Eskom Inquiry Reference Book: briefing by UCT State Capacity Research Project
17 October 2017
Chairperson: Ms D Rantho (ANC)
The Committee was briefed by Prof Anton Eberhard, a Research Professor at the University of Cape Town's Graduate School of Business whom along with his colleague Ms Catrina Godinho authored the booklet Eskom Inquiry Reference Book. The Reference Book aimed at providing a fact-based account of instances of governance failure and capture of officials at the power utility.
The Chairperson said the inquiry into State Owned Enterprises would focus on Eskom, Transnet and Denel and was part of the Committee’s oversight role of the Department and its entities. Everyone accused or implicated during the inquiry would be given an opportunity to give their side of the story.
Prof Eberhard commented that the Committee would likely make findings on how the governance of the power utility had been undermined and re-purposed to materially benefit a politically connected elite, while compromising national economic and social development. Some of the recommendations in the Reference Book were to consider prosecuting culpable individuals, reforming governance, and restructuring the country’s electricity sector so that corruption was less possible in future.
Committee members agreed that the Reference Book would be very helpful in assisting it in its inquiry into Eskom and to ask the right questions of witnesses or those implicated when called before the Committee.
The Chairperson welcomed all in attendance at the first hearing of the oversight inquiry into the three State Owned Entities (SOE); Eskom, Transnet, and Denel. Prior to the discussion on the business of the day the Chairperson asked fellow South Africans in the meeting and those watching at home to allow him to note that in terms of Section 42(3) of the Constitution, the National Assembly (NA) was elected to represent the people and to ensure government by the people under the Constitution. The NA achieved the objective by scrutinising and overseeing executive actions.
Section 55(2) of the Constitution obliged the NA to provide mechanisms to ensure that all executive organs of state in the national government were accountable to the NA; to maintain oversight of the exercise of national executive authority including implementation of legislation and any organ of state. In terms of the NA Rules, the Committee system was one of the many mechanisms the executive organs of state were held accountable to the NA, and through which the NA maintained oversight over the exercise of the internal national executive authority and any organ of state.
In terms Section 57(a) of the Constitution, the NA determines the control of its internal arrangements, proceedings, and procedures. The oversight inquiry was sanctioned by the supreme law of the land, the Constitution, and the NA Rules. The process was not intended to replace or substitute the role of other legitimate state institutions charged with law enforcement.
Committee members had observed disturbing developments in some of the SOEs like Eskom, Transnet, and Denel documented in a number of reports including the Public Protector’s State Capture report during November 2016, media reports, and the ‘Gupta leaks’. Engagements by the Committee with the Department of Public Enterprise (DPE) and the relevant SOEs did not assist the Committee in comprehending the challenges facing the SOEs thereby enabling the Committee to assist and remedy the situation. The Committee decision to conduct the oversight inquiry into the three SOEs was a project consisting of three phases: Eskom, Transnet, and Denel.
The House Chairperson of Portfolio Committees had instructed the relevant NA Committees to discharge their institutional obligation by holding the Executive accountable. The inquisitorial nature of the oversight inquiry in Section 57(1A) of the Constitution empowered the Assembly to determine and control its internal arrangements, proceedings, and procedures. The inquiry was aimed at finding facts on the state of governance in the SOEs, and therefore no one was accused of any wrong doing, and no one was to behave as an accused in the inquiry proceedings.
The oversight was founded on the rules of natural justice, and therefore the Committee would be fair and transparent in discharging its constitutional mandate of holding the Executive accountable, and in maintaining oversight of the exercise of national authority. The oversight inquiry was divided into two stages. Stage 1 would be calling various witnesses other than the Minister of Public Enterprises and current and former board members of Eskom. However implicated individuals in the testimony of the witnesses would be notified in advance and could attend the proceedings personally or through their representatives, but would not participate in the proceedings of the Committee. At the conclusion of the first phase, the Minister of Public Enterprises and the Eskom board members, both past and present, would engage with the Committee in the Stage 2 of the inquiry. A draft Committee report would be prepared and submitted to all the individuals implicated for comments and written submission to the Committee, whereafter a final report would be presented to the NA for its consideration.
Eskom Inquiry Reference Book
Prof Anton Eberhard, Research Professor, Graduate School of Business, University of Cape Town (UCT) said that what was happening in SOEs needed to be taken seriously, and that it was not government failure but rather state capture by select individuals. The inquiry was concerned with corrupt rent-seeking, which involved private actors with government entities.
The inquiry involved multibillion corrupt transactions, Mr Brian Molefe’s R30 million payout, as well as instances of governance failure in the entity.
The focus was on Eskom because it is by far South Africa’s largest SOE with annual revenues three times that of Transnet, and six times that of South African Airways (SAA). Eskom generates more than 90% of South Africa’s electricity, controls the entire national high voltage transmission grid, and distributes around half of the electricity directly to consumers, with the remainder going to municipalities. Eskom’s assets were valued at R710 billion, and its capital expenditure programme amounted to around R350 billion over the next five years.
Currently Eskom was building some of the largest power stations in the world – Medupi and Kusile – each 4800 MW in capacity, and had recently completed the 1332 MW Ingula pumped storage facility. The late commissioning of the power stations contributed to severe load-shedding in recent years, which was detrimental to economic growth. The power stations had already cost more than double their original budgets with allegations of corruption in the construction contracts. Evidence suggested that R140 billion per annum was lost in Eskom’s operating expenditure due to corruption. The most blatant acts of corruption occurred through the awarding of over-priced coal contracts, the squeezing out of incumbent coal majors, and the questionable acquisition of coal mines by the Gupta family, financed by Eskom.
