The Treasury’s decision to give Eskom exemption from reporting irregular and wasteful spending in its financial statements drew widespread condemnation across the spectrum, underscoring lack of faith in the utility to handle taxpayer funds.
Organisation Undoing Tax Abuse (Outa) CEO Wayne Duvenage said the government is not doing itself any favours by granting Eskom the exemption.
While the Treasury has given similar exemptions under the Public Finance Management Act to state-owned entities such as Transnet, the decision to exempt Eskom from disclosing any irregular and fruitless and wasteful expenditure in its financial statements comes at “a sensitive time”, he said.
“I don’t think government did itself any favours by publishing the notice in the Government Gazette without, at the same time, providing the public with reasons and explanations ...”
Given the public knowledge of many cases of fraud, corruption and sabotage at Eskom, and in the context of general elections in 2024 and the electricity crisis, the Treasury decision would only “widen the trust deficit” between the public and the government, said Duvenage.
According to a notice in the Government Gazette of March 31, finance minister Enoch Godongwana has granted Eskom exemption from disclosing irregular expenditure and fruitless and wasteful expenditure in its financial statements for three years. This will comprise the financial year that runs until end-March 2023 and the two years after that.
Duvenage said it would have been better to grant the exemption only on an annual basis to be reviewed at the end of the year.
The Treasury said in a statement on Monday night, three days after the decision was gazetted, that the exemption still required Eskom to disclose financial and nonfinancial information on irregular, fruitless and wasteful expenditure, but only in its annual report.
“The information will not be lost to the public,” said Duvenage. “The auditor-general will still report on it and Eskom will still have to include information on irregular and fruitless spending in its annual report,” he said.
A reason to grant the exemption could be so Eskom will not risk a qualified audit because of a “technical irregularity” that could make it difficult for the utility to raise funds. But, said Duvenage, Outa has written to the Treasury to request a full explanation for the exemption and why it covers fruitless and wasteful expenditure as well.
The decision on irregular expenditure could be justified because these items would typically relate to emergency procurement that sometimes bypasses rules such as the need to get three quotes before a supplier is appointed.
Eskom has been consistently saying the act inhibits its ability to procure expertise, goods and services to deal with breakdowns at power stations on an urgent basis.
“Irregular expenditure is the lesser of the two evils and it is sometimes necessary in an emergency to bypass strict procurement rules, but what we are concerned about is the exemption from having to report fruitless and wasteful expenditure.”
These items, he said, should be reported in full and in the public eye.
In a letter by Godongwana to Eskom chairperson Mpho Makwana, dated March 31, and seen by Business Day, the minister acknowledges a request sent by Makwana on March 9 for exemption from certain provisions in the act to deal with, among others, the risk that such disclosures could result in a qualified audit opinion.
The Treasury said reporting on irregular and fruitless and wasteful expenditure in its annual report and not in its financial statements would allow Eskom to “mitigate the risks that could arise if these transactions are reported in the annual financial statements”.
This exemption will assist in the dialogue with credit ratings agencies, the lender community and key stakeholders, acting group CEO Calib Cassim said.
“Eskom will abide by the conditions and strict monitoring requirements imposed by the National Treasury in granting the exemption,” he said.
A major risk of having non-material, noncorrupt transactions reported in the annual financial statements include a higher likelihood of qualified audit opinion that triggers loan covenants, which are likely to further increase Eskom’s cost of borrowing, the Treasury said.
According to the letter, Eskom will still have to disclose “any material losses through criminal conduct” and “any losses recovered and written off” in both its annual report and annual financial statements.
Among the conditions for the minister’s approval were that Eskom “develop an action plan to address weaknesses in its control systems to detect and record irregular, fruitless and wasteful expenditure”.
Eskom’s previous financial statements showed that in the year to end-March 2020, it recorded irregular expenditure of R11.2bn (mostly due to modification of contracts), fruitless and wasteful expenditure of R2.3bn and losses due to criminal conduct of R2.2bn.
Overwhelmingly, the criminal conduct losses related to nontechnical losses, including energy theft. There were also incidents of fraud and theft of equipment such as cables.
Fruitless and wasteful expenditure included an amount of R840m incurred in constructing residential flats to accommodate artisans working at Kusile as the building could not be used for the intended purpose.
For the year to end-March 2021, irregular expenditure of R11.7bn was incurred and fruitless and wasteful expenditure amounted to R1.3bn, mostly from overpayments for a fuel oil contract. Losses of R2.5bn due to criminal conduct were reported.
Business Unity SA (Busa) CEO Cas Coovadia said it sends “out the wrong message to the public and to others that we are putting in place an exemption that could result in less transparency on the operations at Eskom. Given the allegations of corruption at Eskom, I think that’s just a wrong message to send.”
While he did not believe the decision was meant to cover up poor performance by former Eskom CEO Andre de Ruyter, he said the Treasury needs to be more explicit and transparent on how the exemption would be applied. Busa is to seek more clarity on this from the finance minister, Coovadia said.
Update: April 3 2023
This story has been updated to add comment from Eskom Group CEO Calib Cassim.
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