In a virtual meeting, the Committee met with Eskom to receive a report on an internal investigation into misconduct allegations, and to conduct hearings into deviations and expansions requested by Eskom in 2020/21.
The Eskom board tabled the report of Adv Ishmael Semenya’s inquiry. The Committee had previously suspended its own investigation to allow Adv Semenya’s inquiry to proceed. The inquiry concerned allegations, made by Eskom’s former chief procurement officer, which implicated Eskom’s executive – and particularly its group chief executive officer – in racial discrimination, poor governance, irregular recruitment processes, and unlawful procurement. However, the inquiry had found no substantiation for the allegations, and the report had cleared the Group Chief Executive of any wrongdoing. The former chief procurement officer had in fact retracted his most inflammatory accusation, that of racism.
The Committee accepted the report, although it expressed some concern that the board chairperson had known about the allegations for more than a year before bringing them to the attention of the rest of the board.
Eskom reported that during the first three quarters of the 2020/21 financial year, it had applied to National Treasury for 30 deviations and 46 expansions. Treasury had supported ten deviations and five expansions, had conditionally supported 11 deviations and 33 expansions, and had not supported seven deviations and eight expansions. The day’s hearing covered only five deviations, all of which Treasury had declined to support.
The first deviation discussed by the Committee involved a request for a limited market for a R253 million contract in air heater spares. The market would have been limited to Balcke-Dürr Rothemühle and Howden Power, but Treasury had found that Howden had not been properly accredited to supply the parts. The Committee discussed this deviation for almost an hour, asking about the licensing issue and about the processes followed by Eskom both prior to its request and after Treasury’s response. Members said that it was unacceptable for such an elementary licensing issue to have slipped through the cracks, and that the procurement process appeared to have been adapted to unfairly benefit Howden.
Also discussed at length was Eskom’s request for a deviation to renegotiate its contract with South32, whose coal mine was tied to the Duvha power station. The renegotiation would have cost R67 billion over 14 years, and was intended to alleviate financial distress experienced by South32. The Committee asked about events that had transpired since the initial request for deviation, and which had led Eskom to renegotiate the South32 contract to include a substantial increase in the price paid to South32 for coal. Members were concerned that Eskom was bailing out a private company, especially since Eskom conceded that South32’s difficulties were caused by financial mismanagement. They were also concerned that South32’s instability would lead to Eskom requesting another deviation before the end of the contract.
The other three deviations were requests for single source procurement – for Leroy Building Construction’s environmental control services at the Camden ash dam (R1.2 million), for Makoya Supply Chain Holding’s coal offloading services (R2.18 million), and for the use of an ABB system at Koeberg nuclear power station (R72.79 million). The ABB deviation was of particular concern to the Committee, which wondered whether it was appropriate for Eskom to do business with a company that had defrauded it in the past.
On each deviation, the Committee solicited input from Treasury and the Special Investigating Unit as necessary. It probed in detail the processes that had led to the deviations, and asked for the identities of the Eskom employees who had approved and signed the requests to Treasury. The discussion was driven by Members from the IFP and EFF, who viewed the number of deviations and expansions as regrettable and even suspicious. They accused Eskom of failing to follow the correct processes and even of coercing the Treasury to get involved in underhand transactions. The Committee held that it was critical to investigate deviations and expansions thoroughly, to ensure that the policy was being used correctly – that is, only in cases in which all other recourse had been exhausted – and was not being abused to circumvent procurement regulations.
The Committee said that it would need to reconsider some of the deviations after receiving comprehensive reports from Eskom and other parties. The expansions and outstanding deviations would also be deferred to a later hearing. The Committee asked Eskom to prepare reports on the conditionally supported requests, because it intended to assess Eskom’s compliance with the conditions. Members also demanded that the signatories of the requests to Treasury should be present at future hearings, to explain and account for their decisions.
The Chairperson welcomed attendees from Eskom and the Department of Public Enterprises (DPE). He said that the meeting would have two parts. First, the Eskom board would present an internal report. Then the Committee would proceed with its hearing on Eskom deviations and expansions, led by Ms N Mente (EFF) and Ms N Tolashe (ANC). Mr B Hadebe (ANC) and Ms B van Minnen (DA) also had certain matters to pursue, but those would be attended to in the next meeting. He invited the Minister to make his opening remarks.
Mr Pravin Gordhan, Minister of Public Enterprises, said that he did not have much to say by way of introduction. The Eskom officials and board chairperson would manage the presentations. The Committee might run into “governance issues,” but those could be dealt with as they arose. He would have to excuse himself in an hour and fifteen minutes, to attend an important Cabinet-related meeting, but he would return as soon as possible.
Report on inquiry into allegations by former Eskom Chief Procurement Officer
Prof Malegapuru Makgoba, Board Chairperson, Eskom, tabled the report of Adv Ishmael Semenya’s inquiry. He said that, as Members would recall from the Committee’s last meeting with Eskom, the inquiry had investigated allegations made by Eskom’s former Chief Procurement Officer (CPO), Mr Solly Tshitangano. The Committee and Minister Gordhan had agreed to allow the board to conduct this investigation. The terms of reference for the inquiry were based on letters sent to the Committee and a letter sent to Prof Makgoba on 16 February 2020. Once drafted, the terms of reference had been shared with the Department of Public Enterprises (DPE) and forwarded to the Committee.
Prof Makgoba said that the report detailed some of the problems that Adv Semenya had faced in trying to initiate the investigation. However, that was a matter of process, and the problems were eventually overcome. Adv Semenya had interviewed several people. He had spoken to Mr Tshitangano for about two days, and had then interviewed Ms Elsie Pule, Group Executive: Human Resources, Eskom; Mr André de Ruyter, Group Chief Executive (GCE), Eskom; and finally Prof Makgoba himself. Prof Makgoba had also submitted to Adv Semenya an affidavit, which detailed his account of the events and which he had initially prepared for the Committee. Adv Semenya had told him at the start of the inquiry that he would be cautious to remain strictly within the terms of reference, since there were three parallel processes at work at the time – apart from Adv Semenya’s inquiry, there was also a disciplinary inquiry involving Mr Tshitangano, and two court cases concerning Econ Oil.
Prof Makgoba said that the inquiry’s report had been released and sent to the Committee. The inquiry had found no evidence of wrongdoing within Eskom (see report). Importantly, Adv Semenya had found no basis for the allegation of racism, which had received media attention and which had been central to the inquiry. Also unsubstantiated were allegations that certain internal processes had been breached or undermined. The allegations were rife with factual inaccuracies. Those inaccuracies could be discussed further if necessary, but one simple example came from the allegation that there had been irregularities in the appointment of Mr Werner Mouton, Senior Manager: Fuel Resourcing, Eskom. The allegations implied nepotism and abuse of power by Mr De Ruyter. Yet the charge of nepotism could not be established unless one could show that there was a friendship or familial relationship between the relevant people. Adv Semenya’s inquiry showed that Mr Mouton and Mr De Ruyter had no such relationship. Mr Mouton was not even a colleague of Mr De Ruyter – they had been co-workers, but not colleagues.
Prof Makgoba said that on 16 February 2020, he had received a letter which made certain allegations, but he had investigated those matters at the time. He had concluded that they did not merit an investigation by the board, but rather could be handled through Eskom’s internal processes for grievances. Similarly, Adv Semenya had expressed surprise in his report that such a simple matter should require such a “heavy-handed” inquiry.
Prof Makgoba concluded that none of Mr Tshitangano’s allegations had been substantiated. The report had cleared Mr De Ruyter of wrongdoing. Eskom, Mr De Ruyter and the Committee should now turn their attention to the task of fundamentally transforming Eskom and building the “high-performance culture” it needed. People should stop using “the race card” to “excuse” everything that happened at organisations like Eskom. Eskom’s mandate, and the public’s expectations of it, were too serious to be obstructed by “frivolous” complaints of the kind lodged by Mr Tshitangano.
He was pleased that the Committee had allowed the board to conduct the investigation, and he and others could answer any questions Members had. Though Mr Tshitangano had raised some other allegations, those had not been new ones – most of them, if not all, were already being investigated by the Special Investigating Unit (SIU).
Ms V Mente (EFF) said that she had already raised her concern in the 7 April meeting – the meeting at which the Committee had decided to postpone its own investigation so that Eskom’s internal investigation could proceed. Her concern was with financial matters – the expenditure framework, and especially various irregularities which “flouted” the Public Finance Management Act (PFMA) and National Treasury regulations. The terms of reference of Adv Semenya’s inquiry had not included these financial matters. Therefore, the Committee had to investigate them. Some of the issues were “very serious,” and some were related to the deviations the Committee would discuss later in the meeting. She had no problem with Adv Semenya’s report, and the Committee should move on to investigate the financial matters.
The Chairperson said that he had gone through the report and subsequent correspondence about it. On his understanding, certain key allegations had been withdrawn, because they had been shown to be categorically false. Ms Mente was correct that the Committee, in the ordinary course of its work, would probe matters related to the financial management of Eskom. Of course, the Auditor-General (AG) was also going to conduct an audit. If the Committee felt that there were unresolved financial issues, it could direct its concerns to the AG, as it ordinarily did.
The Chairperson said he would repeat a point that he had made before, and which he thought Prof Makgoba would agree with. As his mother, a nurse, used to say, prevention was better than cure. The board should have dealt with the allegations the moment they were raised. When the Committee first heard about the issues that became the subject of the inquiry, it had learned that the Chairperson had already known about the issues for 13 months or so. As a rule of thumb, “urgency and expediency” were central to dealing with and dispensing with any important allegation or problem. Otherwise, that issue would become an “albatross” or a “stumbling block.” However, the Committee noted the report as presented, and Ms Mente was right that it would now turn to the financial management issues.
Prof Makgoba replied that Mr Tshitangano had sent him a letter on 16 February 2020. Within four days of receipt, on 20 February, he had contacted Mr Tshitangano. After interacting with Mr Tshitangano four or five times, he had concluded that the matters raised by Mr Tshitangano did not require consideration by the board. Instead, he had requested that Mr Tshitangano and Mr De Ruyter – who had not known each other at the time – should meet and “conduct themselves as adults.” In Mr Tshitangano’s submission to Adv Semenya – which the Committee had not received – Mr Tshitangano confirmed that he had met with Prof Makgoba multiple times before the “explosion” that occurred a year later. It was false that the board had not done anything for over 13 months. Prof Makgoba had done something, but it had not worked out the way he had hoped. He could assure the Committee that he had not neglected an urgent matter raised by a former senior executive. There was evidence to that effect, and he had said the same in his affidavit to Adv Semenya. He could forward that affidavit to the Committee if necessary. Other than that, he agreed that the report should be noted and that the Committee and Eskom should move on to focus on pertinent financial issues and on other issues relevant to Eskom’s responsibilities to South Africa, its economy and its people.
