Eskom 2020/21 Annual Report; with Minister

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Public Enterprises

17 November 2021
Chairperson: Mr K Magaxa (ANC)
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Meeting Summary

Video                Part 2

Annual Reports 2020/21

Eskom presented its 2020/21 annual report in a virtual meeting to the Portfolio Committee on Public Enterprises. It also briefed lawmakers on its strategy, performance overview, turnaround plan, financial performance and outlook.

The impact of the power utility's load-shedding dominated most of the meeting. The Minister said a number of factors had been involved and had not been adequately dealt with -- sometimes through circumstances, and at other times through the human factor. As far as circumstances were concerned, the pandemic, particularly during the lockdowns last year, had impacted on the maintenance routine, and the intentions that Eskom had. Part of its plan had been to overcome the legacy of poor maintenance and hard-driving of the plant during the period of state capture. As a consequence, midlife refurbishment had to be undertaken, but that had been disrupted. It was also disrupted because of the poor response time of the procurement office and the National Treasury to some of its requirements. It was increasingly clear that the work ethic and culture within the organisation was in serious need of attention. There was still too much of a tendency to engage in corrupt and negligent activities. The policy shift in government in respect of a less complex, less “red tape-oriented” 100MW plant establishment as far as renewables was concerned, would be likely to make a big difference in the short-term. That would add megawatts to the system on the one hand, but on the other hand it would not happen overnight. There was a gap of between 12 to 18 months that the Department still had to cope with

Eskom reported that its financial results were challenging, with a net loss after tax of R18.9 billion;
that COVID-19 had impacted its performance, with sales volumes down 6.7%; and its gross debt burden was reduced by R81.9 billion, with government support of R56 billion contributing towards debt servicing. Total revenue had improved to R 204 3 billion due to an 8.76% tariff increase;
cost savings of R14.4 billion were achieved against a target of R14.1 billion; but there was a decline in earnings before interest, taxes, depreciation and amortisation to R32.8 billion due to lower sales volumes and an increase in primary energy and other operating expenditure.

The Department said its roadmap provided timelines for the restructuring of Eskom from a vertically integrated utility to an unbundled state, with three wholly-owned, separate legal entities. There would be functional separation to drive accountability for each division and thereby improve business
performance, with divisions capacitated to function relatively independently while aligning with and implementing the overall Eskom strategy. Following the completion of functional separation, the focus had shifted to legal separation.

Eskom reported that the debt arrears at municipalities had risen by R7.3 billion to R35.3 billion. It was installing pre-paid meters in order to improve revenue collection. It had received a qualified audit opinion based largely on the extent of its irregular expenditure, but there was also material uncertainty as to its status as a going concern.

Apart from persistent questioning about the factors involved in load-shedding and its impact, the Committee asked about the implementation of consequence management to reduce irregular expenditure, and suggested there was a need to change the skills, reliability, maintenance and culture within the organisation.

Members highlighted that the majority of key performance indicators were not achieved, such as improving plant operations, reducing the environmental footprint, but also issues that had to do with industrialisation and localisation.

Questions were asked about renewable energy, NERSA’s rejection of the multi-year tariff increase, the budget of the Wilge Residential Development Project that was meant to house artisans working on Kusile, the Soweto debt, the MOU with the City of Johannesburg and why Eskom was not audited by the AGSA.

After a Member expressed concern about the CEO’s recent media comment, he apologised, explaining that his comments were derived from a colloquial expression, and he was deeply sorry that they had been misunderstood. 

Meeting report

The Chairperson said the meeting was taking place after Members of the Portfolio Committee (PC) had made an oversight visit to the Medupi and Kusile power stations that were in the process of being finished. The PC was supposed to have had a follow-up meeting with Eskom where it would have been taken through the maintenance, security of supply, and accounting on the issue of the houses that were built near Kusile that seemed to be abandoned. It would have had that meeting before South Africa got another extended lockdown, including the constituency period, which culminated in the election. The latter became a long period, and the PC had been unable to realise all of those plans, so in its presentation, Eskom would have to address those issues that were outstanding.

The PC’s oversight visit had been very important, as it had helped it to actually understand what was happening at those power stations. It had come to the visits highly motivated because of the finishing of Medupi, with all units that were ready for commissioning. With Kusile, many of the units were in the process of being finalised. The PC was given an undertaking that by June or July the following year, load-shedding and all of those problems “would be history”. However, “we are where we a now.” The presentation would help the PC to get clarity and be put on the same wavelength as Eskom, to understand what was taking place at that entity. He asked the Minister to provide an overview before handing over to Eskom to make its presentation.

Minister’s overview
Mr Pravin Gordhan, Minister of Public Enterprises, agreed with the Chairperson in that it seemed like each time Parliament heard from Eskom management and the board, it said that the load-shedding issues would be dealt with. This meant that all units, both coal and nuclear on the one hand, and hydro (water) and diesel on the other, would be reasonably operational. As a consequence, Eskom’s output would have been able to cope with the demand for energy at various stages during the lockdown and the COVID-19 pandemic.

However, a number of factors had intervened, and had not been adequately dealt with -- sometimes through circumstances, and at other times through the human factor. As far as circumstances were concerned, the pandemic, particularly the lockdowns last year, had impacted on the maintenance routine, and intentions that Eskom had. Part of that plan was to overcome the legacy of poor maintenance and hard-driving of the plant during the period of state capture. As a consequence, midlife refurbishment had to be undertaken, but that was disrupted. It was also disrupted because of the poor response time of the procurement office and the National Treasury to some of the requirements that Eskom had put to those institutions. Those that were historically responsible for creating the current situation were now on a rehabilitation campaign. There might be consequences for Eskom's operation in that particular regard.

A long time ago, both the Eskom management and the Department, at Eskom’s behest, had said that Eskom required extra megawatts (MW) in the system to allow for maintenance to occur. For the record, those extra MW had not been made available. At the same time, Eskom had not improved substantially the energy availability factor (EAF), which was sitting at around 65%. That was also part of the challenge. That could be attributable to the plant on the one hand, but it was increasingly clear to the board that the work ethic and culture within the organisation was in serious need of attention. There was still too much of a tendency to engage in corrupt and negligent activities. That was accompanied by good people, who did not have adequate experience. Various efforts were being made to complement the existing management as well. Many of the senior managers had taken a huge amount of strain in this period, which was understandable. “These were ordinary human beings just like us, some of whom were resilient enough to cope with the stress, and others were not resilient enough to cope with the stress.”

There were also question marks that needed to be raised around the contractors who undertook some of the maintenance, and whether all of them had performed the quality of maintenance that was required at various stages. Once some technical people were on the call, he thought that it might be important for the Committee and the public to understand and get a better appreciation of the complexities that needed to be dealt with in a power plant. That had to do with understanding better what a chip, or a boiler tube leak was, etc. The Department had given the Committee illustrations of the complex machinery at a power station. Attending to breakdowns in some of these instances was far more complex than putting in a new pipe somewhere. That complexity, if better communicated, needed to give rise to a better appreciation of the time taken to get some of the maintenance work done.

The policy shift in government in respect of a less complex, less “red tape-oriented” 100MW plant establishment as far as renewables was concerned, would be likely to make a big difference in the short-term. That would add megawatts to the system on the one hand, but on the other hand it would not happen overnight. There was a gap of between 12 to 18 months that the Department still had to cope with. That was the context in which improvements in other areas of Eskom's performance needed to be undertaken. The current management crew had little to do with the development of Medupi and Kusile, and the mistakes that had happened in that process, but all had to take responsibility, and “we cannot say that somebody else did it.” All had to make the best of what was available to them. These were long-term projects with long-term consequences, both for Eskom and the country as a whole. The sooner the Department resolved some of these issues, both in Eskom’s operations and in the wider context, the sooner it would be able to give South Africa the assurance that there was an adequate supply of electricity available, which must be the goal that the Department was working towards.

The Minister had said that the energy issue “should not turned into a political football”. Regrettably, that was not the case, as the elections had inspired all kinds of responses. They were back to square one in a sense, where the realities that existed in the Eskom context had to be dealt with. He encouraged the board to give the Committee as much information as possible, but on the understanding that there was a plan, but it would take time to put it into operation.

Eskom's 2020/21 annual report and financial statements

Prof Malegapuru Makgoba, Board Chairperson, Eskom, said the board believed that it had a plan to deal with the challenges it faced as an organisation on behalf of the country. It was mindful of the role that Eskom played in the wellbeing of South Africans and in the economic development of the country.

The board had identified three issues. The first was skills, the second was the reliability maintenance it had to undertake, and the third was culture -- the culture at Eskom needed addressing, and it needed to change as it was working on unbundling Eskom at that moment. The board, like all South Africans, was never pleased to see what had been seen, or to experience what had been experienced. Together with the current management, the board had a plan that required time and resources, and for all to be coordinated in what it was doing. For example, sometimes the board made requests to the National Treasury, and it took about two to three months to get a response, and this delayed some of the processes. These were things that could be ironed out as they went along.

Prof Makgoba said that he had been double-booked that day. He was supposed to give his report as the Health Ombud to the Portfolio Committee on Health, which started at 09:00. He had requested time to participate in this meeting so that he could share his thoughts on Eskom up until 12:00. He had also been told that Mr André de Ruyter, Group Chief Executive Officer (CEO), was having a press conference, and would be joining the meeting soon.

Mr Calib Cassim, Chief Financial Officer (CFO), Eskom, presented the highlights and challenges of Eskom's strategy and performance. Key aspects of his report included:

• Financial results were challenging, with a net loss after tax of R18.9 billion;
• COVID-19 had impacted performance,  with sales volumes down 6.7%;
• The gross debt burden was reduced by R81.9 billion, with government support of R56 billion contributing towards debt servicing;
• Environmental performance remained disappointing, particularly at Kendal;
• Medupi power station Unit 1 achieved commercial operation on 31 July 2021, after being synchronised to the national grid on 27 August 2019;
• Two Kusile units were commissioned, adding 1 598 MW capacity to the national grid.

(See attached documents for details)

Mr Cassim said the generator at Medupi Unit 4 had exploded on 8 August, with extensive damage to it. It was apparently caused by a deviation in operating procedures during a short-term outage. No injuries were sustained during the incident. Until completion of the major event investigation, employees had been placed on precautionary suspension.

As an essential service, Eskom had been allowed to continue operating at full capacity even during level 5 of South Africa’s national lockdown, with coal mines permitted to operate to supply stations.
Eskom's priority was the supply of electricity, and maintaining the safety of its people. Where possible, employees had worked at home since the start of the national lockdown, with some staff returning to work as restrictions were lifted. Its information technology (IT) capacity had enabled a large amount of the workforce to work remotely during the lockdown. Measures were in place to protect critical staff and minimise the number of employees on site wherever possible. Plans were in place to protect key operations.