During the 2016/17 financial year, Eskom’s assets amounted to R710 billion, capital expenditure was R56 billion, revenue was R177 billion, net operating expenses were R140 billion, coal purchases were R50 billion, and staffing costs were R33 billion.
Prof Eberhard noted that since President Zuma was inaugurated into office in 2009, South Africa had been faced with scandalous and corrupt activities. Minister of Public Enterprises Barbara Hogan was dismissed from her position in November 2010 after resisting the emerging and undue interest by politicians into board and executive appointments at SOEs in general, and at Eskom and Transnet in particular. Malusi Gigaba was appointed as the Minister of Public Enterprises shortly after, and in April 2011 intervened in the Koeberg procurement process, pushing Westinghouse aside. In June 2011 Minister Gigaba instituted the most radical board change in Eskom’s then recent history and replaced all but two non-executive board members. Mr Zola Tsotsi was appointed as board chairperson and maintained a close relationship with Minister Gigaba. The majority of the respected executives left during this period, demoralised by the changing institutional culture and early onset of coordinated corruption and political interference.
The hollowing out of Eskom’s board and executive governance appeared to be more severe when Ms Lynne Brown was appointed as Minister of Public Enterprises in May 2014. In December 2014, Minister Brown made sweeping changes to the Eskom board. Six of the eight appointed board members had unambiguous connections to the Gupta family and questions were raised about the notable deterioration in notable skills, expertise, and experience on the board. Earlier that year the CEO, Mr Brian Dames, and the CFO, Mr Paul O’Flaherty resigned. In the first quarter of 2015, the Eskom executive was stripped to the bones when the board chairperson, Mr Tsotsi, suspended four executives before stepping down himself, allegedly at the behest of President Zuma. Minister Brown then made secondments from Transnet, instating Mr Brian Molefe as CEO in May 2015 and Mr Anoj Singh as CFO in August 2015. Minister Brown also appointed Dr Ben Ngubane as board chairperson despite his poor performance at the South African Broadcasting Corporation (SABC) and the Land Bank respectively. This was the same time that the Dentons probe into possible governance failures and other issues at Eskom was prematurely terminated, with the interim report being held back from Parliament and the public, and then allegedly destroyed by the board in August 2015. It was during this period that the most serious of alleged instances of capture of Eskom leadership, procurement, and operations appear to have taken place.
In the midst of resignations and suspensions in July 2017, the first qualified audit report for Eskom was released. R3 billion was reported as irregular expenditure, and the audit revealed the devastating impact that weak and arguably corrupt governance had on the institutional integrity and financial sustainability of South Africa’s most critical SOE.
Koeberg generators tender
In 2010 the Eskom board approved the business case for extending Koeberg’s lifespan. The extension plan included a once-off replacement of Koeberg’s six steam generators. A three year tender was issued later the same year. In 2011, the Eskom board signed off on the Eskom Executive Procurement Sub-Committee (EXCOPS) recommendation that Westinghouse (US based) should be awarded the bulk of the tender, with a smaller part appointed to Areva (France based). Areva then signed letters of intent with Eskom during President Zuma’s visit to France in March 2011. In April 2011, Minister Gigaba vetoed the board’s decision to award Westinghouse the bulk of the tender. This was Minister Gigaba’s first intervention into Eskom procurement. The tender bidding process was reopened in 2012, and EXCOPS again undertook a technical evaluation of bids and reached the similar decision that Westinghouse be awarded bulk of the contract. However, Board Tender Committee (BTC) chairperson, Mr Colin Matjila, curiously blocked EXCOPS from presenting their recommendations to the board, effectively stalling the process.
Mr Matjila initiated a parallel process – contracting Swiss firm AF Consult to undertake a bid evaluation review in which Westinghouse and Areva were both asked to resubmit their bids in July 2013. The bid criteria did not change however. The Eskom board rejected the EXCOPS recommendations on the bids too and invited the companies into parallel negotiations. While negotiations were underway in December 2013, members of the BTC were flown to France for a ‘nuclear training’ trip funded by Electricite de France (EDF), which had a stake in Areva at the time and the same majority shareholder.
After Mr Brian Dames’ resignation was effective in March 2014, Mr Matjila was appointed as Acting CEO, relieving him of his BTC duties even though he continued to attend. Mr Matjila along with Mr Matshela Koko tried unsuccessfully to revise the recommendations of the bid in favour of Areva. Following a protracted five year process during which EXCOPS had consistently identified Westinghouse as the stronger bid, the BTC inexplicably awarded the tender to Areva on August 2014 via secret ballot. Westinghouse challenged the decision through the courts, and it initially succeeded, but ultimately the Constitutional Court ruled in Eskom/Areva’s favour on incidental procedural grounds. The cost of the protracted process went beyond the R5 billion Areva bid.
The New Age Breakfast deal
Gupta-owned The New Age (TNA) media’s New Age newspaper was first published in December 2010. Though TNA neither published it audits or circulation figures, it had been able to attract millions of money from government departments and SOEs through bulk subscriptions, advertising budgets, and TNA business breakfast sponsorships. When Mr Gigaba was still Minister of Public Enterprises, his advisor, Mr Siyabonga Mahlangu, pushed TNA deals at SOEs.
