that Eskom needed to submit to them. There was a transition at that time towards the end of December. That was when the contract collapsed and that impacted on the extension with National Treasury. That started the condonation process.
Mr Maharaj said that the submission to National Treasury was done within two weeks of the approval by the Eskom Board. The submission date was 31 October. National Treasury only granted an additional one-month extension up until 11 December with a further request for information. That information was sent to National Treasury a day late, on 12 December. National Treasury stated that it was a day late and therefore they would not approve post facto. In January 2019, the new CPO was appointed and an appeal letter was submitted to National Treasury. Again, National Treasury confirmed that they could not approve a contract after the fact. In terms of the contract it was still valid. The approval within the Eskom environment, which was the delegation, is was what had expired. There were two possibilities of the contract ending. One was the completion of the work or there was termination. Eskom did not terminate the contract neither did the contractor terminate the contract. As things stand the contract was still a valid and live contract except that the delegation, with respect to this contract, was not valid. The contract’s manager at that time had made the right submission. It was for extension of time only. The delay was not due to Actom itself. The culpable contractor, the delay damages was recovered by the team at that point in time to the tune of R190 million. When this particular submission was done four of the Kusile units had been completed. A fifth unit was completed in November 2020. There was one unit outstanding. All of the deliveries and installations were complete.
Ms Tolashe said that this matter was part of the AG’s report. The AG had declared this matter irregular. She did not hear the answers discuss this. The AG did not usually intervene at the end but intervened earlier. The AG declared this contract irregular but the official was unable to explain it to the Committee. If the AG said that the contract was irregular, then that was the final word. She was not sure there was any other way to explain it further than that. She heard the officials’ explanation but she did not get the sense of why it happened. She heard the CEO explain extensively on the issues of South32 and to an extent he covered very important areas. However, she had a suspicion that South32 was being well-looked after by Eskom. She believed that South32 were being preferred against other suppliers. How much has been spent by Eskom on South32 in this contract? Why did Eskom go so far with a private contract that did not necessarily belong to the State? Eskom has really gone out of its way to look after South32. She was curious if this was happening at the expense of everyone else? Why did Eskom go to the extent of granting relief to a non-governmental entity? The Committee should be given that information. All the explanations given confirmed the suspicions the Committee had.
Mr de Ruyter discussed the hardship relief and the measures that were put in place to assist South32 during their financial difficulties. It was important to stress that Duvha Power Station has inadequate coal handling facilities to be fully supplied from non-mining sources. The retention of the option to be fed directly from the mine was of critical importance in order to keep coal supply to that mine operational. This was a legacy design issue that has been with that particular power station since its inception. South32 has indicated that it intended to exit the South African coal industry. South32 was in the process of selling its coal interests held in SAEC to Thabong colliery which was a subsidiary of Sereti. Sereti was a 90% plus black-owned entity. Eskom saw the continuation of the South32 mining contract at Duvha as strategically important in order to secure coal supply and in order to ensure that there were not significant job losses due to the closure of that mine as a result of it not being financially sustainable.
Mr Snehal Nagar, Acting Head: Primary Energy, Eskom, said that it was important to understand that the power station was designed to receive coal supply from the adjacent colliery. For the last 30 or 40 years, Eskom had been receiving its coal supply from the adjacent mine. The infrastructure and design was meant to receive coal from South32. It was important to mention that this coal supply agreement was the cheapest coal supply agreement in the fleet. Eskom was concerned about protecting the pricing structure that it had of this being the cheapest coal supply agreement. In considering getting coal from South32 or giving them price relief Eskom considered other options of coal supply to the power station. Besides the adjacent colliery having a transport advantage compared to any other supplier, the reclaim capability of the power station was one of the biggest hindrances. Hence, the decision to give them price relief. That price relief was still very competitive to the average coal suppliers that were being delivered from other sources to Duvha Power Station. He answered the question of what Eskom spent on the contract to date. In the financial year 2021, Eskom bought 4.8 million tons from South32 at a cost of R2.4 billion.
Ms Tolashe said that she was not sure whether she was satisfied with the explanation. How did Eskom realise South32 was the cheapest if it did not test the market? She did not understand that. She wanted Eskom to provide further clarity to the Committee. In quarter four, the Telco WAN contract was expanded from the original value of R2.5 million to R25 million. However, this was rejected by National Treasury. Why was the tender expanded instead of going to the market? Eskom withdrew its application as an inquiry was re-issued to test the market. What was the outcome after Eskom tested the market? Eskom emphasised the condonation process being underway. Have all the cases for 2019/20 been investigated?