Capital and generation maintenance projects had been delayed early on due to restrictions on movement and limiting the number of people on site. Continued uncertainty around COVID-19 was expected to continue threatening future sales volumes, the cost of production and customers’ ability to pay. Demand was not expected to recover to pre-COVID19 levels in the short to medium term, due to the long-lasting impact of the economic recession experienced in 2020. Largely stagnant sales volumes of approximately 190TWh per year were anticipated for at least the next five years.
Daily peak demand had fallen by between 7 500MW to 11 000MW during level 5 of
the lockdown, and generation output had to be reduced drastically in response. Electricity sales  of 191 852GWh were down 6.7% year-on-year. The industrial, rail and international sectors were the most severely affected.

(See attached presentation for details of the strategy and turnaround plan)

Financial performance

Mr Cassim outlined the improvements in the income statement, despite the COVID-19 lockdown depressing economic conditions and supply constraints hampering growth, causing a 6% to 7% reduction in sales volumes. Winter sales incentives had been offered to mitigate this impact. Significant aspect of the income statement included:

• Total revenue improved to R 204 3 billion due to an 8.76% tariff increase;
• Favourable high court judgments were received on a number of National Energy Regulator of South Africa (NERSA) review applications;
• Cost savings of R14.4 billion were achieved against a target of R14.1 billion;
• Growth in primary energy costs were contained to 3.4%, with a 3.9% decrease in production, offset by a higher use of relatively more expensive open cycle gas-turbines (OCGTs) to minimise load-shedding, and higher Renewable Energy/Independent Power Producer (RE-IPP) procurement.
• There was a decline in earnings before interest, taxes, depreciation, and amortisation (EBITDA) to R32.8 billion due to lower sales volumes and an increase in primary energy and other operating expenditure;
• An operating profit of R5.8 billion was achieved despite a very challenging environment.
• An unsustainable debt burden resulted in net finance costs of R31.5 billion, and a net loss after tax of R18.9 billion for the year.

To strengthen the balance sheet, government support of R56 billion had been received to support Eskom’s status as a going concern, with a further R31.7 billion committed for 2022. Gross debt and borrowings had been reduced by R81.9 billion to R401.8 billion due to the government's support and the strengthening of the Rand. Gross funding of R 18.9 billion had been secured for 2021, mainly from development finance institutions (DFIs) and local bond issuances.

There had been further credit rating downgrades arising from concerns around operational and financial sustainability. Payment levels for customers in arrears were improving, although they remained below acceptable levels. Municipal arrear debt grew by R7.3 billion, to R35.3 billion. Negotiations for active partnering agreements were under way with 45 municipalities for Eskom to act as agent for the supply of electricity, maintenance services and collection of revenue. Opportunities for the disposal of non-core assets were bearing some fruit

Progress on business separation

Mr Cassim said the Department of Public Enterprises (DPE’s) roadmap provided timelines for the restructuring of Eskom from a vertically integrated utility to an unbundled state, with three wholly-owned, separate legal entities. There would be functional separation to drive accountability for each division and thereby improve business performance, with divisions capacitated to function relatively independently while aligning with and implementing the overall Eskom strategy. Following the completion of functional separation, the focus had shifted to legal separation.

For the transmission entity, timelines were aggressive and considered high risk due to critical external and regulatory decisions and dependencies, and were dependent on the government playing an active, supportive role. The set up of the entity depended on lender approval and licensing by NERSA. The Eskom Conversion Act, 2001 and Electricity Regulation Act, 2006  had to be amended.
Approved trading arrangements had to be in place by 31 December 2021, which required wholesale and retail tariff structures to be aligned aligned.

Generating plant and network performance

• High unplanned load losses had resulted in capacity constraints, leading to load-shedding on 47 days, compared to 46 days last year;
• Gas turbine usage remained high, at a cost of energy of R7 billion (2020: R7.5 billion);
• The generation recovery and reliability maintenance recovery programmes were showing results;
• Investments in wet coal handling had paid dividends, with stations surviving two weeks during Cyclone Eloise without having to load-shed due to wet coal;
• Significant progress had been made in correcting major plant defects at Medupi and Kusile units, with Medupi Unit 3 reaching full generation capacity in April 2020;
• An operational excellence initiative had been launched to ensure skills and disciplined execution.

Network system reliability had improved, with customers experiencing fewer incidents of interruptions and shorter outage durations. The load reduction initiative had contributed positively to reducing equipment failure related to overloading caused by illegal connections and the bypassing of meters.
However, the negative economic outlook and socio-economic challenges had led to higher distribution of non-technical losses, particularly due to the theft of electricity. Asset vandalism, equipment theft and overloaded networks had led to increased breakdowns, maintenance costs and increased safety risks.

Environmental performance

Besides the Kendal power station, those at Kriel, Lethabo, Matla and Tutuka had experienced periods of poor performance due to poor coal quality and poor-performing dust handling and sulphur trioxide  plant. Water consumption at power stations had deteriorated slightly to 1.42 l/kWhSO. A total of 80 environmental legal contraventions had been recorded, of which 68 were water related, but performance on legal contraventions had shown an improvement since year-end. The Ingula Nature Reserve wetlands had been declared a wetlands of international importance by the International Ramsar Convention.

Reporting on Eskom's socio-economic performance, Mr Cassim said there had been 106 669 electrification connections under the Department of Mineral Resources and Energy's (DMRE’s) electrification programme.

Turning to liquidity and funding, he said liquidity remained constrained due to debt servicing and working capital requirements, and limited debt raising activities. Credit ratings remained at sub-investment grade level. There was a concerted effort to reduce Eskom’s debt burden and improve gearing, with the support of government equity injections. A lack of cost reflective tariffs and escalating municipal arrear debt also contributed to liquidity constraints. Court review applications and municipal interventions were being pursued. Capital expenditure was being restricted to improve liquidity.

Eskom had received a qualified audit opinion relating to irregular expenditure under the Public Finance Management Act (PFMA), and there was material uncertainty regarding its status as a going concern. Cash interest cover and debt service cover ratios had declined, as operating cash flows remained inadequate to fund even the interest component of Eskom’s debt servicing requirements.
The 8.76% revenue tariff increase for 2021 was nearly fully eroded by an unprecedented 6.7% decline in sales volumes. Cash from operations remained insufficient to meet debt servicing and some capital investment requirements. Cost savings alone were not the answer, as R75 billion in savings amounted to 43% of operational outflows. Eskom’s capital and tariff structure had to be resolved to ensure long-term financial sustainability.

Arrear debt management

The invoiced municipal arrear debt (including interest) had grown by R7.3 billion, adding liquidity pressure. The payment level by municipalities was 83%, excluding metros. The payment level for the top 20 defaulting municipalities was 53%. Progress had achieved from its municipal debt management strategy, as well as the ring-fencing of arrear accounts, leading to lower interest charges. The political task team and multi-disciplinary revenue committee were focusing their efforts on the top 20 defaulting municipalities. Active partnering agreements were being pursued, and  discussions were under way with 45 municipalities.

The Soweto Small Power Users (SPU) debt (including interest) had decreased to R7.5 billion, due to a write-off of prescribed debt and in duplum interest. Of this, only R536 million was deemed collectable and reflected as receivables in the financial statements. It was in negotiation with the City of Johannesburg for the proposed transfer of customers to City Power.

Regarding the financial outlook for the 2022 financial year, government support of R31.7 billion had been received for the 2022 financial year, and a further R21.9 billion and R21 billion was committed for 2023 and 2024.

Audit qualification

Apart from the material uncertainty regarding Eskom’s status as going concern, its qualified audit opinion was related to irregular expenditure in terms of the PFMA, and compliance in the areas of procurement and contract management, consequence management, internal control deficiencies and the correction of material misstatements regarding inventory.

Processes to manage irregular, fruitless and wasteful expenditure include:

• A centralised loss control department  which had been established to address PFMA violations and oversight of consequence management, including disciplinary actions, condonations and recovery of losses.
• A revised PFMA reporting procedure implemented to ensure that all assessments and investigations into occurrences of irregular expenditure and fruitless and wasteful expenditure were performed by this function from 1 April 2021.
• Progress in obtaining condonations of irregular expenditure had been slow for a number of years. Until condoned, expenditure on affected contracts remained irregular towards the end of the year, when Eskom received notice of condonation of 296 transactions valued at R9.5 billion.
• Eskom was working with the DPE and National Treasury to ring-fence historical irregular expenditure to prioritise the close out of these items and minimise the continued impact on its annual financial statements.
• A procurement roadmap was in place to enhance internal procurement processes and contract management.

Various interventions had been implemented to mitigate the recurrence of the findings which resulted from irregular expenditure. The Eskom Procurement Supply Chain Management Procedure had been enhanced to align with the relevant legislative prescripts. In collaboration with the Internal Audit Department, periodic reviews were being conducted on procurement processes, as well as on awards to determine the level of compliance to supply chain management (SCM) legislative frameworks and adherence to various internal controls. Awards identified to be irregular were logged on to the Central Condonation Register for preliminary investigation and determination, and subsequently submitted to National Treasury for approval. In instances where anomalies had been identified, lessons learnt were shared, with training being offered to ensure that all procurement practitioners were capacitated to prevent the recurrence of findings and eliminate any ambiguity that might arise due to different interpretations of the SCM governance frameworks.

Eskom had embarked with the DPE and National Treasury (NT) on an initiative to ring fence the historical irregular expenditure, to have it condoned before the end of the current financial year in order to minimise the impact on its annual financial statements. The Supplier Review Committee (SRC) had been re-established to decide on remedial actions on tenderers or suppliers found to contravene the SCM governance frameworks, and it had concluded a total of 63 matters out of 253 investigated issues, as concluded by the Assurance and Forensics Department.

The PFMA required entities to submit draft financial statements by 31 May to National Treasury and the external auditors. In preparing for the audit, it was established that the physical inventory and financial records did not reconcile in all instances, with financial records exceeding the physical inventory. Eskom and the auditors had agreed on a process to quantify, reconcile and audit the difference. This process was completed only after submission of the draft financial statements. It was noted in the submission letter to National Treasury that a number of significant accounting and auditing matters were still outstanding that could have a material impact on the draft financial statements. Inventory amounting to R1.2 billion had been written off after submission of the draft financial statements.

Corrective action included:

Independent investigation against employees in responsible areas;
Warehouse augmentation to be implemented, and introducing best practices in the industry;
Automation implementation of bar-coding and radio frequency identification;
Enforced independent counts conducted by inventory accountants;
Materials managers must ensure compliance to materials management policies and procedures by performing periodic checks and balances.

Mr De Ruyter said that he had nothing further to add, as the CFO had done a fine job of explaining the financial results.

Ms J Mkhwanazi (ANC) thanked the Chairperson for arranging the meeting before it was scheduled in the programme, because South Africa was really facing a problem. The issue of Eskom that people had experienced in the last few weeks was very inconveniencing, especially to the thousands of matriculants who were writing their exams. It was not a nice experience for matriculants -- including her son -- to have in the new, democratic South Africa. The effect and impact of load-shedding on businesses, especially the small, medium and micro enterprises (SMMEs), as well as on individuals, was “not a nice experience.”

