Eskom 2020/21 audit & investigations: hearing with Deputy Minister

Public Accounts (SCOPA)

23 November 2021
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary


The Standing Committee on Public Accounts (SCOPA) in a virtual meeting conducted a hearing on Eskom’s deviations, expansions, audit report and investigations. The Committee was not pleased with the number of repeat findings in the Eskom audit report. Last year SCOPA was unable to conduct a hearing on the 2019/20 audit but at least both the Eskom Board and the group chief executive had had enough time to analyze and process the 2019/20 audit to prevent repeat findings in 2020/21, but unfortunately that is not the case. According to the Auditor-General, the audit outcomes are stagnant with many repeat findings. There were serious concerns about project management and consequence management at Eskom and there is slow progress in recovering the money lost.

Eskom noted that efforts are being made to introduce cost efficiencies and savings. In 2020/21, Eskom saved R14 billion and the current year's target is R20 billion savings. The latest year-end forecast indicates that R17 billion of the R20 billion target will be achieved. Eskom is also working on a solution to resolve outstanding municipal debt which is R40 billion. Another sticking point is for Eskom to be able to secure cost-reflective tariffs. Notably, Eskom has a debt burden of near R400 billion, which cannot be serviced with its current cash flows and operations. Eskom wants government to relieve its balance sheet of as much as R200 billion in debt, and while discussions are ongoing, there has been no agreement on the matter yet.

A lifestyle audit of 383 executives and senior managers and their partners highlighted 34 high-risk cases that were referred to the Special Investigating Unit (SIU). Of those cases, seven resulted in no adverse finding. However, 11 resulted in referrals to Eskom for disciplinary action, and seven employees resigned during the investigation. One Eskom official was dismissed on unrelated charges. A further three cases are being referred to Eskom for disciplinary action, while the remaining five cases are still under SIU investigation.

The Committee will visit Eskom, Medupi and Kusile for two days in early 2022.

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed the delegations from Eskom, Department of Public Enterprises (DPE), National Treasury, Auditor-General South Africa (AGSA) and the Deputy Minister of Public Enterprises while noting the Minister’s absence due to another engagement.

It is important to state that when it comes to Eskom, something has got to give because all is not well and is increasingly beyond the parameters of what is be acceptable. The audit report has findings which are generally a cause of concern to the committee and less time should be spent on debating the semantics of load shedding or blackouts and focus on the key fundamental of keeping the lights on. This is a problem that has unsettled South Africa since 2008, and its implications on the public are far reaching. Year after year it is a case of déjà vu and the economy and the people must hold their breath due to the uncertainty that exists at Eskom notwithstanding the findings of the irregular and fruitless expenditure, as well as deviations. All those factors combined provide a conducive environment for the crisis that exists at Eskom. It is a social, political, socio-economic imperative to keep the lights on. Eskom must shape up at all levels and in every element.

Deputy Minister’s opening remarks
Mr Phumulo Masualle, Deputy Minister of Public Enterprises, said that the Chairperson is right in saying that the challenges that Eskom is facing are too big and that there is a need for a decisive departure from the status quo for energy security for the country. DPE is working with Eskom in fixing the situation and they are making strides, but some problems still persist. The Eskom team will explain the interventions made in response to the current situation at Eskom.

Eskom audit findings and consequence management: hearing
Mr B Hadebe (ANC) noted that SCOPA was unable to conduct a hearing on the 2019/20 Eskom audit outcomes. He had hoped at least the Eskom Board and the group chief executive had had enough time to analyze and process the 2019/20 audit to prevent repeat findings in 2020/21, but unfortunately that is not the case. According to the Auditor-General, the audit outcomes are stagnant with many repeat findings. Firstly, the annual financial statements that were submitted for audit purposes have a lot of material misstatements. This is the same finding as the previous financial year. Secondly, appropriate steps were not taken to prevent irregular, fruitless and wasteful expenditure highlighted in the previous financial year. On procurement and contract management there were insufficient records, which is a worrying fact as it contributes to many of the findings.

The auditors stated that there was insufficient audit evidence that goods and services were procured in a fair, equitable, transparent, and cost-effective manner, which is in transgression of section 217 of the Constitution which speaks about procurement. The same finding was noted in 2019/20. Other repeat findings are insufficient evidence that construction contracts were awarded to contractors registered with CIDB; insufficient evidence that commodities designated by Department of Trade and Industry for local content and production were procured from suppliers who met the prescribed threshold; and insufficient evidence that financial misconduct allegations were investigated except for high-profile cases. There is also insufficient evidence that the theft, fraud, extortion, and forgery of documentation of a value exceeding R100 000 had been reported to the SAPS plus disciplinary steps were not taken.

There is insufficient and inadequate evidence that disciplinary steps were taken against officials who incurred irregular, fruitless, and wasteful expenditure despite the recommendations to Eskom in 2019/20 that investigations must be conducted and finalized within reasonable time and disciplinary processes initiated. The irregular expenditure of R37.2 billion as a closing balance is incomplete due to missing documents that could be billions of rands in undisclosed irregular expenditure. He asked if consequence management has been enacted on the officials who failed to keep records for audit purposes. He asked who the officials are and what led to the disappearance of the documents.

