Eskom 2019/20 Annual Report

Meeting report

The Chairperson began the meeting and welcomed the attendees. 

The Minister and Deputy Minister of Public Enterprises had apologised. There was a Cabinet committee meeting taking place at the same time. He asked for other apologies. 

The Committee Secretary, Mr Disang Mocumi, said there had been no apologies other than those from the Parliamentary Liaison Officer (PLO). 

The Chairperson said he did not have apologies. He understood that the Director-General of the Department Public Enterprises (DPE), Mr Kgathatso Tlhakudi, would be in the meeting but would join late as he was in a meeting with South African Airways (SAA). The Acting Chief Director of Energy: Eskom; the Chief Director: Eskom, as well as the Eskom Board members, including the Interim Chairperson, Prof Malegapuru Makgoba, were also present. 

The Eskom Executive was in attendance. This included the Group Chief Executive, Mr Andre de Ruyter and the Chief Operations Officer, Mr Jan Oberholzer. 

He handed over to the Acting Chief Director of Energy at Eskom, followed by the interim Chairperson, Professor Makgoba. 

The Acting Chief Director of Energy had not yet logged in to the meeting. 

The Chairperson handed over to Prof Makgoba. Time was against the meeting. He asked for opening remarks and an outline of the presentation. The meeting was dealing with the finances of Eskom; nothing else. 

Prof Makgoba thanked the Committee for the opportunity to interact. The full complement of the Eskom executive was present. The presentation on the financial matters of Eskom in the past financial year would be led by Mr de Ruyter.

Mr de Ruyter asked whether the Chairperson wished Eskom to take the Committee through the group annual results. Eskom had also received a list of questions and prepared answers to them. They had been proactively answered. Eskom would proceed to the questions under the assumption that the annual results had been ventilated. 

The Chairperson asked Eskom to go through the presentation and in the process, make reference to the questions Mr de Ruyter had mentioned and answer them. There would be 40-45 minutes for the presentation. 

Mr de Ruyter said he would then move to the annual results presentation. [Readers should consult the attached copy of the presentation, for the full account.]

Eskom Group Annual Results for the Year Ended 31 March 2020
High-Level Overview 
Disappointing financial results for the year ended 31 March 2020 
Cost savings of around R16 billion had been achieved, exceeding the target of around R6 billion. These savings had largely been absorbed by cost overruns on diesel in order to minimise load shedding. 

Eskom’s unsustainable debt burden had led to a net finance cost of around R31 billion, resulting in a net loss of around R20 billion. 

Favourable court judgements had been received on numerous National Energy Regulator of South Africa (NERSA) revenue review applications. 

Eskom had received Government support for debt servicing amounting to R49 billion in 2020, with R56 billion committed for 2021. These Funds are reserved for debt servicing

Some progress made, off a low base 
In November 2018 there had been significant coal stock shortages at numerous power stations. Coal stock had been normalised to last for up to 50 days by the end of March 2020. 

A reliability maintenance programme had been launched with planned maintenance beginning in October 2020. 

Kusile Unit Two had come into commercial operation on 29 October 2020. Design modifications had been successfully implemented on four of Medupi’s units by October 2020. 

The divisionalisation of Eskom was underway as a first step towards restructuring the entity. There would be a separate Transmission subsidiary by December 2021. 

Eskom was embarking on a more assertive approach to debt collection and distribution energy loss prevention was delivering results. Municipal payment levels were being maintained despite the challenging economic conditions under COVID-19. The top 20 defaulting municipalities’ payment rate had increased from 42% in March 2020 to 49% in September 2020. The Soweto payment rate had improved from 12.5% in March 2019 to 21% in March 2020. 

COVID-19 will have a substantial impact going forward 
COVID-19 had seen a 10.3% decline in sales volumes year-to-date compared to a decline of 16.5% seen in the first quarter of 2020. Sales volumes for 2021 were expected to be 7% lower than 2020. 

Planned and opportunity maintenance had been undertaken during the initial lockdown period due to decreased demand. 

There had been delays in executing capital projects due to lockdown restrictions on the movement of people. 

COVID-19 was seen as a significant risk factor affecting the global and local economy, as well as Eskom’s business now and in the foreseeable future. 

Operational Performance and Outlook 
Some significant challenges in the 2020 financial year 

The generation energy availability factor (EAF) had been around 66% in 2020 (compared to 70% in 2019) which, together with unplanned maintenance levels exceeding 20%, had contributed to 46 days of load shedding. 

The Stage Six load shedding entered into on 9 December 2019 had been a nadir for Eskom. 

Environmental performance remained poor, particularly at Kendal Power Station, where there had been a change in management. Mr Bruce Moyo had been appointed as the new manager. 

There had been slow progress on implementing supply chain recovery, with inefficiencies in the procurement process hampering operations and delivery on the maintenance programme. 

Municipal arrear debt had escalated by 41% to R28 billion. 

Community resistance, vandalism of equipment, as well as threats to Eskom employees continued to hamper efforts at curbing electricity theft and non-payment. 

Generating plant and transmission network performance declined, distribution remained stable 
Generation Energy Availability Factor (EAF) had declined compared to 2019 mainly due to worsening coal plant performance. 

There had been unplanned capability losses of around 22.86% (compared to 18.31% in 2019). 

The coal energy utilisation factor (EUF) had increased to 93% (compared to 90% in 2019). Mr de Ruyter said that running at a high EUF was bad, particularly as Eskom was dealing with an old set of assets where the median age of plant was 39 years. It was comparable to revving a car engine in the red for lengthy periods. This increased the lack of reliability. 

Eskom’s Distribution network had delivered stable performance, although Transmission performance had deteriorated. 

Progress on new build defect correction plan 
Mr de Ruyter said that Dr Titus Mate had been instrumental in design modifications at Medupi and Kusile. 

Environmental performance declines, with stable socio-economic and safety performance 
There had been scrutiny from the Department of Forestry and Fisheries as Eskom was consuming increasing amounts of water due to new households being connected to the grid. As South Africa was an arid country, this was a concern. 

B-BBEE attributable spend had amounted to R102 billion (compared to R89 billion in 2019). 

Eskom had seen continued improvement regarding racial and gender equity. Disability equity had not met the target. 