She wanted the management of Eskom to go to its audit outcomes, and share with the PC the work or action done to address the 2019/20 irregular expenditure, and its plan to address the 2020/21 irregular expenditure. Her worry was that the irregular expenditure was increasing, and she did not see what Eskom had presented that would result in progress going forward. What was Eskom’s plan going forward? In the options presented, was there any plan to reduce the three- to four-year maintenance period that was cited in the report and in the CEO’s press conference? Eskom needed to report on its backlog of maintenance, especially because the PC had just seen in the news that stage two load-shedding was planned. The PC needed to be taken through the problems responsible for this, and to understand the challenges and the plan going forward.

For the recent load-shedding and the plan going forward, could the Eskom management share the lessons learned, especially on the communications strategy? For her as an individual and as a public representative, she thought that the communication was a bit lacking to all stakeholders and end users, to indicate what the role of each stakeholder was in working with Eskom, and to assist it in the problem of load-shedding. Regarding the communication expected of Eskom, could it share its strategy, so that the PC could get an indication of how it could assist? When the PC attended the oversight, it was quite comfortable with the information it was getting, but after experiencing the load-shedding, it was confused about the information that it had got there. Could Eskom relate its readiness at the power stations where the PC did oversight visits to the load-shedding that South Africa was experiencing? Could the PC get an update on the investigation of the Medupi power station explosion? Could it also get an update on the abandoned flats built near the Kusile power station?

One of the responsibilities of the board of directors was strategic direction and monitoring. Could the board share the strategic plan to meet the additional capacity of electricity that was needed to meet the current demands? Could it share the monitoring plan, as the company’s board, for Eskom to do things correctly, such as staff performance, the quality of coal supplied to different plants, and the performance of contractors? Some of that had been highlighted by the Minister in his remarks. What was the board’s plan to make sure that Eskom provided reliable electricity to all South Africans?

Mr G Cachalia (DA) said that a number of his questions could be answered in the meeting, but in the event of some of the questions requiring data that was not to hand, could the PC ensure that those were answered in writing afterwards? He would send a list of questions to the Committee Secretary.

What was the cost of diesel that Eskom bought from suppliers -- not the unit cost averaged, but specifically per supplier? How much diesel was required to meet peak demand and the shortfalls for the coming year? Could the PC have a realistic appraisal as to how reliable and sustainable the repairs that had been effected are? What downtime was envisaged to secure reliability? Please explain to what extent municipalities were not implementing load-shedding. Who, why and what was being done about it?

Referring to the headcount, he asked for a breakdown of the people in the executive band by job description, salary and relevant qualifications. What would it take in terms of time and cost to ensure the reliability of Medupi and Kusile? On the proposed sale of older plants, what criteria were required from prospective buyers to ensure the continued generation at the requisite levels, and what steps were being taken to mitigate the inevitable shortfalls as these were being refurbished? Since the inception of the new build programme, the local content of contracts had amounted to R169.5 billion. Could the PC have a schedule of the spending, including who was involved, the costs and the rationale? In the future absence of further government equity contributions, could the PC have the plans to reduce debt and support liquidity?

He gave a list of questions that were labelled alphabetically.

A) Why were there different time horizons for spending, reflected over the period 2017 to 2021, and contract values reflected from 2007 to 2021? Could the PC have more comparable numbers?

B) What did the presenter mean by “total measurable spend”? Surely all spend was measurable?

C) What was the difference between local content, contracted, and local content spend? The latter was higher than the former; so did this mean that South Africa received local content at zero cost?

D) R70 billion had been spent to create R190 000 jobs. Were these durable jobs? Would they stay in business after the work was done for Eskom? Was this high or low efficiency for job creation, versus other methods of job creation?

E) The presentation said that Eskom had created 11 400 skills. Were there more than 10 000 skills Eskom was seeking to develop? What were these skills -- what was being counted here, and what was Eskom saying?

F) Was there a measure on what would have been saved if Eskom had bought all R498 billion from non-Black Economic Empowerment (BEE)-compliant suppliers?

G) R235 billion had been spent on non-BEE suppliers. Did this mean that there were no BEE offerings for these suppliers, or were these suppliers offering better value than non-BEE suppliers?

H) This was one-third of the total spend over the previous five years for comparison. What was that ratio? The PC needed a timeline comparison to provide meaning.

 I) Could the PC have a breakdown of the other two-thirds of the BEE spend in terms of cost, comparative value, and durable and sustainable jobs created?

J) Was there a reference point, given the need for prudence and the imperative to keep the lights on, of how much additional spend had been incurred to ensure that this BEE spend was indeed BEE-compliant?

Ms O Maotwe (EFF) focused on the financial aspects of the presentation. What was the comment from the Minister on the qualified audit opinion that Eskom had received for five years consecutively? On material uncertainty, the auditors were clear that Eskom had incurred losses of about R18.9 billion. The current liabilities exceeded the assets by over R19 billion. That was an area of concern for her, and she would want to hear from the CFO what measures were in place to improve the current situation. On compliance with the legislation, the auditors were saying that the financial statements that Eskom had submitted were not in accordance with the prescribed financial reporting framework – what had led to that non-compliance with the legislation? On expenditure, the auditors had said that effective and appropriate steps were not taken to prevent irregular and fruitless expenditure. This was the case even in the last financial year. It looked like were no measures put in place to ensure that those things did not recur. There were also irregularities that were mentioned by the auditors as an area of concern when it came to procurement and contract management.

She asked the Eskom CFO and Chief Procurement Officer (CPO) what steps were being taken to achieve the compliance that was needed. She asked for an update on the irregular and wasteful expenditure that had been incurred by Eskom over years. What was the consequence management, and who was being held accountable for the irregular and wasteful expenditure? It could not be that it kept being reported, and nothing was happening. What was the board doing to ensure that the management carried out the consequence management that was expected to be taken?

She had not heard any commitment from the Minister on load-shedding when he was speaking earlier on. This was the third year of the current administration, and South Africa was still having load-shedding. What was the plan, and when would this issue be resolved once and for all? They could not keep on saying, ‘"More time was needed" -- they did not have time. Industries were failing, small companies were closing down, and businesses were collapsing because of load-shedding. Eskom was crippling the already-burdened economy in South Africa. It was not assisting the economy to grow. When would load-shedding be history in this country?

Mr S Gumede (ANC) commented that load-shedding was coming back to haunt South Africa. He was interested in getting a report or feedback on how load-shedding would affect the country. How would load-shedding be reduced? Ms Maotwe had hoped that load-shedding would be a thing of the past. Currently, that may look impossible -- one could only talk about reduction. He asked about the programme of what Eskom was trying to do, when it was likely that load-shedding would get reduced and when it would finally be done away with. On the whole, when one looked at the performance of Eskom, there were slight improvements, but one would say that those were “very insignificant” in a sense. Its performance had been fluctuating. One could not have a loss of R18.9 billion. That was too high. Perhaps there needed to be something to say that Eskom suspected this and that, which could have led to a loss of that much. He was listening to the presentation, and noted that when the PC talked to Eskom, “we talk billions; we don’t even talk millions.” If Eskom was talking about millions, then that was “very little”, in a sense.

He appreciated the statistics on fraud and corruption, but asked what action had been taken, and what update Eskom had. The Minister had spoken about contractors and poor performance. He was not sure whether people who had done “shabby work” would still be paid. What action did Eskom take to challenge that? It looked as if that work was not guaranteed. Was it work that was guaranteed, especially if it was work that was done internally or externally, which was a matter of procurement as well? The PC needed guidance on what was happening to deal with the poor performance – was the work guaranteed? Did the contractors that had done the work get recalled to fix the work that they should have done?

Mr Gumede asked what lessons the entity had learned from the occurrences at Kusile and Medupi. Had it been necessary for the artisan housing project to be undertaken? The project had started at a cost of R160 million, but it had ended up being R1.1 billion. Those units were still incomplete, in a sense. There were board members who had resigned more or less within a similar period, and he asked if this could have affected the performance. The PC had not been given the reasons why the two board members had resigned, and it understood that the board had requested that those two positions be filled. He was not sure if the board had been given permission to do that or not. He asked for an update on the matter.

He liked the idea of local content, because it told him that the community did benefit in a sense. The CFO had also mentioned the debt with the municipalities. This was something that the PC had been raising -- whenever the debt was presented, the municipalities were always reflected. What was the collection strategy that Eskom had, focusing not only on municipalities? Could Eskom talk about the big businesses as well? The PC understood that quite a lot of big businesses owed Eskom money.

He asked about blackouts and load-shedding -- were those concepts similar or interchangeable? How did the concepts differ? If one looked at the presentation, a pertinent question was whether Eskom would ever be normal again. How long would it take to normalise Eskom? What strategy did it have to achieve this, where it could say that it would be normal in a certain period, and would take this much? The PC was aware that there was the question of whether the debt was always increasing. When de-carbonisation was introduced, what would the status of the labour in Eskom be?

He asked about the skills, reliability, maintenance and culture in Eskom. When Eskom started using some of the interventions, a number of misconduct incidents were revealed. What strategies did Eskom have regarding this? Could the PC get a report, so that it was sure that some of those people who were involved in state capture would at least be dealt with? The PC would then be sure that such people in fact ended up behind bars.

Mr N Kwankwa (UDM) said that if one were to look at the strategic turnaround plan that was approved by the board in November 2018, it had key focus areas. These were operations recovery, improving the income statement, strengthening the balance sheet, driving business operations, and transforming people and culture. He had heard the Minister underscoring that point. The Chairperson of the Board had highlighted the point about transforming the people and the culture. It concerned him that more than three years after the plan was adopted, that critical aspect had not been addressed, or attended to properly. He was also concerned that progress was slow in trying to transform the culture of Eskom. Eskom had to marry that plan with its nine-point plan, which was adopted, unveiled and announced at the same time. His understanding was that when Eskom reported to the PC, the formula was to always go back to the nine-point plan, and give the PC progress on each and every one of those aspects in detail. The PC would then be able to keep track of the progress being made on a quarterly basis or on an annual basis.

The other aspect that was important for the PC to consider was the fact that the majority of key performance indicators (KPIs) were not achieved, such as improving plant operations, reducing the environmental footprint, but also issues that had to do with industrialisation and localisation. The problem with that was that if the targets that were set were not achieved, it would affect the overall performance of Eskom. He asked about the defect correction plan at Medupi and Kusile, and whether or not Eskom was keeping track of those defects, to make sure that whatever deadlines Eskom set were met, so that the PC did not sit and say that there needed to be an extension in 2023, hypothetically speaking, to those deadlines. South Africans needed to know when there were challenges. Public communications about the challenges Eskom was facing, and being transparent about those problems, was critical, so that people knew exactly what was happening at Eskom.

Referring to gross revenue, Mr Kwankwa said that if one was talking about 106 000 new connections per annum, should Eskom not focus for instance on how much money it expected on average to receive from these connections? The connections would happen in different areas, and people fell into different categories in terms of the Living Standards Measure (LSM). Surely if Eskom had a lot of connections taking place in indigent communities, it should know how much on average it should expect to get out of those connections? It would give an indication of how much Eskom’s revenue would grow when it had those connections.

