The withdrawal of the notice exempting Eskom from disclosing irregular, fruitless and wasteful expenditure in its annual financial statements for three years will be temporary while the Treasury engages with the auditor-general on tighter checks and balances, finance minister Enoch Godongwana said on Wednesday.
He anticipated a revised exemption notice under the Public Finance Management Act to be gazetted by the time the audit of Eskom’s financial statements by Deloitte begins in May.
The revised exemption will balance the requirements of a sound Eskom balance sheet and fiscal sustainability with the need for transparency and accountability in its financial statements.
The withdrawal of the notice — announced in parliament on Wednesday — followed a public uproar, with critics saying the exemption would serve to conceal the corruption that has become rife at Eskom. Members of five parliamentary committees that met with Godongwana and a Treasury team were unanimous in their condemnation of the exemption, which they said undermined transparency and accountability and would serve to conceal fraud and corruption in Eskom.
Committee members welcomed the withdrawal of the exemption, which they said had damaged the Treasury’s reputation and credibility. Several saw it as an attempt to misrepresent Eskom’s true financial situation to its lenders — who they said would not be fooled by the deceit. Auditor-general Tsakani Maluleke also welcomed the withdrawal.
The head of the Treasury’s asset and liability unit, Duncan Pieterse, insisted in reply to a question by DA finance spokesperson Dion George that the withdrawal was not in response to concerns raised by credit ratings agencies, which had not been in communication with the Treasury on the matter.
George indicated the DA had drafted court papers to contest any new exemption in court.
Godongwana said the withdrawal of the notice followed discussions with Maluleke on Tuesday as the auditor-general wanted to explore certain issues. He noted that the Treasury had sought legal advice before the exemption notice was gazetted to ensure it was “on the right track”.
The toxic environment surrounding Eskom clouded the response to the exemption notice. The minister said lessons learnt were that the Treasury should have been “pre-emptive in the communication and pre-emptive in the consultative process” and realised that some technical issues had serious political implications.
Standing committee on public accounts chair Mkhuleko Hlengwa said the necessary consultations should have taken place before the exemption notice was gazetted. He called for the exemption to be withdrawn “completely and forever”.
Raising capital
In terms of the now withdrawn exemption notice, Eskom would not have had to disclose irregular, fruitless and wasteful expenditure in its annual financial statements, but only in its annual report.
Godongwana told MPs that Eskom’s financial statements are constrained by the need to disclose these items, and that this affects its ability to raise capital. That in turn affects the risk to the fiscus, which has committed to a R254bn bailout for Eskom over three years. The minister said the exemption notice will not conceal criminal activity, which still has to be reported in the annual statements. The irregular, fruitless and wasteful expenditure also have to be reported in the annual report.
Accountant-general Shabeer Khan pointed out that Eskom is required to comply with onerous accounting standards including IFRS (International Financial Reporting Standards), the Companies Act and JSE listing requirements. He argued that accountability and transparency would be tackled adequately under the exemption notice.
The broad definition of irregular expenditure in the Public Finance Management Act — unique to SA — creates problems, he said.
Irregular expenditure had increased by an average annual growth rate of 36% over the past decade, often for procedural reasons. It captured any spending emanating from a transgression of any applicable legislation irrespective of the nature and amount of the transgression.
Khan said the rise in irregular expenditure has become a major concern for the government.
The Treasury said in a written presentation that disclosure of irregular expenditure in the financial statements carries the risk of qualification. This could trigger loan covenants that will put Eskom’s balance sheet under further pressure, “will increase the cost of borrowing and may result in additional fiscal pressure should the entity be unable to negotiate lender waivers for these covenants”.
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