Mr de Ruyter responded to the question on South32. Eskom was a large buyer of coal from a significant number of different collieries. Eskom bought on either a cost-plus basis or on a fixed-price basis. Or Eskom bought on a short to medium term contract basis which typically revolved around the delivery of coal to different power stations. When Mr Nagar said that the South32 price was the lowest in the fleet he meant that this was the lowest delivered price of any coal contract to any of Eskom’s power stations. It was in this context that Eskom was able to ascertain that this particular coal price was in fact substantially lower than the market prices that Eskom paid out in other contracts to coal suppliers. Eskom believed that the benchmarking conducted was appropriate.
Ms Faith Burn, General Manager: Information Technology, Eskom, responded to the questions on Telco Wan. Eskom went out on RFP and awarded the contract to a number of players. The dark fibre was a specific type of link that was required for Eskom’s purposes of redundancy and other uses. When MTN responded that it did not have the service available at that point in time Eskom was aware that there were limited suppliers who would have the service available. Those limited suppliers were Liquid Telecom and Dark Fibre Africa. Eskom already had Liquid Telecom servicing some of those links. For backup purposes Eskom needed another supplier. Eskom could not award that to Liquid Telecom. Therefore, Eskom requested from National Treasury to award it to Dark Fibre Africa which was one of the suppliers within that contract. When National Treasury did not support the request, Eskom went out to market and the results were as expected. The contract was then awarded to Dark Fibre Africa. Between the time period of requesting this, the process was started in October 2018, and the conversation with National Treasury the contract had expired. That was why the condonation process was underway.
Ms Tolashe said that she did not hear the entire answer because of connectivity issues but would read the transcription of it. She then discussed the Stefanutti Basil Read matter. She noted that they had an expansion in the first quarter. Was Eskom aware that there were allegations that R1 billion in overpayments were made to the Stefanutti Stock Basil Read Joint Venture? This related to unsubstantiated claims as well as compensation events which were agreed and paid without final measurements being done. She wanted to know if this supplier was one of the suppliers that were being investigated? One of the suppliers was overpaid for Kusile Power Station. Was this one of the suppliers being investigated?
Mr de Ruyter confirmed that this was one of the contractors being investigated. The SIU was currently conducting an investigation into this particular contract and the overpayments that were alleged to have been made.
Mr Maharaj said that the investigations were ongoing. The contract was progressing and updates were provided in a different SCOPA report. The expectation was that by June 2021 Eskom would have that final value determined based on an actual measure.
Ms Tolashe discussed the Siemens contract. The Siemens contract was initially signed in 2016 to the value of R1.2 billion for 38 months. The contract was modified in December 2017 by R101.6 million. The contract has been modified three times. What was the reason for this modification? She wanted clarification on that matter.
Mr de Ruyter said that he was not sure what exact Siemens contract Ms Tolashe was referring to as it was not part of the submission for tonight’s meeting. He asked for more information so that Eskom could answer her question.
Ms Tolashe said that on table two of deviations for quarter one, two and three Siemens fell under quarter one.
Mr Jan Oberholzer, Chief Operating Officer, Eskom, said that he did not have the details of this contract. He Committed to make that information available to the Committee within the next day or two.
Ms Tolashe asked when the Gildenhuys Malatji contract was signed. She also wanted to know why it was extended?
Mr de Ruyter said that Ms Tolashe was asking questions about the 2020/21 financial year. Eskom would deal with the 2020/21 financial year in the next batch of expansions and deviations. Eskom had only prepared the 2019/20 financial year for this meeting.
The Chairperson said that was fine. The Committee would deal with the 2020/21 financial year in the next set of meetings that would deal with the expansions and deviations. He opened the floor to members to ask their questions. He said Ms Tolashe and Ms Mente would come in at the end of the meeting if there were any other matters.
Mr S Somyo (ANC) had a question on the first expansion, reference number 23, which was worth R215 million. There was an assertion that that extension was only time bound and was not necessarily financial. He wanted clarity. Was it that the elasticity of time had no effect on the amount? Why was it then difficult to deal with a matter that was nonfinancial within the financial modelled extensions?
Mr de Ruyter responded that an expansion either referred to an expansion for time or for money or for both. In this case Actom had a contract to provide certain transformer and earthing equipment for the Kusile Power Station. Actom was delayed by another contractor. The value of the contract did not increase so the scope of work did not change. The contract initially stipulated a certain period in which the work was to be completed and because they were delayed there was an extension for time that Eskom had to request from National Treasury. The contract value was not increased pursuant to the request.
Mr Somyo asked where was the difficulty because Eskom was talking about a non-financial expansion? All Eskom was asking for was for the contractor to finalise its work that was unfinished. Where was the difficulty in handling that kind of contract time extension?
Mr de Ruyter said that maybe that question should be directed towards National Treasury and not at Eskom.