He had been sitting with a number of people during the campaign period in the Eastern Cape, who talked about how the connections were done, but the pre-paid meters were never connected. There was no delivery of pre-paid meters. In some of the communities, people said that it seemed like Eskom had run out of pre-paid meters. It was a missed opportunity, and it was lost revenue. Eskom did not need an audit report to understand that. The audit report highlighted the revenue management, which included revenue collection. It did not need an audit report to understand that -- by just taking a casual look at the financial statements, it could see that if it was going to depend only on tariff increases in order for its revenue to grow, or there was something wrong with its collection. Eskom was saying that it had a problem with the revenue, which had grown at 2.4% per annum. If it was keeping track of revenue management, while dealing with tariff issues, and not depending only on tariff increases to improve revenue, the situation might improve. He expected Eskom to say that out of the 106 000 connections, this was the impact it was going to have on the overall gross revenue of the company, etc.

Eskom had  talked about the gross securities and borrowings having decreased to R401 billion due to government support. The PC needed to get an indication of how Eskom intended to stabilise that, or how it intended to reduce its debt levels over the next few years. It could use the medium-term as an example. It was important that Eskom informed the PC on matters relating to its debt outlook, as it was of critical importance. He thought the key issue on municipal debt was the intervention of government. Perhaps the Minister should account for that. Eskom would only refer to its frustrations and the interventions that it had put in place. It was more government that had to account to say how it would deal with the issue of the failure to collect municipal debt, what had happened in the past, and what would happen in the future to ensure that those challenges would not recur. The municipal debt issue needed to be addressed at a policy level.

How would Eskom ensure that the transmission and distribution networks were sufficiently maintained, in order not to compromise the grid for the next few years? It concerned him a great deal that when he looked at the challenges facing Eskom at the moment, they were challenges that had been foreseen and known about in 2018 when Eskom adopted the turnaround plan, but it seemed to be going back to the same challenges. Alternatively, it seemed to be stuck in a situation where while it knew the challenges, and had written the problem statement eloquently, it did not seem to be able to get itself and the country out of that quagmire.

Ms J Tshabalala (ANC) asked what the basis had been for the Energy Availability Factor (EAF) falling over a few years, from 69% to 64%? One would have thought that with the maintenance that occurred during the early period of lockdown, that would improve. She was basing her question on the low the EAF restrictions and supply negativity impacted on revenue.

Why was Eksom not developing a division focused solely on renewable energy? Her question was based on the fact that South Africa’s involvement in the renewable energy sector meant that it would know the regularity hurdles in the renewable energy sector. There was a lot of discussion on energy security in South Africa. The Minister had alluded to that saying that there needed to be a better energy discussion in the country, so that there was one understanding of exactly where the issue of energy was being taken.

What was Eskom doing to reduce load-shedding, which was damaging the economy? The PC knew that it was damaging small businesses and even big businesses. People’s livelihoods depended on it. What was the plan going forward? How would the unbundling of Eskom into three divisions balance the need to secure Eskom’s financial position? The PC had spoken about that plan and adopted it. She thought it important that at a particular point, the PC needed to try to focus on the issue of unbundling, so that it was able to deal with it both as a Committee and as a society. There seemed be a deviation from the plan. The reality was that there were supposed to be legal prescripts around that plan by December. She wanted to find out what the balance that needed to be done was.

On the migration of customers to alternatives to Eskom’s electricity supply, it would definitely lead to a decline in revenue. Eskom would not be able to regain that customer base. How did Eskom envisage optimising its revenue? Had a transfer pricing mechanism for electricity between these three divisions been determined, and would this further increase the electricity tariffs? What was Eskom’s strategy to increase its revenue and reduce its debt liability? She thought that that was a question that bothered everybody at that point. The base load of electricity supplied in South Africa would have to be supplied by Eskom. The base load for satisfying local demand would definitely grow, and this was one move that she thought the PC should be supporting. The PC needed to come up with solutions to the quagmire South Africa found itself in.

The Office of the Auditor-General of South Africa (AGSA) had indicated that Eskom had been audited by the private sector over time, which was a concern for the PC. Why was Eskom not audited by the AGSA, so that one minimised the issue of cost? The auditors in the private sector gave financial statements late. Did the Department have the appetite to ensure that Eskom was moved from being audited by private companies, considering the magnitude and the importance of Eskom [as a public entity, because it received its budget from the public. She thought that it was important for the Department to minimise that cost. Did the Department have the appetite to give the auditing to the AGSA?

She felt that Eskom had a “very simplistic approach” to the Soweto debt issue. There had been a previous MOU with the former Mayor of Johannesburg, the late Jolidee Matongo, which needed to be signed to allow City Power to supply energy to its own residents. How far was Eskom with that, and what were the pros and cons? What was the way forward around that? With the communities of Soweto, it was not a secret that community members wanted to pay for electricity. The PC wanted to encourage communities to change the culture of not paying for services.

With the issue of load-shedding, Eskom would have realised that the issue of meter box visits were important. There were parts of the community that had welcomed that, besides what had happened historically. What was the plan to make sure that Eskom spoke to that type of situation, so that it was putting meters in? People could then pay for what they consumed. The culture of payment was important, and the PC should encourage South Africans who could pay to do so. The Soweto situation needed to be handled better. She wanted to couple this issue with the issue of big businesses. The PC was told that those businesses did not owe much, but let it be specific on those that were not paying to Eskom, and where Eskom was not able to get what was due to it.

Addressing a question to Prof Makgoba, she said the matter of corruption and state capture had happened, and was historical. Parliament was in the Sixth Administration. However, it was still seeing lots of matters coming up, where certain officials were still in the employ of Eskom. What was being done to ensure that the disciplinary committee within the board did its work? The question became, “Where does the board come in, especially when the rot keeps on happening?” Because of irregular expenditure, there was a company that had been paid over R100 million more than it should have been. Eskom must investigate the procurement or tender irregularities itself. It seemed to her there was nobody to hold people accountable. The board needed to come closer to these procurement processes within Eskom. It was something that Eskom was not doing very well. As a board, at what point did it come in to deal with the inefficiencies and corruption that the PC saw involving the big companies?

She referred to Mr De Ruyter's TV interview, and said it had been unfortunate for him to refer to Eskom as a “dead horse.” It was really disturbing, because some Members of Parliament now had to ask what he had meant. She urged Mr De Ruyter personally, and Prof Makgoba as the Chairperson of the Board, to be aware because they were civil servants, that such statements might be taken out of context when broadcast in the media. It was upon Mr De Ruyter to correct the "dead horse" statement, and to apologise to South Africans. It seemed to indicate that he did not have faith in the direction of Eskom while the Department was dealing with the three unbundling stages. She thought that an apology should be made publicly.

Eskom's response

Prof Makgoba responded to Ms Tshabalala question on the EAF that had fallen from 69% to 64%, and what the rationale was behind that. As the plant was deteriorating and becoming dysfunctional, the EAF of the output of those plants would deteriorate over time. That was a function of the degeneration that had occurred in the system, rather than any particular importance.

Regarding load-shedding, he thought the EAF was something that related to load-shedding, but more importantly, it was about accountability and the rot of corruption. A number of investigations and disciplinary cases had taken place at Eskom, and consequence management had been implemented. That information could be provided to the PC. There were a number of cases that had joined the legal system of South Africa. Eskom had no control over that. For example, it had the Econ Oil matter, and it had the state capture issues in relation to the Guptas, etc,  that were now within the legal system. These were not within Eskom’s purview or control. Perhaps it would be useful to present to the Committee a summary of actions and activities related to stopping the rot of corruption that had taken place before.

In response to Ms Mkhwanazi on reducing carbon emissions, the long-term strategy dealt with the just energy transition strategy, which involved social impacts, job creation, and also policy alignment and cooperation agreements between various sectors, such as the DPE, the Department of Mineral Resources and Energy (DMRE), the Department of Forestry, Fisheries and the Environment (DFFE), and the National Treasury. All of those national role players were important in the overall long-term strategy of Eskom. The last two factors of the just energy transition strategy dealt with cleaner energy, decarbonisation and funding sources that would allow Eskom to carry out its plans.

On load-shedding, he said Mr De Ruyter was appointed on 6 January 2020, and Prof Makgoba was appointed on 10 January. Eskom had a board meeting with Mr De Ruyter on 16 January 2020, at which he was asked: “What is your plan, and what is your interpretation of what needs to be done at Eskom?” He wanted to list those things, and then tell the PC what the progress had been.

The first was unbundling, the second was to reorganise the executive, the third was to deal with reliability maintenance, the fourth was cost savings, and the fifth was the governance problems that had plagued Eskom, particularly the culture and corruption. This was the immediate plan that Mr De Ruyter saw in his vision of interpreting what Eskom needed to do. At every board meeting, or in-between board meetings, Eskom had received progress reports from him and his executive on each of these elements, or some of the elements. Reliability maintenance, which was the bedrock of trying to deal with load-shedding, was discussed at the board meeting of 16 January. It was only kick-started towards the middle of this year, because Eskom required money, and it required a two-year planning period.

It had about 80 units that it had to repair, and so far, it had repaired seven of the 80 units that required repairs due to being dysfunctional. Every three months or so, Prof Makgoba, as Chairperson of the Board, met with the generation team of Eskom to try and understand their problems, and to try and discuss ways of reducing load-shedding. Eskom required about R11 billion. So far, it had managed to provide about R6 billion or so for reliability maintenance. The board had discovered that there were skills shortages, particularly at the power plant, in order to monitor what happened there. Some of the board members visited the plants to see what problems were. There were issues that had been interrupted by COVID-19. The board and the executive management all wanted to reduce load-shedding and bring it to an end. It was not an impossible task, but the utility was faced with plants that had been deteriorating over the past 15 years. How Eskom would repair and restore the plants required a detailed plan in which all the role-players were coordinated. About two or three years ago, Eskom had made it clear that it required additional capacity of between 4 000 to 6 000MW. Three years after Eskom made that call, it had not happened. One could ask what the reasons for that were, and why there was a lack of policy coordination, and policy misalignments. These were all issues that impacted on the functioning of Eskom.

Ms Maotwe had raised the issues of the audit and consequence management. There was consequence management, there were disciplinary inquiries, and there were disciplinary consequences as a result of them. She had specifically asked about irregularities in Eskom’s audit. He said that Eskom had appointed a new audit company. He had made it very clear that there were things that Eskom had not been doing very well. He had tasked the CFO and his team to clear up Eskom’s house so that next year, he did not want to find in an audit report that there were issues it could have done, but had not done,. He had seen that, and it was unacceptable. He apologised to the Committee. That was the decision that the Eskom board had taken -- that it must keep its house clean and in order. The new auditors that were going to audit Eskom must be made aware that all of those issues needed to be cleaned up straightforwardly.

