Eskom's Special Appropriation Bill: FFC submission

Meeting report

Prof Daniel Plaatjies, Financial and Fiscal Commission (FFC) chairperson, said the FFC submission was made in terms of S4(4)(c) of the Money Bills Procedures and Related Matters Act of 2009 (MBPRMA) and the FFC Act. FFC is a permanent statutory body established in terms of Section 220 of Constitution and was independent and subject only to the Constitution and the law.

Overview of Eskom Financial Position

 • The 2019 Budget allocated R23 billion annually to Eskom for the next 10 years which was to be disbursed in October 2019. This was to service its debts and meet redemption requirements and to support Eskom during its reconfiguration and restructuring.
• On 2 April 2019, the Minister of Finance invoked Section 16 of the PMFA that enables funds in emergency situations and authorised the early payment of R5 billion to Eskom to service its debts and meet its obligations immediately.   
• The Eskom Special Appropriation Bill consists of additional funding of R26 billion in 2019/20 and R33 billion in 2020/21.

• Government guarantees to Eskom account, on average, account for 74% of total government guarantee to all public institutions at R350 billion between 2015/16 and 2018/19. Government guarantee exposure to Eskom has increased by 69% from R174.6.4 billion in 2015/16 to R294.7 billion in 2018/19.
• This significant increase in government guarantee to Eskom constitutes a risk to the sustainability of the fiscus and is credit negative for the government because a high level of contingent liabilities translates into a higher risk premium on, and increased costs of, sovereign debt.

• The net assets of Eskom were declining. Its rapid growth in liabilities means that Eskom has to spend a larger portion of its revenue to service its debt costs thus impacting negatively on its cash flow position and liquidity.
• The financial health of Eskom was declining. The financial performance of Eskom decelerated from a profit of R9.3 billion in 2014 to a loss of R20.7 billion in 2019. Whereas Eskom revenue grew by 80.3 per cent between 2014 and 2015, it only grew by 1.4 percent between 2018 and 2019. These indicators are a reflection of a poor financial performance. Eskom is increasingly financing its operations through debt and is a heavily indebted company.

Implications of Government Support Strategy

• FFC underscored that the energy crisis is perhaps the biggest risk currently. Its hold  on the economy was evident in Quarter 1 2019, where there was 3.2% negative growth rate partly due to load shedding.
• On the positive side, the bailout sends positive signals to investors that government is committed to resolving the energy crisis. Investors will appreciate the fact that Eskom will not be allowed to collapse.
• On the negative side: The R59 billion bailout to Eskom will compound South Africa’s risks posed to economic growth and development by Eskom
• Eskom special appropriation will result in the widening of the budget deficit to above 5.7% in 2020
• The bailout will further put South Africa’s investment status at risk of downgrade
• The worry is that the bailout is not anchored in a sound strategy to get Eskom out of the doldrums and onto a sustainable growth pathway
• The bailout is given in the context of a leadership void at Eskom. Although the Chief Reorganisation Officer (CRO) has been appointed, there is no permanent CEO to work with him.
• FFC is concerned about the deployment of a lone CRO to change Eskom. Pushback and resistance to change from the existing  governance and human infrastructure may derail efforts of the CRO
• The Eskom bailout does crowd out other infrastructure investments and expenditure items, which could negatively affect service delivery.

FCC proposed measures to improve sustainability of Eskom
It proposes the following operational actions for Eskom:

• Reducing the costs of the current and additional IPP contracts, costs of transporting coal as well as costs associated with coal specifications in the international markets
• Diversification into alternative energy generation (not only coal)
• Acceleration of the deferred infrastructure maintenance programmes
• Acceleration of the outsourcing of non-core services
• Speed up the recruitment of a permanent CEO and policy clarity on the CRO
• More predictability on future government financial support for Eskom to enhance financial planning
• Vigorously pursue the rightsizing of staff complement.

FFC proposes the following conditions attached to the 2019 Eskom Special Appropriation Bill:
• A performance management framework by Parliament linking the turnaround plan deliverables to Eskom executive and non-executive pay and performance contracts.
• Clear key performance areas with specific timeframes by National Treasury for the Eskom CRO and relationship to governance and functionality of the Board and Exco
• An oversight framework of Eskom by an ad hoc committee of parliament entailing quarterly reports outlining the milestones reached in relation to the prescribed set of performance indicators
• A comprehensive legislative and regulatory framework by the Department of Energy with timelines and responsibilities for energy transition towards cheaper renewable power generation
• A detailed legislative and regulatory framework by the Department of Public Enterprises with timelines and responsibilities for unbundling Eskom into three separate units: generation, transmission and distribution
 

Prof Plaatjies proposed some general measures to improve the entity’s efficiency:
• High levels of inefficiency at Eskom level (due to monopoly, absence of competition, lack of innovation)
• Government subsidies/guarantees have made Eskom more inefficient, prevented competition and the development of cheap renewable energy technologies to their necessary level.
• In the distribution of electricity, there are also inefficiencies,  such as leakages, illegal connections to the grid and poor billing systems
• Eskom's tariff disparities: Industry and mining sectors consume 60% of electricity but are charged lower prices compared to residential consumers who consume 16% to 18%
• Need to ensure Eskom tariffs are fair, cost reflective and not compromise revenue yields
• Eskom is owed R10 billion by municipalities. This debt is likely to cripple its long term plans. Inter-Governmental Fiscal Relations (IGFR) mechanisms should be catalysed to resolve the debt.