During Mr Matjila’s tenure as BTC Chairperson (2011-2014), Eskom spent R12 million on 10 TNA business breakfasts, which was more than the going rate for more established media groups. It has come to light through the Gupta leaks that the last minute appointment of Mr Matjila as Acting CEO may have been facilitated by the Gupta Lieutenant, Mr Salim Essa, who forwarded Mr Matjila’s CV to Mr Tony ‘Rajesh’ Gupta and Mr Duduzane Zuma. Mr Matjila broached the idea of a one year R14 million business breakfast deal with the Eskom executive committee in early April 2014, but the TNA contract soon ballooned into a three year R43 million business breakfast deal and a R4 million newspaper subscription package. Members of the board, executive, and legal counsel tried to stop or at the very least improve the terms of the contract, but Mr Matjila, overriding official procurement processes and acting outside the scope of his authority, signed the improvident contract on 30 April 2014.
The board initiated a forensic review into the deal and found that Mr Matjila had acted improperly in signing the contract. As a consequence, Eskom’s external auditors, SizweNtsalubaGobodo (SNG), raised the TNA - New Age deal as a reportable irregular expenditure in October 2014. The forensic review recommended that Minister Brown remove and lay criminal charges against Mr Matjila, but she was conspicuously unavailable to the board. Troubled by the implications, two board members sitting on the Audit and Risk Committee (ARC), Ms Yasmin Masithela and Ms Bajabulile Luthuli, tendered their resignations. Soon after, Minister Brown implanted a new Eskom board on 11 December 2014. Only Mr Zola Tsotsi and Ms Chwayita Mabude were retained. The new Eskom board ratified the TNA deal and no legal action was taken against Mr Matjila.
In 2013, the Chief Information Officer (CIO), Mr Sal Laher, identified and reported on an opportunity for the utility to save almost R1 billion by internalizing core IT functions. T-Systems, the serving IT support provider became aware of the risk of losing Eskom’s business which together with Transnet contracts, accounted for majority of its income. They were however invited to bid for the smaller, non-core IT tender that the Eskom BTC launched in December 2013. T-Systems however was not shortlisted and when it became clear that they were going to lose out on any Eskom contracts, Mr Essa was said to have approached the firm’s leadership – offering to lobby on their behalf.
As in the Koeberg deal, Mr Matjila had used delay tactics to impede the awarding of the IT tender to any shortlisted companies. During the short period that Mr Matjila was Acting CEO (March-October 2014), the CIO, Mr Laher, was sidelined, mainly through a number of audits conducted under Matjila’s direction. Though each audit indicated that the proposed internalisation of core IT functions would save the then financially stressed Eskom around R1 billion, which was disputed by T-Systems, none of the recommendations reached the board until Mr Matjila was replaced by former Director-General for the Department of Public Enterprises, Mr Tshediso Matona, in October 2014. The IT contract for no-core functions was finally tabled before the BTC. On 31 October, Mr Laher informed T-Systems that Eskom would no longer be needing their services. But in December 2014, Minister Brown appointed six Gupta-linked board members, and in January 2015, the new board decided to retain T-Systems.
There had been reports that T-Systems was linked to the money laundering shell, Homix. Mr Laher, noteworthy for winning the 2013 Visionary CIO Award, along with two respected Group Executives, Ms Erica Johnson and Mr Steve Lennon, left Eskom following the Koeberg, TNA, and T-Systems scandals.
In February 2011, the unit four turbine at Duvha power station was damaged during a control test and in March 2014, unit three’s boiler exploded. The 2014 boiler explosion was linked to the quality of coal procured for the Duvha plant and operational errors. The explosion took 600MW offline. Despite a clear imperative to replace the boiler as quickly as possible, the country entered into a period of extended load shedding in the second half of 2014. Eskom took an inordinate amount of time to conclude the insurance evaluation process. The tender was issued in December 2015, and awarded in March 2017. During this period Trillian invoiced for the work done in August 2016.
Eskom BTC awarded the contract to a Chinese company ‘Dongfang’ – one of the more expensive bids – despite previously stating that price would be the determining factor. Over and above cost considerations, Dongfang scored far lower than other bidders in the safety, health, and environmental category because it failed to submit key documents. In December 2016, the Eskom executive committee and external procurement reviewer – KPMG – had recommended that negotiations be conducted only with General Electric (GE) and Murray & Roberts (M&R), each with tender submissions that were R2 billion less than the Dongfang bid. The final award was supported by a late stage report conducted by Trillian just two days before the contract was awarded that proposed that a fixed-cost Dongfang bid would ultimately be cheaper. Eskom state that the findings of the report were confirmed by ‘SekelaXabiso’, a company implicated in irregular spending at the SABC.
On 30 June 2017, the High Court granted GE and M&R an interdict to stop Eskom from implementing its contract with Dongfang, whilst a judgement was being made on the matter.
With coal being Eskom’s largest procurement line item, with around 120 million tons worth more than R50 billion purchased annually, it was no surprise that the Gupta family schemed to land lucrative contracts through a lack of transparency in the coal procurement process.
The Gupta family first tried to obtain a coal supply contract to the Lethabo power station in 2010 when Mr Dames was CEO but failed as Lethabo was supplied through a secure, long term contract at competitive prices by the New Vaal mine. This forced the Guptas to focus on the acquisition of the Brakfontein coal mine which was always unlikely to achieve the quality of coal required by Eskom, and then moving up a notch to acquire Glencore’s Optimum Coal Holdings (OCH) and coal contracts to supply Eskom’s Arnot, Hendrina, Komati, and Majuba power stations.