Mr Malegapuru Makgoba, Eskom Board Chairperson, replied that he accepts that there are repeat findings and it will be confirmed by the executive that the Board has noted this and have been forthright to the executive management that the Auditor General findings must be cleared. The Auditor General was explicit that there was no deliberate deceit or hiding of records and that what they audited was a fair reflection of what happens at Eskom; several investigations have been carried out. “Several cases have been reported to SAPS, but they have their own way of doing things, so there are lots of activities that are taking place to try and address the issues raised by Mr Hadebe". At the end of the last financial year, the Board made it very clear that Eskom should not continue with repeat audit findings. He, the Board, and the executive management are also not happy with the status quo and will do whatever it takes to change it. What is being reflected as a plethora of irregularities is a culture that has existed for over a decade, but they are trying to deal with it and the evidence will be produced.

Mr André de Ruyter, Eskom CEO, said that the statement that there are billions of rands in undisclosed irregular expenditure is not supported by the facts. “The statement that there was a deliberate attempt to mislead the auditors is a very grave statement and accusation and, with respect, I do not believe that it is supported by facts”. On the audit qualification, there were four major matters and the first one is the material uncertainty on Eskom's status as a going concern, and that relates closely to the ongoing debt challenges, including non-payment predominantly by municipal customers. A qualified audit opinion was raised on irregular expenditure in terms of the PFMA and this impacted compliance of the financial statements with irregular expenditure disclosure notes, expenditure management, procurement, and contract management, as well as consequence management and some internal control deficiencies were noted as a result. The third element was a correction to a misstatement on inventory and finally revenue management in collecting all revenue.

Mr Calib Cassim, CFO: Eskom, noted that there are key findings on irregular, fruitless, and wasteful expenditure and this has been discussed by the Board alongside the executive to resolve the findings. They have taken time dealing with the historic transactions, but they believe that they are making movement in the right direction even though there are some challenges that remain. In its submission to National Treasury, Eskom indicated that they are looking into the inventory balances for generation and they had not finalized them and that the balances were likely to change by the time the audit was concluded. The key audit matters included compensation events relating to the build programme which they had not concluded at the time of submission as they had to go back to the inception of those build contracts. Trying to find the managers responsible who may have left the organization and getting the necessary documentation in place as far back to 2007 has taken some time and Eskom worked with the auditors to finally conclude that. Eskom also dealt with accounting for the pension fund and that has been resolved. Eskom also dealt with residual values in terms of benchmarks and assessed the condition so there is no intention from Eskom to misrepresent numbers as highlighted. They concluded the audit and made the necessary adjustments. He acknowledged the challenge with inventory management at the power stations and they have put controls and audit checks in place to ensure that there is no repeat of that in the next financial year. They are also looking to automate their logistics and warehouse system.

On revenue management, Mr Cassim said that they are making every effort to collect the outstanding revenues with a focus on the big-ticket items, including the municipalities, but there are several steps that are taken monthly by Distribution to remind customers of what is outstanding and what is due to Eskom. In the last financial year, they sent about 63 000 reminders per month to customers and 40 000 follow-ups were sent per month to customers. On average they have about 25 000 disconnection requests and 57 000 customers were disconnected in 2020/21. They implemented 1 667 payment arrangements and the payment rates of Eskom have increased. However, they acknowledge that in terms of the auditor’s sample, Eskom could not demonstrate that all the specific steps were taken and there are valid reasons for that, including all the cases that have been undertaken.

On irregular expenditure, Mr Cassim said in 2020/21 they updated supply chain management (SCM) procedure and procurement to align with National Treasury instructions. They have also done several training sessions on the findings of the irregular, fruitless and wasteful expenditure. Their engagements with National Treasury have improved and they have received some condonations for irregular expenditure from Treasury in the last financial year. The historical transactions need to be ring fenced separately and the focus should be on financial year 2021/22 and moving forward because it takes a lot of effort and management hours to continually go back to the previous transactions.

Mr Hadebe said that the auditors reported that the disclosed irregular expenditure is not complete and accurate. If such is the case, there could be billions of rands missing. He asked why Eskom has failed to keep records and who is responsible for record keeping. These findings were highlighted in the previous financial year.

Mr Cassim said that in 2020/21, new transactions amounted to R2.2 billion irregular expenditure of which R1.2 billion was for fuel oil for emergencies. The R11.7 billion relates to irregular expenditure that continues while contracts are running that have not been condoned and they cannot replace those contracts.

The Chairperson interjected and said Mr Hadebe’s question is about documentation and consequence management. The Committee has studied the presentation and there is no need to go through it again. Mr Cassim must answer the questions directly.