Prof Plaatjies concluded that the FFC welcomes the unbundling of Eskom, the R59 billion allocated to Eskom  for its reconfiguration, and the appointment of a CRO. However, it remains concerned about leadership instability, and absence of a clear strategy to  improve the viability of Eskom and return it to profitability.  Financial challenges are only a fraction of Eskom’s problems. Eskom epitomises the governance, leadership, and general inefficiencies that characterise all SOCs. What is required are sound and implementable plans and strategies to turnaround these institutions; with clear deliverable and reporting timeframes. There is also a need to ensure that the electricity generation space is open for more Independent Power Producers, Eskom tariffs are fair and cost reflective, and municipal debt is resolved. It recommends the Bill but underscores the point that certain conditions must be included before enactment. 
 

Discussion
The Chairperson asked about the figures and percentages included in the slides

Mr Z Mlenzana (ANC) asked for an estimated timeframe on the progress Eskom would have made after a five-year period given its diverse challenges. He commented on the disparate views of rating agencies and asked how Eskom was rated by these agencies. He asked about the conditions for bailout. How are the FFC proposed conditions different from those put in place by National Treasury? On balancing the heavy wage bill with job security, how could it be achieved without tampering with labour relations and causing job losses?

Mr O Mathafa (ANC) commented on the policy uncertainty of Eskom and asked if the President and Cabinet had done enough to close the gap. On the quarterly reporting to Parliament put forward by FFC, how would FFC advise all the different committees to synergise their work to achieve one outcome since currently each committee does its own work. On the government debt to GDP ratio, had FFC done studies of similar economies in the world and what was the global average ratio. Through his desktop research he observed some countries had worse ratios but had better ratings than South Africa. On the acceleration of outsourcing, he asked if FFC was suggesting a complete sell-off of Eskom. In the event of a sell-off, could the resultant cash reserve be used to compensate the current employees. He emphasised the unemployment rate and the need for this cash reserve to compensate workers. Commenting on the inefficiencies at Eskom, he expressed his concern about the allocation of the R59 billion bailout and that it could be spent irregularly. The Committee can only approve the bailout if there had been improvement since the last bailout. He asked about the role of EXCO and FFC on the board, and if there was a programme of action.

Mr A Shaik Emam (NFP) said Members knew all the information in the submission. Did Prof Plaatjies see a turnaround in a two-year, five-year or a ten-year period? He called the municipal historical debt a feeble excuse and asked if FFC could provide the percentage of historical debt. He asked who should be responsible for the appropriated fund at Eskom. He used the example of a KZN municipality where a contract worth only R500 000 had gone up to R2 million due to the many middle men illegally profiting from the contract. He asked for a solution to this kind of red tape. On assets declining at Eskom, he asked if the FFC foresaw a crisis at some stage. He agreed with the infrastructural maintenance comment and asked that the maintenance be budgeted for. Eskom’s problems needed to be dealt with holistically. There was currently no measures to curb illegal electricity connections. He asked how the country was to achieve economic growth if there is an energy crisis. South Africa is selling energy outside its borders. What was the logic of that since South Africa did not have enough energy of its own?

Mr A Sarupen (DA) asked if the FFC believed National Treasury’s draft conditions were adequate. Treasury's conditions seemed more like routine managerial tasks. He asked if Parliament had the power to impose conditions.

Ms E Ntlangwini (EFF) was concerned about the lack of accountability in the Eskom management structure. The R10 billion municipal debt had been a recurring theme at every meeting. She insisted the FFC give a sound proposal for a solution on this. She asked how the Bill would help to reduce the unemployment rate in the country. She asked how the work done by this Committee could be complemented by other committees dealing with public enterprises. Which Committee ought to be responsible for monitoring Eskom?

Ms R Komane (EFF) asked Prof Plaatjies’s opinion on the government’s seemingly deliberate effort to delay getting the management structure in order. She asked if it was a manoeuvring to privatise Eskom. On budget reprioritisation, she suggested the government consider scrapping some of the useless entities to protect useful entities like Eskom that service the poor. She called the privatisation of Eskom “the demon of white monopoly capital”. Should this succeed, it would be WMC governing Eskom in future.

