ATC150625: Report of the Select Committee On Appropriations on the Eskom Subordinated Loan Special Appropriation Amendment Bill (2008/09-2010/11 Financial Years)[B17-2015], dated 25june 2015

NCOP Appropriations

REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE ESKOM SUBORDINATED LOAN SPECIAL APPROPRIATION AMENDMENT BILL (2008/09-2010/11 FINANCIAL YEARS)[B17-2015], DATED 25JUNE 2015
 

1. Purpose of Bill

The purpose of the Bill is to amend the Eskom Subordinated Loan Special Appropriation Act (2008/09-2010/11 financial years), 2008 so as to convert the subordinated loan to Eskom Holdings SOC Limited to shares for the State.

 

1. Background

In terms of section 13(1) of theMoney Bills Amendment Procedure and Related Matters, Act No. 9 of 2009, (the Money Bills Act), other money Bills than those stipulated in sections 10, 11 and 12 must be referred to the respective committees on appropriations. The committees referred to, are further required to conduct public hearings on the Bills referred and present a report to the relevant House. The following is a sequence of Committee activities in processing the Bill:

• On 10 June 2015 the Select and Standing Committees on Appropriations held a joint meeting where the National Treasury made a presentation on the Bill.
• On 12 June 2015 the Department of Public Enterprises and Eskombriefed the Standing Committee on Appropriations as agreed during the two committees’ joint meeting on 10 June 2015, and the presentations were shared with the Committee.
• The Financial and Fiscal Commission (FFC) and the Parliamentary Budget Office (PBO) briefed the Standing Committee on Appropriations on 17 June 2015.
• On 19 June 2015 the Standing and Select Committees on Appropriationsheld a joint hearing where the following stakeholders made presentations: ProfPhilip Lloyd from the Cape Peninsula University of Technology and Mr Rob Jeffrey from Econometrix; Dr Tobias Bischof-Niemz from the Council for Scientific and Industrial Research (CSIR), and Mr Hilton Trollip from the University of Cape Town.
• On 23 June 2015 the Committee received further briefings from the FFC and the PBO.

 

 

 

1. Presentations by stakeholders

3.1 Rationale of Bill

The National Treasury indicated that during September 2014, Cabinet approved the following support package to Eskom as reaffirmed in the 2014 Medium Term Budget Policy Statement (MTBPS) and 2015 Budget Review:

• Eskom improving efficiency through reducing costs;
• Eskom applying for tariff adjustments in line with the regulatory processes; and
• Conversion into equity of the subordinated loan of R60 billion that government had previously provided to Eskom.

 

Both the National Treasury and the Department of Public Enterprises reiterated that conversion of the R60 billion loan would help improve Eskom’s operations, credit ratings and enhance Eskom’s additional borrowing capacity.

Eskom’s acting Chief Executive Officer (CEO) indicated that the company is currently undertaking a capital expenditure programme amounting to R280 billion over the next five years. The company’s balance sheet position reflected an opening balance of about R11 billion in 2015/16. Despite the 2015/16 financial year’s anticipated cash-positive of R27 billion, when loans, interest payments and capital expenditure were taken into account, there was a shortfall of approximately R70 billion. According to the CEO the company will,through various sources, raise about R66 billion but when the government’s equity injection of R23 billion is added the result would be a closing balance of about R15 billion.

The FFC submitted that the Bill is critical to ensure Eskom’s sustainability while energy supply is critical to fulfil the National Development Plan (NDP) goals.

According to Dr Bischof-Niemz, the proposed appropriation will assist Eskom with current liquidity problems and potentially reduce the need for tariff increases.

Mr Trollip indicated that Eskom needs urgent funding to make up its shortfalls due to its tariff determinations that are not able to cover the costs of its electricity supply.

Prof Lloyd and Mr Jeffrey showed that Eskom must grow if our economy is to grow and they further indicated that a shortage of electricity is disastrous to the economy.

According to the PBO there are various factors that suggest that it is necessary and desirable to provide Eskom with financial support.

 

3.2 Reasons for Eskom’s challenges

The following are some of the factors identified by various stakeholders as the reasons for current Eskom challenges:

• The massive infrastructure programme running over schedule led to cost increase and revenue reduction;
• Historically low tariffs;
• Supply and demand challenges (load-shedding and demand reductions) plus the cost of running diesel and gas turbines;
• Delayed maintenance; supply chain and municipal debts;
• Downgrading of Eskom by credit rating agencies; and
• Governance and operational challenges within Eskom.

 

3.3 Concerns raised

Despite their support for Eskom funding most stakeholders raised the following concerns:

• By converting the loan, government potentially foregoes approximately R82.6 billion in interest payments while there are no indication that government will receive any dividends in the near future.
• Loan provisions that allow for interest not to be paid can turn a loan into a partial cash transfer.
• There is a lack of policy clarity on the role of Independent Power Producers (IPPs) and Public Private Partnerships (PPPs) in supporting Eskom.
• In the next five years Eskom is planning to raise an additional R280 billion to fund its capital infrastructure expansion programme to meet the growing energy demand. By 2017/18 government guarantees to Eskom alone would have escalated to 67 percent of total government guarantees. Guarantees imply that government commits to making loan repayments on behalf of Eskom should it default. This exposes the budget to undisclosed risk and is recorded as a liability on government’s balance sheet. At the same time guarantees are not normally subjected to Parliamentary scrutiny.

 

3.4 Stakeholder recommendation

Given that guarantees are not exposed to the same level of scrutiny in the budget process as regular spending, the FFC advised that oversight mechanisms of guarantees should be strengthened to reduce the risk of unintended consequences.

1. Findings and observations

4.1 The Committee noted the perception/notion that electricity tariffs have been low and could not finance Eskom's operations and investment needs. The Committee is however of the view that the matter requires further probing and interrogation.

 

4.2 The Committee noted some of the factors that might have contributed to Eskom’s current challenges as indicated in 3.2 above.

 

4.3 The Committee noted that the proposed conversion of the Eskom loan is in line with government plans to support Eskom with additional funding without worsening the current budget deficit.

 

1. The Committee is of the view that there is a need to ensure that the proposed additional funding achieves the desired results.

 

1. The Committee noted that there is a need to attach some conditions to the proposed additional funds while taking cognisance of any unintended consequences.

 

1. Recommendations
   1. There is a need to ensure that Eskom tariffs are cost-reflective while innovative ways are explored to ensure that the poor are adequately protected.As already indicated above, the Committee will further probe and interrogate the perception/notion that Eskom tariffs have beentoo low to finance its operations and investment needs.

 

1. The Department of Public Enterprises should monitor and support Eskom to ensure that its governance and operational challenges are addressed.

 

1. National Treasury should exercise its legislative mandate to ensure that the appropriated funds are used to achieve the desired results.

 

1. Both the National Treasuryand the Department of Public Enterprises should monitor the utilisation of government guarantees by Eskom and report to Parliament on a regular basis in order to reduce the risk of unintended consequences.

 

1. The Minister of Finance should attach some conditions to the proposed additional funds while taking cognisance of any unintended consequences.

 

1. Eskom should report to the Committee on a quarterly basis with regard to the converted funds.

 

The Committee, having considered the Eskom Subordinated Loan Special Appropriation Amendment Bill (2008/09-2010/11 Financial Years)[B 17 – 2015], referred to it, and classified by the Joint Tagging Mechanism as a section 77 Bill, reports that it has agreed to the Bill without amendments. 

 

The Committee further reports that the Economic Freedom Fighters (EFF) did not agree to this Report.

 

Report to be considered.