Eskom Appropriation Bills [B16-2015] & [B17-2015]: FFC & Parliamentary Budget Office comments; Appropriation Bill [B6-2015]: briefing & adoption

Meeting report

Briefing
2015 Appropriation Bill
Ms Raquel Ferreira, National Treasury’s Director of National Budgets, spoke to the processing of the Appropriation Bill, the structure of the Bill, the reorganisation of Cabinet and new departments, the consolidated budget, the reduced expenditure ceiling and the allocation of budget resources.

She said the expenditure ceiling had been reduced by R25b for the last two years of the Medium Term Expenditure Framework period with a R10b reduction in 2015/16 and a R15b reduction in 2016/17. The reductions would be drawn by not filling posts that had been vacant for a prolonged period, a reduction in transfers to public entities, the freezing of non essential budget items like catering and entertainment at 2014/15 levels and reduced capital project allocations that were projected to be underspent.The growth in debt service costs declined to 4.4%.

While expenditure growth rates had been moderated, expenditure budgets continued to grow and fund government’s outcomes in targeted priority areas. The largest reprioritisation was in funding infrastructure. R813b would be spent over the next three years of which R127b would be spent in 2015. There was an unallocated reserve of R65b in the appropriation.

Discussion
Mr O Sefako, (ANC; North West), said the vote impacted positively on rural lives in the North West province.

Mr C De Beer, (ANC; Northern Cape), said the budget was an expression of government’s allocations and the priorities it attached to it. He said the main thing was oversight over the allocations on a quarterly basis, including the Eskom Bills.

The Committee agreed to the Bill without amendments.

Financial and Fiscal Commission (FFC) submission on Eskom Appropriation Bills
Mr Bongani Khumalo, FFC Chairperson, said the presentation would cover recent challenges facing Eskom, the support programme for Eskom based on the September 2014 Cabinet Package, an assessment of the mechanics of the two bills and the next steps that needed to be taken.

He said electricity production had fallen year on year and this resulted in a decreased demand through increased load shedding thus leading to lower revenue. The load shedding itself was caused through delays in the build programme and inadequate maintenance. The decline in electricity consumption and the challenges Eskom faced in recouping money from consumers and municipalities would lead to an increase in electricity tariffs. Electricity was key to the growth aspirations of the country including rural development so there was reason for the State’s intervention and the FFC supported this move.

Dr Ramos Mabugu, FFC Research Director, said there was a close relationship between the country’s growth rate and the units of electricity consumed. It was estimated that there would be a negative knock on effect which would take off 1.4% from the forecast growth if electricity supply was further affected. Hence it was better for the State to support Eskom through the sale of assets than keep those assets.

He said the oversight provisions in the Eskom Special Appropriation Bill provided lots of room for oversight because money could be withheld if provisions were not met. He welcomed these oversight provisions as a positive innovation. The R23b was to be used to increase generating capacity for the supply of electricity and to fund capital expenditure. It would also reduce the gearing ratios of Eskom. The R23b would be funded from the sale of State assets. This was a once off transaction which could not be repeated. The transaction did however demonstrate government’s strong commitment to reducing the budget deficit announced in the 2015 budget.

He said the Eskom Subordinated Loan Special Appropriation Amendment Bill converted R60b of a 2008 loan into equity and hence there was now no need for Eskom to repay that debt. This would strengthen Eskom’s balance sheet, reduce its principal debt, reduce its debt service obligations, improve its debt / equity ratio, improve its gearing, defend its credit ratingand close the gap in the funding shortfall.

Government guarantees were one of the additional measures to improve Eskom’s fiscal sustainability. However the guarantees should not be used as an easy option, but as a last resort and the risks should be tackled head on. Eskom should have to demonstrate alternative actions it had taken before the use of the guarantee as a last resort.

Other measures were cost reflective tariffs. Eskom had already been awarded a 12.7% increase for 2015/16 and NERSA was expected to approve an additional increase of 12.6% for 2015/16. The FFC agreed with the concept of cost reflective tariffs but effort should be put into demonstrating the affordability measures taken by Eskom. Work along these lines would reduce resistance to increases because the public were not aware of the inputs keeping the infrastructure and services at affordable levels.

Regarding Eskom’s revenue collection, municipalities owed big amounts which totalled a substantial portion of what Eskom was owed. He said Eskom was doing what most successful businesses did, namely optimise debt levels and minimise interest expenses. The two Bills reflected this also.