Progress is being made on the turnaround 
The five key priority areas on the turnaround strategy were: operations recovery; improvement of Eskom’s income statement; improvement of Eskom’s balance sheet; business separation; and people and culture. 

There is light at the end of the tunnel 
Mr de Ruyter said the sun was rising on Eskom. The generation outlook was improving due to restructured organisation structure and an enhanced focus on maintenance, combined with prioritisation of environmental issues. 

Eskom had the opportunity to repurpose end-of-life power stations, but South Africa required further capacity increases.

Eskom welcomed the Department of Mineral Resources and Energy’s (DMRE’s) procurement of new electricity generation infrastructure under the Integrated Resource Plan (IRP) 2019, as well as emergency procurement. 

Significant capital investment was required in order to fund Transmission expansion and improvement, as well as investment in cost-plus mines to sustain production. 

Distribution revenue collection remained a challenge, but payment levels were improving. 

The Just Energy Transition Strategy would bring an equitable introduction of cleaner and greener technology along with access to low cost debt for green financing. Mr de Ruyter said Eskom was the first business in the country to implement a Just Energy Transition Office. 

A recent Eskom compact had been signed at the National Economic Development and Labour Council (NEDLAC) and hopefully, with opportunity to achieve cost reflective tariffs and a more sustainable debt burden, the financial position of Eskom could be turned around in the medium term. 

Financial Performance and Outlook 
Driving Eskom’s financial turnaround 
Mr Calib Cassim, FRO, Eskom, said that since 2019, Eskom had focussed on turnaround through: revenue optimisation through achieving cost reflective tariffs and increasing sales volumes; implementation of cost curtailment through cash savings on operational and capital costs, thereby improving liquidity and financial sustainability; as well as debt relief through Government support. Progress had been made in the majority of these areas; however, municipal arrear debt had escalated to R28 billion. 

Eskom’s financial results had been disappointing with a R20 billion loss in 2020 on the back of R20 billion in 2019. 

A key matter in the audit opinion had been Eskom’s treatment of the Eskom Pension and Provident Fund (EPPF). There had been increased disclosure on it. 

Process to manage irregular, fruitless, and wasteful expenses improved, more initiatives under way 
Once a contract was identified as irregular, spending against that contract would continue to come through as existing irregular expenditure (as contracts often could not be exited immediately despite being identified as irregular). Enabling agreements were being sought to address irregular expenditure from existing sole source contracts. 

There was a decreasing trend in new irregular expenditure. 

A Loss Control Department was to be established at Eskom to address Public Finance Management Act (PFMA) violations and oversee consequence management. This included disciplinary actions, condonations, and the recovery of losses.

Eskom was driving a procurement roadmap to improve internal procurement processes and contract management. 

Most financial indicators improved slightly, but remain well below acceptable levels 
Eskom was borrowing to pay a portion of its interest. Eskom had made losses for the past three financial years. 

Operating profit achieved, but eroded by excessive debt servicing costs 
Units at Hendrina and Komati had been placed in cold reserve in 2019 due to depreciation. 

Financing costs were increasing due to higher indebtedness coupled with increasingly expensive costs of borrowing. 

Electricity revenue increased by 12% (before IFRS adjustments)
Eskom could only recognise revenue on customers that were going to pay it, according to International Financial Reporting Standards (IFRS) 15 standards. This affected sales and negatively impacted revenue records due to accessibility of funding. 

Reliance on debt is unsustainable – gross finance costs are the largest cost after primary energy 
The growth in debt securities and borrowings could largely be attributed to the weakening of the Rand in March 2020 with a corresponding growth in derivative assets due to comprehensive hedging of market exposures. The average cost of debt was around 9.6%. 

Eskom secured 64% of funding for the 2021 financial year by 30 September 2020 
A large portion of Eskom debt was Government guaranteed. A R350 billion portfolio was available to Eskom as part of the total Government guarantee. There was R22 billion of this remaining. Without Government support, cash from operations would have been insufficient to meet debt servicing requirements. 

Capital expenditure contained to manage liquidity 
R10 billion had been used to expand Eskom’s asset base while R12 billion had been spent on existing assets.

Eskom was however operating under restricted organisational capital expenditure requirements in order to improve the entity’s liquidity. The continued deferral of capital maintenance, refurbishment and replacement of infrastructure could lead to operational challenges. 

Arrear municipal debt continues to escalate, leading to additional liquidity pressure 
Invoiced municipal arrear debt had increased by R8 billion to R28 billion. 

Eskom was collaborating with the Eskom Political Task Team to address ongoing municipal debt challenges. 

Some progress achieved in correcting the lack of cost-reflective revenue determinations 
Several favourable court judgements had been received by Eskom regarding the issue of non-cost reflective tariffs since 2015. 

Financial results for 2021 expected to be worse, before long-term improvements materialise 
The results for 2021 were expected to be worse in 2020 due to the anticipated impact of COVID-19 on Eskom’s operations, particularly on sales. 

Cash from Eskom’s operations remained insufficient to service its debt without continued Government support. 

Most ratios were expected to maintain negative trends into 2021, however, on the back of cost saving initiatives, the ability to correct arrear debt, and the assumption under the Corporate Plan of a growing cost-reflective tariff path, Eskom could be profitable by 2023. 

Conclusion 
In reality, the R56 billion in government support committed for 2021 ensured Eskom could operate. This was a regretted burden on the national fiscus. Eskom would require on average around R1 billion per week in Government support in 2021. 

With a significantly reduced debt balance of R200 billion, a cash balance of R30 billion, as well as an margin of Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) of at least 35%, Eskom was projected to be in a position to be able to achieve independent financial sustainability. This would be enhanced through an improvement in operational performance. 

Whilst government equity support improved liquidity through the assistance with debt servicing, it did not resolve Eskom’s financial viability and was an unsustainable solution. Therefore, the migration to a cost-reflective tariff system was necessary to cover the cost of Eskom’s capital and, combined with the cost efficiencies and reduction of debt levels, would restore Eskom’s financial sustainability. 

The Chairperson asked if there was other input.

Mr de Ruyter suggested moving to questions and answers. The full Eskom team was present. 

The Chairperson opened for questions. 