Mr Hadebe replied that the information presented by Eskom is inaccurate and incomplete according to the Auditor General and this is due to lack of documentation. Who is responsible for record keeping and what has Eskom done to effect consequence management for the failure to keep records.

Mr Cassim replied that they do acknowledge some of the shortcomings in record keeping and they are addressing this by focusing on each of the accountable group executives across the business to ensure that the necessary record keeping is in place. He added that he currently does not have specific details on this.

The Chairperson said that the matter is already a finding so an acknowledgement does not matter. The Committee wants to know why there are no documents. The questions must be answered directly.

Mr Hadebe added that this is a repeat finding and that the acknowledgement should have come in 2019/20 and not now. In the year under review there were clear recommendations that Eskom must keep full records.

Ms V Mente (EFF) said that the Eskom Board Chairperson in his opening remarks said they have proof of action that they are addressing the findings. She asked where the proof of action is.

Mr Cassim asked to come back with the details of their actions on this at a later stage, as he did not have the information with him.

The Chairperson said that the CFO cannot say that he does not have the details because he knows exactly what the findings are.

Mr Cassim asked his colleagues from the Eskom executive to assist with the information.

Mr Hadebe asked if they have done something about the officials who failed to keep records for audit purposes.

Mr Cassim replied that consequence management was enacted.

In reply to Mr Hadebe asking who the officials are, Mr Cassim said that he does not have the information.

The Chairperson said that if action has been taken, then it should not take much to disclose the information.

Mr Cassim replied that warning letters were issued as consequence management for irregular expenditure. Some were six-month and some were 12-month warning letters. He was unsure of the names of the officials. There were also some dismissals and suspensions. A Supplier Renewal Committee is also available to deal with irregular expenditure to do with suppliers.

Mr M Dirks (ANC) said that the information presented by Mr Cassim relates to consequence management on irregular, fruitless, and wasteful expenditure and not record keeping. He asked Mr Cassim to speak to consequence management on record-keeping.

The Chairperson asked for the details on record keeping and said that the information on consequence management on irregular, fruitless, and wasteful expenditure needs to be explained at a later stage because it is vague.

Mr Hadebe said that Section 28 of the Companies Act says a company must keep accurate and complete accounting records. The issue is not being raised out of pettiness, but Eskom has transgressed the Companies Act by failing to keep accurate records, and as a result, the audit team was unable to do its work. The auditors stated that Eskom did not fully and accurately record irregular expenditure in the disclosure notes to the financial statements as required not only by the Companies Act, but also section 55(2) of the PFMA. This is due to inadequate systems to detect, record and appropriately disclose all such expenditure.

Mr de Ruyter said that the level of detail required by the Committee about employees and suppliers and matters under investigation is sensitive and confidential as some of these matters are sub judice. Eskom has provided the information in good faith and on the basis that it will not be distributed and discussed outside of this forum as it may affect some of the investigations. They have submitted Annexures A, B, and C to SCOPA, and these are not contained in the slides for this reason. They do contain details of the date of each alleged transgression, amounts, employee names, as well as the consequence management or sanctions enacted.

The Chairperson said that Parliament has brought to public attention that sub judice does not apply to Parliament as it is a separate arm of the state. However, the rational sensitivity would be that this may jeopardize ongoing investigations. He supported Mr Hadebe’s question which was direct about probing the reasons for the lack of record keeping and who the culprits are.

Mr Hadebe said that the Committee is referring to 2020/21 at the time when the CFO took over and not the years before that. “There are issues currently under your watch and your leadership of not keeping records and you had enough time to analyze and process the previous audit outcomes for you to be able to put measures in place to stop the repeated findings and you have not done so”. He asked why this is the case and who the people involved are. The annexures referred to by the CEO do not help because they do not speak to record keeping and are dated 2019.

Mr Cassim replied that the main reason is that many records are kept manually as they do not have a completely automated system. Secondly, when the auditors request information, they are given a deadline which they do not always meet, and this would explain why the report says complete records were not provided. They need to automate their record keeping systems.

Mr Hadebe asked if the records are available.

Mr Cassim replied that one of the reasons for this limitation is that many of their records are manual and they need an automated system. He is not saying that all the records are available, and they would have to present a detailed report on that at a later stage to explain where the records are and why they could not be found.

The Chairperson asked the other reasons besides manual keeping.

Mr Cassim replied that it would be the lack of necessary supervision of the record keeping from the respective supervisors and managers to ensure that it is in place across the organization. They have started to improve on the monitoring.

The Chairperson said that the point is that this is a repeat finding, so it should ordinarily be part of Eskom’s Audit Action Plan for 2022, and they should have done a full analysis of the root causes. He asked if that has been done and how they responded to the record keeping concern.

Mr Cassim replied that they measure the progress in terms of the new irregular expenditure incurred in the current year and their assessment of this shows that they are moving in the right direction.

The Chairperson asked what investigation was done that informed Eskom’s Audit Action Plan.

Mr Cassim replied that the issue was with discipline of keeping the records in the organization.

Mr Hadebe asked the reasons for the failure to report the theft, fraud, and extortion of over R100 000.