Mr Maharaj said that the National Treasury standard for the infrastructure procurement requested that if an organisation needed an increase in time and/or money then it needed to get approval. In this case it was only for an extension of time. The reason that the contract values did not increase was because the contractor was not totally site based. The contractor only came in when he received access, does the work and then leaves. On this particular contract the original contract money that was due to the contractor would only be paid to him when he had completed the specific activities of work. The expansion was only due to a time extension and not a value increase. That was part of the National Treasury standard. Either expansion would trigger National Treasury approval.
Mr Somyo asked how much was spent on that contract by the time Eskom appealed to National Treasury for the time extension?
Mr Maharaj said that at the time when the original approval was requested of National Treasury, which was in October 2018, the contract value was R215 million and R205 million of that had been expended. A large portion of the cost was for actual delivery of the equipment. The minor portion was for installation and a very small portion for commissioning. At that time all 13 unit transformers had been delivered to site.
Mr Somyo said it was interesting that out of R215 million, R205 million had already been spent in terms of the supply of the materials and the installation tended to be processed. The crucial part of installation was not yet finalised by the contractor. He had a problem with that. What would be the loss to Eskom in this instance looking into the available materials in terms of supply, the less installation out of that, and therefore the non-approval of the time extension? He noted that there was no active contract management and that had allowed the contract to expire. He thought it was a very interesting balance.
Mr Maharaj responded to the question about Actom not installing or commissioning their plant. Eskom’s loss would be the loss of warrantees and guarantees that was associated with that equipment. In this case the delays were not as a result of Actom. It was as a result of the civil works contract. Eskom applied the delay damages that were applicable. The maximum delay damages for the main civils contract amounted to R190 million which was taken from the civils contractor.
Mr Hadebe asked a follow up question on the issue of South32 that Ms Tolashe raised. She asked how Eskom arrived at the conclusion that it got the lowest price without testing the market. The response given was that Eskom tested the market with the existing contracts. Was that the measure of the market price by testing in-house? The Committee was not given information about those contracts that were the benchmarks and how long they had been in operation. He found it strange that Eskom used what it already had as a benchmark and then arrived at the conclusion that it had tested the market. He said the benchmarking and comparison was an unfair comparison. He was made to understand that the conveyor belt from the mine to Eskom belonged to Eskom and was maintained by Eskom therefore South32 did not pay for transportation. That was an unfair comparison and that explained why their prices were low. He wanted confirmation that the conveyor belt from the mine to Eskom belong to Eskom and was maintained by Eskom?
Mr Nagar said that the colliery that supplied the power station was adjacent to the power station. There was a conveyor belt that the mine owned up to a point and then from that point onwards Eskom owns it. He could get the exact details as to what portions of the conveyor belt was owned by who. He noted that this particular supplier had a transport advantage compared to any other supplier. For any other coal supplier there was the cost of the coal and then the coal still needed to be transported to the power station. This particular supplier was right next door so the coal was supplied by a conveyor belt and there was definitely a transport advantage.
Mr Hadebe asked why did Eskom compare ‘apples with bananas’? Eskom came to a conclusion that it was the cheapest option when circumstances and cost implications were not the same.
Mr Nagar said it was important to bear in mind, with this particular coal supply agreement, was that the power station was designed to run on a coal supply from the mine. The infrastructure at the power station has not been upgraded to receive its full supply from third party sources. There was a reclaim constraint at the power station. The power station needed coal supply from the mine and that was an important factor in the decision that Eskom took to apply to National Treasury for price relief. Another important factor was that there was an existing contract between the two parties. A party had raised a contractual provision within that specific contract. This interim arrangement was there to allow the parties to deal with the contractual clause. If Eskom did not allow that to occur, then South32 would have incurred even bigger financial losses. It would have switched off the conveyor belts and not supply Duvha Power Station. In the short-term Eskom could have diverted other coal suppliers to Duvha Power Station and supply it with coal but the reclaim capability constraint at the power station limited it to only burn three out of the five units. Hence, it was important to look at the coal supplier. There was a physical constraint. There was a contractual issue that needed to be dealt with. Even the increasing price of the coal supply agreement, that South32 wanted immediately, compared to the current coal contracts in fleet, on a delivered cost basis, was still more beneficial to Eskom, and to Duvha Power Station, than the other suppliers. The matter needed to be looked at from a multifaceted approach and not just with one lens.
Mr Hadebe said that his question had not been answered. This contract was being compared to others when the advantages were not the same. This contract had an added advantage because there was no transport cost. Eskom did not test the market and that was the issue Ms Tolashe raised. Eskom’s response was that it was the cheapest compared to others yet the advantages and benefits were not the same. He said of course other contracts would be more expensive because they had transport cost incorporated in their price. Eskom did not test the market and therefore it could not arrive at the conclusion that this contract was the cheapest. He said that apples should be compared with apples.
Mr Nagar agreed with Mr Hadebe that Eskom did not test the market.