Mr M Dirks (ANC) said that he had his own view on the matter, and he had not planned to express it in the meeting. However, since Prof Makgoba had raised the issue, he would comment. Prof Makgoba had said that he had asked Mr Tshitangano to meet with Mr De Ruyter. However, Mr Dirks did not think that was the correct procedure. In his understanding, once Mr Tshitangano had submitted his complaint to Prof Makgoba, Prof Makgoba should have tabled the matter with the Eskom board, so that the board could deal with it. That had not happened, and that was Mr Dirks’s “gripe” with the matter. One could not insist that one had done something to deal with an issue, even though one had not followed proper procedure.
The Chairperson concluded that the Committee noted the report. Members would study it and could pursue it further if necessary. Issues of financial management still remained for the Committee to deal with.
Hearing: Eskom deviations and expansions, Q1-Q3, 2020/21
The Chairperson said that Ms Mente would lead the discussion about deviations, and Ms N Tolashe (ANC) would lead the discussion about expansions.
Inadequacy of Eskom’s submission
According to Eskom’s presentation, Eskom had made 76 applications to the Treasury during the first three quarters of the 2020/21 financial year. Of the 30 applications for deviations, Treasury had supported ten, conditionally supported 11, and rejected seven, while one further application had been withdrawn and another was still pending. Of the 46 applications for expansions, Treasury had supported five, conditionally supported 33, and rejected eight (see slides).
Ms Mente said that the Committee’s last meeting with Eskom had been impeded because Eskom had not provided adequate information. At that meeting, the Committee had made specific requests. The Committee’s hearing had been triggered by a briefing by Treasury, and it had been agreed that the Committee had to be furnished with all information pertinent to Treasury’s submission. She was therefore very “uncomfortable” with the information Eskom had provided for the current hearing, and wanted Eskom to clarify what it had sent. Firstly, were those officials who signed the requests for deviations present in the meeting? Secondly, and more importantly, Eskom’s written response – the basis for the current hearing – seemed incomplete. For example, Eskom had provided a response on six deviations, but there had been 30 deviations in total. Similarly, only about nine out of 46 expansions were covered, so she was very uncomfortable. The Committee had to clarify who was failing to “do justice” in this regard. Did responsibility lie with the Committee and its secretariat? Or was it Eskom telling the Committee only “what they want us to hear” and nothing further? The hearing was not just a “tick-box exercise.” The Committee had to investigate and understand the irregularities that Treasury had alerted it to. It could not just tick a box beside the six deviations and leave the others. She asked for the Chairperson’s guidance on how to proceed.
The Chairperson said that it was something of a “dilemma.” Ms Mente would lead the hearing through the substantive issues and allow Eskom to respond directly. If he understood Ms Mente correctly, her concern was that Eskom’s submission dealt with only six deviations, when there were about 30 in total. Prof Makgoba and Mr De Ruyter could respond to that concern before the hearing continued. Eskom had sent the Committee a list of the delegates attending the hearing.
The Chairperson was disconnected.
Ms Mente said that she wanted to know whether Eskom was deliberately responding on only six deviations. There were seven deviations that were not supported, and 11 that were conditionally supported. Why did Eskom’s submission cover only six deviations, rather than 18?
Prof Makgoba asked Mr De Ruyter to respond. Ms Mente’s point was important and had to be addressed without evasion.
Mr De Ruyter said that Eskom had given the Committee an overview of the deviations and expansions that were not approved by Treasury, because those were the requests most likely to be a cause for concern in the Committee. This approach was in accordance with the custom Eskom had followed in previous submissions to the Committee. Eskom’s submission therefore did not deal with conditional approvals or applications still pending with Treasury. However, if the Committee wanted a full explanation of all requests for deviations and expansions, including those that were supported or were still pending, Eskom would of course be willing to provide that.
The Chairperson, who had rejoined the meeting, acknowledged Mr De Ruyter’s response. He thought that applications that had been conditionally approved were important, because the Committee needed to assess whether Eskom had been complying with the relevant conditions.
Ms Mente said that she understood Mr De Ruyter’s response, but she found Eskom’s approach “very problematic.” If Treasury had conditionally approved an application, that meant it did not completely agree with Eskom’s handling of the relevant contract, so Eskom should account for that. For example, suppose Treasury told Eskom in January that, for certain reasons, it should stop working with a given supplier within three months. Then, in June, Eskom should tell the Committee what was happening with that contract and whether it had instituted a process to replace the supplier, since that had been a condition of Treasury’s approval. If the Committee did not investigate the conditionally approved deviations, it was rendering Treasury “useless.” Treasury had come to the Committee saying that it had placed certain conditions on Eskom and was not sure whether Eskom was complying with those conditions. The Committee should therefore follow up on compliance. Otherwise, Treasury would not receive the relevant information about compliance until the end of the financial year. She was still not comfortable with the Committee dealing with only six deviations. Moreover, the whole investigation would be compromised if it was split into two parts – that is, if the Committee dealt with the first six deviations now, and then came back in six months or so to deal with the remaining deviations.
The Chairperson said that he fully agreed that the conditionally supported deviations also had to be discussed so that the Committee could assess Eskom’s compliance with the conditions. He also agreed that this assessment could not wait six months. He suggested that the hearing should proceed – the Committee should deal with the first six deviations in the current meeting, noting for further discussion any overlaps with other deviations. The hearing could then be reconvened soon to deal with the other deviations. At the end of the current meeting, the Committee and Eskom would arrange another meeting to be held as soon as possible. Ms B Van Minnen (DA) also had many issues to raise regarding Eskom investigations. The only constraint was that Parliament was in recess, so the Committee was not currently meeting with its ordinary frequency.
Mr B Hadebe (ANC) asked what the brief to Eskom had been for the current meeting. Had the Committee asked Eskom to respond on only six deviations, or had it asked Eskom to respond on all deviations? He did not think it was the former. It was “strange” that Eskom should decide, of its own accord, the scope of the hearing. He understood the Chairperson’s suggestion for the way forward but, as a matter of principle, the Committee could not be dictated to regarding the scope of the information it received. That was “unacceptable.” The Committee should not create a precedent under which entities did not furnish the Committee with full information because those entities judged that certain facts were not relevant to the Committee. If there had been misunderstandings about the scope of the hearing’s brief, Eskom should have sought clarity from the Committee. He saw Eskom’s behaviour as a “deliberate attempt” to withhold information from the Committee. The Committee could not accept that.
The Chairperson said that the Committee had not attached any conditions – for lack of a better phrase, he joked – to its request for information about the deviations. Because the Committee had to move forward anyway, he had decided that the other deviations certainly had to be dealt with in the future, but that the first six should be dealt with now. The principle Mr Hadebe had alluded to was “spot on.”
Minister Gordhan said that the Committee’s guidance on the scope of the submission was “absolutely acceptable” to Eskom. However, on behalf of Eskom’s board and executive, he had to say that it would be “incorrect and inappropriate” to insinuate that information had been deliberately withheld. Eskom would follow the Committee’s guidance and there must have been some misunderstanding about what exactly the Committee required. Any information required by the Committee would be provided to the Committee, at a time selected by the Committee. There was no intention whatsoever to withhold information, and there was no record of Eskom doing so.
The Chairperson asked Ms Mente to lead the meeting through the six deviations which had not been approved by Treasury and on which Eskom had submitted. The hearing would continue on the mutual understanding that Eskom should have provided information about all the deviations.
Ms Mente said that any precedent set by the Committee would be difficult to reverse. She acknowledged Minister Gordhan’s response. At the same time, however, Eskom had known that it was required to account on the issues raised by Treasury. The Committee’s request had been for Eskom to respond on the deviations flagged by Treasury and to provide an update on their current status. She would have a lot of difficulty leading the hearing, because she had prepared to discuss all the deviations.
The Chairperson had consulted his correspondence and read a pertinent communication for the record. An 11 June communication regarding preparation for the current hearing specified that the Committee would deal with the expansions and deviations for quarters one, two, and three of the 2020/21 financial year. Mr Hadebe and other Members could therefore be assured that the Committee had not been “selective” in its brief to Eskom.
Deviation no. 72: Balcke-Dürr Rothemühle and Howden Power
Ms Mente directed participants’ attention to the deviation with Treasury reference number 72. She asked Eskom to explain the deviation. Who had requested the deviation, why had it been requested, and who had signed the request? What had happened once Treasury had declined to support the deviation?
Mr De Ruyter asked Mr Phillip Dukashe, Group Executive: Generation, Eskom, to respond.
Prof Makgoba suggested that Mr Dukashe should respond to the specific questions asked by Ms Mente, rather than giving a broad presentation.
Mr Dukashe said that the deviation was a request to solicit goods from a limited market for the manufacture, supply and delivery of air heater spares for generation power stations (see slide 32). The market would be limited to Balcke-Dürr Rothemühle and Howden. Balcke-Dürr Rothemühle was the original equipment manufacturer (OEM) for the spares, and for about 20 years had had a license agreement with Howden that allowed Howden to manufacture, supply and deliver the spares to Eskom power stations. Howden therefore had the intellectual property, including drawings, required for the contract.
Mr Dukashe said that Treasury had not approved the deviation. Treasury had recommended that Eskom should investigate Howden for supplying the spares and implementing design improvements while it did not hold the required licences, and that Eskom should approach only service providers who possessed the required licences. In fact, Howden had initially been licensed, but the licence had expired. Since the application, Howden had acquired Balcke-Dürr Rothemühle, effective 29 January 2021, so the deviation was no longer required. Eskom was finalising the process and hoped to have a new contract in place by November.
Ms Mente asked Mr Dukashe who had approved and signed the request for a deviation. At what level had that request been approved – that is, was it approved by the executive or by the board?
Mr Dukashe replied that he had held his current position for about five months, so he assumed that his predecessor had made the request for a deviation. The request was usually sent to the Chief Procurement Officer (CPO), who submitted it to Treasury. In this case, he did not know the specifics of the process.
Ms Mente said that this meant the Committee’s problems were already beginning. In the Committee’s last meeting with Eskom, at which the hearing had been postponed, there had been agreement that the hearing would be attended by everyone who had signed letters requesting deviations. This was because the Committee wanted to ask those persons why they had sought to involve the Treasury in fraudulent, unlawful, or illegal transactions. Why had those persons needed Treasury to tell them that the relevant transactions were inappropriate? Now, while dealing with the very first deviation, it transpired that the signatory of the request was not present. Upon receiving the request, had Treasury sent guidelines to that signatory, telling them what the regulations required? Persons who signed requests for inappropriate deviations were “coercing” the Treasury to get involved in “illegal” activities. Now the Committee was being denied the chance to speak to the signatory of this particular request.