Eskom had been doing the unbundling into three units in collaboration with, and under the guidance of, the Minister. So far, the unbundling was on track as far as the board could see. It was ready to set up an independent transmission company out of Eskom at the end of the year. All had been working in coordination. Load-shedding was not impossible to deal with. Eskom just needed the coherence and coordination of all the role-players that govern Eskom to work together in dealing with that matter.

On having Eskom audited by AGSA, as far as he knew the late AG and the current AG had guided the process of auditing Eskom during the past two years that he had been Chairperson. He was not aware that there was a move to make that auditing public, rather than private, but he knew that the private auditing firm worked under the guidance of the AG.

Prof Makgoba asked if there were any other questions he needed to attend to.

The Chairperson said there were still Members who wanted to raise questions, but because he had had to split his time to accommodate the PC, which it appreciated, it would release him from the meeting. The delegation that remained would continue engaging with Members. If there were any questions that had not been properly answered, the remaining delegation members would answer them.

Further discussion

Ms M Clarke (DA) said Eskom had reported on its losses. Did these losses include the amounts lost to fraud and corruption, and state capture? When would the Committee receive a report on the disciplinary actions taken on those matters? How would Eskom improve in terms of rolling blackouts? She knew that the CEO did not like the Committee to call them “rolling blackouts”, but she was sure that that was what they were. There was very short-term communication that was coming through – how would that be improved? Could the CEO confirm that there had been no sabotage at the plants? There had been speculation around that.

She expanded on Mr Cachalia's question about which municipalities were not conforming to load-shedding schedules. Eskom knew that municipalities did at times work with it on load-shedding because many of those municipalities had aging infrastructure. What had been experienced was that Eskom carried out load-shedding, but then municipalities were not able to get their power supplies back on the grid. People had suffered five to six hours’ extended load-shedding instead of two to three hours’ load-shedding. Load-shedding had such a huge impact on the economy, and that further impacted businesses when they were sitting without power for an extended five to eight hours, often due to the municipalities’ aging infrastructure. Was there synergy between Eskom and the municipalities to ensure that this did not happen?

Was there any assistance from, and synergy with, the Minister of the Department of Cooperative Governance and Traditional Affairs (COGTA) working with Eskom to ensure that municipalities adhered to what was outstanding to Eskom in terms of debt?

What impact would the NERSA rejection of the multi-year tariff increase have on Eskom? There were massive increases to the consumer -- almost unaffordable to many people. Would there be another request for government bailouts? That was a “double whammy” on the public purse in the form of increases in tariffs, as well as government bailouts.

When would the investigations at unit 4 at Medupi be concluded and the report presented to the Committee? What were the reasons for the resignations of the board members, and what was the process to replace those who had resigned?

How would Eskom deal with its environmental woes? Had it been fined for not complying environmentally, and if so, what did those fines amount to? The Minister had spoken about work ethics and consequence management, corruption and fraud, which were “a huge factor” in terms of Eskom. When the Committee did an oversight visit to Eskom, it was informed that the sub-contractors were screened to ensure that they were able to exercise their capabilities in the projects that they got. When she listened to the presentation, it did not seem that that was happening. Could the Committee get clarity on that? Eskom spoke about vandalism -- was that taking place on Eskom’s sites, and what security precautions did it have? What did those security precautions cost on an annual basis?

In the presentation, Eskom had referred to production bonuses that would be paid to certain staff members. What would the criteria for those production bonuses be?

Ms Clarke asked for feedback on the CEO’s press conference that day, and why South Africa was back to stage 2 as from 14:00 that day. There were articles in the media saying that Eskom was going to do a skills search for engineers to assist the organisation. What was the status of that?

On the Eskom audit outcome, the Committee had been told about a large portion of irregular expenditure, and about the consequences that were going to be put in place. She wanted to see a quarterly report from Eskom to see how effective its consequence management was in relation to its irregular expenditure.

Ms C Phiri (ANC) asked for clarity on NERSA’s rejection of Eskom’s multi-year price determination application for the financial years from 2022 to 2023, and from 2024 to 2025. What was Eskom’s response to NERSA’s decision? What would the implication be for Eskom’s finances, given the financial constraints it was facing as an entity? How would that decision affect its targeted performance going forward?

She wanted to join her colleagues in questioning load-shedding. All were aware that Eskom was supplying other countries, such as Botswana and Zimbabwe. How was the load-shedding affecting the other African countries that Eskom was supplying with energy? Was it affecting only South Africans? She wanted to understand the consequence management that would be done by Eskom with the municipalities that were not adhering to the planned load-shedding schedule. What would it do to enforce load-shedding? Everyone wanted electricity, but if there was a challenge and load-shedding was planned for, yet municipalities chose not to abide by the planned load-shedding in South Africa’s best interests, what could Eskom do to enforce it?

Ms V Malinga (ANC) said other Members had already mentioned the trending news of stage 2 load-shedding. It seemed as if Eskom did not have a plan. She was very concerned, especially about Eskom’s maintenance plan – did it have a sustainable maintenance plan? She knew that sometimes things broke down, and one needed to do emergency repairs, etc. What was trending on the news was that two boiler tubes at Kusile and Medupi had leaks. It was “sad” that someone who was on national television was being asked about this event, and did not know who was doing maintenance on the plants. The person would just say “our senior engineers,” but did not know how many. This brought her to the irregular and wasteful expenditure that Eskom was facing. How would it monitor if it did not know how many engineers there were? Were they the relevant people to be dealing with the leaks? There was a request from the DMRE of an additional 4 000 to 6 000MW to be connected to the grid. Eskom could not manage what it had now. Whatever was being done in the power stations, how was it going to manage an extra 4 000 to 6 000MW? Did it make sense, because everything just breaks down?

The Committee had not heard about the housing built for artisans -- the “white elephant” that it went to see, where the expenditure had soared to R1 billion. It had heard only that executives were fired. Was money recouped from the executives that had sanctioned the housing and approved that project? There had been an engagement between the Department of Human Settlements, Water and Sanitation (DHSW) and Eskom, to take over the flats – how was that going?

Mr N Dlamini (ANC) asked about load-shedding. In South Africa’s situation, where it wanted to create jobs, etc., the basis of investors investing in the country would be its ability to provide a stable power supply, which it was not doing now. With increasing unemployment, South Africa had a bigger problem that was growing as it was dealing with the problem of load-shedding. It did not inspire confidence to hear the CEO saying that Eskom was a “dead horse” or a “broken-down car,” yet it still had a driver; what was he driving? It did not give the Committee hope going forward.

Eskom was going to have a very peculiar situation in the near future, in that most people would probably want to venture outside of the grid. Those people would be more in the upper-middle-class; these were the people who could generally afford to do things. It would be left with the poor people who were already not able to pay for electricity. Eskom was in a car going steadily towards "a steep fall along the road”. How would Eskom turn things around? The Committee represented the common people out there, such as Mr Dlamini’s mother, who would say that South Africa did not have load-shedding in the two years before 2019, so what had happened? Why was there load-shedding now? The Committee would explain aging infrastructure, but it could not afford to keep talking about it. What was Eskom doing about that aging infrastructure through maintenance? As a layman, he would think that maintenance was about seeing that a bearing was old, and was not working optimally; it would then be replaced. For someone to replace it, one would have to shut that one down while the others were operating.

Perhaps the Committee needed to look into who was supplying who, because he had noticed that the price of coal had increased. Coal was doing well in the markets at that moment. South Africa had a lot of coal, but still had load-shedding. Was there a correlation? If there was, what was the correlation? If this was a problem that could not be solved, what was going to be done, because one could not keep on lamenting about aging infrastructure, and still have load-shedding.

 It had already been communicated that there was going to be stage 2 load-shedding again. The Committee needed to be solutions-orientated. It knew all of the problems -- there were no new ones. It was being told about staff doing this or that, but those were human resources (HR) problems. He did not think that HR issues should be part of the Committee’s discussions. Someone responsible for HR should be able to deal with them, and they should not be elevated to the PC level. The Committee did not want to get involved in administrative issues. If there was an employee who did things in a way that were outside of what was expected, there must be procedures at Eskom to deal with employee behaviour. That should be dealt with at that level. The Committee should at most be told that Eskom had a problem with a particular employee, and these were the measures it had taken. Let the Committee not be bombarded with problems with no solutions.

The Chairperson said that it was a pity that the Chairperson of the Board had to leave. There was a concern that on 23 and 24 June, when the PC made an oversight visit to Medupi and Kusile, none of the members of the Eskom board had accompanied the PC or briefed it. Though there was an apology, that there was a session that was taking place somewhere, Members had raised their concern about the failure to send even one person to be with the Members, or to just welcome them when they visited those sites. It was not a visit at short-notice. The PC had prepared for the visit and sent all the correspondence to Eskom in time.

There was “mischief” within the load-shedding process that had been taking place in some areas, particularly in Cape Town, where load-shedding was more concentrated in the poor and working-class communities. It was raised as a concern, and he had to embark on a process of proving that that was a fact. He had to forward concerns to the CEO, because he happened to have the CEO’s WhatsApp number. There was a complaint in most areas, especially in the poor townships, that load-shedding would extend beyond two hours, to three to four hours, and even to six hours, with no electricity. When one went to Camps Bay, Pinelands and all of the affluent areas, people did not get load-shedding. He had relatives who stayed in those affluent areas and who did not experience load-shedding at the beginning of load-shedding. It was only when it came now that they had started to experience a similar situation. He extended that complaint to the CEO, so he could make a follow-up and investigate if there was that kind of mischief. If there was, then people needed to be dealt with.

Regarding the fire that had happened at Medupi and damaged some of the units there, most people had heard about it, as it was on social media and widespread. The PC’s concern was the investigations that took too long to get the individuals involved. People would perhaps be tolerant of load-shedding if they knew that the culprits who were reversing the gains at Eskom were being dealt with. “We know for a fact that there might be mischievous people in Eskom who are remnants of the previous corrupt individuals that had been dealt with, that might be the beneficiaries of those people somewhere.” Those individuals might commit those mischievous acts of backlash or retaliation. However, the reality of the situation was that if Eskom, in investigating such things, took quick action and dealt with those individuals, and let consequence management take its course, it would make people feel much more at ease. People would still have confidence that at some point, Eskom “would win this war.”

Minister's response

Minister Gordhan said that the Chairperson’s last remarks were a good starting point. Why was it that each time Eskom thought that it was reaching stability within the system, that it had tweets coming from certain quarters, and no sooner the tweets came, then one or other part of the plant experienced some kind of disruption? Unfortunately, there had not been the kind of attention required in order to figure out what was really going on. However, he thought that the Chairperson’s message was one that needed to go to all Eskom staff, on the one hand, and to those who still felt aggrieved because they had lost the opportunity "for all sorts of mischievous stuff” at Eskom, and who wanted to retaliate in one form or another, or whose egos would not allow them to accept that it was time for them to move on and leave the job to somebody else to do. There would be a significant shift if Eskom saw some of those changes, together with what was referred to as the culture issues within Eskom and its 40 000-odd staff.