Mr Hadebe said that if he did not have the proper information the members would have left the meeting thinking that the current contract was the cheapest. The suppliers did not maintain the conveyor belt and did not pay for transportation yet Eskom thought it suitable to compare it with other suppliers. He said that was an unfair comparison.
Mr Nagar said that when Eskom did a comparison it did a comparison on the delivered cost of coal to a power station. Transportation costs could not be excluded. Certain suppliers would have a transport advantage depending on the location of their colliery and their coal quality. This was an interim arrangement concerned with how Eskom could get coal supply on an interim basis while it was doing its analysis and further studies. To alleviate Eskom’s interim risk of not receiving coal supply to the power station the factors of reclaim constrain at the power station, the current contract and the delivered cost basis needed to be considered. This contract was the cheapest coal supply taking those three factors into consideration. Eskom had gone out on RFP to the market and was busy testing that. The outcome of the RFP would be used to evaluate and ensure a favourable supply option for Duvha Power Station in the long term.
The Chairperson asked why did it take National Treasury to tell Eskom to test the market. He thought that was the line Mr Hadebe was following. Eskom was taking the easy way out by bothering National Treasury with an application. Eskom was engaging with this process not out of its own volition. Eskom was engaged in this process because National Treasury was not playing ball and correctly so because otherwise Eskom would not have bothered. Deviations and expansions were exceptions and not the norm. They were not designed for the purposes of some of the things mentioned in this meeting.
Ms Tolashe said that all the explanations that the official gave confirmed that South32 was receiving special treatment from Eskom. The more Mr Nagar explained the more he exposed that fact that South32 was being dealt with in an extraordinary way at the expense of everyone else. It confirmed the Committee’s suspicions.
Mr Hadebe said he was interested in knowing the extent of capital expenditure to Eskom in relation to this matter.
Mr Nagar said the two applications before the Committee should be separated. The first expansion was to deal with an interim arrangement. He went to discuss the longer time solution. It was a colliery that was designed to supply Duvha Power Station. In order for Eskom to renegotiate it needed to apply to National Treasury first for a deviation. Hence, the application was made before Eskom could start negotiating with South32 which National Treasury denied. That was the reason Eskom made the application to National Treasury because the application had to be made before Eskom could negotiate with South32. In re-negotiating the contract, Eskom needed to understand what they could do versus what the market could do. Eskom also went out to test the market. These were two applications and it was not like Eskom wanted to do one and not the other. Both would have been done but in this particular case it was an application to negotiate and talk to South32 in terms of what was possible with that coal supply agreement. Eskom currently had a fourteen-year agreement on the table. Circumstances had materially changed and so Eskom did not think a fourteen-year agreement was possible in any event anymore. That was the reason why Eskom applied to National Treasury for the application. He responded to the capital question. This was a fixed price coal supply agreement and there was no capital spent on South32 or the Duvha coal supply agreement contract.
Mr Hadebe discussed expansion reference number 23 in quarter one. The note from National Treasury said that the contract had expired at the time of the request yet Eskom constantly said that the contract had not expired. The presentation said that the condonation process had been initiated. He wanted to know if the contract had expired at the time or was the contract not expired. He wanted clarity on that matter.
Mr Nxumalo said there was a complication with this matter. The contract between Eskom and Actom was a different matter now because of the governance issues within the Eskom process. Because of the delays the contractor was entitled to claim the time. That was what Mr Maharaj meant when he said the contract between the two parties had not expired. The internal governance between Eskom and National Treasury where the one-month extension was granted was what caused the dilemma in the contract between Eskom and Actom. The contractual arrangement with the contractor was still valid but internally the condonation process had to be initiated to condone that transaction. National Treasury could not extend the contract when the team went back to them on 12 December 2018 instead of a day earlier. That was the difficulty Eskom were having in dealing with the two issues that governed this transaction.
Mr Hadebe said that the contract or the project has a start and an end date. A contractual agreement was entered into and if there were delays then the contract was extended. Even that extension had an end date. National Treasury was adamant that the contract had expired at the time of the request. Was the contract expired at the time of request? The issue of claiming the extension only becomes effective once the expansion had been agreed to.
Mr Nxumalo said that Mr Hadebe was correct that the contract had a timeline. Because of the delays the contractor had claimed the time delays from Eskom which then was approved by Eskom. In terms of the damages, Eskom went back to the contractor that caused the delay which was a civil contractor. Eskom claimed the maximum R190 million. For this contractor the extension was granted contractually. National Treasury granted one month after the October 2018 request which did not give the team enough time to conclude the relevant information to submit by 11 December. National Treasury could not approve the request. Contractually, between the contractor and Eskom, Eskom had approved the extension for the contractor which then extended the contract.
