PRESENTATION ON ESKOM SPECIAL APPROPRIATION BILL JOINT MEETING
PRESENTATION ON ESKOM SPECIAL APPROPRIATION BILL – JOINT MEETING: STANDING COMMITTEE ON APPROPRIATIONS; PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES AND SELECT COMMITTEE ON APPROPRIATIONS CIVIL SOCIETY REFLECTIONS – BY RONALD CHAUKE 11 SEPTEMBER 2019 Page 1 of 18
CONTENT q Who is OUTA q Context q Recap q OUTA’s Concerns q Financial Position q Bail-Out Priorities q Bail-Out Conditions q Recommendations q Concluding Remarks Page 2 of 22
WHO IS OUTA? OUTA is a proudly South African non-profit Civil Action Organization formed to hold those in public office accountable and is funded and supported by ordinary people who are passionate about improving the prosperity of our nation. VALUES ü ü ü ü Accountability Transparency Promotion and Protection of public interest Constructive engagement Strategic Partnerships Zero tolerance to corruption and maladministration Active citizenry Page 3 of 22
OUTA’S ROLE IN THE ESI q Introduction OUTA envisions South Africa as a prosperous country, with an organised, engaged and empowered civil society that ensures responsible use of tax revenues throughout all levels of government. q OUTA is active in the energy sector and has participated in energy-related submissions, for example, on the Integrated Resource Plan, the Carbon Tax Bill, and in the multi-year price determination (MYPD) process of the National Energy Regulator of SA (NERSA) on electricity prices. Page 4 of 22
CONTEXT q Minister of Finance, Mr Tito Mboweni announced a support package of R 23 bn for 10 years in the 2019 February Budget Speech. q Special Appropriation Bill, which allocates R 59 bn to Eskom over the next two years — R 26 bn in 201920/20 and R 33 bn in 2020/2021. q The reasons for the intended ESKOM financial assistance have been stated as follows: a) Eskom’s high levels of debt; b) Eskom’s inability to generate sufficient revenue to meet operational and capital obligations; c) Eskom’s liquidity and balance sheet risks; and d) Concerns over Eskom’s status as a going concern. Page 6 of 22
RECAP q In Parliament, Prof Daniel Plaatjies from the Financial and Fiscal Commission (FFC) has presented a sobering commentary on Eskom: i. “Eskom, in its current form, poses substantial risks to the public finances and economy at large. Eskom is neither financially sustainable, nor capable of meeting the country’s electricity needs. ” ii. “The Eskom bailout has the potential to crowd out other infrastructure investments. It is unproductive government spending. The bailout monies will come from somewhere. Obviously there will be reprioritisation or cuts on other expenditure items, which will likely result in service delivery in other areas being negatively affected. ” Page 12 of 22
RECAP (CONT…) q In various submissions, OUTA has previously recommended that Government urgently intervene at Eskom, by inter alia – 1) Reviewing Eskom’s outdated business and operating model; 2) Instituting electricity supply industry (ESI) reforms without delay, including revisiting the electricity distribution industry (EDI) restructuring; 3) Ensuring that technical and strategic working groups should be established to address Eskom’s sustainability; and 4) Exercising rigour by ensuring that there is policy and regulatory certainty to attract investments in the ESI; etc. Page 5 of 22
OUTA’S CONCERNS q Eskom’s growing R 440 bn debt q No consolidated ESI and EDI reforms – Strategic Direction is missing q Upcoming Eskom Paper – is it holistic or piecemeal approach? a) Business model - ‘not fit for purpose’ & ‘unsustainable’ b) Debt restructuring c) Future Eskom – Gx & Dx company or only a Tx company? q Outcomes of Parliamentary Inquiry on SOEs & State Capture Commission of Inquiry led by Deputy Chief Justice Raymond Zondo üHawks, NPA’s readiness to prosecute culprits? Page 7 of 22
OUTA’S CONCERNS (CONT…) q Deficient Regulatory Regime/Frameworks a) Eskom court cases for review of NERSA determinations q Operations costs – growing by 30% up to R 151 bn a) Primary energy - R 85 bn to R 99 bn b) Personnel – R 29. 5 bn to R 33 bn c) Interest payments q Auditors’ findings – PFMA non-compliance q Procurement strategic review a) Middlemen in contracts – supplies, diesel, etc. q List of contractual reviews a) Possible savings that could be derived q Eskom made a R 20. 7 bn loss in the 2018/2019 financial year. Page 8 of 22
OUTA’S CONCERNS (CONT…) q Deficient Regulatory Regime/Frameworks a) Eskom court cases for review of NERSA determinations q Operations costs – growing by 30% up to R 151 bn a) Primary energy - R 85 bn to R 99 bn b) Personnel – R 29. 5 bn to R 33 bn c) Interest payments q Auditors’ findings – PFMA non-compliance q Procurement strategic review a) Middlemen in contracts – supplies, diesel, etc. q List of contractual reviews a) Possible savings that could be derived Page 9 of 22
OUTA’S CONCERNS (CONT…) q A sustainable level of debt for Eskom should be five times earnings before interest, tax depreciation and amortisation (EBITDA) – however, 1) EBITDA = R 40 bn 2) Sustainable debt should be @R 200 bn 3) Regrettably, the extra R 250 bn was supposed not to in Eskom’s balance sheet (these are the catastrophic ramifications of state capture üHow should Eskom deal with this debt trap – should it be removed off its balance sheet by a debt transfer to the government? q Poor environmental compliance at 57% levels – will require between R 150 bn and R 170 bn to fix q Accuracy of cost-to-completion figures for Medupi estimated @ R 136 bn to R 145 bn and Kusile @ R 156 bn to R 161 bn - if execution is in accordance to planned schedule – with potential R 10 bn savings. Page 10 of 22