The Guptas are said to have purchased Brakfontein coal mine through their company Tegeta in 2011. Although managers and technical staff raised concerns about the quality of Brakfontein coal, environmental contraventions, as well as BBBEE credentials of Tegeta, a contract was signed on 10 March 2015 to supply Majuba power station. Two days later the Eskom board suspended four executives including CEO Matona, CFO Ms Tsholofelo Molefe, Mr Dan Marokane, and Mr Matshela Koko.
Mr Brian Molefe took over as Eskom CEO in April 2015, and Mr Koko was reinstated to his position as Managing Director of Technology and Commercial. The initial Brakfontein contract was subsequently amended with the coal supply increasing from 65 000 tons to 100 000 and then 200 000 tons per month, and the contract period extended from five to 10 years at a price higher than that of other coal suppliers to the Majuba power station. The Brakfontein coal was repeatedly failing quality assurance tests, and because of this the Brakfontein contract was briefly suspended, only to be reinstated by Mr Koko who then suspended the scientists responsible for the negative quality tests. Ownership of the Brakfontein coal mine was subsequently transferred to another Gupta owned company, Shiva Coal, which did not meet Eskom’s empowerment criteria.
OCH had three assets: Optimum Coal Mine (OPC), which supplied Hendrina power station, Koornfontein mine, which supplied Komati power station; and an export allocation at the Richards Bay terminal. Under Glencore, the cost of OPC had increased to more than R300 per ton. However, the mine was locked in a fixed price contract with Eskom of around R150 per ton until 2018, meaning that the mine was losing R120 million per month. Glencore invoked a hardship clause, and following negotiations, EXCOPS approved a new contract in March 2015, but final approval was deferred to the new Acting CEO, Mr Brian Molefe, who then rejected all the terms of agreement and suspended all negotiations. In July 2015, Mr Molefe imposed a R2.1 billion backdated fine on Glencore for not meeting coal supply specifications. During the same time, the Guptas through their company Oakbay Investments, made Glencore an offer to purchase OPC. The offer was initially rejected.
In August 2015, Glencore placed OPC under business rescue to stave off liquidation. In the same month, Mr Molefe along with board chairperson, Dr Ngubane, met with the then Minister of Mining, Mr Ngoako Ramatlhodi, to persuade him to cancel Glencore’s mining rights, while Mr Koko threatened to review all of Glencore’s coal contracts with Eskom. Mr Koko the insisted that Glencore sell all of its assets in OCH including Koornfontein and the export allocation in Richards Bay.
Under pressure, Optimum’s business rescue practitioners went into negotiations to sell OCH. Negotiations were facilitated by the new Mining Minister, Mr Mosebenzi Zwane. Minister Zwane joined Mr Tony Gupta and Mr Salim Essa in Switzerland in December 2015 to finalise the sale with Glencore’s leadership. Minister Zwane allegedly joined the Guptas on their jet to Dubai on his return journey.
The Guptas wrote to Mr Koko to confirm an in-principle agreement for a R1.68 billion pre-payment for coal to be supplied in future. Both Mr Koko and CFO, Mr Singh, were allegedly flown to Dubai at the Guptas expense to arrange for the R1.6 billion Eskom guarantee to Tegeta. Just hours after a consortium of banks had refused to advance a R600 million loan to Tegeta, it was agreed at the meeting in Dubai that Eskom would make a pre-payment of R659 million to the company. Phone records obtained from the Public Protector show continual communication during that time between Mr Molefe, the Guptas, and one of their senior executives. On 14 April 2016, Tegeta was able to pay Glencore R2.1 billion, concluding the purchase of OCH. The initial fine imposed on Optimum coal mine under Glencore leadership of R2.1 billion was then reduced to R577 million.
The Guptas have acquired major coal mining assets with Eskom’s assistance and secured lucrative coal contracts to power stations without competitive tendering and where there were better priced alternatives. Due to scrutiny and increased risk of censure, the Guptas sold Tegeta’s coal interests to associate Almin Alzarooni in August 2017. Soon after, the South African High Court granted an interdict to freeze the Optimum and Koornfontein min rehabilitation accounts, which had been moved to the Bank of Baroda in mid-2016. The implications of those developments were still unfolding.
In December 2016, Minister Brown denied in Parliament that Eskom had ever conducted any business with Trillian Capital Partners (Trillian). It later emerged that Eskom had in fact paid Trillian almost R600 million for “consulting work” – unofficially contracted to McKinsey and allegedly undertaken by other Gupta connected companies. McKinsey had also received roughly R1.1 billion from Eskom over the same period.
Before becoming entangled in Eskom, Trillian shareholders – Eric Wood and Salim Essa – were first involved in a locomotive deal that won Essa’s Tequesta R5.3 billion in advisory fees. This was when Mr Brian Molefe was CEO of Transnet and Ms Anoj Singh was CFO.
In 2015, McKinsey negotiated two contracts with Eskom, the mandates for both were approved by the BTC. McKinsey then partnered with Gupta-linked Trillian, allegedly in order to meet Eskom’s empowerment requirements. At this stage there was no evidence of a contract between Eskom and Trillian, or between McKinsey and Trillian. All payments made to both firms were therefore likely in contravention of the PFMA section 45(c) as well as internal Eskom policies.