The CEO would add more information on how long load-shedding would go on for. The bottom line was that it would go on until Eskom could put a few more thousand MW on to the system, notwithstanding the problems -- not just internal, but also externally inspired. The opportunity would then be created to do the kind of maintenance that was required to be done, provided that the contractors were held to account and deliver the quality of what they were required to deliver.. All of those factors, which he accepted unreservedly, were causing immense amounts of frustration among South African people, whether they were residents in middle-class areas or working-class areas, and whether the businesses were large or small. Government required an integrated response to the crisis. It would be one which ensured that each role-player, based on the legislation that informed their work, did what was necessary, did it timeously, and did it with the necessary sense of urgency, to ensure that the work that was needed to stabilise Eskom could take place.

Eskom was going through its current issues, and would still go through them for some years to come. The question was, “When would we have a stable Eskom?” There would be a fair amount of managed instability, rather than instability being misinterpreted. Eskom would manage change over a period of time. Currently, it had to repair what it had to repair. It had to complete the unbundling process. It also had to introduce the changes that were required for a just energy transition, starting at the Komati plant. As it went beyond that, and implemented the nationally-determined contribution that South Africa had put on the table at the 2021 United Nations Climate Change Conference (COP26), that would also have implications, both in respect of pollutants, and carbon emissions more generally.

The Department’s aim was that load-shedding must end sooner rather than later. It would end when all of those things were done properly, but in particular, if Eskom had extra MW on the system. One could get extra MW by doing maintenance better, and also by doing the operations that were required to be done by managers at different levels within a power station, and within Megawatt Park itself. If everyone did their bit of work with the necessary discipline, without outside noise influencing them in any kind of way, there would be the right kind of outcomes. Additionally, if people understood that they were managing a public entity that belonged to the people of South Africa, and the outcomes of which -- the megawatts -- was something that the people required, and what the country required for both internal and external investments, then there would be the right kind of outcomes. However, if the culture was one where everybody, or a significant majority, wanted to take shortcuts -- and there were indications that that was still the case -- then those outcomes would not eventuate.

Culture change was easy to talk about, but difficult to get going. Therefore, all of the Members’ voices needed to be added to the Department’s voices as well, regardless of party and political background, to tell the people at Eskom that they worked for South Africa. It was important that the people at Eskom became honest workers, and stopped any nefarious activity that they might be involved in. That nefarious activity was causing huge damage both to Eskom’s reputation and to the country as a whole.

The Department had heard what the PC had said about a plan not only for maintenance purposes, but also a plan for beyond today. There was work being done on that. The outcomes of that were under discussion, and hopefully an announcement would be made sooner rather than later.

Eskom members of the board were on the Zoom call, and could assist where the Chairperson required them to do so. Mr Cachalia had asked for a lot of detail, and Eskom colleagues would respond to those questions to the best of their ability, save where there was commercially sensitive information. However, even in that case, the Minister would insist on there being absolute transparency, so that facts would be known by whoever was interested.

There seemed to be two parts to the audit opinions. One was the going status concern, which was understandable because of the debt burden that Eskom was carrying. As Eskom went through the financial restructuring process, some elements of the financial restructuring would take place without compromising the lenders to Eskom, and in consultation with them. That process would take on a greater deal of urgency and sharpness, because Eskom had a clearer destination.

With irregular expenditure, there were two issues. The first was the historical irregular expenditure. In that regard, the Department had been trying to persuade the AG, and the Accountant-General in the Treasury, that the irregular expenditure such as the corruption that took place at Medupi and the documentation related to that, must be ring-fenced in some way so that it did not carry over from year to year. All of the Members and the public would know that within that ring-fenced amount, there were so many billions of rands of irregular expenditure. Where it was justifiable, the Treasury would give Eskom the condonation required. Where documents needed to be tracked down post facto, everybody in Eskom and similarly in other state-owned enterprises (SOEs) would do everything possible to track down the documentation. As part of the nefarious activities of the past, documentation might not be available as well. The Department was still of the view that the state capture part of irregular expenditure was not being dealt with properly, and could be dealt with “in a more elegant way” if the irregular expenditure was in two different pockets. Both such “pockets” would be transparent, both would require the necessary attention from the financial people, and both needed to be accounted for and dealt with in different ways and at different stages, depending on the processes that the Department agreed upon.

On the AGSA conducting the audits, that had been the direction the Department had agreed on with the late Mr Makwetu. Ms Maluleke, the current AG, understood that as well. As the AGSA developed the capacity, it would take over the audit, as it was doing in the case of some of the smaller SOEs. The point was validly made that the Department might get better outcomes. What was noteworthy was that the private sector audit companies that had audited Eskom and other SOEs during the state capture period had never exposed the corruption that went on. There must be some process by which these companies which collected massive fees at the time -- on average that would be more than R100 million in fees a year -- must account for the fact that they did not disclose, or look for, the corrupt transitions that took place at the time.

The Minister commented that there was a difference between a blackout and load-shedding. There had been blackouts in the states of Texas and California. There had been blackouts in other parts of the world where the grid collapsed. As a result of high demand on the grid, and inadequate supply of electricity into the grid, the gird collapses and that is the blackout. To then get the grid restarted would be quite an exercise. There were processes that Eskom had in place in the event that that happened. Load-shedding was to avoid getting to the point where blackouts occurred -- where the grid collapses. Load-shedding was necessary to reduce demand on the one end, because production was reduced as a result of faults at one or other units. One might like to colloquially call it “rolling blackouts,” but that did not help people to understand the difference, nor did it inform people about a “simple technical matter,” which the public should be aware of, so that it could understand what was really going on at that particular point in time.

On decarbonisation and the status of labour, he said the just energy transition was about recognising that over the next few decades, the world would go through a very significant change in the energy terrain, and therefore in the electricity chain was well, and the way electricity was produced and used. There would also be a significant change in the extent of carbon emissions that would take place as a result of all of these processes, and other processes in society. Those shifts were going to happen. Younger colleagues would be living through the experience of temperatures increasing. Some estimates said that COP26, in terms of what it had before it on nationally determined contributions, would still leave the globe increasing in temperature by somewhere between 2.4 and 2.7 degrees above pre-industrialised levels.

There were geopolitical issues involved, but the critical issue for South Africa was that government had decided what its nationally determined contribution was, and these were the decarbonisation processes that it would initiate in the country. Electricity contributed 41% of carbon emissions in South Africa, and a special presentation to the PC could be given by his Eskom colleagues. Eskom’s plan had been given a lot of positive recognition at the COP26, and that was why it was able to attract some capital (but not sufficient) for the pilot project at Komati, which would be initiated in a way in which workers were protected and retrained. The newer generation of workers would be trained in the new technologies that would be used in the production of electricity. There had to be an understanding of the impact on communities, whether they were near the coal mines or power stations, and they must not be left worse off or marginalised in the process of undertaking a just energy transition. The Department could go through those details with the PC. Within a year, the Department would learn a lot of lessons about what it meant to implement a just energy transition.

Eskom colleagues would respond to Mr Kwankwa’s question on reducing debt. The Minister added that a significant reduction in debt had taken place, as the numbers indicated, using the opportunities that a strong Rand and other factors had helped with. If such an opportunity arose again, he was sure Eskom would use those opportunities as well.

Municipal debt, and how it was dealt with, was a matter that had been preoccupying the Department and Eskom for some time. It was also an issue that the Department had discussed in an integrated way as government in a committee chaired by the Deputy President. Some municipalities were quite willing to have Eskom come in and assist them technically, and there were a few agreements in that regard. There were a few municipalities which had subscribed to the partnership model, which the Department had talked about before. The partnership model basically said Eskom would come and run their electricity system for them, upgrade it, collect the revenue, and make sure they got some slice of the revenue until the situation in their municipality had stabilised. Yet in other instances, after years of court actions and other such negotiations, municipalities such as Maluti-a-Phofung had refused to take part. In that case, one had to ask why. Whose interests were being affected as result of the approach that the Department was taking?

On the transmission network, the CEO would point out to the PC that there was a fair amount of investment -- to the tune of above R100 billion -- that needed to occur over the next ten years or so, so that the independent power producer (IPP) projects and other projects that were established in other parts of the country, particularly in the Northern Cape, had an easier connecting point to the grid. On the distribution side, there were colleagues who would make the point about municipal infrastructure. This was where municipal budgeting and Integrated Development Plans (IDPs) were of consequence. There must be a sufficient investment that took place in the refurbishment of municipal infrastructure so that the municipality could “run its show well,” distribute electricity and articulate it in an appropriate way to all stakeholders, and ensure that there were no breakdowns.

A division to look at renewables was a matter that was being looked at, and when the Department made an announcement, some of those things would become clearer. There was some advanced thinking in that regard.

Regarding the Soweto debt, good discussions had been taking place with former mayor Geoff Makhubo, and once the issue of the mayor and mayoral committee were settled next Monday, as required by legislation, the Department would ensure that Eskom continued those discussions. It would not be a panacea, because there were many assets that City Power would have to pay for and assets it would have to run. City Power would have to work out what it could afford to do and what it could not afford to do. It was reassuring to hear that they were of the view that the culture of payment was something that they needed to encourage, and that not everything could be free in South Africa, because it was not affordable at this point in time. There were communities in different parts of the country that engaged in illegal connections and overburdened transformers and mini substations. Some people were involved in sabotaging some of the equipment, and bypassing meters, etc. The Department could supply photographs, but the Minister was sure that many colleagues were aware of attempts to bypass the regulatory obligations that users of energy actually had. That was the kind of issue that the CEO and his team actually had to deal with going forward.

Regarding Ms Clarke’s questions, where information was required, the Department would supply that information. The CFO would address the implications of the NERSA application.

Referring to the resignation of board members, he said people sometimes resigned without giving a reason. In some instances, the Department was told informally that there were other businesses that such people were involved in, and that they needed to move on and give attention to those businesses. There had been several instances like that. He acknowledged that the replacement was a matter that had taken a very long time. The Department was looking for the right kind of balance, that would ensure that Eskom would have the right governance, but also the right skills at the board level to guide it through the process that he had described earlier.

The Minister agreed with Mr Dlamini that if the Department did not get the electricity situation right and get it right with a far greater sense of urgency and in an integrated way, whatever the policy brief of different people was, with the sole intention of making sure that the country’s reputation was retained, and that electricity did not become a constraint on economic growth, then new possibilities could be explored in order to achieve that objective. An integrated approach would be crucial in that regard as well.

He said there seemed to be some indication that there might be mischief around, but he did not want to dilute the strength of what the Chairperson had put forward to the Committee.

South Africa had serious issues on the electricity front. The Minister noticed that Mr Cachalia wanted to intervene at that point, which he thought was “rather impolite.” He had been asked to answer questions, and he would do so. He needed to be given adequate time to answer, just as Mr Cachalia had time to list his questions. That was the purpose of this transparent exercise. Constraining the Minister would not help Mr Cachalia in any way.
The Minister concluded by saying that there was hope ahead, but it was still going to be a “long-ish” journey, which would be made as short as possible, with the different interventions that the Department could hopefully make sooner rather than later.