Mr Hadebe asked if Eskom admitted that it submitted after the expiry date.
Mr Nxumalo said the original submission to National Treasury was submitted before the expiry date. It was the subsequent submission that was a day late. National Treasury sent a note that it could give an extension of one month and that then Eskom should come back with more information for National Treasury to consider. The team returned to National Treasury a day later. The original submission was done in October before the contract expired.
Mr Hadebe said he was convinced that there were deep-seated challenges in Eskom especially when it came to contract management. There was a team of consultants within each and every project. There was a project leader, a client representative, there were site meetings and variation orders. All of these things were built into a project and the programme was amended based on the delays experienced on site. It seemed that such things did not exist in this case. Basic project management skills were lacking. Things could not be done on the last minute and then make excuses about delays. This was a clear example of a lack of project management. He could tell that he was not going to get satisfactory answers from Eskom.
Ms Maotwe agreed with Mr Hadebe that there was a serious project management problem at Eskom. Eskom had put South32 at a competitive edge over other suppliers. Eskom was assisting South32 by maintaining the conveyor belt. For those reasons it was not possible to say that South32 was cheap. She paused that issue because the Committee would never get an answer for that. Earlier on the presenter mentioned that South32 received relief because it indicated that it was having hardships. Based on the relief that was given by Eskom, what was in it for Eskom? This was business and Eskom gave this company a relief fund of so much money but what did Eskom get in return?
Mr de Ruyter said that what Eskom got back from South32 was the supply of coal. Without the relief offered South32 would have entered into business rescue and would have ceased the supply of coal. Then there would have been negative consequences such as job losses. Once a mine was closed it was very difficult to reopen that mine. That would have seriously compromised the supply of coal to Duvha which could then have led to those units not being available, or only available at excessive cost, which would then have increased the risk to the generation system overall.
Ms Maotwe said that Eskom was shedding jobs currently. Eskom had let go of 2000 employees.
Mr de Ruyter responded that was on an entirely voluntary basis.
Ms Maotwe said that was fine but that was still job losses. She asked if he agreed?
Mr de Ruyter said that if people wished to accept packages to move through their own volition, there was no pressure on them, then that would suggest that they had the opportunity to find employment elsewhere or have other plans that fit in better with their personal aspirations. Eskom was not forcibly retrenching.
Ms Maotwe said that she never said retrenching but rather job losses. She said she would move on. She discussed the health services contract that Eskom wanted to expand. Eskom said the reason for that was to maintain business continuity. In this country how many health companies were offering these services? Why did Eskom wait till the end to extend the contract? How long was the contract in existence before Eskom wanted to expand on it? When there was only a year left on the contract why did Eskom not start the tendering process of sourcing another supplier?
Mr Dukashe said that in this case the contract was still in existence so it had not come to an end. Eskom wanted the same continuity with the same service supplier. That was not approved and Eskom moved on. Eskom was currently making use of what was in place. Most of these employees were based at power stations but would have to come to a central place for an evaluation as to whether they were still fit to continue with their work. Eskom thought it was a good idea at the time but the new way afforded Eskom additional efficiencies that it could make use of.
The Chairperson said that this was precisely why there was a problem. The old way was convenient and easy. He was not sure whether Eskom was hearing its responses. He suggested that Eskom make time to listen to this hearing and listen to the responses it had given. Eskom needed to reflect on whether the responses indicated a commitment. In the 2020/21 financial year Eskom had the highest number of applications for deviations and expansions. These responses were a reflection on the ‘willy-nilly’ approach of Eskom. Eskom thought that there was always the option of deviation and expansion. The response that was just given summarised the entire attitude of why Eskom was where it was. Eskom’s attitude was unacceptable. He was worried about Eskom’s attitude and it did not sit well with him. At some point, the Committee would have to re-look at this matter. The Committee took a dim view on the deviations and expansions that were being talked about.
Ms Maotwe said that she was equally pained by what she had just heard. She went on record to say that the issue was not just with health services. It was even the security services. The request to expand from R886 million with a further R443 million. There was another expansion where the value was R80 million and Eskom wanted an expansion by a further R17 million. What exactly was going on here? In the R80 million that was given and the contract was now coming to an end. Eskom wanted to extend it by another R17.6 million denying everyone else who was in the market who could be looking to provide these services. The reason given was the continuity of service. There was no emergency or anything like that except continuity of service. That was what the Committee was being told. She wanted to know why this was being done? Health services, security services and catering services were all being asked for expansions. There was a problem with the reasons given for catering services. It stated that there were funds depleted. How were the funds depleted and then Eskom still wanted to expand? Could the Committee get an explanation on what was going on? The original value of the contract for the catering service was R31 million. The expansion value was R15.2 million. The reason for deviation was funds depleted. She wanted to get a response on what was going on.
