Over the past few days the credibility of the National Treasury has been severely undermined by its chaotic approach to the process of granting Eskom exemption from the disclosure provisions of the Public Finance Management Act (PFMA).
On March 31 finance minister Enoch Godongwana signed a gazette apparently exempting Eskom from the “disclosure of any irregular expenditure and fruitless and wasteful expenditure that occurred during the financial years in the annual report”. This sought to mirror the concession granted to Transnet in 2022. In lobbying for that exemption Transnet argued that the continued disclosure of historical irregularities in the financial statements contributed to audit reports being qualified, and was creating intractable problems.
Since its agreements with lenders required unqualified audit opinions, repeated qualifications led to continual activation of negative clauses in lending arrangements. This in turn escalated the costs of funding and was detrimental to the company and the fiscus. The auditor-general’s approach of factoring irregularities into the formulation of an audit opinion meant that as long as Transnet had irregularities, qualified audit opinions were inevitable.
Transnet lobbied to be allowed to distinguish between historical and new irregularities, and between irregularities emanating from noncompliance with the PFMA and blatant criminality. This resulted in the exemption being granted in 2022.
When the new board of Eskom assessed its prospects of achieving a clean audit it too identified the disclosure regime of the PFMA as a key contributor to the qualifications in its audits. Naturally, it also lobbied for an exemption, which was duly granted.
Given the prevalence of corruption within Eskom, an exemption sneaked in through an abrupt Government Gazette naturally generated an outcry. The intentions behind the exemption, however noble they might be, are difficult to divorce from the consequences. Where information on irregularities would be disclosed and audited with the same vigour as the financial information, the exemption seeks to reduce the level of interrogation and lower the prominence of the information by moving it to an integrated report. Since the contributors to irregularities involve disregarding procurement laws, corruption, incompetence and criminality, it was always going to be difficult to convince the public that the intentions were entirely pure.
The natural anxieties around whether this would be a new umbrella for hiding corruption were not assisted by the fact that the previous CEO stated that corruption remained prevalent in the company, and was promptly fired by the board. Citizens armed with nothing more than a gazette lacking in detail inevitably assumed that this exemption would simply hide the scale of the ongoing corruption. In response to the crisis the minister withdrew the exemption to consult more widely with stakeholders, including the auditor-general.
The question of why only Eskom and Transnet was addressed by the Treasury, which explained that it is just these two entities whose strategic risk to the state due to their debt exposures warrants a departure from strict PFMA compliance. Whether one believes it or not, it is an approach that comes with significant credibility risks for both the Treasury and the auditor-general, whose reports will now attract renewed scepticism for all exempted entities.
It is also important to note that the Treasury itself is engaged in a protracted dispute with the auditor-general regarding the classification of the costs of its Integrated Financial Management System (IFMS) contract. As the project has yet to be fully implemented, the auditor-general regards the ongoing costs as fruitless and wasteful. The Treasury insists there is value. To that end, the auditor-general qualified her opinion for noncompliance with PFMA disclosures.
The problem that arises is that if the Treasury is happy to provide a PFMA exemption to Transnet and Eskom to facilitate clean audit opinions, it is difficult to imagine it will not activate the same clause to its own benefit. If that happens, whatever remaining credibility the country has will cease to exist.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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