Discussion 
Ms J Mkhwanazi (ANC) welcomed the report and acknowledged the work being done at Eskom thus far. The work being done in Government was to help peoples’ lives, help people fight poverty, inequality, unemployment, and corruption. A question for the Eskom Board was what the reasons were for the non-achievement of the targets in the shareholders compact? Could Eskom or the Department give the details of the newly established Audit Unit? How would it assist to deal with the historical irregular expenditure? How did Eskom plan to deal with the significant challenges indicated in the 2020 financial year in the presentation? On the municipal debt escalations, had other stakeholders or departments been engaged to deal with the matter? She understood it involved many departments and stakeholders. Was there a plan to deal with escalating municipal debt indicated in the report? Could Eskom talk to plans of minimising load shedding going forward? In terms of the current Eskom financial position, were there any new plans or programmes in new areas? She was always interested in new programmes or projects as a public representative. 

Mr G Cachalia (DA) said that the presentation had raised a number of concerns which he was sure that everyone shared. These included Eskom’s debt, the cost to customer and onward funding of the entity. Over the next year, Eskom would have to face a funding requirement of R1 billion per week. Against this, the Committee had been told that financial stability would be delivered on the basis of debt reduction of R200 billion and cash balance of R30 billion. Did this include off-balance sheet debt, it did not seem to? What was the cost of required maintenance going forward, over next two years? What was the cost of the fix of the new builds of Medupi and Kusile going forward, over and above what had been reported? In terms of increased costs, what percentage went to debt servicing? Were any other investments being considered into Eskom? With both equity and debt, there had been talk of Public Investment Corporation (PIC) funding. The Minister of Finance, Mr Tito Mboweni, had rekindled talk on the matter. There had been talk of the Unemployment Insurance Fund (UIF) Compensation Fund coming into Eskom. Given the “fragile state of our balance sheet”, how was this going to be met? What other investment would Eskom be open to in order to allow for affordable energy? Could the cost of coal contracts be laid out in a transparent way for the Committee? 

Ms O Maotwe (EFF) said that looking at Eskom’s losses in the financial year, liquidity remained a challenge. Eskom relied heavily on Government support for equity. Without this, Eskom would be bankrupt. What was the cost of diesel per day? What were the big corporations that owed Eskom? The Committee had heard about Soweto and other municipalities in the presentation but not about the large corporations that owed Eskom. What was the age of the debt and how much being owed by large corporations? On slide six on COVID-19, earlier in the year the Committee had been told that load shedding was under control. Eskom had been told by the Committee that this was early celebration as people were not at work so factors were not functioning optimally; therefore there was little stress on the system. Now the Committee was being told that COVID-19 was affecting Eskom. What did this mean? On slide eight on critical risks to Eskom, disaster risks had been mentioned. What was Eskom telling the Committee here? What was being done to mitigate these risks and what were they? Slide eight had also mentioned slow progress in implementing supply chain recovery with inefficiencies in the procurement process. Who was supposed to do what in this regard? Why was it not being done? There needed to be able to control and manage procurement processes, as well as delivery and maintenance. Was the Committee being told that Eskom was unable to be managed? Slide 15 mentioned Eskom had received a qualified audit opinion. Issues that had been raised included irregular expenditure. There were new reports of irregularities that had been raised. What did it mean? What was being done to address it? Slide 16 had made reference to new irregular expenses including R73 million and R191 million. Of the R73 million, the CEO had picked four companies, were the four companies part of the R73 million? On operating profit mentioned on slide 17, why had the operating profit increased like that? She said the levels were “wrong and mischievous” on the slide, the presentation had used green arrows going down and red arrows going up. This had been fixed on slide 28. Arrows going down had been put in green on slide 17. On Eskom’s gearing ratio, it was too high. She said the CFO knew Eskom could not have a gearing ratio of 71%. Anything above 50% signalled “danger zone”. It had been moved from 76% to 71%, what was the plan to have it moved below 50%. If Eskom could not make profit, it would soon be bankrupt. It was clear on slide 21 that without government support, Eskom would be bankrupt. It had received R49 billion in support in 2020. Government had pledged to give R56 billion to Eskom in 2021. Despite this, Eskom was planning for a huge loss of R26.2 billion. There was no hope for Eskom. 

Ms C Phiri (ANC) asked what was being done to deal with irregular expenditure. The presentation had been about finances and having a huge debt. It could be heard from debates in Parliament that Members of Parliament no longer wanted to give bailouts to entities. What was the recovery plan for recovering irregular expenditure? How far was it in terms of implementation? State capture had caused money to be lost. Getting returns on irregular expenditure would add to Eskom’s profits. Could Eskom elaborate on the higher costs of primary production? How and what impact did the NERSA tariff determination have in terms of impact on Eskom? 