Mr N Kwankwa (UDM) commented on the decline from a R9.287 billion profit in 2014 to a loss of R2.337 billion in 2018; it showed the looting at Eskom during that period. On Parliament's soft accountability approach, there were no consequences for the entities that did not comply with the Committee’s conditions and recommendations. He suggested conducting an inventory of all government guarantees and to have a framework of criteria that the Committee could use to evaluate and assess risks. He expressed his confusion at the negligence in the use of the contingency reserve but instead it grew the government guarantee book. He asked if a higher risk would be created for Eskom with this special appropriation. He asked if FFC had considered using the government guarantee book as a risk mitigating measure.

Ms E Peters (ANC) asked about the FFC suggestion of expanding the use of independent power producers (IPPs). What was Prof Plaatjies’s view about rather building the generating capacity of Eskom and ensuring that competent people were in place to ensure the healthy growth of Eskom. She asked if the FCC had considered the cost of the IPPs to Eskom. Currently, Eskom bought electricity from the IPPs at R1.12 and sold it at R0.90. For renewable energy, Eskom bought it at R5 and sold it at R3. She asked what was the business sense in that. She suggested it would be better for Eskom to build engagement with the IPPs about the particular fee for the IPP generated power. Then perhaps residential power can be supplied by certain power producers and energy-intensive sectors get theirs from their own producers.

Ms Peters asked if the FFC had engaged National Treasury on the municipal debt. It would be interesting to know if municipalities understand the role of Eskom in national and local economy sustainability. She expressed concern about the fixation on municipal debt whenever the issue of debt was raised. What about service providers that owe Eskom? Eskom needs to brief the Committee on how they collect debt.

Mr X Qayiso (ANC) spoke about the role of private sector in the debacle of Eskom. Monopoly companies were always found to be wanting and they were drowning Eskom. He sought clarity on FFC's view on the privatisation or partial-privatisation of Eskom. Commenting on the politics around Eskom, he said that rating agencies were not innocent. They were used to push investors.

The Chairperson said that Eskom would brief the Committee next week. He expressed his confusion at the Eskom business model. IPPs were one of the reasons the economy was not growing because of their effect on Eskom. He suggested inviting the Minister of Public Enterprises to attend when Eskom presented. He asked Members not to create barriers that constrain their oversight function.

The Chairperson said that the Committee was not privy to what they were funding. He raised his concern about the appointment of the CRO and whether the person could adapt to the Eskom environment as soon as possible and provide sound leadership. There needs to be clear structure and accountability within the governance of Eskom.

The Chairperson asked where were the inefficiencies. The Committee also needed to be told if there is electricity theft by big businesses. He asked if Prof Plaatjies could explain the impact of the long-term contracts  on Eskom. The Committee must also be mindful of transformation when funds were appropriated. The Committee should have consistent criteria on the conditions for granting bailouts.

Response
Due to time constraints, Prof Plaatjies said that he may not be able to cover all the questions. Addressing Mr Shaik Emam, he replied that the job of a parliamentarian was a complicated one and that they needed to figure out how to do their job.

On the length of the intervention strategy, Prof Plaatjies replied that it could not be prolonged because the special appropriation was for two years. He suggested that the conditions for the appropriation be kept in place for two years multiplied by two which was four years and would fall within this five-year parliamentary term. It was important that it be before the end of the term because when Parliament rises, the next Parliament does not carry through on the work of the previous Parliament. There was this lack of consistency in Parliament’s work. Eskom should submit every six months as a condition.

On previous government guarantees, the performance of previous grants is critical. The conditions were soft and thus forgotten. He said that if the previous conditions were hard, then the outcomes of those previous special appropriations would have been seen. The Committee has to set more in addition to what is already on the table. He said it is not FFC's job to comment on Treasury's conditions.

On wage bill versus job security, Prof Plaatjies replied that restructuring, retrenchment, right sizing could not be isolated from the Labour Relations Act, otherwise it would be a contravention of the law. Thus the Committee needed to pose questions on the unbundling of the three constituent components of Eskom.

On policy uncertainty, according to the Money Bills Act, the Committee had the power to appropriate funds and thus it had the power to put in conditions as it saw fit as long as they are rational, fair and prudent. The carry through effect of the conditions of previous appropriations did not happen as they were soft and merely administrative.

On the reporting process, Prof Plaatjies replied that it did not matter if the work done by this Committee was in conflict with the work of other Committees. It was the Appropriations Committee’s prerogative to perform its oversight function on Special Appropriations Bills. The Committee has to follow through and track performance and ensure mechanisms are in place to yield the return on this special appropriation. You can change those conditions in future as well as that is the authority this Committee has.