The Chairperson said that he thought Ms Mente’s concern was that the Committee could not accept an employee saying that he did not know the specifics. The Committee had always indicated that specifics were “the name of the game” at such hearings. Could Eskom provide a “cradle-to-grave” account of this deviation? Who initiated it, and what processes had it gone through? He thought that the Committee had made its expectations very clear at its last meeting with Eskom. There should not be “obfuscation.”
Mr Hadebe said that the Committee had also requested previously that all officials should be well prepared if they were assigned to answer Members’ questions. It was a problem when the officials who had been given the authority to answer instead continuously redirected questions to other officials. The Committee had raised this previously and had asked Eskom to ensure it did not happen in future meetings. It appeared that Eskom had not prepared thoroughly for the current meeting. Going forward, the relevant official should respond fully to any questions; if he was not prepared to answer questions in full, he should allow another official to discuss the relevant matter with the Committee.
The Chairperson asked Mr De Ruyter who had initiated the request for the deviation.
Mr de Ruyter replied by providing a brief description of the ordinary process. In accordance with the delegation of authority, a request was put to the procurement group, led by the CPO. A request for the deviation was signed by the CPO – in this instance, judging from the dates, that would have been Mr Tshitangano. Mr Tshitangano was obviously no longer employed by Eskom, and so was not present to explain the process.
Ms Mente was unhappy with the form of Mr De Ruyter’s response. The Committee wanted to hear the exact process that had been followed in this particular case – not a general statement about how the process should ordinarily go. If the process had gone as it ordinarily should, there would have been no disagreement with Treasury. Mr De Ruyter had also said that the presumptive signatory was no longer at Eskom. As a body of Parliament, the Committee had no problem with summoning people to account before it, regardless of their employment status. At stake were people’s taxes, and the situation at Eskom was “dire.”
Ms Mente asked why Eskom had not included its written requests to Treasury as part of its submission to the Committee. Eskom was unable to provide full information even for an unsupported deviation – a deviation around which there were “question marks.” The Committee was told about the ordinary process, when it wanted to hear about this particular case. The signatory of the request for deviation had to explain his reasoning to the Committee. Why had that person signed the request and “coerced” the Treasury into involvement in an “illegal” transaction? That question spoke to the crux of the matter. Who had failed to do his job in ensuring that a deviation should not be necessary in the first place? Deviations should be used in cases where there was no other recourse to solve a problem. If the Treasury said that the deviation was inappropriate, that meant that there had been no problem – somebody had created the problem. The signatory to the request had to explain why he had “created a problem.” She would not move forward with the hearing unless the Committee could get answers.
The Chairperson asked whether the request for deviation had been initiated by the former CPO.
Mr De Ruyter replied that it had been. The business – in this case, the generation division – had identified the need, and the request to Treasury was signed by the CPO.
The Chairperson asked whether the generation division had contacted the CPO about the request.
Mr De Ruyter replied that it had.
The Chairperson said that, in line with his cradle-to-grave analogy, he would therefore turn to the generation division, where the request had originated.
Mr Dukashe said that as he had mentioned, the request for deviation sought a confined or limited market, because both Balcke-Dürr Rothemühle and Howden could have done the relevant work. Howden had had the requisite licence, though it had expired, and it had the drawings, and the “know-how.” Balcke-Dürr Rothemühle, on the other hand, had been the OEM. That was why the request had been to include both companies in the market – to encourage competition between them.
Mr De Ruyter added that in such a situation, where it was challenging to approach the open market to fill the need, Eskom was required to approach Treasury for its approval. That was the lawful process as required by the Public Finance Management Act (PFMA). In his understanding of the PFMA, the point of the process was precisely to allow the Treasury to guide entities like Eskom in complying with the PFMA. The Treasury had ultimate discretion in approving any deviation, and it had an absolute right to decline to approve any request. Eskom, therefore, was not in a position to coerce the Treasury. There was no way that Eskom could force Treasury to approve a transaction. Moreover, an application for a deviation could not itself be unlawful or illegal – especially when the applicant followed the proper process, as Eskom had. Eskom engaged with Treasury, seeking its guidance, and it was important that Treasury could exercise its oversight role as the guardian of expenditure, particularly in relation to procurement conducted by state-owned entities (SOEs) under the PFMA’s auspices. That a deviation or expansion had not been supported by Treasury did not imply unlawful or illegal activity. Instead, it implied that the Treasury had successfully exercised its oversight role, and that the process provided for by the PFMA had worked.
The Chairperson replied that Mr De Ruyter’s explanation was “elementary,” and Members understood it. The overriding principle the Committee had tried ad nauseam to express was that deviations and expansions should be exceptions, not the norm. Why had Treasury declined this particular deviation?
Mr De Ruyter said that as indicated in Eskom’s presentation, Treasury had recommended that Eskom should investigate alternatives to Howden, to ensure that Eskom did not have to revert to single source procurement. It also recommended that Eskom should ensure that only service providers who possessed the required licences were approached, in a fair and transparent manner. However, these recommendations had been “overtaken” by subsequent corporate action – Howden had acquired Balcke-Dürr Rothemühle’s interests. In accordance with Treasury’s response, Eskom had not implemented the deviation, because that acquisition had changed the relevant market.
The Chairperson said that, in such cases, the Committee always asked why the entity had not taken the necessary steps until after Treasury had told it to. Moreover, after Treasury declined the request, what had happened to Eskom’s needs? If Eskom had not implemented a deviation, how had it dealt with its need for air heater spares?
Mr De Ruyter replied that as indicated in the presentation, after the acquisition of Balcke-Dürr Rothemühle, Eskom had no longer needed to source from a confined market. As he had said, Treasury’s recommendations had been overtaken by events. Eskom was in the process of providing feedback to Treasury about that.
The Chairperson said that the need for air heater spares surely still existed. How was Eskom acquiring the spares?
Mr Dukashe replied that Eskom currently had a contract with Howden, though it would expire at the end of October. As he had said, Eskom would be arranging a new contract to take effect on 1 November. So there was a contract in place, both for spares and for maintenance of the heaters.
The Chairperson asked what Eskom would do moving forward.
Mr Dukashe replied that Eskom had begun the relevant process to award a new contract from 1 November.
The Chairperson asked whether this meant that Eskom had gone out on tender for the spares. Had it explored the market?
Mr Dukashe replied that Eskom was exploring the market for the maintenance contract. For the spares, there was a sole source supplier, whose contract would come into effect on 1 November. That supplier was Howden, because it had acquired Balcke-Dürr Rothemühle.
The Chairperson asked whether Eskom would have to apply for a deviation for that contract with Howden.
Mr Dukashe replied that it was “in place,” because Howden was the OEM.
The Chairperson asked what Mr Dukashe meant by that.
Mr Dukashe replied that for air heater spares, Howden was the OEM. Eskom would have received Treasury’s approval to begin the process with Howden.
The Chairperson asked whether Treasury had approved that deviation.
Mr Dukashe said that Treasury would have approved it.
The Chairperson asked whether he meant that Treasury had approved it.
Mr Dukashe said that Treasury had approved it. That was why Eskom had been able to start the process. The contract would be in effect from 1 November.
The Chairperson asked why, in that case, the presentation said that Eskom had not implemented a deviation from a competitive bidding process to a confined market (see slide 32).
Mr Dukashe replied that the initial request had sought to allow competitive bidding between two suppliers, Howden and Balcke-Dürr Rothemühle. That request had not been approved, because Eskom had to ensure that it approached only accredited suppliers. What had changed since then was that there was now only one company, Howden, and it was the OEM.
The Chairperson said that something did “not add up” in Eskom’s narrative, but it was fine.
Ms Mente asked whether Treasury could explain why it had not supported the deviation, and what Eskom should have done to forestall the need even to request a deviation in the first place. If the Treasury said it did not support a transaction that meant that Eskom had failed to undertake some necessary process prior to making its application. She reminded Members that it was “the year of consequences.” She was not yet satisfied.
The Chairperson asked Treasury to provide input.
Ms Basani Duiker, Chief Director: Supply Chain Management Governance, Monitoring and Compliance, Treasury, said that Eskom had sought to confine the relevant bid to two service providers – the OEM, Balcke-Dürr Rothemühle, and another provider, Howden, which was supposed to be accredited by the OEM. Unfortunately, at the time of Eskom’s application, Howden had not had a valid licence from Balcke-Dürr Rothemühle to do any design work for the spares. Naturally, if Howden was not accredited, that meant that Balcke-Dürr Rothemühle was the sole supplier. Legally, Balcke-Dürr Rothemühle owned the intellectual property and could provide the relevant services. Thereafter, the ordinary process would have been for Eskom to acquire the spares from Balcke-Dürr Rothemühle through sole source procurement. However, Eskom delegates were explaining that since Eskom’s request had been denied – in around June or July 2020 – Howden had become the sole supplier through its acquisition of Balcke-Dürr Rothemühle. Again, the ordinary process allowed the accounting officer or accounting authority to approve a sole source deviation to appoint the OEM, as sole supplier. So there was no longer any need for Eskom to approach Treasury. If she understood the Eskom delegates correctly, Eskom was implementing sole source procurement, and would be providing feedback to Treasury on the process followed in that regard.
Ms Mente asked whether, for this bid, there had been only two possible suppliers, so that the failure of one supplier to become accredited would imply that the other supplier was left as sole supplier. Had there been no need to test the market?
Ms Duiker replied that Ms Mente was correct. However, as she had mentioned, Howden had not been licensed at the time that Eskom had made its application. In her view, Eskom should never have made the application in the first place. Howden had not been a legitimate option, since legally it could not provide the services. At that time, only Balcke-Dürr Rothemühle should have been considered.
Ms Mente asked Mr Dukashe to explain how the application had come about, given that Treasury held that Howden should not have been considered.
Mr Dukashe replied that Howden had previously had the licence and had been supplying the spares for 20 years under licence by Balcke-Dürr Rothemühle. At the time of the application, the licence had expired. The application had been an attempt to create some form of competition with Balcke-Dürr Rothemühle, so that at least two suppliers were considered for the bid, but Treasury had not approved the application, so it had not been implemented.
The Chairperson asked whether only one supplier had been licensed at that time.
Mr Dukashe replied that only one firm, Howden, had been licensed by Balcke-Dürr Rothemühle.
The Chairperson asked Treasury to comment. He thought that Treasury disagreed with Eskom over the licensing issue.