Mr S Gumede (ANC) said he had had an intention of not asking any questions in the meeting. He needed to discuss matters with the Chairperson or talk to the Whip first to see about whether the things he wanted to raise were relevant. He would try “softening” the questions. He thanked Eskom for the detailed presentation. He said he hoped that the “accountants” present would agree that figures were “boring”. At times when he listened to figures he got confused. He greeted the Eskom delegation, especially Prof Makgoba. He said he liked the leadership of a black person. A black person had more responsibility than any other counterparts. Black people knew and understood better what exactly “we are looking for”.  Who had given Eskom such questions in preparation for the meeting? Were these relevant questions that the Committee could have asked? Were they reliable? It would have been good that the questions had been at least flouted so that the Committee could see their relevance. When would the questions be answered? He had “missed it” when the CEO was presenting where the requirement of R118 billion (on slide 18) had been stated. It had spoken about light at the end of the tunnel despite this requirement. He was coining his own word which may not be accepted. It was out of the reading of the information that he had. He said he was picking up something he termed “programmed performance” at Eskom. It was a situation that said that, if production had been at 100 in the previous financial year, even if more than 100 could be produced in the current year, those in production would say “let us not exceed or be more than 100”. This was in order to find things at a similar level. He was interested to ask this to the same team that year that had been present in the previous financial year. What exactly was going to happen when the guarantees were done? He needed more than the explanation that had been given. The Committee had been told Eskom was currently left with R22 billion. It had then been said that Eskom may need more. How were guarantees granted? Did they have the limit or not? He said electricity was “everything to us”. It was the economy and “our lives”. He knew Eskom needed to be cushioned and supported. But it had to be equal to many others who needed help. He asked “who did we pay the debt to” relating to the R480 billion? It had been said that if this was reduced to R200 billion it would make Eskom “comfortable”. He needed to know “who were we paying”.   In finance, the bigger figures were informed by finer details. The finer details were more important. A million was constituted by cents and coins, accumulating to millions or billions. The Eskom presentation had unfortunately not provided the finer details. On irregular spending of R840 million and R102 million for flats where artisans were accommodated, what was the status of the flats? Were the people staying in the flats for free or did they pay? This impacted on Eskom’s spending. For the CEO, he said he would have to be “very strong”. The narrative performance of his units had “a lot to tell”. If the narrative was read, Mr Gumede was questioning the qualified audit that had been received. If Mr Gumede were an auditor, at the time he would have given Eskom a disclaimer audit. He did not know the figures but he had read the narrative and this informed his position. Mr Gumede was not an auditor, but he read the narrative and put it in his mind. This had made him wonder if Eskom was dealing with qualified people. Were they qualified to do the work they were doing? If they were qualified, he smelt “a rat in all that was being done”. He said you could not have people working within the very same entity and the people running the business with the company and “those people had not declared”. You also found that critical documents were missing. Mr Gumede was also looking at some companies who ought to be disqualified who had been awarded work and were working in procurement and contracts. On these issues Eskom had spoken about consequence management. People ought to have been disciplined and had not been. When Eskom sought consequence management, minutes were found to have not been taken correctly. This hindered consequence management. This may have been deliberate. People doing audits could not find the documents. There were deficiencies in the internal controls. In times on the side of the CEO, Mr Gumede questioned the oversight role of the Committee. How far did it extend? Did the Committee have the right to ask whomever it could ask to go and investigate something that concerned the Committee? Eskom was an entity that could not be lived without. He appealed to the CEO to change the perception of Eskom and allow South Africa to reap the fruits of it. When people were expelled for misconduct, production decreased. 

Ms J Tshabalala (ANC) asked what would be done about Eskom’s net loss figure of R20.5 billion.  South Africa had been downgraded, what would Eskom do to attend to this? Energy was a critical aspect of assessment of South Africa and its economy. On Eskom’s balance sheet, the Committee had been told Eskom’s finances were in a “bad state”. What was the balance sheet? There had been recurring contracts and instances of fruitless and irregular expenditure. How long would the condonation by National Treasury take, irrespective of the audit? How had COVID-19 affected honesty and transparency at Eskom? She asked this particularly in relation to procurement and PPE and where National Treasury had given regulations for procurement. Had any matters of inflated prices been recorded as seen in other departments? On the matter of the Soweto debt, the Committee had been told in the presentation that at least some payment was being received. She asked for monthly reports on the amount of debt that was recouped from municipalities. It should also contain cases where Eskom had restored power and the provision of substations to communities. There had been protests in Vaal and Gauteng, over and above the issue of Soweto. The Committee agreed that people needed to pay for their electricity, but this included households and big businesses that needed to pay Eskom. Eskom needed to be able to account for the big businesses that were not paying them. Eskom had a customer base and needed to be able to create and get payment from its own demand, it could not continue requiring Government assistance. The reports should include the municipalities concerned and the amounts that had been recouped. This would allow the Committee to coordinate the information with where there were protests over electricity service delivery in municipalities. Municipalities were expected to give communities the free basic meter boxes. There were still communities that preferred the use of flat rates. This funding information needed to be provided to the Committee in the spreadsheets. On the matter of civil recoveries, litigations, and criminal cases, the Committee wanted to see progress being made. This was money that was supposed to be gotten from people who had benefitted from misconduct. On the Presidential Task Team that sought to deal with the matter of municipality debt, there were also communities who paid the money due to Eskom for electricity. Municipalities were the ones not paying Eskom. She said Eskom needed to be careful not to penalise communities who were paying for electricity when it was municipalities at fault. She understood and acknowledged that there was a Presidential Task Team. On Medupi and Kusile, where were they in terms of completion? On NERSA tariffs, what was the impact of the tariffs on the determination of Eskom? There was unsustainable debt at Eskom. This impacted on future sustainability. What were the levels of inefficiencies in Eskom’s supply chains that were delaying procurement processes? This hampered delivery on the maintenance programme. Could Eskom elaborate on the higher costs of primary production, including open cycle gas turbines (OGCT)  and Independent Power Producer (IPP) production? Industrialisation was a topic not only for politicians. It was important for local procurement to take place here. Was Eskom really empowering local communities through partnerships in this area? The Committee wanted to see Eskom’s balance sheet looking better. The balance sheet needed to go up at some point. Eskom could not continuously be paying debt. An important question had been raised about who Eskom was really paying the amounts to? On the matter of distributions and unbundling, how much was being paid for the unbundling? On the issue of legal separations, when would it happen? 

The Chairperson handed over to Eskom for responses. 

Responses from Eskom
Mr de Ruyter asked his team to respond to the question on the gearing ratio and other financial matters.  

Mr Cassim said that in terms of the balance sheet, it had been disclosed that a gearing ratio of 71 was unsustainable. What was being generated from Eskom’s operations could not service a debt of R400 billion. In order to make the balance sheet look better Eskom was working with National Treasury and the Department of Public Enterprises to reduce the amount. Taking R200 billion off the balance sheet would make a difference in the amount of debt service cover to be paid moving forward. There were options in this regard. Eskom was in discussions with National Treasury, the Department of Public Enterprises, as well as considering the PIC option. These were not yet at a stage to present what had been concluded – there was still work to be done. However, the bottom line remained that Eskom’s earnings could not support its debt level.  

The lenders of debt to Eskom were a combination of domestic and foreign lenders. These included bonds, development finance institutions, as well as export credit agencies. He said Eskom could return to the Committee with a detailed write up of these lenders. R330 billion of the R480 billion was already guaranteed by National Treasury. Member had asked whether the guarantees would run out. In the financial year for 2021, for example, R25 billion of guaranteed debt would be repaid. As and when the guaranteed debt was paid off, it would become available to Eskom again [as a guarantee for other debt] with the support of the shareholder, National Treasury, and Eskom could go into the market to raise further guaranteed debt when required. Eskom would look to extend the facility, not increasing the R350 billion, and would approach the Department of Public Enterprises and National Treasury to do so. In the next three years there were maturities that were coming due and were repayable. Eskom would like to use this going forward until the balance sheet was restored, and Eskom was no longer reliant on government guarantees. 