Though a number of reports have confirmed the illicit relationship between Trillian and Eskom, wherein firm recommendations to begin criminal and civil proceedings against those implicated were repeated, Eskom and Minister Brown have been slow to act. When Eskom finally took action against Trillian, McKinsey, and implicated officials in early October 2017, Minister Brown and the board hastily replacing Acting CEO, Johnny Dladla with Mr Sean Maritz, and suspended the head of legal, Ms Suzanne Daniels.
Prof Eberhard said that the Committee’s inquiry into Eskom would most likely make findings concerning the manner in which governance at Eskom had been undermined and re-purposed to materially benefit a politically connected elite, while compromising national economic and social development. The inquiry would hopefully make recommendations to prosecute culpable individuals, reform governance, and restructure South Africa’s electricity sector so that grand corruption would be less possible in the future.
The Committee’s immediate task would be to probe breaches of laws and regulations and expose individual acts of corruption. It would need to recommend prosecution and forward relevant details to the National Prosecuting Authority (NPA). The inquiry was a unique opportunity to force implicated individuals to answer under oath publicly, to widely publicised incidents of administrative and financial malfeasance, and blatant corruption.
Ms N Mazzone (DA) said that the Reference Book was invaluable. She said that Prof Eberhard was part of the war room tasked with tackling load shedding. When the war room was being set up it was clear that the Committee would not be informed of the proceedings of the war room and it was patently obvious that there was a large deal of corruption taking place. Charges were laid against certain individuals and reported to the war room, but the recommendations were not given to Parliament.
Ms Mazzone asked if Prof Eberhard was aware of the issues in the war room. She asked why the war room was wrapped up before it had completed its work.
Ms Mazzone asked if one of the issues the Committee should be interrogating was why certain names appeared continuously across the entire spectrum of Public Enterprises. A frightening fact was that the name ‘Salim Essa’ appeared continuously in the Reference Book and would appear continuously when the Committee interrogated Transnet as well.
Ms Mazzone said that individuals could not simply carry on being moved from one SOE to the next when problems emerged.
Ms Mazzone said that the executive was reckless, and that Minister Brown had blatantly lied when asked if Trillian had ever done any work for Eskom.
Ms Mazzone asked how many other ‘Pandora’s boxes’ there were in Eskom.
Ms Mazzone asked if there is anything else besides the obvious that Prof Eberhard could suggest the Committee look at that they had not done thoroughly enough.
Ms Mazzone said that she was amazed how money changed hands, and that people had become so used to dealing with billions, that millions seemed like nothing. Ms Mazzone asked where the money was going and how it was allowed to leave the shores of South Africa.
Prof Eberhard said that the war room was set up in the midst of load shedding and to help Eskom tackle the issue as swiftly as possible.
Prof Eberhard said that it was deeply regrettable that investigations and reports undertaken at the time, in particular, the Dentons report, were not tabled to the war room and that the question needed to be asked to the Minister and the Department why the report was not tabled. There were three versions of the Dentons report; heavily redacted, semi redacted, and one that that named companies from individuals never surfaced.
Prof Eberhard said that what they were seeing was not a number of acts of corruption but a facilitated systematic political project to benefit an heavily connected elite, and this was done through brokers like the Gupta family and Mr Essa.
Prof Eberhard said that in many instances the issues started in Transnet and what was learned there got carried on and applied in Eskom.
Prof Eberhard said that there were many more Pandora’s boxes, and the booklet had highlighted areas that needed further investigation under the title, ‘Still in the shadows’.
Prof Eberhard said that there was a lot of reporting around the Transnet locomotive deal with clear evidence that came out of the Gupta leaks on kickbacks and flows of companies to certain countries. This was an area where much investigation would be required to try and understand what exactly happened.
Dr Z Luyenge (ANC) said that the expertise and institutions that Prof Eberhard worked with brought legitimacy to the presentation he presented before the Committee.
Dr Luyenge asked if there was any kind of information documented from meetings and interaction with individuals that revealed corrupt activities because the Committee would find itself having to recommend a further investigation by institutions charged to do that, because the Committee was embarking on a fact finding mission which would enable them to recommend to the National Assembly the way forward.
Dr Luyenge asked what the status of Transnet and Eskom was before 2009 relating to corrupt activities.
Dr Luyenge said that people needed be able to identify between a ‘corrupter’ and ‘corruptee’, and asked Prof Eberhard to give examples of each so that the Committee could know going forward.
Dr Luyenge asked if it was possible that a reliable employee sabotage equipment and then the benefits to of repairing the equipment going to the same person. He asked if there was valid information and facts on the Duvha incidents as well as decisions taken by the board because there were common denominators around Transnet and Eskom where certain individuals were mentioned consistently.
Dr Luyenge asked if there was an instance where a collective meeting was held of corrupt people determine where the basic steps to loot a particular SOE were discussed.
Prof Eberhard said that there was a substantive amount of evidence around tenders which went wrong, where technical and commercial staff in Eskom recommended the best technical and commercial solutions but senior executives and Ministers turned the decisions around. The Committee needed to probe why that was done. It was not about looking at Duvha, Trillian or The New Age deal, but rather about connecting the dots and why executives and Ministers acted the way they did.
Prof Eberhard said that it needed to be recognised that there were many good and professional individuals at Eskom.