Mr De Ruyter's responses

Mr De Ruyter replied to the comment by Ms Mkhwanazi regarding irregular expenditure, saying that this had been inflated by bringing to light irregular expenditure incurred in previous years. For example, in the 2021 financial year, where there was irregular expenditure reported of R2.158 billion. R1.251 billion was related to the prior year's irregular expenditure, specifically a contract that was concluded with a fuel oil supplier that was currently the subject of litigation to recover that irregular expenditure. The challenge that Eskom had was that in the process of cleaning up, the irregular expenditure was inflated by prior year disclosures that Eskom was bringing to the attention of the board as it continued to turn the business around.

A number of Members had commented on stage 2 load-shedding. It was “very regrettable,” and Eskom wanted to apologise for implementing it. Load-shedding was a deliberate intervention by the system operator to curtail demand on an equitable and rotational basis in order to ensure that Eskom could avoid a total system blackout. It did have contingency plans in place for a total system blackout in the highly unlikely event it occurred. Such an event would require between six and 14 days to restore electricity countrywide. That was something that Eskom wanted to avoid at all costs, and in order to do so, when generation capacity was constrained because of trips and failures, then it was forced  -- in accordance with long-established practice and with the grid code -- to implement load-shedding to prevent the far more negative outcome of a blackout. The terminology may have struck people as “pure semantics”, but it was not. “Blackouts” and “load-shedding” were two very different phenomena.

Eskom had tried to improve its communication about load-shedding. This was something that it did proactively, and it was trying to give as much advance warning as possible. The nature of breakdowns was that they tended to be unreliable and unpredictable. It was thus difficult to forecast a precise time and date long in advance when there would be load-shedding. Eskom was trying to be transparent in an endeavour to ensure that the South African public was fully informed in order to enable them to make alternative plans. Eskom understood that this was a very inconvenient and disrupting issue, and it was fully cognisant of the impact load-shedding had, not only on the economy but on the daily lives of people, in particular on the matriculants currently writing exams. The solution was to accelerate the immediate procurement of additional capacity in the range of 4 000 to 6 000MW.

Members were aware that Eskom was unable to buy electricity of its own accord. Eskom was the single buyer of electricity, but the procurement process was driven by the Independent Power Producers (IPP) Office, which reported to the DMRE. The IPP Office drives a competitive bidding process in terms of bid windows. Those bid windows were then negotiated by the IPP Office, and were then presented to Eskom for approval and acceptance by the Eskom board, having regard to the fiduciary duty of board members to protect the interests of the entity. The Eskom position at the moment was that it was very grateful that the IPP Office had recently identified the preferred bidders for bid window 5, and that would bring an estimated 2 600MW on to the grid. It was clear from that number that that would be insufficient to address the total electricity shortfall. Eskom was of the view that still more capacity was required. Eskom anticipated that the recent announcement by the President of the lifting of the licensing restriction from 1MW to 100MW would enable more capacity to be brought to the grid sooner, rather than later. Eskom was investigating options to accelerate grid access in that regard.

The Medupi unit 4 explosion was a very regrettable incident. The investigation was still continuing. Eskom had had the first preliminary report by its internal technical forensic team. That was completed two weeks ago, and Eskom was in the process of working through the findings of that report. Once that was done, it would be able to share the results with the Committee and with the public as well, bearing in mind that it had been a very significant incident that played a major role in the current load-shedding that South Africa was experiencing, with a loss of generating capacity of approximately 720MW, which would take between 18 to 24 months to recover. This was clearly a matter of national interest, and Eskom needed to identify if there was any negligence or malicious intent. If there was, then it needed to bring those individuals to book for their actions or inactions.

Mr Cachalia had furnished Eskom with the questions that he raised, and Eskom would provide detailed answers to those questions in order to provide full transparency.

Mr De Ruyter gave a high-level number to give context to diesel consumption so far. By the end of September 2021, Eskom had already consumed some R2.5 billion for its open-cycle gas turbines at Gourikwa and Ankerlig, which was significantly higher than its budget. That was a consequence of the lack of reliability of Eskom’s coal-fired systems. The coal-fired system was not delivering the MW that Eskom required, and it was having to top it up with very expensive diesel generators. Eskom could give Mr Cachalia full detail of the cost of the new build, and a breakdown of exactly what that entailed.

Eskom could give an idea of the type of interventions that it had achieved after correcting those design defects. By April 2020, the monthly EAF at Medupi was sitting at 46%, which was far too low. After implementing these design defect corrections, it had been able to improve that to above 70% by July 2021. Eskom had seen some weaknesses as a result of the operational challenges that it had. All in all, it was clear that it had addressed the bulk of the design challenges at Medupi, and that that plant was in a position to deliver far closer to its design specifications. The cost of implementing those design corrections had come at a cost of R330 million per unit. Multiply that by six units, and then Eskom also had to do similar corrections at Kusile, where that process had commenced. There was still a way to go in addressing those design defects.

A Member had raised questions about Eskom as a going concern. Mr De Ruyter requested Mr Cassim to give comments on its going concern status and the steps being taken to address that.

Mr Cassim said that Eskom was focusing on its own costs. Government support was still earmarked for the next two financial years. Eskom was working within those cost and funding requirements to ensure Eskom remained a going concern, which was presented to the board at the six-month review and annually. Eskom appreciated the support that it had received from government and the National Treasury.

On financial statements not complying to standards, that was specifically referring to one financial statement around the irregular expenditure and disclosure note in terms of completeness. A lot of that related to legacy contracts. The second one related to the inventory balances where, as Eskom indicated, at the time of meeting the submission date, it was still busy with the auditors regarding the generation inventory. It had put in processes to make sure that there was no repeat around the inventory counts so that it could meet the 31 May 2022 deadline for submission to the National Treasury next year.

Mr De Ruyter responded on Eskom’s plan to eliminate load-shedding. In spite of its attempts to carry out reliability maintenance at its plants, the risk of load-shedding would be diminished over time as it carried out its reliability maintenance programme, but it would not be eliminated. That risk would be eliminated only by the addition of further capacity to the grid, which was the 4 000 to 6 000MW that he had referred to earlier. That was therefore the reason why, for past two years, Eskom had repeatedly put it out in the public and in its engagements with government, that bringing on additional capacity to the grid should be pursued as a matter of urgency. Eskom was therefore pleased to see the progress going forward.

In response to Mr Gumede, he agreed that the loss of R18.9 billion was substantially attributable to a 6.7% reduction in revenue during the year in review, bearing in mind that Eskom had moved on about eight months after that. The loss in sales was due to the fact that Eskom had seen a significant decrease in electricity consumption during the initial phase of lockdown during the previous calendar year. Eskom had seen a return to normal consumption patterns during the current financial year. Without giving a forward-looking statement, he thought it was fair to say that Eskom’s numbers should look better for the current financial year once it released those results. The half-year results should be ready for release before the end of the current calendar year.

Work by contractors remained a challenge. Part of the challenge that Eskom had with ensuring quality work by contractors was that the work that needed to be carried out required a high level of skill. If a contractor did not have an adequate pipeline of work for his staff, then that staff would very often be retrenched or let go, and it was therefore very difficult for such a contractor to attract the necessary skills to the business. Eskom thus found that the current avoidance of long-term, strategic contracts to be concluded with original equipment manufacturers in accordance with PFMA regulations made it difficult for contractors to build up a skills base, and then retain it. That was one of the consequences of the current procurement environment in which Eskom found itself.

Municipal debt remained a “substantial headache” for Eskom. It was sitting with an overdue municipal debt of approximately R41 billion. That was significantly more than what it was owed by businesses. With all of Eskom’s other customers, except the municipalities and Soweto, the overdue debt was less than 1% (0.7% to be specific). With its key industrial customers, the payment rate was 100%. There were no key industrial customers that did not pay their bills. The reason was that if those customers did not pay their bills, Eskom could cut them off. Because of court action, Eskom was interdicted from pursuing the same approach with municipalities. Therefore, the consequences for non-payment for a municipality were very different to a key industrial customer. The sanction of severing the connection was not available for Eskom.  

Mr Kwankwa’s question had put the focus on people and culture. When an organisation needed to be turned around, it was important to focus not only on the “hardware,” but also on the “software." There had been a concerted effort to improve communication internally, and to look at staff motivation and morale, so that Eskom could engage its employees on a continuous basis and keep them informed, not only via face-to-face town hall meetings, but also through newsletters and regular communications on a number of issues. The culture surveys that Eskom did from time to time had borne out that there was a positive change in the attitude of Eskom employees. There were 42 000 employees, and some of them possibly had loyalties that lay with previous incumbents, which therefore may complicate matters.

Eskom was driving KPIs on localisation and industrialisation very hard. Eskom was probably one of the largest buyers of goods and services in South Africa. It procured about R141 billion in goods and services, including coal, every year. It could therefore play a major role in driving demand for locally manufactured goods. In conjunction with the Department of Trade, Industry and Competition (DTIC), Eskom continued to implement government policy in that regard. It was also part of the shareholder compact that it had with the DPE.

Eskom wanted its customers to pay for new connections. Where it rolled out new connections, it did have pre-paid meters that it implemented. There was also the free basic electricity programme that was funded by the government by means of subsidies to municipalities. That provided for an amount of 50 kilowatt-hours (kWh) per month to indigent users. Those users had to register with their municipality in order to qualify. That relieved some of the burden of electricity costs to those indigent users, but also secured Eskom’s payment in a positive way, while enabling it to also play its role in providing electricity in hitherto sub-serviced areas. It was in the process of increasing the conversion to pre-paid meters. It had about 180 000 households in Soweto that it still needed to convert to prepaid meters. Every household had a meter, just not a pre-paid meter. It was not as though there was an absence of control; it was just that revenue certainty with a pre-paid meter was higher than with a post-paid meter. Eskom currently had about 30 000 pre-paid meters that it was rolling out. There was a significant opportunity for Eskom to procure more in order to improve its revenue security.

Ms Tshabalala had asked why the EAF was falling. With the exclusion of Medupi and Kusile, the balance of Eskom’s coal fleet was now more than 41 years old. The plant had not been maintained adequately, and in a number of instances, midlife refurbishments had not been done. That had resulted in a plant that was unpredictable and unreliable. As Eskom took more plants out for maintenance, the way that the EAF was calculated was that planned maintenance was also deducted from the overall availability to arrive at the EAF. That put one in a position where the more maintenance one did, the lower the EAF became.

The performance of the coal fleet had been disappointing. Eskom had seen a number of units where it had significant challenges, particularly with its “balance of plant.” These related mainly to cooling towers. Some of those cooling towers had not been maintained for decades, and in the same way that a geyser would eventually scale up if hard water was used, those cooling towers, if not maintained adequately, would clog up and become less efficient. This was the case particularly during summer, when ambient temperatures were high, the cooling of steam was significantly prejudiced, and that led Eskom to a position where the output from its fleet was reduced because of vacuum losses. Eskom could schedule the maintenance of those cooling towers only when there was a general outage. It could not do maintenance while the plant was online, so it had to schedule and coincide the maintenance of those cooling towers in line with its maintenance programme. Therefore, there was a period of about three to four years during which Eskom would catch up on the maintenance of the cooling towers.