The debt issue was a function of four important variables. Eskom could not be charging a price for electricity that was not covering the costs of production. This was unsustainable. Therefore, the tariff gap needed to be closed. Eskom had calculated this to be in the range of 25-30%. This regulatory process need not be a once off process. Considering the impact on the economy, it [the price increase] should be phased in. Considerations needed to balance the impact on the economy and Eskom being unable to meet its commitments. When Eskom could not meet these commitments, it went back to government and taxpayers. A combination of migrating tariffs and Eskom doing its bit in terms of operations by reducing its cost base and balance sheet would contribute to Eskom being more sustainable. One approach in isolation would not address the issues Eskom was facing. 

On the matter of the forecasted loss, it was simply where Eskom found itself at that point. The tariffs for the 2021 financial year were already known. Significant debt servicing commitments remained if one looked just at Eskom’s fleet and the operational performance of power stations, without the assumption of a significant portion of debt being taken off of Eskom’s balance sheet in whichever manner was decided,. 

On the audit opinion and reports of irregularities, one related to the PFMA and irregular expenditures. Eskom had introduced the loss control function to help ensure the discipline of biding by the regulations and following up and making sure that irregular expenditure was addressed. The second related to disclosure. Eskom had closed out with the disclosure made by Mr Mabuza. Other issues had been raised regarding the company secretary and the recording of minutes and extracts. The new company secretary would instil discipline in this regard. 

On the arrows issue, it was looking from a point of revenue going up being positive. It was the same on Slide 17 of the presentation. He would look to find the red arrows in the presentation and come back to that to respond. 

Mr de Ruyter asked the delegation to respond to further questions. 

Mr Monde Bala, Manager of Distribution, Eskom, said on issues of municipalities where customers paid the municipalities, but the municipalities did not pass on the money to Eskom, Eskom had previously embarked on a process of disconnecting municipalities when this happened. However, Eskom had tried to find ways to change and not affect paying customers in the process. These were the ones taking Eskom to court. There had been several successful in interdicts. Part of the challenge of Eskom was that when municipalities did not pay them, they were slack on installing connections, and slack on managing illegal connections. This resulted in municipalities exceeding their levels of supply. In order to protect Eskom’s infrastructure, it had embarked on efforts at managing maximum demand. This involved limiting municipalities to their contracted supply of electricity. This was also ensuring that paying customers had access to electricity. 

On repairs to distribution infrastructure, a scheduled maintenance programme was run on an annual basis. In 2020 this had been delayed due to the lockdown. Eskom had started again as soon as possible with the needed maintenance. He said yes, it was ageing infrastructure. The Eskom team was doing its best to ensure the existing infrastructure kept going. Because of issues such as illegal connections, the network became overstressed and Eskom lost parts of the network at times. These were part of the challenges. Eskom could not keep replacing infrastructure for it to then fail again due to overstressing. Eskom had to reach agreements with local communities and identify recourses and remove issues causing equipment to fail in order to restore supply. There were issues with communities who had connected illegally and bypassed access to meters. There were challenges to address the issues. 

Mr de Ruyter asked Mr Oberholzer to deal with questions on the maintenance spend in the next two years and the costs of fixing design defects of Medupi and Kusile.

Mr Oberholzer said maintenance was not only related to the generation business. Eskom had a value chain moving from Generation to Transmission to Distribution. There was a budget for R20-50 billion to invest on the three line businesses’ networks across Generation (where the majority of the money would be), Transmission and Distribution – all were classified as maintenance spend. The performance experienced currently in the generation environment was improving, but Eskom was not out of the woods. The system was unreliable and unpredictable but due to maintenance that had been undertaken, things were improving. Transmission and Distribution were very good compared to previous years. The focus on maintenance would continue. 

He had looked at the system before connecting to the meeting. Mr de Ruyter had mentioned in the presentation that a lot was being spent on maintenance. This came to in excess of 16.6%. He commended his colleagues in the Generation environment for this. 

On progress at Medupi and Kusile, design modifications were being undertaken on four units at Medupi. Design modifications were expected on all units at Medupi by March 2021. 

In terms of performance, Medupi Three was the first unit that had been modified and it was showing very good performance. It needed an assessment period of four to six months before a conclusive verdict could be made. The initial indication was that it was extremely successful. He would communicate on the matter soon.

The design modification would be rolled out at Kusile. Three units were in commercial operation. Units Four, Five, and Six were not synchronised to the grid yet and were not close to operational level. They would be modified before synchronisation. Over and above the maintenance that had been undertaken, the recent strong grid performance was due to the units at Medupi and Kusile that were operating.  

The cost of modification was R280 million per unit, coming close to R3.2 billion with all 12 units. Eskom had agreed with Hitachi Mitsubishi that, due to cash flow issues on both sides, the costs would be divided by 50%. The focus was to fix the design related effects, in parallel Eskom followed a commercial process. This amounted to R1.6 billion for the units in terms of cost to Eskom. Eskom would, after the commercial operation, be confident that that Hitachi Mitsubishi should pay for the additional charges and was confident in this outcome. 

On the question of accommodation for artisans and contractors living in the accommodation, Eskom was paying. This was due to the way the contracts had been negotiated and signed. When the contractors had tendered and negotiated the contracts it had been determined that Eskom would provide them with accommodation. 

Coal contracts were on average for Eskom R500-600 per tonne. There had been nine contracts one year ago that were considered high rand-per-tonne. Eight of these overpriced contracts had come to an end. Nothing could be done about the remaining contract. Eskom had entered discussions with the Mining House. These had been unsuccessful to that point, but Eskom would continue trying to reduce the rand-per-tonne of that remaining contract. In terms of coal contracts for the next 18-24 months, Eskom was fully contracted with 60 days on average stock volume available. Challenges in terms of coal quality remained. 

Mr de Ruyter asked the delegation to next respond to questions on Personal Protective Equipment (PPE) irregularities and COVID-19 procurement. 