Mr Cassim replied that some transactions were reported.

Mr Hadebe said that the AG said that there is no proof that the theft, fraud, extortion, and forgery that amounted to over R100 000 was reported to SAPS. He asked for the evidence that the matter was reported to SAPS.

Mr Cassim replied that there are several investigations ongoing at Eskom, which are undertaken either by the forensic legal department or the internal audit department, so that is highlighted through the Executive Committee and the Audit and Risk Committee. He does not have the specifics of the number of outstanding investigations and the stage they are at.

Mr Hadebe said that the AG says that there is no evidence that these cases have been reported.

Mr de Ruyter said that they are dealing with these matters in accordance with their legal obligations, but they do report such matters.

Mr Hadebe said that the point is that there is no evidence that they are reporting them and not about the actions they have taken.

Ms Nthato Minyuku, Group Executive: Government Relations, Stakeholder and Regulatory Affairs: Eskom, said that there is evidence that they have submitted cases to the SAPS. There are 82 cases on record submitted over the past three years, and they check with SAPS regularly on any further support they require. Nine cases have been closed to date on referrals Eskom has made. They register cases at SAPS after they have collected enough evidence to substantiate the allegations and have determined the amount involved. They have reported 82 cases and this list has been provided to the auditors. The auditors would have looked at the database of investigations but Eskom does not currently run one consolidated database although they are in the process of putting that together. That means that Forensics would have a separate database, for example, to Group Security. However all the information is contained within their case management system, which they have shared with the auditors in question.

Mr Hadebe asked why the AG did not have that evidence during the audit.

Ms Minyuku replied that in the financial year under review, the finding was that there were two items that were being looked for that did not appear on the list. However, that related to the accounting authority and those cases have been dealt with. The evidence has been shared, but from the current list of investigations within Eskom’s database, they would not necessarily have referred any of those cases to SAPS if investigation was still in progress and they had not determined that it required a referral from a criminal perspective. They refer the cases to SAPS for registering once the case has been substantiated. That is probably where the difference of opinion was with the AG.

The Chairperson said that it is not a difference of opinion but a finding.

Mr Hadebe added that it is a repeat finding.

Ms Minyuku said that they believe that they have raised and referred every case required to be registered with SAPS and that is the list of 82 cases. The cases currently under investigation in their database would not have been referred to SAPS because Eskom did not believe that they had sufficient information to justify that referral.

The Chairperson asked for the number of cases referred before the audit and those that were referred after the audit.

Ms Minyuku said that she does not have that information at present.

Mr Hadebe said that Eskom condoned R9.5 billion of irregular expenditure. Were the officials responsible held accountable, both those still at Eskom and those who are no longer there?

Mr de Ruyter referred the Committee to Annexures A, B and C where each of the individual cases is detailed.

Mr Hadebe asked if the officials who were part of the R9.5 billion irregular expenditure condonation are still working for Eskom.

Mr de Ruyter replied that because Eskom is subject to the labour laws of South Africa, they cannot just dismiss employees. They must follow the disciplinary process which depending on the severity of the alleged offence, may include suspension for the duration of the investigation and the subsequent disciplinary process. It is feasible that some of those officials are still at Eskom.

Mr Hadebe said that R9. 5 billion has already been condoned, but the Irregular Expenditure Framework clearly states that before such a condonation can be approved, there needs to be remedial action to prevent future findings, disciplinary steps taken and the demonstration that there was value for money. The disciplinary process would have been completed by now since that R9.5 billion has already been condoned. He asked if the officials responsible are still part of Eskom and if they are still part of the procurement process after facing the disciplinary process.

Ms Thea Verreynne, Chief Advisor: PFMA Reporting & Systems: Eskom, said that there are 34 line items that were condoned and out of them, four resulted in dismissal. National Treasury does not condone without consequence management, so there was consequence management, but the majority were written warnings for 6 or 12 months, so the officials will still be part of Eskom.

Mr Hadebe asked for the number of written warnings and Ms Verreynne asked for some time to gather the information.

Mr Hadebe said that he is asking these questions because Eskom was unable to prevent the reoccurrence of irregular expenditure. Part of the requirement is they need to put remedial action in place to prevent future irregular expenditure. He asked for the number of officials that were part of the R9. 5 billion condonation. Are they also part of the irregular expenditure incurred in 2020/21?

Ms Verreynne replied that she will not be able to provide that information without conducting a detailed analysis and a comparison of the current year to the previous.

Mr Hadebe asked how Eskom measures the effectiveness of sanctions if they cannot provide that information.

Mr de Ruyter replied that Annexures A, B, and C show that there are a several officials who were implicated in repeat findings with different contractors and some have left the organization; others are in the disciplinary process depending on the severity of the issue, while some have been issued with sanctions, including six month suspensions and written warnings. They are currently dealing with 167 cases which cover a range of periods and that is why these processes take some time to resolve. Once they are resolved, the appropriate steps are taken as established by the disciplinary hearing.