Prof Eberhard said that there was corruption prior to 2009. The focus was on 2009 and after because that was when there was upscale corruption taking place.
Prof Eberhard said that there was no evidence of deliberate sabotage of equipment at any of the power stations thus far.
Mr S Swart (ACDP) said that the Committee was committed to exposing what other reports had indicated and figured out what was going on at Eskom.
Mr Swart said that Prof Eberhard needed to monitor what was happening at Eskom currently.
Mr Swart asked if Prof Eberhard would be in agreement that the economic growth in South Africa should be around 5% but due to state capture and rent seeking, the country was currently at 1%.
Mr Swart asked how millions and billions were able to move around bank accounts without anyone noticing.
Mr Swart said one of the ongoing issues of great concern was the Koeberg steam generators, and besides seeing it from an inquiry perspective there were dangers.
Mr Swart said that surely there were foreign agencies that would be interested and have jurisdiction when looking at the McKinsey issue.
Mr Swart noted that the pace of state capture was picking up because people involved were aware of what was exposed in the media. He asked if that was a concern to Prof Eberhard, and if the cabinet reshuffle which placed the State Security Minister, Mr David Mahlobo, as the new Minister of Energy was also a concern.
Mr Swart asked if Prof Eberhard would like to comment on the National Treasury report on the Tegeta deal.
Mr Swart said that the Optimum report had found a complaint that payments were not made to business rescues but rather made to Gupta related persons and asked Prof Eberhard to unpack that.
Mr Swart asked if Prof Eberhard was aware of a guarantee that was made by Eskom and if that was unlawful.
Mr Swart said that this would be a lengthy process and the Committee would be getting to the bottom of it.
Prof Eberhard said that Eskom was absolutely critical to South Africa’s growth prospects and had an impact on National Treasury’s lending ability to other SOEs.
Prof Eberhard said that the financial intelligence centers could know more than what was published.
Prof Eberhard said that the tender process on the Koeberg steam generators had delayed the process. This was of great concern because the steam turbines were scheduled for replacement at a certain time and Koeberg was well behind the scheduled date. A colleague of Prof Eberhard had confirmed to him that the Areva contract was running very late on the replacement of the turbines.
Prof Eberhard said that complaints were raised in New York at the securities exchange by Corruption watch on McKinsey.
Prof Eberhard said that there had been some push back and key individuals that were facilitating the process were no longer in place.
Prof Eberhard said that he was aware that State Security Minister was appointed as new Minister of Energy and that could have interesting implications for the nuclear deal in particular.
Prof Eberhard said that National Treasury reports were extremely thorough and supported by PwC investigations. There was great information on the Brakfontein contract and Optimum story. It was clear that a pre-payment was motivated on the basis of Optimum investing in a further coal mining equipment to secure the coal supply to Eskom. All the evidence suggested that the pre-payment was used to purchase Optimum Coal Holdings. The guarantee that was made by Eskom in effectively supporting Tegeta to purchase Optimum was extremely unusual and there was no other case where that had happened, and it could be regarded as wasteful and irregular expenditure.
Mr N Singh (IFP) said that Prof Eberhard had worked with the ANC government and asked to what extent he was offering services to the ANC, and at what point did he realise that his participation in the war room had resulted to his team coming up with their report.
Mr Singh asked if Prof Eberhard was currently working with any other organisations involved in the energy sector in South Africa.
Mr Singh said that coal was expensive largely due to the cost of transport, set at R190 per ton. Mr Singh asked if Prof Eberhard knew the raw cost of coal in relation to the actual cost of transport.
Mr Singh asked if there were any facts Prof Eberhard could provide to the alleged trips Minister Zwane had taken to Dubai with the Guptas.
Mr Singh said that any whistleblowers being threatened needed to report those cases to SAPS as soon as possible so that they could be investigated.
Mr Singh asked if the research team had ever looked at how much electricity would cost the public if corruption had never taken place at Eskom.
Mr Singh asked if there had been any impact in events at Eskom with bringing on more power producers in the electricity sector.
Mr Singh said that there could be people that could influence the inquiry and asked if there were any individuals that would need to be removed while the inquiry was underway.
Prof Eberhard said that when the ANC was unbanned and would be coming into power they did not have an energy policy team and therefore he worked constructively during that period and contributed to the energy White Paper.
Prof Eberhard said that he had worked with many stakeholders in the energy sector. It was important that research was of a broader impact.
Prof Eberhard said that none of the work done by the war room had an impact on the current work looking at state capture in Eskom.
Prof Eberhard said that there was a huge amount of evidence through Gupta leaks that confirmed the allegations and were not denied by Minister Zwane.
Prof Eberhard said that the corrupt procurements had resulted in higher prices of electricity. Electricity prices had increased 400% in the last decade.
Prof Eberhard said that Independent Power Producers (IPP) went solo on the new contracts that Eskom had. They were cheaper than Eskom’s average price.
Prof Eberhard said that the procurement programme run by the Department of Energy (DoE) and National Treasury were the cleanest procurement programmes run by government.
Prof Eberhard said that a lot of evidence about people who had acted in the corrupt procurement processes, and Ministers and boards had been slow to act and no action was taken.
Mr M Gungubele (ANC) said that the presentation created a platform to have a quality inquiry mind, and the information assisted the Committee in asking important questions.
Mr Gungubele said that they wanted a report that would leave Eskom standing alone once the inquiry was completed.