He asked Mr Hewu to respond. Mr Hewu was not present at that time. 

Mr Solomon Tshitangano, General Manager: Procurement, Eskom, said Eskom had currently not detected irregularities on PPE matters. The internal audit was continuing with the investigation. Eskom had complied with all directives issued by National Treasury in March 2020 and April 2020, until the withdrawal of emergency procurement, when National Treasury had observed there was enough use of emergency procurement. Eskom’s internal audit arm was continuing with the investigations and would provide updates on any issues that were detected. 

On the procurement process, he noted that at Eskom the governance processes were very long. Procurement was considered by three to five committees. This delayed procurement processes. The Board had approved new delegations of authority in order to reduce turnaround times in transactions. Another leg of the procurement process was reliant on National Treasury in terms of condonation of irregular expenditure and the approval of modifications. He said the turnaround time between Eskom and National Treasury was still unacceptable. Mr de Ruyter and Mr Cassim were engaging National Treasury stakeholders to reduce the turnaround time for the condonation of irregular expenditure. Requests for increased efficiency in modification and cancellation of contracts were also being looked at. 

On questions on internal processes, in 2018 after the Board had been appointed, Eskom had initiated processes of revising internal procedures. Most were historical expenditures that had been incurred and continued to be incurred were due to the fact that some of the Treasury norms and standards ( which had been issued before Schedule Two had been included in National Treasury instructions), were not observed or complied with after 2016. This had created the large irregular expenditures still faced by Eskom until they were condoned. In 2019 the review of the processes had been finalised. There remained challenges in terms of implementation of different standards. It was hoped that the new divisionalisation would reduce turnaround time. 

Mr de Ruyter asked the team to next respond to questions on the loss control function. 

Mr Bartlett Hewu, Acting Group Executive: Legal and Compliance, Eskom, said the loss control function was an instrument recommended by National Treasury to all State-Owned Companies (SOCs). Its role was to exercise oversight on consequence management for the entire organisation at Eskom, focussing on disciplinary action, condonations by National Treasury, as well as instituting financial recoveries on entities and people found to have acted in contravention of processes and systems and control of Eskom. It would also be reporting criminal investigations and it worked in tandem with Eskom’s forensic functions. It would be closing irregular expenditure matters. Loss Control worked closely with the CFO and the Board of Eskom. The key focus was on irregular expenditure, fruitless and wasteful expenditure, as well as the circumstances relating to irregular expenditure. It added value by providing the chronological sequence of events leading to irregular expenditure and would identify root causes. It added value by identifying the individuals, employees, and contractors that needed to be taken to consequence management. It would also confirm the amounts of irregular expenditure. Questions had been asked by Members on the recurrence of irregular expenditure. The CFO had indicated that this came from historical contracts entered into by Eskom, hence it was possible to see the figures escalating despite the reduction in ‘new’ instances of irregular expenditure. Loss control measures would help the entire organisation bring down those numbers and bring about improvements. It would also be able to provide recommendations on preventative measures. Its other contribution would be on the audited financial statements. It would be addressing the completeness of the disclosure of irregular expenditure and the completeness of financial statements and disclosure notes. 

Mr de Ruyter said he would address the remaining questions. He said that the key risks materialising during March 2020 related to an IT disruption of Eskom servers, leading to significant disruption of Eskom’s capability. This had been flagged as a key risk in Eskom’s risk register. Marine life had entered into Unit One of Koeberg power station, resulting in Stage Four load shedding. There had also been the challenge around the sovereign downgrade which translated to a downgrade of Eskom itself and an increase in its cost of debt. There had been the global pandemic on top of it. These had been the major challenges faced during that particular time. 

On the accusation of Eskom producing a “programmed response to limit production”, Eskom did not intend to limit production at all. Eskom wanted to avoid load shedding wherever possible. Load shedding was the ultimate measure to protect the national grid from complete blackout. There was no programmed response to limit production at Eskom. During periods of low demand (such as at night) Eskom took some units offline but this was to keep units balanced. 

The cost of unbundling to that point had been modest. The most significant costs that far had been on legal expenses to obtain appropriate legal advice in order to ensure Eskom was able to comply with the provisions of the Companies Act and comply with provisions of loan covenants. These had been relatively minor costs. Eskom had not appointed management consultants to assist with the unbundling process, rather this had been dealt with using internal resources.  

The timelines for unbundling began with the functional separation of the three divisions, which was intended for completion in March 2021. Legal separation of the Transmission business was the most important catalyst to enable Eskom to accelerate as per the DMRE’s programme and bring new capacity to the grid which was desperately needed. The emphasis was to ensure the legal separation of the Transmission business by September 2021. This would follow with Generation and Distribution by the first quarter of 2022. There was work to be done but Eskom was making good progress. 

The non-achievement of targets in the shareholder compact was regrettable. Eskom was held to account by its shareholder department (the Department of Public Enterprises). The Department set Eskom stretch targets which were not achievable easily. Much debate went into setting the targets and Eskom tried to maximise achievement. This was not always simple, as had been pointed out in various reports to the Committee. Eskom was making use of old, unreliable plant equipment. Maintenance had been neglected or deferred, and there was the impact of variable coal quality, non-cost-reflective tariffs, as well as defaulting municipalities. These factors made it difficult to achieve all the targets set by the shareholder. The Board and management of Eskom were committed to doing their utmost in this regard. 

The most prominent of the new projects and programmes had been alluded to in the introduction to the presentation. This was the programme to drive a just energy transition. Eskom was in the process, as per the Integrated Resource Plan (IRP) of 2019. There would be initiatives to phase out / put into retirement between 8 000-10 000 MW of capacity. In order to ensure Eskom was transitioning in a way that created economic growth and increased capacity, the programme had launched under the supervision of a senior manager at Eskom. Eskom would drive it as an integrated programme covering many areas of the business in order to facilitate and enable additional capacity to generation in South Africa. Mr de Ruyter said he did not anticipate that the programme would consume a huge amount of additional capital. 

One programme that would consume additional capital was the strengthening and expansion of the Transmission grid. Eskom would add in excess of 8 000km of transmission lines over the next ten years. It was anticipated that this could cost up to R118 billion in order to link the most favourable renewable acreage (in the Northern and Eastern Cape mostly) to the main electricity markets. The programme had been launched and would it be communicated to the public at large. 