Mr Hadebe asked for details on the irregular appointment of Bowmans to investigate irregular expenditure.

Mr de Ruyter asked to return to the Committee with that information at a later stage.

Mr Hadebe asked if none of the officials know about the appointment of Bowmans Attorneys to investigate irregularities at Eskom.

Mr de Ruyter replied that the decision taken to extend the appointment of Bowmans was in accordance with a Treasury directive they received whereby Eskom was permitted to extend certain tasks until the full completion of those tasks. He does not have the exact correspondence when they were given that authority by the Chief Procurement Officer at National Treasury.

Ms Jainthree Sanker, Contracts Management Executive: Eskom, said that at the establishment of Eskom’s new panel, Bowmans did not qualify to be part of the new panel. However, Eskom had applied for an exemption from Treasury which was granted for existing matters until the matters were resolved.

Eskom investigations and consequences
Ms B Van Minnen (DA) said that 5 594 referrals were made by the SIU to Eskom institute disciplinary action. Eskom has so far actioned about 94.4%. She asked for a progress report on this, as it says 60 of these referrals were officials who were either doing business with Eskom or failed to declare their interest in outside business entities.

Mr de Ruyter replied that they have conducted lifestyle audits and handed over 34 high-risk cases to the SIU. Seven resulted in no adverse findings and the cases are closed; 11 have resulted in referrals to Eskom for disciplinary action and seven employees resigned during the investigation. One Eskom official was dismissed on unrelated charges and a further three cases are in the process of being referred to Eskom for disciplinary action, while the remaining five cases are still under investigation by SIU. In total, the number of cases referred by SIU is 5 594 and 17 of those cases the disciplinary process has not started, 51 cases the disciplinary process is in progress, and 1 651 disciplinary processes have been completed with sanctions imposed such as written warnings, dismissals, or suspension without pay. Based on Eskom’s internal assessment, no disciplinary actions were taken on 3 864 cases and 11 cases are related to the lifestyle audit.

Ms Van Minnen asked for the steps taken to prevent the high number of disciplinary case from happening again. Is the alleged sabotage linked to the high numbers of SIU investigations?

Mr de Ruyter replied that they have found no evidence that these numbers are in anyway linked to the alleged sabotage. One of the measures they have taken to ensure that they do not have people dismissed or sanctioned by Eskom coming back in a different guise and working as fixed term contractors or employees of contractors or reemployed is that they now have a register of those former employees so that they can prevent them from coming back.

Ms Van Minnen asked if the register also applies to people who resigned before disciplinary processes took place.

Mr de Ruyter replied that it has been challenging as they cannot act if there has not been a finding and people do use resignation as a tactic to avoid disciplinary action.

Ms Van Minnen asked if they can put these people on the register.

Mr de Ruyter replied that it is difficult for them to discriminate against these people based on a suspicion as they have not been found guilty through a proper process and that would expose Eskom to a potential litigation for unfair treatment of former employees.

Ms Van Minnen said that there are seven NPA referrals against seven officials and then eight further matters have been completed for referral to the NPA. She asked for a progress report on this and if those employees are still working or if they are suspended.

Mr de Ruyter replied that the matters referred to the NPA are out of Eskom’s control as the entity is not involved in the law enforcement process. Eskom assists with providing evidence, so they are unable to provide information in that regard.

Ms Van Minnen said that they had mentioned that they receive updates on the matters from the NPA and asked when they expect to receive the next update.

The Eskom Head of Audit and Forensic (1:55:05), said that the last update was two months before, and they expect a further update at the end of this month. Referrals to the NPA would have been done through the SIU investigations and the updates will come when the individuals have appeared at their court cases.

Ms Van Minnen asked for an update on the Brakfontein matter and the coal supply agreement.

Ms Mel Govender, Group Executive: Legal & Compliance: Eskom, said that the Brakfontein matter was dealt with in three separate processes. The first one was where SIU had made a declaration that the contract was invalid based on it being unconstitutional. The contract value was R3.7 billion and through this process Eskom was able to save about R2.6 million with the contract declared invalid. The second one is a recovery process which is underway in terms of the business rescue practitioners at Tegeta and the claim amount is R734 million. Simultaneously, Eskom is working with counsel to establish if there is a meaningful way to institute legal proceedings against the former employees that were involved. Koornfontein is like Brakfontein as the same principles were applied where the contract was declared unconstitutional and null and void. In this instance Eskom was able to save approximately R5.5 billion through the SIU. The difference was that SIU was not able to establish that there were pricing irregularities or overpayments, hence no additional action was taken. However, counsel is working to establish if action can be taken against certain employees within Eskom for failing to act in Eskom’s best interests. The Optimum contract has come to an end and no application was brought to declare the contract unconstitutional or null and void. There are civil proceedings underway to recover about R3 billion and the employees who were implicated on this contract have since resigned.

Ms Van Minnen asked if there is a way to follow up on these officials who resigned as the issue of tactical resignations was raised earlier.