OUTA’S CONCERNS (CONT…) q OUTA believes that electricity is an enabler promoting access to improved health, education, security and economic independence a) However, the inflationary impact of electricity price increases creates social hardship, including negative effects on food security as people have less income and a lowered ability to obtain sufficient food. q OUTA’s research finds that inflation over the last decade was 58. 5% a) Over the same period, the increase in the average price of electricity charged by Eskom was 261%; b) Thus, electricity prices increased more than four times more than inflation; c) Such increases in such an unequal society with many people without an income, contributes to deepening of poverty. q The effectiveness of the Inter-Ministerial Task Team to resolve the overall R 38 bn municipal debt, including Soweto debt Page 11 of 22
FINANCIAL POSITION q The Eskom Annual Financial Statements(AFS) for 2019 list the debt securities and borrowings as made up as follows: i. Non-current: R 387. 208 billion; ii. Current: R 53. 402 billion (to be serviced in the short-term); iii. This is a total of R 440. 610 billion. q The Statement of Financial Position in the AFS 2019 shows this: i. Current assets: R 63. 994 billion; ii. Current liabilities: R 108. 051 billion; iii. Liquidity shortfall: R 44. 057 billion. q This indicates the immediate funding requirement and includes the current borrowing of R 53. 402 billion above. Page 13 of 22
BAILOUT PRIORITIES q OUTA recommends that the bailout should be apportioned for the following priorities: a) Reducing the current high levels of debt; b) Operational objectives; c) Capital objectives; and d) Improving liquidity and balance sheet risk, which should address the going concern status. We would like clarity on how Eskom will be operationally sustainable as a result of the R 59 billion bailout. Page 14 of 22
BAILOUT CONDITIONS q Tighten up the conditions Section 1(2)(b) of the draft Bill stipulates that, for the purpose of promoting transparency and the effective management of the funds, the Minister of Finance, in writing — i. may impose conditions to be met by Eskom before any part of the amount is transferred. Given the history of Eskom bailouts, it would seem prudent to institute certain conditions before any monies are transferred. OUTA recommends that “may” be changed to “must”, and that such a condition should be the appointment of the restructuring team at the very least. ii. must impose conditions to be met by Eskom after the transfer of any part of the amount. OUTA queries - If Eskom fails to meet such conditions, will National Treasury institute corrective measures? Page 15 of 22
RECOMMENDATIONS OUTA recommends that: 1) Eskom’s turnaround strategy be developed and implemented without delay under the auspices of specific, measurable, achievable, realistic and time-bound (SMART) principles; 2) A new performance management framework and culture be introduced at Eskom that links the turnaround plan deliverables to Eskom executive and non-executive pay and performance contracts; 3) The role of the Chief Restructuring Officer (CRO) and how he complement and interface with Eskom’s Board & EXCO and report back to NT must be outlined; 4) Parliament plays a rigorous oversight role over Eskom without fear or favour. 5) The Department of Mineral Resources and Energy (DMRE) must develop comprehensive legislative and regulatory frameworks with timelines and responsibilities for energy transition towards cheaper renewable power generation and associated technologies Page 16 of 22
RECOMMENDATIONS (CONT…) 6) 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; 7) The bailout conditions being drafted by NT should be published for public comments; 8) The terms and conditions that NT is currently drafting must prescribe how compliance will be enforced, including what appropriate interventions or remedies the Treasury will institute to correct any failures to comply by Eskom; Page 17 of 22
RECOMMENDATIONS (CONT…) 9) NT, in collaboration with the DPE, must instruct Eskom to draft and submit a SMART (specific, measurable, achievable, realistic and timebound) cost reduction plan with special focus on the key areas that will be trimmed and associated targeted savings; 10) Eskom must be statutorily obligated to provide a breakdown of how funds will be utilised, including its payment plans to its creditors, interest payments, etc. as a non -negotiable condition before monies are transferred; 11) NT must provide clarity on how long it envisages its financial assistance to Eskom is likely to endure and the expected outcome or effect of this assistance; and 12) NT, DPE & DMRE should set unequivocal timelines for the turnaround of Eskom in line with the envisaged ESI reform “End-State” Agenda. Page 18 of 18
CONCLUDING REMARKS q As OUTA we appreciate the National Treasury’s efforts to hold Eskom accountable, as per the relevant paragraph in the Bill. q It is a fact that Eskom has failed to abide by compliance obligations imposed by the Public Finance Management Act – ü Auditors disclosed their findings as reflected in both the 2017/18 and 2018/19 annual financial statements. ü What measures is NT putting in place to do its oversight differently this time around? ü Cost overruns were incurred without NT approval q Deficiencies in shareholder oversight role over Eskom – by Parliament, DPE, DMRE, NT, NERSA, etc. Page 19 of 22
CONCLUDING REMARKS (CONT…) q The CRO with strong financial background has been appointed, however, Eskom has a combination of structural, engineering and legal problems; q 170 days without loadshedding; q Ingula operating at full capacity; and q Another unit @ Medupi synchronised. Page 20 of 22
THANK YOU!!! Page 21 of 22
Contact Details Ronald Chauke OUTA’s Energy: Advisor Tel : 087 170 0639 Cell : 082 666 9704 Email : Ronald. Chauke@outa. co. za or maronza 97@gmail. com or : liz. mcdaid@outa. co. za or 0871700639 Website: www. outa. co. za Page 22 of 22
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