Follow-up questions from Members
The Chairperson checked for follow up questions. 

Mr Cachalia said he would write to the CEO. 

Ms Maotwe asked for a list of the 73 irregular contracts that Eskom mentioned, with their values. 

Ms Phiri had connection issues and her contribution was not audible. 

Mr E Marais (DA) said the outstanding debt held by various municipalities remained a concern. The months of December and January could see these numbers escalate. He welcomed the Eskom CEO’s engagement with the Minister of Cooperative Governance and Traditional Affairs (COGTA) to come to agreement with municipalities. Bringing this debt down would be to the advantage of Eskom. 

Mr Gumede said some questions he had asked had not been responded to. His question on whether there had been foul play in terms of production had been answered. Three questions of his had not been answered. Where had Eskom got the list of questions prior to the meeting? The Committee had responsibilities in terms of oversight to know where these had come from. On payment of the debt of R480 billion, who was the money paid to? On Slide 13 and R118 billion, it had been indicated by the CFO that Eskom had a balance of R22 billion. “Were we secured?” Was there any hope that Eskom would get the guarantees in the near future? This was scary to have R22 billion left when Eskom consumed more in a year to remain operational. It needed to be guaranteed that Eskom would get the money. He was indifferent in terms of the status of flats where artisans were accommodated; he had been unaware of the flats. He was interested in terms of maintenance, were the people paying for it? It was an investment for the Committee, and he was interested to know. There were no reports given where monies had been used to upgrade or maintain the flats. He asked for the status of the flats. He doubted the qualifications of the people that the Group CEO was working with. Simple procedures of procurement processes were not followed by these people. If the people were qualified and did things in the manner they were doing it, his only conclusion was that there were elements of deliberate corruption. This related to procurement and contracts, consequence management, governance, and deficiencies in the internal controls. Out of the narrative he had read once, it had depicted that any sensible person could not do such things. People would misplace documents, provide incomplete information, whilst they also worked for the company with their relatives. Any credible person could not do those things. His question had been passed over in the responses. Eskom could at least say that they heard the concern over the matters and would return with more information. These were “serious things”. He was waiting to see the loss not range “around the 20s” at Eskom. 

Ms V Malinga (ANC) did not want to repeat questions that had already been asked as she had just logged in from another meeting. 

Ms Tshabalala said the question on the impact of the NERSA tariff determination on Eskom had been insufficiently covered. On the question of Eskom facing higher costs of production, she had a concern that with the dwindling production, given the higher tariffs, something needed to be addressed. People were paying more money for less production. South Africa was paying more for this correction. Where was it going to be addressed? Did it need to be addressed in the business model? She heard what Mr de Ruyter was saying on the responses of the municipality debt and was happy with the response thus far. She had a concern from residents as a public representative. She said Mr de Ruyter may not want to respond to it in the meeting. She wanted specifics. What was the problem, when and how would it be fixed? In Winterveld in Tshwane, Gauteng, the community had experienced three years without electricity. The infrastructure that Eskom would have installed over the years had been done by a contractor. This process had been followed randomly. There had been outcries over this in the community for many years. The infrastructure, maintenance, transformer installation were all lacking giving the growing population. Who was the contractor? How much would it cost Eskom? 

Mr de Ruyter he would make the list of the 71 contracts available to the Committee. 

He had struggled to hear Ms Phiri’s question and asked her to repeat it. 

The matter of municipal debt was a challenging question for Eskom. They were in consultation with a number of other government departments on the matter and were developing a potential solution. It still required a mandate from the shareholder and Political Task Team. The matter was taken seriously at Eskom and was one of the top priorities.

Eskom had been provided with a list of potential questions by the Department of Public Enterprises prior to the meeting. 

Mr Gumede was correct that it was not Eskom’s role to comment on the oversight role of the Committee. 

In terms of creditors or the space for guarantees, while the CFO had provided information on this in his response, he asked him to expand on the identity of the creditors and the headspace remaining. 

Mr Cassim said on the matter of the debt and who paid it, the total was R480 billion spilt between domestic (55%) and foreign (45%) lenders. 

On the guarantees, as guaranteed debt matured, as there would be in Financial Year 2021, the debt maturing during the course of the year amounted to R25 billion. The headroom of R22 billion would be increased by the amount that is repaid and matures. Each year going forward, there would be maturities in the region of R25 billion over the next three years that became due and would become available during that timeframe. 

On tariffs, the regulatory mechanism allowed for the cost of production and cost of capital to be recovered. For example, it included Eskom’s primary energy costs, as discussed, the coal costs, as well as Independent Power Producers (IPP) costs that would come online in the future. These would be allowed as a pass through and the Regulator had implemented that principle. Effectively, in terms of the tariffs, as reflected by the court decision, it was Eskom’s understanding that the regulator would determine when that money could be recovered from the consumer over a period of time. This would be added to Eskom’s future revenue.

On the “misleading” arrows on slide 17 and 28, on slide 17 there were some green arrows going up on revenue whereas when there was a loss coming down also showed a green arrow. He noted the comment. In future Eskom would use the robot indication of green, yellow and red, without the direction indication. This was because some items, such as when debt equity improved, it was desirable for it to come down, therefore it would be represented using a green arrow whilst going down. 

He had given a forecast for 2021 in the slides, and things did worsen from the R20 billion. This took into account the impact of COVID-19 on Eskom’s revenue line. For Mr Gumede, he said Eskom was being transparent on this. 

On the equity support from Government used to help with funding and servicing debt at Eskom, it did not improve Eskom’s performance from a profit/loss perspective. It did not come in as revenue; it came in to the balance sheet. This was why Eskom did not see an improvement on the income statement although it had received equity injections. 

Mr de Ruyter said on the issue around Eskom’s staff following prescribed guidelines on procurement, he agreed it was essential to take place. Where procurement guidelines were not adequately followed, consequences were applied, disciplinary actions could include dismissal if the misconduct was severe enough. 

He asked Mr Oberholzer to comment on the matter of provisions of flats to artisans and on whether there was a rental charge. 

On the matter of the replacement of the transformer, he would engage with Ms Tshabalala to find the exact location of the transformer outside of the meeting. He would seek to understand the reasons why Eskom had not seen adequate replacement schedules being adhered to in that specific instance. 