Ms Govender said that due process needs to be followed and employees need to be given the opportunity to file their case and subsequently either be dismissed or have appropriate action taken against them. In these instances, Eskom did not dismiss the employees, so a way to deal with this potentially is through the civil process and recover funds if the employees are guilty.

Ms Van Minnen said that the Committee has heard a lot about the ABB project and the company that self-reported and asked what is happening in that specific case.

Ms Govender said that ABB has entered into a settlement agreement with Eskom and the SIU, and the company has paid Eskom R1. 577 billion to date and there are a few matters on the go. One is that Eskom is in the process of taking the matter under review to have the contract set aside. Simultaneously, as ABB has come very close to completing the scope of work, an analysis was conducted, and it would be much more costly for Eskom not to allow ABB to finalize its work. Eskom is currently working with ABB in setting new terms and conditions and a new contract to allow them to finalize their scope of work.

Ms Van Minnen asked about the other packages that have been red-flagged.

Ms Govender replied about the build packages underway. There are a few that progressed significantly and there are a few that are still ongoing. Some of the key findings reflect wrongdoing and they have been referred to the NPA for legal recourse. To date, several employees have been dismissed, seven have been suspended and are going through consequence management processes. Two employees resigned and the work of appropriate recovery processes has not commenced yet, but the quantification exercise will take place and Eskom will take the appropriate action against implicated individuals and companies found to have engaged in corrupt activities.

Ms Van Minnen said that there are serious concerns about project management and consequence management at Eskom. It appears that a few Eskom officials are facing consequence management and there is slow progress in recovering lost money. It is hard to believe that Eskom has a plan for recovering the lost money. She asked how they plan to recover the lost money, as it is a question that always comes up in discussions.

Ms Govender replied that Eskom does take the matter seriously and does have a plan. She agreed that the consequence management process has been slower than expected. There is a plan Eskom is working on in expediting consequence management implementation and having a quick resolution of the cases. On the recovery process, it is in their interests to recover as much funds as they can, but unfortunately, these must be managed on a case-by-case basis.

Ms Van Minnen said that this has come up virtually at every hearing held with Eskom. She asked Eskom to provide a comprehensive presentation of the plan because it seems as if Eskom is not making much internal progress.

The Chairperson agreed and added that Eskom speaks in generic terms while the Committee is looking for specificity.

Ms Van Minnen said that matters are referred for investigations, SIU makes recommendations but Eskom's responses on consequent management and reclaiming of monies are relatively vague. There is a real need to receive a specific report from Eskom on what they are doing internally.

Mr Hadebe said that there is a material finding on revenue management and the auditors said no effective steps are taken to collect the revenue due to Eskom, and they highlighted the household revenue collection. The debt repayment for Eskom is R152 billion, and interest is R125 billion. The sustainability of Eskom’s liquidity position and the mid-term ability to raise funds remains at risk. He asked why Eskom is unable to collect household revenue. He asked for a clear indication of the steps taken to ensure revenue collection.

Mr Cassim replied that the most important thing is that payments have been improving on overdue debt. In terms of residential consumers; it is not that Eskom is doing nothing about it. Their focus is on the bigger outstanding debtors, especially the municipal debt.

Mr Hadebe said that the other worrying factor is that there seems to be a disagreement between the auditor findings and what Eskom is saying. He is unsure who to believe about the findings.

Mr Cassim replied that the overall payment rate has increased marginally from the previous year. The overall incoming payment level for overdue debt is 96.8% and there are some categories where it is above 100%, which indicates that they are recovering the arrear debt. In the results for 2020/21, Eskom sends reminders to customers monthly, as mentioned earlier. Eskom has just above 6 million customers that they are monitoring, and they cannot get to all 6 million, but efforts are being made.

Mr de Ruyter replied that with their business customers, they have the option to disconnect them and disconnecting a customer typically is a very powerful enforcement action and that results in quick payment. That option is not open to Eskom in the case of municipalities. They have significant challenges in overcoming the arrear debt that has accumulated there and in business and residential customers except for Soweto. Those should be a cause of major concern.

Mr Hadebe asked how Eskom is dealing with its liquidity position that is at risk.

Mr Cassim replied that they are addressing it through their own cost efficiencies and cost savings and last financial year, Eskom saved R14 billion, and the current year's target is R20 billion. The latest year-end forecast indicates that R17 billion of the R20 billion target will be achieved. Eskom is also working on a solution to resolve outstanding municipal debt which is around R40 billion. Another sticking point is for Eskom to be able to secure cost-reflective tariffs. Notably, Eskom has a debt burden of nearly R400 billion, which cannot be serviced with its current cash flows and operations. Eskom wants government to relieve its balance sheet of as much as R200 billion in debts and while discussions are ongoing, there has been no agreement on the matter yet.

Mr Hadebe asked if they will still rely on government support.

Mr Cassim replied that they will still need support next year and the following year until they can resolve the challenges of recovering the full cost of capital and all the efficient costs and collecting based on what they get from the consumers and resolving the municipal debt.