Mr Gungubele said that when a new Minister was appointed there would be reasons why he or she would change the board and that is why causality in terms of information would be very useful. If he were to say Minister Gigaba had intentions of doing whatever, then he would have to provide the evidence because someone could argue that it was generalisation.
Mr Gungubele said that looking at the T-Systems deal he was curious about the meeting in Melrose Arch where Mr Matjila allegedly sabotaged the tender, and if the Committee could confirm that the meeting indeed happened.
Mr Gungubele asked where Prof Eberhard based the assumption that board members were Gupta related.
Mr Gungubele asked what the significance was of Mr Koko taking over coal technology and commercial.
Mr Gungubele asked if Prof Eberhard could prove where it said that “Mr Tsotsi appointed Mr Matjila as Acting CEO, subverting a board recommendation”.
Mr Gungubele said that what was consistent was the centralisation of power and determining the type of people deployed. Prof Eberhard had made the point that the people appointed at the time had no skills to be in the positions they were appointed.
Mr Gungubele said that the Committee wanted to reach a factual conclusion.
Prof Eberhard said that the Committee had the opportunity to establish causal relationships and bring evidence to light and ask people if they met and why, and all the issues of Mr Tsotsi suspending four people at the instruction of the President or if the meeting had occurred at Melrose Arch between Mr Matjila and T-systems could be asked when people are summoned to appear before the Committee. The evidence was collected from investigative journalists, media reports and Gupta leaks.
Prof Eberhard said that documented evidence led to the resignation of certain Gupta linked individuals as they had conflict of interests.
Prof Eberhard said that looking at some board members appointed by Minister Gigaba, one could see why a particular person was appointed. And it was the same thing in Minister Brown’s board.
Mr E Marais (DA) said that Eskom belonged to all South Africans because facilities were built using taxpayers money.
Mr Marais said that it was not strange that the most important SOE was targeted by some people.
Mr Marais said that it was important which person would be appointed as the Minister of Public Enterprises because of the value of SOEs.
Mr Marais said that the three most important people to play a strategic role in SOEs would be the Minister, CEO, and the Chairman of the board. Minister Brown was appointed after the May 2014 elections and shortly after Mr Brian Molefe was appointed as CEO. Mr Marais asked if this was a strategic point to follow in the awarding of contracts after the CEO was appointed.
Mr Marais asked what happened along with way with the most lucrative contracts in Eskom, and this could be traced back to Transnet.
Mr Marais said that he would love to have the original Dentons interim report.
Prof Eberhard said that it was not a surprise that Eskom was a target for rent seeking.
Prof Eberhard said that there was a de-escalation in Eskom after the appointment of Mr Molefe as CEO and the Public Protector had reported at detail the relations between Mr Molefe and the Guptas.
Prof Eberhard said that more needed to be investigated around the awarding of coal contracts.
Mr R Tseli (ANC) asked to be assisted on the process that was taken in collecting information for compiling the Reference Book.
Mr Tseli asked what other information could be found in the volume three Reference Book presented to Parliament that could not be found in earlier versions of the book.
Mr Tseli asked Prof Eberhard found the price of electricity problematic and what would have been a justified tariff increase.
Mr Tseli said that the documents that Prof Eberhard and his researchers could have in the process of compiling the booklet could be very helpful to the Committee.
Mr Tseli asked for clarification and elaboration on the R2.1 billion fine to Glencore.
Mr Tseli said that the maintenance contract had improved tremendously in the financial sustainability of the company to a lesser extent but was not sure if the contracts were deemed legal.
Mr Tseli asked if there were written submissions by those interviewed or if they were just presenting orally to the team in terms of issues happening at Eskom.
Mr Tseli said that there would be a stage where implicated people would be given an opportunity to state their side, and if convinced that some of the issues raised in the book did not necessarily represent a true picture he asked if the research team would go back and review some of the information.
Prof Eberhard said that the process to collect information followed standard practice, reviewing documentation, analysis, relied on work done by investigative journalists on the Gupta leaks, and supplemented by interviews. Many of the interviews were sensitive and kept confidential. He was not in a position to disclose who the individuals were or their contribution, but was sure some of them would be appearing before the inquiry.
Prof Eberhard said that not a lot of changes were made between versions of the booklet, but they mostly expanded and updated on a few areas.
Prof Eberhard said that a 400% increase on electricity prices was very unusual and impacted the economy. The biggest area of expenditure in Eskom was coal, which also contributed to high cost of electricity for consumers.
Prof Eberhard said that Eskom prices increase were out of sync with what was happening around new technology.
Prof Eberhard said that the Auditor-General of South Africa’s (AGSA) most striking finding was the R3 billion of irregular expenditure where there was no documented evidence. The audited report was an extensive set of qualifications. The question posed was whether it was only in 2017 that these concerns were raised.
Prof Eberhard said that as soon as Mr Molefe came in as Acting CEO he immediately stopped negotiations of interacting with Glencore and imposed a R2.1 billion fine on Glencore for not meeting the coal specifications which impacted on its liquidity. As soon as Glencore was sold to Tegeta, the fine reduced to R570 million.
Prof Eberhard said that the contracts on maintenance should be looked at given everything that happened at Eskom.
Ms G Nobanda (ANC) asked what the normal process of appointing a board member would be.
Ms Nobanda asked if the shareholder mandate included having a say on procurement, and if so, to what extent.