Mr Oberholzer said that when the contracts with contractors had been concluded about 10-12 years ago, accommodation costs had been apportioned for Eskom’s account. The contractors then tendered without accommodation costs being included in the component that they tendered for. It had always been the understanding that Eskom would provide the accommodation for the apprentices as well as the contracted staff. That had been planned for Wilge. It was a nine-building accommodation complex with 336 units. These were currently not being used. The matter had been investigated thoroughly by the SAU. Eskom had dealt with some of the employees involved there. Civil action was being taken with one of the individuals. Eskom had had to rent additional accommodation for the contracted staff. Eskom was in the process to try and see how the building could be sold. This had advanced “quite a way”. 

Mr de Ruyter handed back to the Chairperson. 

Ms Phiri asked whether the loss control department was in place. When would it start to be effective? She said the department needed to be at work “as soon as yesterday”. Eskom needed its money back.  Who would the department report to? If it would be reporting within Eskom itself, there would be the possibility of tampering with information. She wanted the structure of who the Department would be reporting to and when the losses would be recovered. 

Mr de Ruyter asked his team to respond on the timing of the loss control department being actioned and who it reported to in order to ensure independent work. 

Mr Hewu said the loss control function was established within the Legal and Compliance Department. It was a joint PFMA and loss control function. It was reporting to the Audit and Risk Committee which was constituted by non-executive Board members. It had a dotted line reporting to the Group CEO. 

Ms Phiri asked for the effective date. 

Mr Hewu said that the Executive Committee had passed the resolution for the establishment of the loss control function – it had already started operating, although there were still vacancies. Efforts to fill these vacancies were underway but the department had already started working. 

The Chairperson said there would be no more questions. The Committee would move towards the end of its engagement in the important session. He asked whether the DG was present. Mr Tlhakudi (DPE DG) had been supposed to make opening remarks for the meeting; he suggested that he conduct closing comments. 

Closing remarks 
Mr Tlhakudi apologised for not being able to attend the beginning of the meeting, he had experienced network issues. He supported the presentation made by Eskom. There was a solid base put in place for solid results going forward. There were signs of green shoots in the savings Eskom would be able to realise, with Eskom’s savings exceeding the targets. 

Good progress had been made on the stabilisation of the Generation system. This would help in ensuring that load shedding was placed behind Eskom in the next few years. This would be supported by the new power that the Department of Energy was ensuring it procured. 

The management / leadership team had been stabilised at Eskom and this was a big positive, considering other entities where this was not the case. He appreciated the Eskom team sharing the performance of the massive SOE with the South African public. He said Eskom needed to be helped on the policy front, as well as by National Treasury on the debt situation. 

The Chairperson said he appreciated the entire Eskom team. He said Eskom made a very important gesture by having the whole delegation present. The Committee was impressed with that. Members like to see this in sessions – it showed that the Portfolio Committee was taken seriously. This had included a large delegation of Board members led by Prof Makgoba – this was appreciated, it showed respect of the Committee. The Eskom team had included the Executive; Eskom had brought everyone to the Committee. It was not necessary for all members of the delegation to speak, it simply ensured them in case a relevant question came in that they would not be found wanting to provide an answer by having people in a position to say something to account to the Committee on any question. This was an important example in his perspective. When awkward or difficult questions were asked it became embarrassing when delegations did not respond because the person directly responsible to deal with the questions was not present. This behaviour therefore showed a high level of respect for democracy and accountability for the arm of state that was Parliament. He thanked Eskom for showing the respect and giving the necessary answers. He said delegations were never “100% with answers” – people answered questions from their own unique perspective not from within the minds of those asking the questions. He appreciated that there had been an attempt to respond to all the serious questions raised. 

He said the Committee’s meetings would be an example of the legislative arm – the Committee was not a political rally and had set an example in Members’ conduct. Members were elected to lead as representatives in the kind of system in South Africa. Unfortunately, Members were in the current kind of system and until members were under a different system, they had to conduct themselves based on the system that governed them. An alternative system might be in the form of a public rally. In the current system, Members were compelled to organise themselves in the way they had done in that meeting up until they overthrew the system if necessary. He thanked Members for their contributions – they had really acted as “honourable” Members in the meeting, and for their treatment of him as a chairperson. 

To the Department, at the beginning, he understood that they had been held up in their responsibilities. Apologies were important for the Chairperson. He expected to be told about apologies or delays. It was not that there were no representatives from the Department that day. The Director-General had been delayed. The Committee were also mindful of the fact that the Minister and Deputy Minister had tended apologies. 

Ms Tshabalala asked if it was the last Committee meeting. 

The Chairperson asked the Committee Secretary to answer the question. He released the Department and Eskom so the Members could deal with the issues raised. 

The Committee Secretary said the Committee had planned to undergo an oversight visit in Alexander Bay. The application had not been approved so there would be no oversight visit the following week. 

Plenaries were still scheduled by the National Assembly. Oversight visits would therefore only take place in 2021. The Committee had a morning session available the following week to engage with any outstanding matters if Members wished to meet. 

The Chairperson said the question from Ms Tshabalala was whether the current meeting was the last meeting of 2020. 

The Committee Secretary said yes, it was supposed to be the last meeting following the oversight visit. 

Ms Tshabalala said the Chairperson had not told Members it was the final meeting of the year in order to allow for farewell speeches. She thanked the Chairperson and opposition Members for the work they had done as a Committee, as well as the Committee support staff. She looked forward to the oversight visit in 2021. 

Mr Cachalia asked when the Committee was scheduled to do the oversight visit.  

The Chairperson said it would be at the beginning of 2021. The Committee would have to have a programme directing Members to that in the new year. The Office of the Chair of Chairs could not give the Committee the opportunity [in 2020] due to the parliamentary schedule. 

Mr Cachalia said this was okay as long as Members received active notification. 

Ms Maotwe thanked her colleagues for the year, it had been a good 2020. She urged people to stay safe. The Committee worked hard in the interests of the people. 

The Chairperson thanked the Members for the manner in which they handled themselves. 

People had to be very careful with COVID19; healthy people had passed away from it quickly. He urged all to try to remain safe and to be vigilant. 

The meeting was adjourned.