Mr Hadebe asked for a rough estimate on how long Eskom expects to continue in this trajectory of reliance on government.

Mr Cassim replied that it links to those levers being resolved timeously. If they can get the cost-reflective tariffs within a short period of time and address municipal debt, then they should be on the right trajectory. They also believe that if Eskom does not want to remain reliant on government, there would need to be a solution from government to help them with the balance sheet so that they can cover the debt service commitments on their own.           

Mr Hadebe asked what the solution from government could be.

Mr Cassim replied that Eskom wants government to relieve its balance sheet of as much as R200 billion in debts, and while discussions are ongoing, there has been no agreement on the matter yet.

Mr Hadebe said that the auditors highlighted insufficient and inappropriate evidence to explain if some of the awards were in accordance with the National Treasury requirements for COVID-19 PPE procurement. He asked what Eskom has done to resolve the matter and the number of cases.

Ms Sankar said that the COVID-19 PPE procurement project was complicated because they did not provide a separate PPE list [2:29 inaudible as speaker lost network connection].

The Chairperson suggested Mr Hadebe pause his questions and allow Members to raise questions they may have.

Discussion on general issues
Mr A Lees (DA) said that the question of load shedding has been raised for 14 years and it does not seem to get any better despite many assurances from Eskom. He asked what the situation is with the baseload capacity as it is not there to meet the demand and about regular maintenance and breakdowns. He asked when the new stations in Medupi and Kusile will be fully online and operational at full capacity and not running at a limited capacity. He asked what the additional cost budget is to get those two power stations running fully and efficiently. In 2014, one of the Duvha generators blew up and the excuses given by Eskom were not credible. Then there was a problem about what the insurance money would be used for. He asked if the generator that blew up is now fully operational because the statement at the time is that would happen around 2020. He asked if there are plans for building new generation in South Africa under the auspices of Eskom as opposed to the many independent operators.

Mr de Ruyter replied that the challenge we have in South Africa is not so much about baseload but rather about peaking, particularly during winter where there are very pronounced peaks in the morning and in evening. During the summer months there is a significantly lower demand, but there is a more stable demand throughout the day. They plan 4 000 to 6000 megawatts of planned maintenance during the summer months when demand is structurally lower, that then exposes the system to risk which results in load shedding in the event of major units tripping. The question on baseload is rather complicated and depends on the time of year and the demand profile. Eskom has a system designed to serve a very small domestic market and a very large industrial base, and that system was designed in the 1970s and 80s and the entire composition of the market has changed considerably to having a far larger and more peaking generation. All the units at Medupi have now reached commercial operation. The last unit was Unit 1, which reached commercial operation on 21 July. At Kusile, Eskom has achieved commercial operation on Units 1, 2 and 3. Unit 4 is intended to reach commercial operation in December 2022, Unit 5 in June 2023 and Unit 6 in November 2023. At Medupi so far, they have spent R199 million rectifying the design defects. This essentially completes the design modification programme except for further modifications that need to be made to the molds which grind the coal. In due course, they will provide an update to the Committee of where they are on that design defect correction.

They started with boiler plant modifications in Kusile on 12 June 2021 and it has since returned to service. Unit 2 is currently on outage to do the same modifications. Unit 3 will be taken out of service to be corrected in the same way in January 2022, depending on generation outage availability. The remaining boilers, Units 4, 5 and 6 are being rectified while they are still under construction, so they will not be completed with those known defects in the plant design. The Duvha Unit 3 suffered a catastrophic failure which resulted in the entire boiler unit being destroyed. Having done extensive technical and economic evaluations and giving regard to the remaining life of the station, the Board took the decision last year not to repair that unit because the cost would not have been warranted considering the remaining life of the station and the additional megawatts Eskom would obtain from repairing that unit. Eskom has an aging fleet of power stations, with the average age of 41 years. These power stations are nearing the end of their lives and need to be replaced in accordance with IRP 2019, which is a government policy that provides the energy mix for electricity generation going forward. The Department of Mineral Resources and the Independent Power Producers Office are responsible for the procurement of new capacity.

Mr Lees said that the Duvha generator blew up in 2014 and it took seven years for the Eskom Board to decide not to rebuild it. What happened to the insurance payout of about R4 billion.

Mr Cassim replied that a portion of the amount had to be repaid to the insurer. He will get the details of that and report back to the Committee.

Ms Mente said that at the end of 2019/20, Eskom presented a document which explained their turnaround strategy, but now the Committee is hearing something that is completely different from what was presented. The document had a plan for recovering money from their debtors as well as a plan for revenue optimization, but none of that have been mentioned. What happened to the plan? That document also had a commitment that more money would be recovered from Miagra, where they received only R3 million out of R35 million – what happened with this pursuit? Eskom is continuing its contract with ABB, but terminated the contract with Econ Oil, which falls under the same category as ABB in overcharging Eskom. She asked why they are extending the ABB contract as it does not make sense to her. They should not continue working with people who have already demonstrated they can be corrupt. On the financial losses and optimization, how Eskom is optimizing when they are not generating their own electricity? She asked how Eskom uses the money allocated to them by government.