Ms Duiker replied that it would have been Eskom’s responsibility to do proper market research and due diligence, and to submit confirmation that only one supplier in South Africa was accredited by Balcke-Dürr Rothemühle to provide the relevant services. At the time, Eskom had said that Howden had the necessary licence. However, that had been Treasury’s problem – that in fact, not even Howden had had the licence at that time, since its licence had expired. For Treasury, it did not matter that Howden had had a licence for 20 years. The fact was that at the time, Howden had not had a licence, and therefore legally would not have been able to provide the services to Eskom. That had been Treasury’s point, and that was why its recommendations said that Eskom should approach service providers with valid licences. From the information Eskom had provided, however, Howden had been the only supplier with the relevant licence – though it had transpired that in fact, even Howden had not been licensed. Provided the rest of Eskom’s information was correct, that meant that only the OEM, Balcke-Dürr Rothemühle, could legally provide the services.
The Chairperson asked the Eskom delegates whether Howden’s licence was still valid at the time of Eskom’s application.
Mr Dukashe replied that the licence was expired at the time of the application.
The Chairperson asked whether this meant that Eskom had made an application to use the services of a company whose licence had expired.
Mr Dukashe replied that that was correct. Rightly or wrongly – in retrospect, probably wrongly – Eskom’s thinking had been that Howden had been doing the work, had the relevant drawings, and would be able to supply the spares, and thus could provide some form of competition for Balcke-Dürr Rothemühle.
The Chairperson pointed out that, nevertheless, Howden’s licence had been expired.
Mr Dukashe agreed that Howden’s licence – which had essentially given it OEM status while it had it – had expired. Balcke-Dürr Rothemühle was the OEM for the spares.
Ms Mente asked whether Eskom had tested the market to check that it was giving the opportunity to compete to all suppliers who were licensed by Balcke-Dürr Rothemühle.
Mr Dukashe replied that as he had mentioned, he had not been at Eskom at the time. He referred the question to Mr Pieter Le Roux, General Manager: Procurement and Supply Chain Management (Generation), Eskom, who he believed had been working in the generation division at the time.
Ms Mente objected.
The Chairperson interrupted to say that the Committee should allow Eskom to answer the question.
Mr Hadebe said that once Howden’s licence had expired, Balcke-Dürr Rothemühle had been the only viable supplier. Had Eskom not conducted due diligence? If not, that was “a serious cause for concern.” If Eskom had done due diligence, it would have learnt that Howden’s licence had expired. Eskom had not known, until the Treasury had brought it to its attention, that Howden’s accreditation status made the deviation impractical. Eskom’s failure to conduct due diligence was a problem – it had needed an external body to bring such a key issue to its attention. This brought into question other deviations, which might also have been requested without proper due diligence.
Mr Le Roux said that Balcke-Dürr Rothemühle, the OEM, had been the only supplier with the requisite intellectual property. As the OEM, Balcke-Dürr Rothemühle was the only supplier that had the original drawings for the spares. However, for a long time, Balcke-Dürr Rothemühle had provided Howden with a licence, so Eskom had contracted with Howden in the past. At the point when Eskom had requested the deviation, both Balcke-Dürr Rothemühle and Howden had had the drawings to manufacture and supply the spares.
On the licensing question, however, there seemed to be some “ambiguity.” After Eskom had submitted its application, there had been a legal dispute about Howden’s licence. In hindsight, it seemed that Howden might not have had the necessary licence at the time of Eskom’s application, but that had come to light only after the application to the Treasury, through legal proceedings between Howden and Balcke-Dürr Rothemühle. Then, in late 2020, Howden had acquired Balcke-Dürr Rothemühle, thus becoming the only supplier with the requisite intellectual property. So Eskom had never implemented its request for a confined market, since now the situation called for sole source procurement instead.
The Chairperson said that the Committee had already heard the explanation given by Mr Le Roux. It had been established that Howden’s application had expired. Ms Mente had asked whether Eskom had tested the market.
Mr Le Roux replied that Eskom had not tested the market, but it had done some market research. The market research found that only two companies could supply the spares – Howden, under perceived licence, and Balcke-Dürr Rothemühle, as the OEM. There was an open tender for the maintenance of the heaters – that contract had been sourced through the open market. The spares, however, related directly to intellectual property, and market research had found that only two companies had the requisite know-how.
The Chairperson said that, in that case, the market had not been tested. Moreover, Howden’s licence had expired. This supported Ms Mente’s point – Treasury had been put in “a very difficult position.” Treasury had had to decide about transactions that Eskom should have dealt with itself. Did the Eskom delegates understand his point? In such a situation, Eskom would remain free to defer to Treasury’s decision, when rightly it should have dealt with the problem itself.
Alluding to a newsworthy Constitutional Court judgment being laid down elsewhere, the Chairperson asked Members to stay in the meeting.
Mr Hadebe said that his question remained. Should Eskom not have confirmed that Howden had a valid licence before applying to Treasury? Why had it not done so?
Ms Mente replied that according to the delegates, Eskom had checked and had known that Howden did not have a licence – yet it had nonetheless “coerced” Treasury.
Mr Hadebe said, “I rest my case.”
The Chairperson said that he wanted to make a point that should be borne in mind “categorically” throughout the hearings. Expansions and deviations were “a last resort,” to be used in exceptional circumstances after the exhaustion of all other processes – including, but not limited to, testing the market. Expansions and deviations were not a “way out” or a “shortcut.” One could not use them to leave work at four p.m. because one knew that otherwise one would have to stay until nine p.m. They were “an extreme case.” Mr de Ruyter had pointed out that the PFMA and Treasury regulations provided for such deviations – but this did not mean that they should be the norm. Clearly, this deviation had placed Treasury in a “very difficult and unfair” position. Treasury had had to make a determination about a matter in which Eskom had not exhausted all its options, and in which the body of facts was incomplete. The Committee could say unambiguously that this was “totally unacceptable.” There was “a serious issue” with deviations and expansions. Deviations and expansions tended to “induce other suspicions.” An entity therefore had to do things completely right and appeal to Treasury only when it had no other option. Precedent had shown that sometimes “chaos and emergency” were created to twist Treasury’s arm, with an entity claiming that there would be trouble for the country if a given application was not supported.
The Chairperson said that the issue of licensing was “elementary research work.” These were basic compliance matters. He hoped his perspective made sense to Eskom. Howden’s licence had expired – but when had it expired? Had it expired during Howden’s contract with Eskom, or while Eskom was applying to Treasury for a deviation? The expiry could mean that Eskom had been doing business with an unlicensed company. How did that affect the integrity of Eskom’s contract with Howden? These were not matters that the Committee should have to point out to Eskom. He wanted to believe that Eskom, the backbone of the economy, was “a high-level entity.” Eskom should have the skills, knowledge and expertise, “grounded in excellence,” to ensure that basic issues did not “fall through the cracks.”
Ms Mente returned to her earlier point: Eskom should have prepared a submission about all the deviations, but instead Eskom wanted to account for only six deviations. The Committee was being “taken for a ride.” Eskom’s attitude to the hearing was to “tick this box and get done with it.” In regard to the deviation at hand, it was clear from Eskom’s written request and the Treasury’s response, that Howden’s licence was expired at the time. Treasury had made that clear, and Howden had gone on to source the licence six months later. Eskom was saying that Howden had been doing the work for 20 years. No matter how one looked at it, the deviation was “designed to benefit Howden.” It was wrong. There was a process that Eskom was supposed to have followed before considering a deviation as a last resort.
Ms Mente said that this was why she had demanded the presence of the requests’ signatories. If it was not the accounting officer who should “take the fall,” it was the signatory of the request to Treasury. It was very serious. Eskom could not “coerce” Treasury to agree to deviations that it knew to be inappropriate. The signatory of the request had to explain his decision. Who was going to “take the fall” for this? Who was going to account for the “transgression”? The Committee would not accept Eskom aiming to unfairly benefit certain individuals. Who had done the wrong thing in this case, and who would “take the fall”?
The Chairperson sighed repeatedly in frustration. He suggested that the Committee should “park” the deviation and come back to it. It spoke to weak internal checks and balances, as he was sure Mr De Ruyter was noting. There were basic functions that fell to Eskom in making such applications to Treasury. However, the Committee should move on to the next deviation, to establish the trends in Eskom’s requests.
Ms Mente said that if the Committee parked this deviation, it would have to park all the deviations. Her line of questioning would be the same on each deviation. She had prepared for the hearing, drawing together the request from Eskom, the response from Treasury, and the information that Treasury had provided to the Committee in February. Eskom was not prepared for the hearing and was merely “ticking a box.” If the Committee was going to suspend consideration of this deviation, it should suspend the whole hearing. Eskom had to prepare itself. The signatories of the applications to Treasury had to be present. If the signatories no longer worked for Eskom – as in the case of this deviation – that was not a problem. The Committee was entitled to summon them and would do so.
The Chairperson agreed that the Committee had no problem with summoning individuals. It could and would do that if necessary. His point was that the Committee should investigate another of the deviations, so that it did not make a determination on the basis of only one deviation. It should see what the next deviation revealed and then decide how to proceed.
Deviation no. 75: Leroy Building Construction
Ms Mente said that she had prepared to discuss the deviations according to a different sequence, but she would follow the sequence used in Eskom’s presentation, meaning that the next deviation to be discussed was deviation 75.
She read out the description of the deviation from Eskom’s presentation. The deviation concerned single source procurement for the services of an independent environmental control officer (ECO) during construction at the new Camden ash dam project (see slide 33). Eskom had intended to appoint Leroy Building Construction, which had been the resident ECO since June 2018, because doing so would ensure continuity while also ensuring legislative compliance. Treasury had declined to support the deviation, saying that Eskom should follow a competitive bidding process, which it had had ample time to do.
Ms Mente asked who had signed the request to Treasury. At what level had the deviation been decided? Why had the request not followed the PFMA?
Mr Bheki Nxumalo, Group Executive: Group Capital, Eskom, replied that the request had been signed in May 2020. The presence of an ECO was required by legislation, so an ECO – Leroy – had already been on site in Camden. The key contractor who was building the dam at Camden had been terminated due to “irregularities,” but Leroy had remained on site. On the corporate side, a competitive bidding process had been running concurrently. However, the project team had felt that retaining Leroy would have promoted continuity of services. Leroy had itself originally been appointed through a competitive process. Also, during the time of this request, there was “a serious threat” at Camden, with the power station closed, so Eskom was eager to expedite the process by retaining the contractor who was already on site. The request for a deviation came from the site team at Camden, supported by the general manager responsible for the project. It was then signed by the acting Group Chief Executive (GCE) and the CPO. By the time Treasury had responded to decline the deviation, the concurrent competitive bidding process had already ended, so the team went on to induct a new contractor instead.