Mr Shaik Emam needed more clarity on the dilemma the Committee was facing about the special appropriation because, whether the Committee approved it or not, Eskom would still be in a crisis. How should the Committee approach it from that angle?

Prof Plaatjies replied that the FCC did recommend the special appropriation but the conditions for the appropriation needed to be improved. For instance, the Committee could request a fool-proof plan within the next six months on the conditions for the special appropriation dealing with risks, management, approvals, organisational changes, timeframes, and on new legislative proposals. The Committee should be more bold in their actions.

On outsourcing, Prof Plaatjies remarked that Eskom is a huge corporation that even National Treasury struggled to figure out its operations. It is hard for outsiders to see what is going on. The reason is that  Eskom says it cannot release certain information in order to protect its competitive edge.

The Chairperson interjected asking who are they competing against since they are a monopoly?

Prof Plaatjies agreed. He suggested that Eskom be stripped down by the Committee to examine its operations and what is happening in the institution, for instance, its core and non-core services. It was Parliament’s job to demand to know Eskom’s operations. The private markets in the sector actually knew more about Eskom than what the government knew.

Prof Plaatjies did not want to respond on efficiency and the cost of corruption as FFC had not adequately worked on this economic cost.

On Eskom’s CEO, Prof Plaatjies said it was a material matter. He suggested this Committee needed to ask Parliament's legal unit to determine whether the CEO-Chairperson role fit with Eskom’s SOC legislation, with the PFMA, and with company law. If it did not, then someone is in contravention of the law. The question of having one person doing both jobs - one first needed to check whether this is compliant with the law.

On the R10 billion owed to Eskom, Prof Plaatjies replied about why this gets raised all the time, explaining that it is part of Eskom’s "story". More than 60% of the debt was from Free State municipalities. Those owing debt to Eskom were unable to reimburse Eskom and they were part of Eskom’s debt book. If you go to a lender, the debtor book is seen as an asset.

Considering the previous soft conditions and lack of consequence management in the past, it was the media who got in first before Parliament did on the matter of accountability. This time around Parliament should get in first. It was problematic and he wished the Committee could alter that this time.  

Prof Plaatjies said that the Committee did have to consider its capability to monitor Eskom's conditions.

On the IPPs, he asked the Committee to refer to Table 11 on Eskom government guarantees on the Treasury website. The exposure of IPPs is R147 billion in 2018 and it is R154 billion in 2019 while Eskom's exposure in the form of government guarantees for 2019 was R3 billion.

Prof Plaatjies said that the FFC cannot advise whether unbundling Eskom would lead to privatisation or greater efficiencies until FFC knew more about the content of the unbundling. FFC gives policy evidence based on research.  

On rating agencies, this was recognised as part of the global market interaction. America’s government deficit is 400% but it is graded as a top performer. Russia had a bad rating with a smaller deficit. It showed the balance of power in the global environment rather than the objective facts. He agreed it can be political.

He can provide additional comments in writing depending on how much time the Committee has to make a decision on the Bill.

Mr Qayiso asked Prof Plaatjies about his reference to apartheid and the historical municipal debt owed to Eskom.

Prof Plaatjies replied that the point he had tried to make was that some debt owed by municipalities was debt that was carried through from the apartheid era.

Mr Qayiso said that was a problematic statement and not conclusive.

The Chairperson said that Prof Plaatjies must be given the chance to finish his response.

Prof Plaatjies said that the debt was carried through since Mandela’s Presidency. At that time there were thousands of municipalities. These municipalities were merged to form the current 257 municipalities. As they were amalgamated, the liability of debt did not go away but became a contingent liability. COGTA can confirm this.

On how to achieve efficiencies, Prof Plaatjies remarked that the Chairperson had raised a few cases himself such as long-term contract management, the role of IPPs relative to Eskom as the provider, the supply issue and delivery.
 

Prof Plaatjies said that the Committee had to ask Eskom what is the plan and put them on notice.

Mr Chen Tseng, FFC Research Specialist, explained that the rating by rating agencies was important as an indicator for Eskom's fundraising capability. Eskom's case was pretty dismal as the agencies had marked it as junk grade. The implication meant that going forward certain funds would not be accessible to Eskom as it is seen as too risky and speculative to their portfolio. As for South Africa's rating, the case was grave as only Moody gave the country one last chance.

Mr Tseng noted the implications of the agencies’ ratings for the fiscal framework and medium-term budget. In 2018 there was fiscal consolidation and Treasury forced recentralisation of provincial conditional grants. R50 billion had been advanced that year to Eskom to rescue it from a liquidity crunch. Thus the success rate of the conditions upon which the special appropriation is granted should be carefully examined.

The Chairperson expressed his worry about Eskom’s incapability to cover its own interest rate payments. He asked Prof Plaatjies to send the Committee his updated presentation.

The meeting was adjourned.