Mr Dukashe said that the funds being depleted was as a result of poor contract management. Additional services were added on to the contract without following the proper process. Disciplinary action was taken against the contract manager because of poor contract management.
The Chairperson asked what kind of disciplinary action was taken. What did it mean because it was broad strokes?
Mr Dukashe said that the contract manager was charged and was given six months written warning for the transgression.
The Chairperson noted that the contract manager was given six months written warning for this kind of blunder.
Ms Maotwe discussed Telco WAN. The initial contract was R2.5 million. An application was made for an expansion to the value of R23 million. Why the change? What brought the amount from R2.5 million to R23 million? Was it a scope expansion? What was the reason for it?
Ms Burn said that one of the suppliers that were allocated the dark fibre links was MTN. A number of suppliers were awarded the contract for the different links and dark fibre was a specific high-tech link that was required. MTN, which was awarded one of these links, wrote Eskom a letter indicating that it was unable to provide the link. MTN also quoted the links at a figure that was much less than what a dark fibre link figure would ordinarily be quoted at. MTN said that it did not have the ability to provide that service at the time. Therefore, Eskom needed to get that service so that it could provide the backup services for those links. For that reason, Eskom approached National Treasury but then subsequently went out on tender for the supply of this service.
The Chairperson asked what National Treasury said when Eskom approached it for an expansion.
Ms Burn said that Eskom asked National Treasury to award an expansion to Dark Fibre Africa. National Treasury did not support the expansion and asked Eskom to go out on market. Eskom could not get the service from Liquid Telecoms which was one of the other suppliers that would provide the service because of its technical nature. Eskom knew that the offerings would probably come from Liquid Telecoms or Dark Fibre Africa. Eskom could not get it from Liquid Telecoms because that would not provide the backup requirements. Eskom already had Liquid Telecoms as a supplier.
The Chairperson asked what happened when National Treasury said that Eskom should go out to the market.
Ms Burn said that Eskom appealed that but while Eskom appealed that it did go out to market. The result of that was the awarding of the contract to Dark Fibre Africa.
The Chairperson said it still surprised him that it always had to be for National Treasury for Eskom to go to the market. It was baffling. National Treasury should not be turning down these requests on the basis of Eskom not testing the market because it was actually elementary. It was procurement 101. It was a Constitutional and PFMA injunction. It was not discretionary. It was the law. National Treasury should be turning down deviations and expansions because of seriously fundamental issues. He said that tonight ‘go and test the market’ has become a refrain. What must it take for testing the market to sink in at Eskom? This is what Eskom needed to do. It was not optional. This was precisely how corruption began to encroach and creep in. Every time the Committee asked Eskom what National Treasury’s response was it was to test the market. If there was anything that Eskom needed to take away from this meeting it was that the Committee was not going to accept Eskom wanting to bypass testing the market and expect National Treasury to condone this type of thing. Eskom was not going to have a good time if it came back to the Committee and said that National Treasury requested it to test the market. He reiterated that deviations and expansions were an exception and not a norm. Eskom should not have an ‘I do not care’ approach to procurement. Eskom needed to subject itself to process. This was just totally unacceptable. It could not be coming from an entity as big and as serious as Eskom that it would be turned down because of a basic such as testing the market. The Committee should be dealing with complex and substantive responses from National Treasury so that it could say that the issues were thoroughly dealt with. A simple thing like testing the market should not be the reason. The Chairperson said that Eskom needed to take the Committee seriously. Eskom needed to take the process of deviations and expansions seriously. They were not a last-minute report because if poor planning. It was not a default position to cover up for Eskom’s shortcomings. For this entire meeting when the question was asked ‘what did National Treasury say’ the response was ‘test the market. That was something that should be elementary at Eskom and any other entity but especially an entity was big as Eskom. The Committee was told that there were 3000 people working in procurement. He said that it needed to stop. He said this situation was unacceptable.
Ms Maotwe said that she agreed with what the Chairperson had said. She discussed the Telco WAN contract. The way the official responded to her previous question indicated that there was parcelling. She provided an example of parcelling. It was when someone bought a car without an engine and then that person says it cannot drive the car without an engine. Eskom awarded this work to different entities including MTN. Then later on MTN said it could not provide the service and that was the reason Eskom wanted to expand by a further R23 million. She cautioned Eskom that parcelling was punishable by law because it was a form of misleading the people who were adjudicating. Eskom bought a product that it knew it could not use. Eskom had denied other companies an opportunity because when it went out on tender initially it said that it was additional scope. Initially that scope was not there so the people who responded only responded on the scope that Eskom went out for. Later on Eskom wanted to include that scope on the people it awarded the contract to. Eskom had done its own shortlisting and only wanted to give work to only a few people that were shortlisted. Now the company could not do it and Eskom was asking for a further R23 million. Why was that happening? She hoped she received an answer.