The Chairperson asked the Treasury delegation to comment on the deviation.
Ms Duiker said that Leroy had initially been appointed in June 2018 through an open tender. In February 2019, Leroy had been reappointed through an emergency deviation. In the same month, the group executive in the generation division had declared an emergency at Camden ash dam, to mitigate the safety and environmental risks of a collapse of the existing dam. So, at that time, Eskom had been right to appoint Leroy without consulting Treasury, because it had been an emergency situation. However, Treasury did not find it justifiable that more than a year later, in May 2020, Eskom had requested a continuation of a contract that had arisen from an emergency appointment. By then, the emergency had been resolved. Treasury had held that once the emergency had been resolved, Eskom should have gone out to the market to appoint a suitable service provider for the long-term contract. For that reason, Treasury had not supported the request for a deviation, and had required Eskom to test the market and appoint a suitable service provider through a competitive process. Eskom believed that Leroy understood the environment and the issues at Camden, because it had worked there before. That justification made sense for the emergency appointment in February 2019 – Leroy had already been at the site when the emergency arose. It did not, however, justify Leroy’s reappointment a year later.
Ms Mente said that it sounded, again, as though a “situation” had been “created.” She asked Eskom who had signed the request to Treasury. That person had to explain the process he had gone through to satisfy himself that the deviation was legitimate and worthy of Treasury approval.
Mr Nxumalo replied that as he had said, the request had originated with the site team and the project manager, Mr Mandla Dlangalala. Signatures had come from the acting GCE and the CPO, who had sent the request to Treasury. He thought that the rationale had been to attempt to mitigate the risk at Camden, where the power station had already been closed due to the termination of a different contract. The system was under pressure. Leroy was already on site, and it would take longer to induct and familiarise a new supplier, so using Leroy could expedite the return of the units. However, as he had said, there had also been a competitive process under way through the environmental panel, so when the deviation was not supported, Eskom had simply reverted to the competitive process.
Ms Mente said that Leroy had been appointed in June 2018. Its contract had expired a year and a half later, in December 2019. However, there were Eskom employees assigned to administration and to the project, including a project manager, and those employees had known that the contract was going to end in December 2019. Someone had failed to begin the proper competitive bidding process for these services – instead, Treasury had had to tell Eskom to do so. Who was that person? Eskom could have reappointed Leroy through the proper lawful process. Which employee had failed to do what he was supposed to do?
Mr Nxumalo replied that, as he had said, the need for the services of an ECO had been identified and a process had been initiated at the corporate level. The competitive bidding process had been initiated. The deviation was just an additional or parallel attempt to try to appoint the contractor who was already on site. The team felt that they could expedite the return of units at the Camden power station by using Leroy. But the competitive bidding process was under way at the same time, which was why Eskom had been able to revert to that process after receiving Treasury’s response. As he had said, the project manager had been Mr Dlangalala, though approval had also been given by the acting GCE and CPO, who signed all applications to Treasury.
Ms Mente said that she did not like what Eskom was doing. She had known from the start that it would do this. When had Leroy left the site? Its contract had ended in December 2019.
Mr Nxumalo replied that Leroy had left the site after Treasury had responded, declining to support the deviation. Leroy had been waiting for Treasury’s response. After Treasury’s response, Eskom had reverted to the competitive process.
Ms Mente said that that was not true. When had Treasury sent its response? Treasury had met with the Committee in February 2021 to brief it on these deviations. She asked the Treasury delegation for the date of that meeting.
Ms Duiker replied that she thought the meeting had been around 23 to 26 February.
Ms Mente asked the Eskom delegation when Eskom had received Treasury’s feedback on the deviation.
Mr Nxumalo replied that he was confirming the exact date in his records.
Ms Mente said that she would make it easy. When had Leroy left the site? Mr Nxumalo should already have that information. Leroy’s contract ended in December 2019. Leroy had clearly remained on site. Eskom had been “manoeuvring” in an attempt to coerce Treasury to agree to inappropriate transactions.
Mr Nxumalo said that Leroy had left the site on 31 December 2020.
Ms Mente said that Mr Nxumalo was contradicting himself. First he said that Leroy had waited for Treasury’s response, now he said that it left on 31 December. When had Eskom received Treasury’s response?
Mr Nxumalo replied that his team was confirming the exact date, but he thought that Treasury had responded in June 2020.
The Chairperson said he was going to ask a “very grade-one” question. Did Eskom agree with the Treasury’s recommendations as summarised in its presentation (see slide 33)? That is, did it agree that Eskom had had ample time to follow a competitive bidding process, and should have done so?
Mr Nxumalo replied that Eskom did accept that.
The Chairperson said that this was what he had been trying to point out. He wondered why Eskom put itself and the Committee in such a position – a position in which they had to grapple with “elementary failures” of compliance. It did not look “professional.” Eskom had to accept responsibility for failing to make use of the time it had had before the expiry of the contract. The question was, when Treasury made its decision not to support the deviation, where was the consequence management? There were people who should have done the work in that time and had failed to do so. Was it just “oh well,” without any consequences? He wanted the Eskom board to note this point and share its reaction with the Committee. Clearly, if Eskom had had the time but failed to do the work in that time, the question was what Eskom had been doing in that time instead. There had been “for all intents and purposes, a collapse in contract management.” That had to be punished – it could not just be noted. What happened to individuals who plainly failed to do their work? What was Eskom doing, if it could not meet internal deadlines or plan internally for contracts, tenders, and so on?
Mr Nxumalo asked if he could respond.
The Chairperson asked Mr Nxumalo to wait. Eskom’s own summary of the situation had said that an incorrect procurement mechanism had been used (see slide 33). He told the board and the executives, “Something has got to give.” The use of an incorrect procurement mechanism was a “first-year” reason for the rejection of a deviation. The Committee should be reviewing much more complex issues in such a hearing. It was “totally unacceptable.” The Committee would not abide any attempt to justify it. If Treasury’s view of the situation was correct, the only satisfactory response was for Eskom to accept responsibility and accountability.
Ms Mente said that ideally, the signatory of the request would have been present, so that he could explain himself. She was comparing the statements that the Eskom delegation was making now with the correspondence in front of her. In 2019, Leroy’s contract had ended, and Mr Nxumalo had said that Leroy had left the site on 31 December 2020. Treasury had responded to the request long before then. Moreover, that meant that for the duration of 2020, Leroy had been on site without a contract – that is, illegally. The new supplier’s contract was effective from January 2021 (see slide 33). What had happened before that, during 2020? She could give the Eskom delegation “the benefit of the doubt,” but the CPO should not be engaging in this kind of thing. That was why it was important for the former CPO to explain his decision.
Mr Nxumalo acknowledged Ms Mente and the Chairperson’s comments. He added that there had been consequence management against the general manager responsible for the Camden project, because of the delay in executing the contract, but Mr Nxumalo took full responsibility.
The Chairperson asked what consequence management had entailed in this case.
Mr Nxumalo said that there had been a disciplinary process involving the general manager at Camden, who had since left Eskom.
The Chairperson asked what sanctions had been applied. Had he resigned or had he been dismissed?
Mr Nxumalo said that he had not been dismissed through the consequence management process, but rather had resigned afterwards.
The Chairperson asked what sanctions had been applied.
Mr Nxumalo said that he would check and report back to the Committee.
Mr Hadebe said that he was not clear on the timeline. The emergency had been declared in February 2019. So why had it taken Eskom so long to start the competitive bidding process? It looked like Eskom had created a “self-made crisis,” and subsequently resorted to deviations to solve it. Had the project manager also been subject to consequence management processes, or had he got off “scot-free”?
Mr Nxumalo replied that the general manager responsible for the portfolio had been subject to disciplinary action, initiated by the acting group executive for group capital at the time, in relation to this and other matters. He was waiting to confirm what disciplinary sanction had been applied, but the manager had not got off scot-free.
Deviation no. 68: Makoya Supply Chain Holdings
Ms Mente said that the next deviation was the request to use a single source, Makoya Supply Chain Holdings, for the once-off offloading of coal (see slide 35). Treasury had not supported the use of single source procurement, and had instead recommended a closed bid among suppliers based in Highveld Industrial Park. However, when this was implemented, only Makoya had responded to the request for proposal (RFP), so Makoya had been granted the contract anyway. Why had it taken Treasury to tell Eskom what it was supposed to have done, in terms of the closed bid?
Mr Snehal Nagar, Senior Manager: Finance (Primary Energy), Eskom, replied that Sable, the other supplier at Highveld Industrial Park, had not had the requisite technical equipment to do the job. That was why Eskom had applied for single source procurement. Eskom had subsequently followed Treasury’s recommendation for a closed bid, but in any case only Makoya had responded. The application to Treasury had been signed by Mr Sagie Chetty and Ms Precious Edward Pesha, and it had been supported by Mr Dan Mashigo, who was the general manager at the time, and Mr Nxumalo. Mr Tshitangano had also signed it and submitted it to Treasury.
Ms Mente asked at what level the application had been approved – at the committee or executive level, or by the board?
Mr Nagar replied that it probably would have been approved at the tender committee level, if appropriate for a tender of its size (R2.18 million). He could find the exact details about the committee and date of approval – Eskom had that information, but he did not currently have it to hand.
Ms Mente said that was precisely why she was asking – he was providing “half information” when he should be detailing the entire process. For example, he should detail the composition of the bid committee – its chairperson and members – and the recommendations it had made, but he did not have that information.
Mr Nagar replied that Eskom could certainly provide that information. Because the contract was relatively small, the deviation might have been approved according to the delegation of authority, rather than by a bid adjudication committee. He did not have the information to hand, but he could get it.
Ms Mente asked Mr Nagar to explain the process in full. Treasury had responded by recommending that Eskom should take the proper steps, which implied that Eskom had previously failed to take those steps.
Mr Nagar replied that he had been explaining that, prior to the application to Treasury, Eskom had followed its processes with regard to delegation of authority. He could provide exact details about that. After the internal process was complete, a submission was made to Treasury. The closed bid was issued only after Treasury had made its recommendation. He could provide details about the entire process.
Ms Mente asked about the status of the need which Eskom had sought to fulfil through the deviation. What had been the situation during the application for the deviation, and what was the situation now?
Mr Nagar replied that the contract had been placed with Makuya. Makuya had delivered the service, offloading the trains, and the contract was now complete. The contract was to offload about 26 000 tons of coal that had been stranded on trains – a service that could be provided only at three offloading facilities in the country, because it required rotary tippler facilities.