In summary, he said the Bills kept to the spending ceilings set by the 2015 budget which was prudent and gave assurance to government’s commitment to the budget. The bills allowed government to withhold payment and this enforced transparency and efficient management. The selling of state assets to finance Eskom could not be a long term measure. The FFC’s view was that the two Bills would improve Eskom’s fiscal sustainability.

Looking forward, government should focus on speeding up policy clarification and implementation especially on alternative energy options. It should, within policy parameters, bring in private sector equity partners to inject funding and expertise into Eskom and its build programme. Eskom should use the guarantees sparingly and as a last resort in managing risks. Eskom and the Department of Energy had to communicate better with customers and interested parties and find an electricity prepayment solution. Prepayment had had an almost total negative feedback. This had to be turned around if fiscal viability was to be realised.

Parliamentary Budget Office (PBO) submission on Eskom Appropriation Bills
The PBO gave a background to SOE financing, looked at considerations relevant to Eskom, gave an analysis of the tabled bills, noted key issues for consideration and gave an overview of the public hearings of the 19 June 2015.

Mr Sean Muller, PBO Analyst, said State Owned Enterprises (SOE) were funded for three main reasons; capitalisation of the enterprise by Government, the non commercial mandates of the enterprise and to reduce borrowing costs. He then spoke to funding conditions and the ability to manipulate around these conditions. He also discussed the broad policy background and public finance oversight.

He said the two Bills were tabled because of the financial challenges Eskom currently faced. The challenges arose from the massive infrastructure programme running behind schedule, cost increases, revenue reduction, historically low electricity tariffs, load shedding which led to a loss of revenue, the cost of running diesel and gas turbines, delayed maintenance, municipal non- paymentandthat Eskom would be affected by a downgrade in its credit rating. He said the build programme should have started earlier.

He said tariffs were regulated by NERSA through the 2008 energy price policy. There was a widespread view that NERSA decisions had not allowed adequate tariff increases and that the State should consider intergenerational equity and the overall balance of financing.

Mr Brandon Ellse, PBO Analyst, said the Eskom Special Appropriation Bill was to plug a financial gap in Eskom and the funds would be raised through the sale of non strategic assets and transferred in three tranches of R10b in June, R10b in December 2015 and R3b in 2016/17. The funds would be used to fund interest payments on debt and maintain Eskom as a going concern.

He said the Eskom Subordinated Loan Special Appropriation Amendment Bill converted a R60b Government loan to Eskom in 2008 into equity. In effect Government had given up its option to convert the loan into cash. In terms of priority claims, Government would now be third in line after senior debt, and junior debt.

He noted some issues for consideration. Various factors suggested that it was necessary and desirable to provide Eskom with financial support. The causes for Eskom financial situation were an important oversight item. Setting conditions on how the cash was spent would be difficult to enforce. The conversion of the loan into equity potentially reduced the State’s return on Eskom’s future activities.

Mr Muller then gave an overview of public submissions. He said Mr Tobias Bischof-Niemz (CSIR) spoke to the costs and merits of energy production and said that maintenance of and an investment in transmission was equally important. Mr Hilton Trollip (UCT) had focussed on cost reflective tariffs and their importance. Mr Phillip Lloyd (CPUT) and Mr Rob Jeffrey (Econometrix) had recommended that Eskom be restructured into three components: generation, transmission and distribution, and that NERSA be restructured accordingly.

The Chairperson said that these submissions showed and called for Parliament to have a greater role in the oversight of the funds.

Discussion
Mr V Mtileni (EFF; Limpopo) said Eskom was well supported by Government yet only paid “lip service” to fulfilling its role. Were the PBO and the FFC in communication with Eskom, because money was going to paying bonuses to executives. Could these two bodies monitor bonuses, golden handshakes and salaries which took up 90% of the Eskom budget?

Mr C De Beer (ANC; Northern Cape) said it was clear from the two presentations that Eskom should get the money but also that oversight be done on the money and the Committee should do this on a quarterly basis. How did the PBO and the FFC view what a cost reflective tariff was?

The Chairperson asked if there were measures to hold Eskom to account.

Mr F Essak (DA; Mpumalanga) asked what assets Government was going to sell to generate funds for the appropriation. What guarantees were there that Eskom would not approach Parliament for funds in two years time? Did the FFC have concrete suggestions to strengthen the oversight mechanism over the funds to Eskom? What mechanisms were there to ensure that Government guarantees were complied with?