Ms Burn clarified that all the respondents indicated that they could provide the service. One of the respondents, MTN, responded after the award and sent Eskom a letter to backtrack on their response. MTN informed Eskom that it was unable to provide the service to Eskom. The additional scope was meant for one of the other suppliers in the full contract. Eskom was the one misled and did not mislead anyone. The supplier misled Eskom by responding and saying that they could provide the service. Once they were awarded they then said they could not provide the service. When MTN informed Eskom that it could not supply the service Eskom requested the additional scope to be given to one of the other suppliers who Eskom knew had the capability having gone through the process of the RFP. This was because the other supplier responded and said that it did not have the capability. That was the request that Eskom put to National Treasury. Eskom did not want to circumvent any processes or mislead. Eskom was the one who was misled.
Ms B Swarts (ANC) discussed Tenova Mining. It was one of the companies involved with overpayments. Has the money been recovered? When was it recovered and how much? The Tenova contract was supposed to be concluded in 2016. Three expansions had been granted. Has the work been concluded on this contract? Why were there delays? How much were the expansions worth?
Mr Maharaj said that the investigations into Tenova for the recoveries were proceeding. The assessments were also in progress with the SIU for that recovery. There were three contracts in place at Kusile, two of which have been completed. There was a third contract that was still in progress and that was for the conveyor systems on each of the respective units. The work that was currently being undertaken was the commissioning of the conveyor systems for unit number four and then construction work on units five and six. He did not have the exact figures of the deviations. He would provide that information to the Committee in the next meeting where the Tenova deviations and expansions would be discussed.
Mr Hadebe asked if National Treasury was available? He wanted to get a response from them on Eskom’s procurement policies that were in place. Did National Treasury not have a limit on the percentage of expansions which an entity was allowed to expand from the original contract value? From the original contract what percentage of it was allowed to be used to expand the contract? He wanted National Treasury to indicate what that percentage was if it did have it. Under what circumstances was one allowed to exceed the prescribed minimum percentage for expansion? He raised this in relation to section 217 of the Constitution which stated ‘when an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods and services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective’. The Committee saw in this meeting expansions that were more than 90% of the original contract value. Other contracts were 100% above. He did not think that was in line with the prescript of section 217 of the Constitution. He wanted National Treasury to provide information on the circulars and regulations it provided to State entities. He wanted to hear more about Eskom’s procurement policy and the limits it had. Why where their expansions that were close to 100% of the contract value?
Ms Busani Duiker, Chief Director: SCM Governance, Monitoring and Compliance, National Treasury, said that there was currently no limit on the percentage of modification of the expansion or deviation of a contract. There were thresholds in place that the modifications could be done by the accounting officer or the accounting authority of a particular institution. Once the modification went above those thresholds then it went to National Treasury. The reason why it came to National Treasury was to look at the extent the expansion was required and the justification for that particular expansion. National Treasury also looked at the reasonableness of that expansion. That was why there was the example of the contract extension that National Treasury only granted for one month. That was the mechanism National Treasury used once it released that the services or the product that was required was critical for service delivery and it would allow for the deviation or expansion of the contract. It would be allowed for a limited period of time and required the institution to go out on open market to establish a long-term contract if the services were still required. This was important to ensure that National Treasury upheld those five key principles of public procurement as required by the PFMA and the Constitution. It was important for these entities like Eskom, before coming to National Treasury, to have done the appropriate due diligence and satisfy themselves that the deviations and expansions that they submit to National Treasury were actually an exception rather than a norm. Deviations and expansions were not supposed to be a solution to poor contract management or poor planning. Many times National Treasury had to consider the continuity and provision of service delivery.
Ms Mente had a question on the deviations that the Committee dealt with in the first part of the meeting. She had left many things suspended because National Treasury had a concern and directed Eskom somewhere else. She discussed deviation number 88 which dealt with Independent Power Producers (IPPs). Eskom suspended the project. Who was now generating that surplus energy? How were they doing it? National Treasury had a concern about the different service providers. Most important was the value that was going to be derived by Eskom. She asked the CEO to expatiate on the value that Eskom received from IPPs? The original value was supposed to be R513 million so what was Eskom’s gain from that?