Mr de Ruyter replied that on 23 December 2020, ABB repaid R1.577 billion and Eskom is working with SIU to set aside a R2.2 billion control instrumentation contract that had been irregularly awarded to ABB. It is important to note that about 90% of the work has been completed at Kusile for the control and instrumentation contract and if Eskom were to terminate ABB work completely, Eskom would incur a commensurate amount in fruitless and wasteful expenditure. They are engaging with National Treasury to seek a way forward in which they can still complete the work at Kusile without incurring unnecessary delays in the completion of Kusile and without incurring fruitless and wasteful expenditure by switching to another provider. The situation is further complicated as this is an integrated project; Eskom would have to incur a standing cost for other contractors and that would give rise to further claims against Eskom. When comparing this to Econ Oil, fuel oil is a fungible commodity, meaning that if Eskom stops buying it from a particular supplier; it has no associated effects, so the decision to terminate that particular contract was not a bad one. There was a claim against Eskom for R61 million and against its subsidiary for about R22 million. Eskom has filed a counterclaim and requested the court to declare the contracts null and void, unlawful and enforceable and requested that the contracts are set aside. They engaged SIU and NPA to ensure that their legal strategy does not negatively influence the legal action being pursued by NPA and SIU and are awaiting trial dates for the matter to be set down for a hearing.

Miagra submitted fraudulent invoices amounting to R35 million for coal transport between 2016 and 2018. Eskom recovered R3 million of the R35 million from Miagra and is pursuing the balance. The owner of Miagra is a former employee of Eskom and is facing 53 counts of fraud and theft, and this is a matter for the criminal justice system and not Eskom. Eskom’s Assurance and Forensic department is liaising directly with the Asset Forfeiture Unit in seeking a court order to acquire the assets of Miagra to recover Eskom’s funds.

On restructuring, Mr de Ruyter said that the legal separation of Eskom into three entities is government policy as noted in the road map to a restructured electricity supply industry in South Africa, issued by Department of Public Enterprises in November 2019. They are making good progress in implementing that policy. It seeks to enable the resolution of South Africa's current generation capacity shortfall as evidenced by load shedding, by creating a platform for increased private sector generation going forward. Eskom has legacy contracts that they acquired because they are guaranteed by National Treasury and a default on most contracts will have significant consequences for Eskom and for National Treasury. The revenue shortfall is largely attributable to Eskom currently not having cost effective tariffs. They have a debt service costs in the order of R32 billion per annum. Looking at Eskom’s operating costs, capital expenditure, and debt servicing costs that they are required to include, there is a shortfall in the revenue they generate and that points to the need for a structural solution to the Eskom debt in a way that reduces their debt servicing in a sustainable manner going forward. This would then relieve Treasury of the burden of continuing to provide Eskom with regular equity injections.

Concluding remarks
Mr Makgoba said that at the end of the last audit report, the Board took the decision that all audit findings that are within its power and control should be cleared so that there are no repeat findings. Consequence management is very different in the public sector to the private sector. It is easier in the private sector to deal with consequence management, but it is very difficult in the public sector, not only at Eskom but globally. The Board has noted the findings and reminded the executive to deal with them. He hopes that when the Committee receives the next audit report, they will see the level to which this process has taken place at Eskom because consequence management processes have taken place since the appointment of the Board.

Every effort through management and the Board to try and reduce or remove load shedding has been made, particularly from the generation team at Eskom. The problem is that they are working on aged power stations that require a lot of repair work and are easily damaged due to their age. The two new units in Medupi and Kusile are not really operating at their maximum capacity because Eskom spends a lot of energy in repairing their design defects. They are making every effort to reduce load shedding and Eskom has a plan that requires them to acquire better skills and better management of the power stations and units. It also requires that the maintenance repairs are planned properly and funded properly.

The Chairperson said that the Committee has a long road to travel with Eskom. Expansions and deviations are not a norm, and it is increasingly frustrating that the granting of these expansions and deviations is not resulting in an improvement in service delivery or electricity. The Committee has no other expectation from Eskom than provision of electricity and adherence to due process consistent with the PFMA and Treasury regulations. The only way to ensure adherence to due process is for the Committee to probe until the right things are done, effective consequence management is effected and the necessary corrective actions consistent with the law are done. “While our patience may be running thin, it is not going to expire because if Eskom fails, the country is in trouble”.

The Committee will go to Eskom to engage on all the concerns for two days, either late January or early February 2022, coupled with a follow up visit to Medupi and Kusile. “We cannot throw financial solutions at non-financial problems and there has to be fundamental and substantive changes and reforms at Eskom which will ensure that we arrive on the plateau of a functional and effective Eskom. If that means people must be fired, then that must happen because consequence management must not be cosmetic or sanitized”.

The meeting was adjourned.

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