 It did not anticipate that there would be an increase in cost because of transfer pricing agreements between the divisions. The tariff regulated was by NERSA, so Eskom could not increase its transfer pricing, and in so doing, raise the cost of electricity. That was a regulated element. In certain instances, municipal mark-ups on electricity tariffs were very high. That led to a cost of electricity that was in some cases as much as 161% higher than the cost of Eskom electricity. That was a potential area that NERSA could also consider.

The AG was responsible for the Eskom audit, and did so in partnership with private entities. That was the current way forward. In the future, the AG might take over the audit in total, but at this point in time, the AG was a close participant in the audit process, together with the private companies.

Eskom had made very good progress in discussions with the City of Johannesburg on the handover of Soweto and Sandton to it. In the interregnum that Eskom found itself in, it had some challenges with stability, which were also due to the very unfortunate and tragic passing of two subsequent mayors. Eskom again expressed its condolences to their next of kin for that loss. Eskom had a good opportunity to align the political accountability with operational accountability. There was a “very keen” willingness. The MOU that was referred to had been signed by both sides. What needed to happen was for the City of Johannesburg to appoint an advisor to assist in the structuring of that transaction. It was potentially a large and complex transaction. Due diligence would be performed by the City of Johannesburg on Eskom’s relevant assets and financial statements. That process needed to be completed before that transfer could take place.

Mr De Ruyter said there was definitely still ongoing corruption. Eskom was uncovering more and more of it. It was trying to implement control measures to stop opportunities for corruption. For example, the bar-coding of spares in Eskom’s warehouses was something that had not been implemented in the organisation. This was a huge omission, because bar-coding was a fundamental control tool that would allow Eskom to maintain far tighter control, and it had admittedly been very slow in implementing that solution. It was putting pressure on the system to accelerate the implementation of bar-coding, which would give it far better control, and avoid the type of write-offs the CFO had referred to when he gave his presentation. Eskom had capacitated its forensic investigation team, and it was very active in investigating allegations. It did have a significant backlog of cases. It would therefore take some time to catch up, bearing in mind also that by their very nature, corrupt acts were done with subterfuge. These cases were not easy to investigate and solve.

Ms Clarke had asked about disciplinary action. Eskom was taking disciplinary action against four people who were accused of malfeasance and corruption. There was a disciplinary process that was followed – typically the accused was suspended, and then a disciplinary hearing took place. Dependent on the outcome of that process in accordance with labour laws, Eskom had the option to dismiss that person. That had happened in a number of instances.

The consequences of state capture were very much alive. The notion that state capture ended with the private jet of a certain family leaving Lanseria Airport was not well founded. It had continued, and Eskom was still sitting with the ramifications of it. It was of the view that there were still networks in place that had been established during the time of state capture. Those were still active, and were “definitely not in place with a view to have the best interests of Eskom at heart.”

The Minister had mentioned the role that Eskom was playing in assisting those municipalities who were willing to enter into active partnership agreements to allow Eskom to help them. In the case of Maluti-a-Phofung, the municipality that had declined all attempts to assist it -- it owed Eskom about R6.1 billion. One may speculate as to the reasons why that debt had been allowed to build up to that extent. Eskom had requested through the political task team assistance from COGTA, but there were a number of constitutional reasons why the National Government could not interfere in the sphere of local government. Therefore, there were some legal challenges involved in getting directives and taking over. In some instances, in Emfuleni municipality for example, administrators had been appointed to assist an ailing municipality.

Tariff increases were required to match cost reflectivity. Eskom had engaged with NERSA on a number of occasions to implement the multi-year price determination methodology. That had not always been the case. Regrettably, Eskom had had to engage in court action, where it had prevailed. The origin of the large Eskom debt could be traced to the construction of Medupi and Kusile where, at the time, the shareholder had declined to inject equity upfront to fund the construction of Medupi, Kusile and Ngula. Because of the fact that Eskom had to borrow money on the market to fund these projects, without being able to recover the costs of these borrowings through a cost-reflective tariff, Eskom had no alternative but to build up its debt to its current unsustainably high level. That was because of the fact that NERSA did not allow for tariff increases, as had been the assumption when equity support was declined at the inception of these projects.

Eskom had significantly stepped up its security precautions at its plants. It had put in place drones equipped with infrared cameras that patrolled the perimeters of its plants at night. It had a number of successes where it had been able to apprehend cable thieves caught in the act. It could also track suspicious vehicles that were in places where they should not be. At its plants, it was rolling out the installation of intelligent cameras. These cameras were equipped with artificial intelligence to observe where there was untoward activity. For example, in the past Eskom had incidents where water valves were opened, draining a boiler of demineralised water, which then took a significant amount of time for that boiler to be filled again. Demineralised water was not water one could get through the tap -- one had to put it through a water treatment plant. Eskom anticipated that the installation of those cameras would help in preventing some of the mischievous acts that Eskom had seen.

The production bonus was confined to people involved in actual production. Executives did not qualify for the production bonuses. It was linked to very strict stretch performance targets. The way that the scheme had been designed was that it was self-funding.  If money was paid out, then it would be less than the overall value delivered by the employees who qualified for that bonus.

On the Eskom response to NERSA,  the announcement by NERSA that it was rejecting Eskom’s multi-year price determination methodology application, and the request by NERSA to Eskom to submit a new application based on an as-yet-to-be-determined new methodology, put not only Eskom but also municipalities in a very difficult situation. This was because in the absence of a proper, approved, regulated tariff, Eskom and the municipalities would not be in a position to apply a lawfully determined tariff. That had led to Eskom again engaging in legal action against NERSA because it would not be in a position to levy any tariffs if it did not have a legal basis on which it could do so.

Regarding its supply to foreign markets, Eskom was a participant in the South African power pool. Eskom was not only a seller of electricity, but also a buyer of electricity, in particular from Cahora Bassa. Eskom therefore had to be very careful how it managed its contractual relationships. If it laterally curtailed the supply to those markets, the same may be applied to Eskom. From a balancing perspective, the risk to Eskom of non-compliance was far greater. It did, however, strictly apply the consumption limits so that there was no excessive electricity supplied above what was available.

Eskom had had extensive engagements with municipalities on adherence to the load-shedding schedule. It could say with confidence that the air had been cleared. It was now in a position where the municipalities would stick to the schedule. They would abide by their obligations, and Eskom really wanted to thank them for their cooperation on that.

The maintenance plan was being carried out, but one should bear in mind the age of the fleet. Eskom could choose to spend more and more on maintenance. There was a curve in maintenance engineering called the “bathtub curve”. As one reached the end of a plant's life, one had to spend exponentially more on maintenance just in order to keep one’s aging plant alive. Due to the fact that Eskom’s plants had been run very hard, a substantial proportion of its units were in that phase where they required very expensive and very substantial maintenance interventions. That had put Eskom in a position where it had to accelerate the addition of new capacity to the grid. Its restructuring effort would assist in that. Eskom did not believe that adding new capacity would exacerbate the problems. One of the reasons was that the private sector, by and large, would be responsible for operating that new capacity. Eskom’s current resources would not be stretched with the addition of new capacity.

The Wilge Residential Development flats for artisans had been a key issue that a number of Members had enquired about. That was another regrettable example of the corruption that characterised the construction of the Kusile power station. There had been negligence on the part of the former general manager for facilities for the project that had started in 2012 to build those residential flats. Disciplinary action had been taken, and the employee was dismissed after a hearing process. Eskom had instructed attorneys to recover the losses from the employee, but did not have powers of arrest, and it was therefore in the hands of law enforcement and the criminal justice authorities to pursue those people who guilty of criminal acts. Eskom could only pursue civil matters as an entity.

The Chairperson said Members had to be in the House at 14:00. He checked if there were any urgent follow-up questions.

Further discussion

Ms Tshabalala followed up on what she raised about Mr De Ruyter’s media remarks. She would appreciate his response to this.

Mr De Ruyter explained there was a colloquial expression of “you should not flog a dead horse.” This meant that when one had a dead horse, changing jockeys or appointing a committee to investigate the dead horse was not the way to go. If there was any discomfort caused by the use of that colloquialism, he was terribly sorry for that, and he withdrew that remark.

Chairperson's concluding comments

The Chairperson thanked the Department and Eskom delegation. South Africa was in a very difficult situation. The meeting was taking place after a serious occurrence. It frustrated the PC, as it was at the forefront and received complaints. Sometimes people would put pressure on the PC to respond on technical or managerial issues. It would try to explain to people that that was for Eskom to answer to those issues. Even that day, he had been bombarded with a lot of approaches from people who wanted to ask the PC some questions. He had said that the PC needed that meeting first, so that Eskom could be in a position to take it on board with confidence and clarify and explain to it. The PC had to bombard Eskom with questions. It was only after the PC had received answers to those questions that it would be able to pronounce on certain matters. The executive -- in this instance, the board and the Ministry -- understood the kind of pressure the PC was under. The PC understood that the executive was also under pressure. They were all frontline workers in with this electricity problem. The PC knew that the problems were complex, but he thought that society expected the PC to deal with the issue.

The PC had come from the oversight visit in June very much motivated when it heard that Medupi was almost finished and all units had been done, and that all that was left was commissioning. It had also got another positive report about Kusile. It came back as a Committee a bit positive, and it was really frustrating to start seeing on social media the fires that were reported to be taking place in these power stations. That was a serious frustration to the PC. It hoped that the issues it raised would be resolved.

Regarding the problems with the AG, he thought it was not helping for Eskom to consistently deny or reject some of the issues raised by the AGSA which differed from Eskom’s opinion. It was not helping the PC, and it was not helping society to understand what was happening. He suggested a process of taking each other into confidence, so that Eskom and the AG were on the same wavelength in relation to the problem. If the AG was claiming that there was no consequence management, they needed to sit down with the AG before it came to the PC. When the outcomes were available to the public, the outcomes would reflect as if the CEO was not making any improvement. The AG had the final word on determining whether there was a qualified or unqualified audit opinion. It would be very important if both groups sat down and tried to resolve those matters. He was not an accountant, so it might not be as easy as he was suggesting, but he thought that there was some kind of engagement that was needed to be on the same wavelength. It must not be just a question of “qualified with no explanation as to what had created that,” so that society could understand that “we were still held up by the legacy of state capture,” if that was the case. It must be something that was clear to everybody.

The PC wished Mr De Ruyter luck to resolve those issues. It knew that he was under pressure; all eyes were on him. The Chairperson did not wish to be Mr De Ruyter in those circumstances, but he thought that those issues had to be resolved. He was supposed to be fit to confront those issues. The Chairperson knew that the Minister had to go and confront Parliament with some other questions, which might not be far away from the questions the PC had been asking in the meeting. The Minister was also under fire. Therefore, the PC wished him well, and wished him good luck in dealing with those issues.

The meeting was adjourned.


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