Ms Mente asked whether Eskom would not have a need to offload more coal in the future.
Mr Nagar replied that it would be helpful to provide some background to the Committee. The conveyor structure at Majuba power station had been damaged by a fire in December 2019. Eskom had stopped all rail deliveries to Majuba after the fire, but there had already been some coal on the way to Majuba. The coal that was in transit presented a problem, because it needed to be offloaded. The only places it could be offloaded were at Majuba, which was not operational; at the Richards Bay Coal Terminal in KwaZulu-Natal; or at Makoya’s facility. When Majuba became operational again, the rail deliveries would resume. However, this particular contract had been a rare, once-off contract for only six trains.
Ms Mente asked about the closed RFP that had ultimately been issued. How long was the RFP open for? Was Sable given a fair opportunity to compete? Could Eskom confirm that Sable did not make a bid?
Mr Nagar replied that Sable had been given time to make a bid, but had not done so. However, he would have to confirm the details about the length of the tender process.
Ms Mente suggested to the Chairperson that the deviation should be “parked” until the Committee received all the information, including about the level at which the request had been approved within Eskom.
Deviation no. 80: South32
Ms Mente asked Eskom to explain the South32 deviation, which Treasury had not supported (see slide 36). At what level had the deviation been approved, and who had signed the request?
Mr Nagar replied that the request had been signed by Mr Mashigo, who was general manager for primary energy at the time, and by Mr Tshitangano, the CPO at the time. He would provide some background for the deviation. Since the 1990s, Eskom had had a long-term fixed-price coal supply agreement with South32, the colliery adjacent to Eskom’s Duvha power station. In June 2019, South32 had declared financial hardship under the contract. Eskom had appointed consultants to investigate the hardship claim. The consultants, disagreeing with South32’s interpretation of the hardship clause, concluded that contractually there was no hardship. However, they had advised that there was certainly “financial distress” on South32’s part, and that Eskom should seek to renegotiate the contract to alleviate any coal supply risks. Therefore, at the time of the application, Eskom’s intention was to renegotiate the entire South32 agreement, which supplied ten million tons of coal per annum, and was to end in 2034. On that basis, Eskom had applied for a deviation to negotiate coal supply with a single source, South32, at an estimated value of R66.98 billion over 14 years – that is, until 2034. Treasury had not supported the deviation.
However, Mr Nagar said that events had progressed since the application. These were also reflected in Eskom’s presentation (see slide 36), and the Committee would see the process unfold when it considered deviations from subsequent years. A technical assessment conducted by Eskom indicated two things. First, the South32 mine should in the future produce only 7.5 million tons of coal per annum – a decrease from the ten million tons per annum specified in the contract. Second, the contract with South32 should end in 2024, because beyond that point the mine would not be economically viable. Technical information showed that after 2024, the capital requirements for the colliery would be substantial, and the operating costs to mine remaining reserves would also be high. So, on the basis of that technical assessment, Eskom had submitted another deviation request to Treasury. That was eventually approved on 1 May 2021. In addition, Eskom had since gone out to test the market through an RFP, to determine the long-term coal supply options for Duvha power station. That process was still unfolding.
Ms Mente said that Treasury had responded to the initial deviation request by recommending that Eskom should test the market for coal supply, yet Eskom seemed to have focused on the financial problems faced by South32. She had not heard Mr Nagar mention what Eskom had done to test the market. What was preventing Eskom from testing the market? Eskom was occupied with solving South32’s problems.
Mr Nagar replied that Eskom had gone out to test the market. The process was ongoing. Importantly – and this was a point Eskom had emphasised in its engagements with Treasury – South32 and Eskom were bound by a contract. It was a 14-year coal supply agreement which afforded certain rights and obligations to both parties. Contractually, South32 had a right to declare hardship, and it had done so. Contractually, Eskom was obligated to test that hardship claim – it could not merely go to the open market. So Eskom had tested South32’s hardship claim, but it had also tested the market. The market testing was still ongoing. In addition to the hardship claim, South32 had also notified Eskom that it would put the mine into business rescue if it did not become financially viable. The South32 operation had been running at a loss – it was weathering a continuous monthly loss. That was not sustainable – at some point, the losses had to be capped. Eskom had been extended the opportunity to engage with South32 in finding a solution that ensured coal supply to Duvha.
Mr Nagar said that Eskom had explained its rationale to Treasury. There were two critical issues in the consultation with Treasury. First, Treasury wanted to know whether Eskom had tested the market – which it had. Second, Treasury wanted to do an assessment to verify what Eskom was saying, but a full-blown technical assessment would take several months. So Eskom had supplied Treasury with all the technical and financial information it had gathered about South32, especially through its consultants. At the same time, with Treasury’s consent, Eskom had built into the renegotiated agreement the right for Treasury to conduct its own assessment in the future. The agreement included an exit clause that Eskom could exercise if Treasury’s assessment yielded conclusions that differed vastly from the information that Eskom had had at the time of the renegotiation. In that way, Treasury’s concerns had been accommodated in the contract.
Ms Mente asked the Treasury delegation to comment on the deviation.
Ms Duiker said that it was important to look at the situation holistically. There were several applications regarding South32. The application under consideration now was the July 2020 application, not supported by Treasury, for a R67 billion deviation. In fact, what had been at stake was an extension of the existing South32 contract. There were two parallel processes, if she remembered correctly. There was a request for a deviation, which the Treasury had not supported. At the same time, however, there were requests to modify the existing South32 contract to alleviate South32’s financial hardship and the legal issues that arose from the same. Treasury had supported a contract modification but had required Eskom to test the market during the period of the extension, in order to ensure that coal supply procurement at Eskom was fair, transparent, competitive, and otherwise compliant with the five pillars of public procurement.
Ms Duiker said that in considering the initial deviation, Treasury had noted that the South32 contract was set to end in December 2024 (with an option to extend until 2034), and that the deviation would involve a ten-year extension and cost up to R67 billion. Treasury could not condone that unless Eskom tested the market first – Eskom had to implement a tender process. At the same time, Treasury understood that it was important for Eskom to secure coal supply for the duration of the tender process. To allow that security, the South32 contract had to be modified. Treasury had also allowed Eskom to adjust the price it paid for coal, to alleviate South32’s financial difficulties.
Ms Duiker said that as Mr Nagar had said, Eskom and Treasury had had numerous engagements over South32. One of the concerns that Treasury had raised was that it wanted to conduct an independent assessment, to establish the facts about South32’s financial situation. This was necessary because Eskom and South32 disagreed about the extent of South32’s financial hardship, but also because Treasury needed to verify the reasons that Eskom had provided for preferring South32 as a supplier over the extended period. Treasury still had to undertake that assessment. As Mr Nagar had said, it was important to look at the matter holistically, considering all the events, including the contract modifications and other events subsequent to the initial deviation request.
Ms Mente asked whether Eskom had acquired any assurance from South32 that it would be able to continue doing business over the next four years, the period of the extension. How would South32 be recapitalised, and was Eskom confident that South32 was “fit for purpose”? She had heard “uncomfortable and disturbing” reports that Eskom planned to “bail out” South32, even though it was itself being bailed out by government.
Mr Nagar replied that it was Eskom’s understanding that South32 had not yet made a decision about the recapitalisation of the mine. The mine was expected to close after 2024, and the closure process had begun. Eskom’s assessment found that it would be very expensive to continue to operate the mine after 2024. However, it might reassure the Committee to know that the agreement incorporated a first right of refusal option for Eskom. If, for some “miraculous” reason – perhaps a change in the situation, or based on information that Eskom was not privy to – South32 continued to operate the mine, and supply coal to other parties, then Eskom was guaranteed the right to step in and buy coal from South32 at a certain price. That price was effectively South32’s cost price, plus a ten percent margin. That was an annual option that Eskom could exercise until 2034. However, Eskom was not aware that South32 planned to recapitalise, and it was his understanding that, using available reserves, South32 could until 2024 supply enough coal to meet its agreement with Eskom.
Ms Mente asked whether Eskom was bailing out South 32.
Mr Nagar replied that it was not. The agreement with South32 and Sereti required a solution to be found for this particular mine and this particular coal supply agreement. This was the solution that Eskom had found. However, to his knowledge, Eskom was not bailing out South32 or any other company.
Ms Mente noted that Ms Duiker had alluded to Eskom increasing the price it paid to South32 for coal. Did that mean Eskom’s chosen solution was to increase the coal price per ton?
Mr Nagar replied that as Eskom had explained in previous meetings with the Committee, the Duvha power station had been designed to receive coal from the adjacent mine. Duvha’s reclaim capability was therefore constrained. Even if coal could be brought into Duvha from an alternative source, there would probably be a coal or electricity supply risk in the short term, because Duvha could not reclaim the requisite amount of coal. That was why Eskom had to look seriously at the coal supply coming from the adjacent mine, South32. Eskom had looked for a “competitive” or “affordable” price which it was prepared to pay South32 for the coal. In the short-term, Eskom believed that this price increase was the best option. In the meantime, Eskom would test the market to find a long-term solution, and to establish what infrastructure was needed to supply coal to Duvha in the long term. This approach also carried certain technical benefits for Eskom. For example, if it was easier to bring coal into Duvha using the mine’s infrastructure, the contract compelled South32 to allow Duvha access to that infrastructure. South32’s infrastructure would have to be upgraded, at Eskom’s own cost. Still, using South32’s infrastructure would allow Eskom to avoid disruptions in coal supply to Duvha. In sum, Eskom had looked at the matter from both technical and commercial perspectives, and believed that it had found the best solution for Duvha.
Ms Mente asked how long it had taken to conduct the necessary research – that is, research into alternative coal suppliers and South32’s competitors.
Mr Nagar replied that the process was ongoing. The RFP had closed in December 2020. The next step was to evaluate the responses and engage with Eskom governance structures. That should occur around July or August 2021. After that, Eskom could begin to engage the preferred bidders that emerged from the process. The supply acquired from a preferred bidder would depend on the bidder’s situation. For example, a greenfield operation might take three to four years to open a mine, depending on the size of the mine. On the other hand, if the bidder already had an operational mine, it might be able to start supplying coal to Eskom immediately, so he could not give a precise answer until he was familiar with the market and with the alternative suppliers that could be used at Duvha.
Mr Nagar added that importantly, because Duvha was designed to receive coal from the adjacent mine, the infrastructure at Duvha would have to be upgraded to receive coal from other suppliers, so there were two issues that needed to be attended to in ensuring uninterrupted long-term coal supply to Duvha. Eskom had to evaluate both its supply options and the corresponding infrastructure requirements. The solution that it had devised with South24 gave it four years to attend to both of these issues.