Ms Nobanda asked when the rotation of CEOs started and if it was from Transnet to Eskom, and Transnet to Denel, and how long would one serve as a CEO before rotation, or if rotation was only done when there were hiccups within a SOE.
Ms Nobanda asked if the R30 million corporate plan would be normal standard amount for presenting a corporate plan.
Ms Nobanda asked for a breakdown in percentage regarding coal provided by the Guptas and other coal mines.
Ms Nobanda asked when the Optimum coal mine was appointed to Eskom and when it was sold.
Prof Eberhard said that a lot of work was done under relooking at the governance of SOEs and how board members were appointed. It was prevalent that the process of appointment in the period of 2009-2017 was not clear on the criteria of qualifications, skills and experience needed on a board.
Prof Eberhard said that Eskom had a clear delegation of authority and it was clear who would be signing off on tenders at executive level or board level.
Prof Eberhard said that what came out from the whistleblower was that Trillian had a maximum of three employees at the time during the work was done, and in affidavit published the whistleblower said that there was no work done by Trillian itself.
Prof Eberhard said that it was a matter of concern that only one emerged on top since coal was distributed amongst the four large coal mines; Anglo, Exxaro, Glencore, and South 32.
Prof Eberhard said that he did not have the information at hand on how much coal was produced by Gupta mines but it would be less than 10%.
Prof Eberhard said that Optimum coal mine had been around for a long time and was not originally owned by Glencore. Glencore bought it years ago, and it was bought by Tegeta after going through fiscal issues.
Prof Eberhard said that there was no formal policy around the rotation of CEO’s. It was not good practice and one would want a CEO to stay. Rotating CEO’s between SOEs was not standard practice, the process needed to be interrogated.
Mr N Kwankwa (UDM) said asked if it was possible to calculate to some degree of precision the amount of the increase in electricity tariff prices that could be attributed to corruption.
Mr Kwankwa asked if there were any specific proposals around improving the structure of Eskom.
Mr Kwankwa asked if it would be a crime for some of the people interviewed to give written submissions with information whenever the need arose on some of the information provided in the booklet.
Mr Kwankwa said that the Committee would need back up evidence of the six people alleged to have been Gupta aligned.
Mr Kwankwa said that he was happy that Prof Eberhard said that the manner in which transformation was implemented was the problem in the sector and not transformation itself.
Prof Eberhard said that the main drivers of electricity price increases was the way Eskom executed its capital programme. Its major coal power stations; Medupi, Kusile and Ingula were more than twice over budget which massively drove up finance costs.
Prof Eberhard said that he did not have the number. They had not calculated to what extent rent seeking and corruption could have driven up the prices of electricity.
Prof Eberhard said that the structure of South Africa’s electricity sector had implications on transparency, and governance
Prof Eberhard said that interviews were done confidentially but this should not inhibit the Committee because they would be able to call up the people and probe them.
Prof Eberhard said that evidence was there and it was well documented whom the Gupta linked individuals were.
Mr Kwankwa said that Prof Eberhard spoke of rent seeking at large and there was a collection of rent seekers working with the state and this was perpetuated by the culture of patronage.
Ms D Carter (COPE) asked what it meant when looking at the appointment of Minister Gigaba from Home Affairs to National Treasury, and Minister Mahlobo from State Security to Energy. She asked about the consequences to social development and how much damage had been done, given what had transpired at Eskom to date. She asked if the increases of the magnitude of 400% would have happened if there was no grand scale corruption at Eskom. She asked who in Prof Eberhard’s opinion were the elite manipulating the capture of Eskom and if he could identify them. She asked how far back the corruption in Eskom went especially with the emergence of coal and diesel contracts. Is there a discernible recipe in laying the foundation for looting? What was the real scale of the corruption because most sums were not audited. Did Prof Eberhard reasonably believe government agencies such as the Hawks and SAPS would have acted on these corruption allegations.
In response, Prof Eberhard said that they did not cover the nuclear deal in great detail since that was not the main focus. Death threats had been made to individuals, including those working in Eskom and he hoped they were reported to the authority. When core SOEs were undermined, the objective of the country was also undermined as well as adding constraints to the broader objective of poverty alleviation. Corruption had always been there and Eskom had been through difficult times previously and the team would look at the broader term as well. At this stage they did not know the exact size of what was looted but more would be uncovered as the inquiry proceeded.
The Chairperson asked if anyone had come forward to dispute the research or came with different information, or if Prof Eberhard expected to be challenged in a court on the findings. He asked what would happen when the board took a decision that would be different to the principles and policy of the company, or institution, and what impact that would have on the company. He asked Prof Eberhard if he thought it was wrong for Eskom to increase their tariffs and from where the money for the Medupi and Kusile projects came.
Prof Eberhard replied that he hoped he would not be in court. The researchers were very confident that the findings were factual and therefore expected no conflicts. If further facts emerged, the team would modify their findings. Eskom needed to be financially sustainable. Its tariffs needed to fund the projects, but costs needed to be viable. Operational expenses needed to be scrutinised by the regulator.
The Chairperson thanked Prof Eberhard and his team for their valuable input in assisting the Committee in their inquiry into Eskom and for the production of the Reference Book. The information presented raised serious allegations of abuse of state resources by senior officials in government.
The Chairperson said that while the task ahead was difficult, she was confident that the Committee would deal with the task at hand and the input given made the work of the Committee easier.
The meeting was adjourned.