Mr Segomoco Scheppers, Group Executive: Transmission, Eskom, discussed the process that had been suspended. He first discussed the new generation regulations. The Minister of Mineral Resources and Energy was the authority on how new generation capacity was to be procured. The Department of Mineral Resources and Energy, through the IPP Office, played the role of the procurer. They ran the procurement process, get the necessary approvals and then Eskom acted as the buyer and the contract manager for the contract. Eskom was not involved in the commercial negotiations for the IPPs. Essentially Eskom administered those responsibilities. He responded to the question about who was generating the surplus power. The process that Eskom initiated comprised of three short term procurement programmes. Two were open-market tenders and the third was the additional IPP programme. Eskom proposed a single source route. It targeted those IPPs that were already connected. The proposal said if the company had capacity to generate more could it please make that available. National Treasury did not support that approach. What has subsequently happened was that Eskom suspended that programme. Eskom then approached the DMRE and the IPP Office to ask if it could look at whether Eskom could get additional capacity from the existing IPPs that were generating. That programme was now being handled by the DMRE. He was sure that they could account on the status of the programme. The reason Eskom asked for the deviation was because at the time, the beginning of 2020, it had very severe supply constraints and load shedding and Eskom was looking to get additional capacity quickly. There were short term initiatives that Eskom was doing and other programmes were being run by the DMRE.
Ms Mente said that there was a part of her question that he did now answer. He did not say what was the value which Eskom derived from the energy which was generated by IPPs. That was the major concern that National Treasury had flagged in rejecting this particular request.
Mr Scheppers discussed the proposal Eskom had put on the table for this specific transaction. Eskom had a number of IPPs producing a number of different capacities at different prices. Some of those prices were quite high. A lot of work was being done on how that could be improved, which the DMRE was leading. The proposal Eskom put forward was a selling price of around 37 cents a kilowatt of power. This was informed by an analysis of Eskom’s cost of generation taking into account that proposal was for the long-term contracts that were in place. Eskom proposed a fraction of what was the current price on the basis that there should be no new capital investment required. Those potential IPPs that wanted to invest in new infrastructure were separated into a separate programme that Eskom made provision for. The cost that was proposed as a selling price of around 37 cents a kilowatt was based on an analysis of the total cost of Eskom’s generation. If capital costs were excluded and one looked at the variable costs, then this was the figure Eskom felt would be fair. National Treasury did not understand how Eskom arrived at that figure and did not support the procurement from a single source. That was why Eskom suspended the programme.
Ms Mente said that if the DMRE was then running with the project then who was paying the bill.
Mr Scheppers said that once the procurement by DMRE was concluded it will flow through the electricity tariff. For Eskom there was no direct benefit. It was just an administrator for those contracts.
Ms Mente requested that this particular item be moved to next week as well so that National Treasury could also explain why it had a concern on the deriving of value. If this was the case, then the official confirmed that some of the prices of IPPs were very high. It did not make business sense for Eskom who had made a promise in their turnaround strategy to save every cent they had. Yet Eskom was still going to be procuring this. What value was this to Eskom? Was it the expenditure that made the business sense? Or was it expenditure that did not make business sense? She did not think National Treasury would site such a concern if it was not serious. There were fundamental problems and deeply rooted issues with this particular deviation. Next week when Eskom came back they would present on this matter. National Treasury must also explain to the Committee what were its concerns.
The Chairperson said that the issues she raised would be flagged for next week. He asked Eskom if there were any expansions and deviations, including in the current year, that it had applied for at National Treasury which were turned down but Eskom proceeded with them regardless of the decision? He wanted to know that for the record.
Mr de Ruyter said that he did not have that information at the current moment. He suggested that this be covered in the following week so that Eskom could give the Chairperson a comprehensive answer on the matter.
The Chairperson said that was fine and that next week all the information should be provided if it had happened and in what instance it has happened. National Treasury had raised a concern with the Committee that Departments and entities at times do not care as to whether a deviation had been granted or not. That transgression, for the Committee, was very serious. The Committee would be raising that matter with every Department and entity. He requested that the other substantive matters be raised next week. He asked National Treasury if it was aware of any expansion or deviation that it did not approve which Eskom proceeded with?
Ms Duiker said that she did not have that information available. The information would be provided in the next meeting.
The Chairperson said that was fine. He said that members raised their concerns about these meetings being virtual. The Committee would be engaging with Parliament about the capabilities for the purposes of physical meetings. Committee rooms were being prepared for the purposes of physical meetings. The Committee was exploring that avenue because the virtual meetings had very serious limitations. Eskom would be advised if such an arrangement was made. The Committee would meet next week, as was agreed this morning, for all the other matters. He requested that if there was any confusion that those matters would be dealt with timeously. He noticed that one media company had said that Committee had buckled under the pressure of the Minister. That characterisation was inconsistent with the cooperative spirit of the Committee. That remark was quite unfortunate but he acknowledged that news and sensationalism sells. It was regrettable and quite sad. The Committee came to the decision to meet again next week and that was not because anybody buckled under pressure. It was a mutual understanding. The Committee members expressed themselves rather sufficiently on that matter. He thanked the Committee members for their resilience and for doing the hard work that had been given to them. He thanked the Minister and the delegation from Eskom for attending the meeting.
The meeting was adjourned.
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