Ms Mente asked whether Eskom could confirm that after 2024 it would be prepared to ensure adequate coal supply to Duvha, and that it would not require further extensions to the South24 contract.
Mr Nagar replied that the solution implemented after 2024 would depend on the outcome of the current RFP process. If South32 or Seriti emerged from the RFP process as the preferred bidder, then Eskom would contract with them again, but he could not know the outcome of the process prior to the necessary evaluation, negotiation and approval.
Ms Mente said that she was asking whether, after 2024, Eskom would be prepared – in terms of infrastructure and the necessary processes – to receive coal from a supplier other than South32. Would Eskom not ask for another deviation in 2024?
Mr Nagar replied that the intention was precisely to prepare for such an eventuality over the next four years. That is, the intention was certainly that there should not be any supply interruption at Duvha beyond 2024. He could not say that Eskom was currently prepared, because it had not yet evaluated how to ensure supply beyond 2024, but it had to prepare and intended to do so.
Ms Mente said that the problem with the situation was linked to the issue of the conveyor belts at Duvha. She assumed that the conveyor belts were part of the infrastructure issue which Mr Nagar had mentioned. Eskom had previously told the Committee that South32 used conveyor belts owned by Eskom that went into Duvha from the adjacent South32 mine. However, suppliers other than South32 would not use the conveyor belts and would instead have to pay to transport their coal. Eskom would have to take that into account. Would Eskom be considering all such factors and finalising their plan before 2024? This would have to be the final extension allowed on the South32 contract.
Mr Nagar replied that it was absolutely Eskom’s intention to account for such factors as transport costs. For example, Eskom would have to consider whether coal should be transported through the mine or through the power station, and therefore whether Eskom should upgrade the infrastructure of the mine or of the power station. Moreover, Eskom might be able to use the mine’s existing infrastructure, which the renegotiated contract gave it access to. Eskom would do the technical and financial assessments, and it had four years to ensure a “seamless and cost-effective” supply of coal to Duvha after 2024. He and Ms Mente were talking about exactly the same thing.
Ms Mente approved of Mr Nagar’s response. Her understanding was that the conveyor belt belonged to Eskom, not to South32. She had noted that Eskom had increased the coal price to help South23 with its financial difficulties -- but was that Eskom’s problem to solve, or was it South23’s problem to solve?
Mr Nagar replied that, firstly, part of the conveyor belt belonged to South32. There were conveyor belts that took coal out of the mine, past a boundary fence of some sort, and into the Duvha power station. Part of the belt was South32’s and part was Eskom’s, and both parties knew exactly which entity owned which part of the belt.
Secondly, South32 had declared financial hardship in relation to the price it was receiving for the coal it supplied to Eskom. The contract had set the price at a certain amount – around R280 per ton, if he remembered correctly. However, South32’s mining costs were up to R600 per ton, so its hardship was not related to the conveyor belt, but rather to the complete cost of the mining as compared to the price it received from Eskom. A solution had to be found, or South32 would have continued to make a loss, which it was prepared to tolerate for only a certain period before it went into business rescue. Eskom had had to step in because there was a risk around the security of its coal supply. If Duvha’s requirements could be met through alternative supply, Eskom could have solved the problem that way, but because Duvha was designed to receive coal from the adjacent mine, Eskom had had to look at assisting South32. Moreover, South32 had a contractual right to declare hardship. The contract had a term of 30 or 40 years. Such hardship clauses were sometimes included in long-term agreements to allow aggrieved parties to address issues that had been unforeseeable at the time the contract was drafted. In this case, South32 had declared hardship, and Eskom had joined them at the table to assess the problem. That might give some context as to why Eskom had stepped in.
Ms Mente asked whether the initial coal supply agreement had been drafted without checking the costs of mining the coal.
Mr Nagar replied that the agreement had initially been a cost-price agreement, until it had been converted to a fixed-price agreement in the 1990s. The fixed-price agreement effectively gave Eskom ten million tons of coal per annum, and it gave Eskom the sole option to extend the agreement. In 1990, Eskom and South32 had agreed on a base price and an escalation formula to calculate changes to the price in the future. The escalation formula assumed that the cost of mining coal would follow a certain trend. If the actual trend deviated from that assumed trend, it was inevitable that one party would become aggrieved. South32 had contended that the escalation formula, and thus the escalated price, did not reflect the reality of its current operating costs.
Ms Mente said she did not yet fully understand. The initial agreement had set a price of R280 per ton, and recently the price had been increased to R550 per ton. Was that correct?
Mr Nagar replied that that was correct.
Ms Mente said that she did not understand what assessment could possibly have led Eskom to decide to make this change, nearly doubling the price, in response to South32’s declaration of hardship.
Mr Nagar said that in 1990, when the contract had been converted to a fixed-price agreement, the parties had considered two things in determining the price parameters. First, they had considered the coal supply, as he had just explained. Second, they also considered the fact that South32 – through BHP Billiton and other companies – had exported coal for sale. The export product was in fact subsidising the Eskom product, by covering the operational costs. Later, however, South32 had closed the export section of its business, because it had been too expensive. Once there was no export product to subsidise the Eskom product, South32’s costs had exceeded the price it received from Eskom.
Mr Nagar said that at that point, South32 had declared hardship, and Eskom’s consultants had verified that South32 was in financial distress. Eskom had not agreed that there was hardship. The contract effectively required that hardship arose from a material change in circumstances that had not been anticipated when the contract was drafted – for example, a change in environmental conditions or legislation. Eskom’s consultants had advised that South32’s financial distress was more a result of mismanagement than of a change in circumstances, so South32 and Eskom disagreed about the presence of hardship. Nevertheless, the “bottom line” was the effect on Eskom’s security of supply, so Eskom had had to come to the table with South32 to find a solution. With the change in price, the contract was certainly more expensive – previously, the South32 contract had been the cheapest of Eskom’s coal supply agreements. Still, this solution gave Eskom some time to address the potential risk to the security of its supply.
Ms Mente asked whether South32 would not declare hardship again before 2024, given that this declaration of hardship had persuaded Eskom to increase the price.
Mr Nagar said that legally, any company could declare hardship in terms of such a contract, and any company could also put itself in business rescue or liquidation. In these circumstances, it was very difficult to get a guaranteed coal supply from anybody, especially from a party that was already facing financial difficulties. Eskom had done everything possible to try to secure its supply, but other parties had their own legal rights and Eskom, unfortunately, could not control how they exercised them.
Ms Mente agreed that South32’s business decisions were beyond Eskom’s control, but in that case, why did Eskom engage in long-term contracts with financially unstable companies? If South32 declared another hardship in a year or two, or went into business rescue or liquidation, that would be a loss to Eskom.
Mr Nagar replied that he did not think that Eskom engaged in long-term contracts with financially unstable companies. When Eskom embarked on big infrastructure projects, it tried at the same time to secure a long-term supply of input materials, to ensure certainty, price security, and security of supply. For example, if Eskom built a power station with a 50-year lifespan, it tried to secure a contract for 50 years of input materials, to ensure that the power station would be able to operate for those 50 years. Such long-term agreements were put in place “with the best of intentions.” Along the line, however, things might change, forcing Eskom to re-evaluate. That was what was happening with the South32 contract. The initial price of R280 per ton had yielded the cheapest coal supply in the entire Eskom basket. Why had South32’s price been so low? It was not that South32 was particularly well run, but rather that its pricing had been “miscued,” with the Eskom product subsidised by other products. That was a situation that eventually had had to be fixed.
Mr Nagar added that Eskom had many other coal supply agreements and partnerships that were proving very valuable and were “extremely favourable” to Eskom and to the country. Those relationships worked. In business, some relationships and investments worked well for one’s interests, and others did not work so well. The South32 relationship had served Eskom well for a very long time, but that was no longer the case, so the end of the relationship was “in sight.”
Ms Mente asked how many investigations Eskom had conducted to verify South32’s hardship claim. Mr Nagar had mentioned that consultants were involved. What investigations had they undertaken?
Mr Nagar replied that there had been one single investigation, conducted over a few months. The investigation had two parts – commercial due diligence, and a hardship review – both of which had been conducted by the same set of consultants. The consultants were Poswa Incorporated, a legal firm, who had sub-contracted technical aspects out to other firms. The financial investigation was conducted by Mazars Group, the technical investigation by Mincon, and the technical-environmental investigation by Globesight. There had also been an environmental-legal team on site.
Ms Mente asked whether any of the consultants had told Eskom that South32 was mismanaging its mine, such that South32 was itself partially responsible for the hardship it experienced.
Mr Nagar replied that that was exactly what the consultants had concluded, as he had mentioned earlier. On the advice of its consultants, Eskom had disagreed with South32’s hardship claim and with its reasons for that claim. The consultants did, however, agree that there was financial distress at the mine – that was different to hardship. South32 was clearly making a loss and was “bleeding cash” at the time of the investigation, but Eskom and its consultants completely disagreed with the reasons that South32 gave for its financial difficulties.
Ms Mente suggested to the Chairperson that the Committee should obtain the consultants’ report on South32. The Committee should satisfy itself that Eskom’s decision to increase the price had been justifiable and appropriate.
The Chairperson noted that according to Eskom’s presentation, Treasury had agreed to the extension of the South32 contract “subject to an independent analysis… on South32’s cost structure” (see slide 36). Had Treasury conducted that independent analysis yet and, if not, why not? He thought the independent analysis could be important, because it could give the Committee the assurance it needed.
Ms Estelle Setan, Acting Chief Procurement Officer, Treasury, replied that Treasury had not yet begun the investigation. Treasury was in the process of drafting its terms of reference, so the investigation would probably be done in the next quarter.
Deviation no. 85: ABB South Africa
Ms Mente said that the next deviation concerned a supplier, ABB, which Eskom had in the past overpaid for its services. She read from Eskom’s presentation that Eskom’s request had been for single source procurement for the transfer of all generator and transformer protection functions to a new digital protection system at Koeberg nuclear power station (see slide 37). ABB had been the preferred service provider because it had existing knowledge and experience of Koeberg. Treasury had not supported the deviation and had required Eskom to conduct market analysis, including all the accredited providers of the service. At what level had Eskom decided to seek this deviation, and who had signed the request to Treasury?
Mr Riedewaan Bakardien, Chief Nuclear Officer, Eskom, replied that Eskom had requested the deviation in July 2020, and had in September 2020 received Treasury’s response and recommendation. The request had been approved through Eskom’s usual process – that is, it had been assessed by the engineering team, the project team, and then by the project management team. It had been signed off by the senior manager for procurement and supply chain management in the nuclear division, and the CPO had signed it and submitted it to Treasury.