Ms E van Lingen (DA; Eastern Cape) was concerned that the guarantees meant that money would be allocated that did not go through the same scrutiny as an appropriation. How much extra money would come in through increasing the electricity tariff? Would the money cover only operational costs or would it cover maintenance costs also? Whose fault was it that Eskom was in a mess and why did consumers have to pay? She said the five point plan of the war room was not materialising.

Mr Khumalo replied that the FFC was not in contact with Eskom. Eskom had a government department which did oversight. If the Committee wanted something to be investigated about Eskom, then the FFC could do so. FFC was only aware of remuneration mentioned in the Eskom Annual Report. It had no mandate to investigate salaries, bonuses and golden handshakes, these were for the Eskom Board to answer. Cost reflective tariffs allowed one to recoup one’s costs and sustain production and service. The big issue was the need to relook at the broader policy of Government. There was a similar situation to Eskom with regard to water supply, where people were not prepared to pay for water. These were challenges to Government and needed a policy response as Government did not have a bottomless pot of money. So all these policy debates needed to be done on cost reflective tariffs. If nothing was done about these challenges, the ripple effect would ultimately be that something had to give, leading to the stopping of local government equity share and to reduced municipal services. It was more important now to fund basic services.

According to section 218 of the Constitution on government guarantees, a report had to be provided by the entity. But how many times were these reports studied? The FFC had not seen Parliament go through these reports. The reports should be looked at and questions should be asked.

On how a capital injection helped consumers, Dr Mabugu replied one had to read the Cabinet support strategy report of 11 September 2014 where it argued that by supporting a better chance of having a continuous electricity supply would reduce the 1.4% decrease in GDP were the capital injection not done.

The FFC did not know what assets were being sold to fund the R23 billion to Eskom.

On whether Eskom would be asking for more money in two years’ time, Dr Mabugu replied that if an asset was sold, one did not have that asset to resell again in two years time. This was a once off way of dealing with a challenge.

Mr Muller said that there was no interaction with Eskom, the PBO could only do so if the Committee asked it. The PBO was there to advise on the money bills not on the quarterly reports. He said half of the Presidential report was on governance issues.

On Mr Essak’s question, he said the notion of competitive neutrality was raised by the OECD countries where a body like Eskom should operate without advantage in the private sector. If this was accepted then market related charges for loans would prevail. Eskom though had not paid interest or guarantee fees to Government because Eskom was not in good financial shape.

Accountability was the key issue for Parliament and the PBO did not have recommendations. There were tensions between those arguing for the concept of competitive neutrality and those in favour of a developmental state agenda.

Mr Rashaad Amra, PBO Analyst, said cost reflective tariffs were well defined in policy. In the context of Eskom’s monopoly, a regulator was needed. NERSA fulfilled this role and was governed by a 2008 policy on costs and reasonable returns. Eskom had requested large increases but NERSA had said it would phase these in over five years. Since then the tariff had increased by 98%. The SA Reserve Bank had said that an increase in electricity tariffs would result in a breach of the 6% CPI boundary. Every five years NERSA had to re-evaluate the cost of supplies. The pricing policy was a standard one and that the issue came when ‘pass though’ costs were included.

Mr Michael Sachs, Deputy Director-General of the Budget Office in the Treasury Budget Office, said that from a policy approach, the funding of Eskom through the sale of assets was not a principle that Treasury was adopting permanently. It was a temporary measure in the face of sharp fiscal constraints. It recognised that risks could arise from state owned companies (SOCs) which this funding would address. It was budget neutral and forced Treasury to look at the public balance sheet. In effect Treasury was exchanging an asset for an asset in Eskom.

On guarantees, he said Treasury was not spending the money, it was not a liability on the balance sheet, it was a contingent liability. It had issued guarantees for R350b and this was to give the lender security that the country stood behind the loan.

He agreed on the issue of a scrutiny of the use of the guarantees because this bypassed Parliament’s appropriations process.

Ms van Lingen requested that the committee secretary to formally follow up with Mr Anthony Julies, Deputy Director General: Assets and Liability Management at National Treasury, for an Eskom report that had been requested at a previous meeting which had not been forwarded despite attempts to contact him.

Mr Mtileni (EFF; Limpopo) once again asked whether the Committee could empower the FFC and the PBO to do investigations on Eskom’s salaries and bonuses and golden handshakes.

The Chairperson said the Committee had the responsibility to hold the SOC to account. The Committee needed to do its homework and check on the review of state owned enterprises for example. It would now be up to the management sub committee to respond.

The meeting was adjourned.