Mr Bakardien said that it would be helpful to provide the Committee with some background on Eskom’s reasons for making the request. The design of Koeberg nuclear power station was aligned with that of EDF nuclear stations, EDF being a French energy utility. Several years ago, Eskom had been notified by its supplier that the system at Koeberg was becoming obsolete. Eskom had engaged with EDF to find out what EDF was doing to address this at its nuclear power stations, and EDF had said that it had moved to the ABB system. This replacement strategy – moving to the ABB system – would have various benefits for Eskom. Eskom already had infrastructure which used the same underlying architecture, which meant Koeberg had training materials and facilities adapted to the architecture. Moreover, Eskom personnel already had a level of proficiency on the architecture. Skills development would be easier, since Eskom had training simulators and other equipment based on the ABB architecture. Eskom had identified that using these existing internal resources, by switching to the ABB system, would have cost savings of up to R69 million. Eskom had therefore wanted to pursue single source procurement with ABB in order to exploit these advantages.
Mr Bakardien said that after doing further analysis at Treasury’s request, Eskom had found that ABB was the OEM, according to the Eskom generation standard. The generation standard supported the use of the OEM. The process was still under way, and Eskom would submit a report to Treasury on the outcome of its analysis. At present, no commitments had been made. He had decided that no commitments should be made until Eskom spoke to Treasury.
Ms Mente said that Mr Bakardien’s response focused on the cost-saving benefits and so on, but was he aware that ABB was under investigation by the SIU? ABB was implicated in malfeasance, fraud and corruption in a case involving Eskom.
Mr Bakardien replied that he was aware of that broader issue. The task before the nuclear division was to procure technology to replace Koeberg’s obsolete equipment, and it had followed its normal approach in assessing the suitable options on the market. Eskom could certainly consider whether the SIU investigation had any impact, but from a commercial and technological perspective, ABB was the preferred supplier. It was not so much that ABB would be less expensive. Rather, the key factor was that with an ABB system, Eskom would be able to do a lot of the work internally, and thus would benefit from the fact that its personnel had experience and skills in using similar equipment with the same software and architecture.
Ms Mente said that she did not think there could be any justification for retaining the services of a company that had defrauded Eskom in the past. At some point, Eskom had paid money to ABB for services that ABB had never provided. ABB had defrauded Eskom and been involved in malfeasance – yet it still stood a chance to do business with Eskom in the future, and in fact Eskom was itself advocating this. She was sure that Mr De Ruyter was in contact with the SIU about the investigation, and the Committee could have the SIU provide an update. She would also like to know what Treasury’s perspective was on doing business with such “crude characters” as ABB.
Ms Duiker replied that she would explain Treasury’s response to the initial request for deviation, before moving on to the issue of fraud by ABB. Eskom had said, and Treasury agreed, that it was important to prevent supply disturbances, to prevent damage to the health of Koeberg, and to minimise the necessity of repairs, but to achieve this Eskom needed to plan maintenance properly. Eskom’s request to Treasury had been an urgent application to facilitate the replacement of an obsolete system. Treasury had been troubled by the fact that Eskom had not identified the urgency earlier. That meant that there was a problem in Eskom’s monitoring and maintenance of the system. Treasury believed that the request reflected poor planning by Eskom. Eskom should have known that the system was becoming obsolete, and should have taken proper measures to approach the market and look for a replacement. That was needed to prevent disturbances, prevent damage to the power station, and minimise repairs. Treasury therefore did not find single source procurement justifiable in this case, and had responded with a recommendation that Eskom should test the market.
Ms Duiker said that Treasury had not been aware of the allegations against ABB at the time that it had considered Eskom’s request. As a matter of principle, when the government did business with a service provider, it did so in good faith, and in the expectation that the service provider reciprocated its good faith. It would not be “in the spirit of public procurement” or in the spirit of the Constitution for government to continue doing business with a service provider who was not acting in good faith. In this case, she thought it would be best to investigate and “get to the bottom of” the allegations against ABB, and Eskom had to test the market for a replacement for the obsolete system. There might be new systems offered on the market with advanced technology that could assist Eskom in achieving its objectives.
The Chairperson asked the SIU to provide input on the ABB case.
Ms Claudia O’Brien, lead Eskom investigator, SIU, said that the SIU had investigated the ABB contract at the Kusile power station. The SIU had found that there had been fraud and corruption. ABB had itself provided a substantial amount of evidence to support the SIU’s investigation and the investigations of other law enforcement agencies, both in South Africa and abroad. The SIU held that, given the constitutional principles in play and given the presence of fraud and corruption, it had had “no alternative” but to apply for the Kusile contract to be put aside. However, there were other issues to take into account – such as technical issues and issues affecting the country’s future electricity supply. For example, if Eskom disengaged ABB’s services, a lot of the equipment would have to be replaced, at significant cost, because of technical considerations and intellectual property concerns. Experts had conducted an independent investigation into the implications of disengaging ABB from Kusile. It had found that disengaging ABB would cost billions and, if she remembered correctly, that it would delay the completion of Kusile by at least two years, affecting electricity supply.
Ms O’Brien said that Eskom, the SIU, and the Treasury had discussed the matter and the issues at stake. It had been agreed that Eskom could proceed to use ABB until the conclusion of the contract. The alternative would have been too costly to the country. The SIU, again with the assistance of experts, had calculated that ABB had been overpaid by R1.6 billion, and ABB had paid that amount back to Eskom in December 2020. Currently there was a process under way to determine the way forward between now and the contract’s end. To her knowledge, the contract was at a “very advanced” stage – about 95% complete. From a criminal perspective, the matter was with the National Prosecuting Authority (NPA), as well as with foreign prosecutors. “Great progress” had been made in that regard, and the SIU expected arrests to take place soon, both in South Africa and in other countries.
Ms Mente suggested to the Chairperson that the Committee should not yet conclude its discussion of this deviation. Instead, the Committee should obtain conclusive and comprehensive reports from the SIU, Eskom and Treasury. Treasury had rejected the initial request for a deviation, but as things stood, ABB still had a chance to win the contract. That would imply that companies which had defrauded the state – such as the companies involved in the Beitbridge border fence project – could come back to contract with the state and its entities. Eskom and the government had to deal not only with instances of misconduct in the past, but also to set a precedent for the future. The Committee should consider how the SIU was dealing with the companies involved in the Beitbridge project – the same approach should apply in this case.
Ms Mente suggested that the ABB deviation should be discussed again at the next hearing. There were outstanding questions. Who at Eskom was supposed to have tested the market and to have ensured that Eskom avoided corrupt companies? Would the state terminate contracts with such companies, and get its money back? The Committee also needed a full report on the “technicalities” of this case, as mentioned by Ms O’Brien. Then the Committee would be fully informed in deliberating on the way forward. It was “not going to happen” that fraudsters would continue to do business with state entities.
Ms Mente suggested that the Committee should return in the next meeting not only to the ABB deviation, but also to the WBHO Construction deviation with reference number 73. The Committee needed to go through the letters sent in February. At some point, Treasury had sent the Committee a folder containing various correspondence. There was substantial documentation regarding WBHO, and it was crucial that the Committee should take the necessary time to deal with the matter.
The Chairperson said that the Committee would not be able to discuss Eskom’s expansions that day, since the meeting was scheduled to end in 20 minutes. He asked Mr Nxumalo whether he had found the answer to his earlier question about the disciplinary sanctions applied to Eskom employees regarding the Leroy Building Construction deviation.
Mr Nxumalo replied that the general manager responsible for the Camden project had been Mr Mark Chettiar. Disciplinary action had been taken against Mr Chettiar, but he had raised grievances about the process. After the disciplinary process had ended, Mr Chettiar was moved from the Camden project, and he had subsequently left Eskom.
Ms Mente said this was “the famous line” – that responsible parties had left Eskom.
The Chairperson had been disconnected from the platform.
After confirming with Ms Mente that she had no further questions, Mr S Somyo (ANC) said that the Committee would not have time to get to other matters. It would have to arrange a further meeting with Eskom to deal with the outstanding matters and with the matters that had been deferred in the current meeting.
The Chairperson rejoined the meeting. He joked that, in this case, he could not blame his technological difficulties on Eskom, because there was no load-shedding that day.
The Chairperson said that the Committee could not discuss the expansions without running over time, and anyway there were outstanding deviations to be discussed in a future meeting. He thought that significant progress had been made and no time had been wasted. It was very important for the Committee to interrogate Eskom’s deviations and expansions, and the cooperation of Treasury and the SIU helped the Committee to get the full picture. He invited the delegates to make any last remarks.
Mr De Ruyter thanked the Committee for the opportunity.
Prof Makgoba said that he had found the discussion “very insightful.” He would appreciate it if the Committee would write a summary of the meeting so that Eskom had a proper record and could provide the details that Members had requested. He agreed that these matters needed to be revisited, because it would further the cause of an improved, transformed and accountable Eskom. He promised the Committee that the Eskom board was dedicated to achieving this.
The Chairperson said that the recording of the meeting could be made available to Eskom and that the Committee would follow up on its outstanding questions. He was sure that the Committee’s next engagement with Eskom would be “greatly improved.” Also, at the next meeting with Eskom, Ms Tolashe would guide the hearing on the Eskom expansions, and Mr Hadebe and Ms Van Minnen would deal with certain investigations. The Committee would communicate with Eskom timeously to give it ample preparation time. He thought that the Ministry was no longer present in the meeting.
The Chairperson thanked the participants. The Committee’s apparent pedantry about expansions and deviations was rooted in its concern with an “undesirable” trend -- the “abuse” of expansions and deviations to circumvent due process, so it needed to confirm that requests to Treasury were made only in the absence of any other available recourse.
To Mr De Ruyter, he said that the Committee endeavoured to point out perceived “shortcomings,” so that they did not “fall through the cracks” and Eskom could institute “corrective action” to “close the gaps.” He hoped there would be progress in that regard. He had some points that he wanted to raise at a later date, including about the South32 contract. Treasury should finalise the terms of reference for its independent assessment of South32 and provide quarterly briefings to the Committee on its progress. The Committee had noted the report of the Semenya inquiry, and would be turning its attention to investigating and assessing the financial management of Eskom.
The Chairperson asked Eskom not to return to load-shedding, especially since in level four lockdown people would be spending more time at home. Load-shedding had a material bearing on the economy and on the country, and since it triggered additional expenditure, on the financial management of Eskom. Load-shedding was not sustainable. It had to receive the attention it deserved as an “apex priority.” Load-shedding had begun when he was in his 20s, and he was now in his 30s.
The meeting was adjourned.
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