National Treasury on why it exempted Eskom

National Treasury claims pressure would be placed on the fiscus and the borrowing powers of state-owned enterprises (SOEs) if the exemption granted to Eskom from disclosing irregular and fruitless expenditure in its annual financial statements was not considered.

Reacting to widespread criticism of the exemption granted to Eskom, National Treasury stressed on Monday the exemption still requires Eskom to disclose financial and non-financial information on irregular, fruitless and wasteful expenditure – but only in its annual report.

Read: Eskom exempt from disclosing irregular and fruitless expenditure until 2025

“By allowing Eskom to report on irregular and fruitless and wasteful expenditure in its annual report and not in its financial statements, the National Treasury ensures that reporting transparency and accountability is not compromised and still made public as currently required, while mitigating the risks that could arise if these transactions are reported in the annual financial statements,” it said.

Additional time to comply

“The exemption also gives Eskom additional time to comply with the new reporting requirements on irregular and fruitless and wasteful expenditure.

“Eskom is not exempted from ensuring that it takes effective and appropriate steps to prevent irregular and fruitless and wasteful expenditure,”  National Treasury added.

It said Eskom is also not exempt from taking appropriate criminal or disciplinary steps because of any losses incurred to date.

National Treasury pointed out that all material losses through criminal conduct and any losses recovered or written off from irregular expenditure will still need to be reported in the annual financial statements.

Eskom welcomed the exemption.

Eskom acting Group CEO Calib Cassim said Public Finance Management Act (PFMA) compliance remains a priority as the power utility continues to address irregular, fruitless and wasteful expenditure, including appropriate consequence management proceedings.

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“This exemption will assist in the dialogue with credit rating agencies, the lender community and key stakeholders.”

“Eskom will abide to the conditions and strict monitoring requirements imposed by National Treasury in granting the exemption,” added Cassim.

National Treasury also noted that a major risk of having non-material, non-corrupt transactions reported in the annual financial statements include a higher likelihood of a qualified audit opinion, which other listed companies do not face, and which trigger loan covenants.

It said triggering loan covenants will likely further increase Eskom’s cost of borrowing and may result in additional fiscal pressure from Eskom’s debt burden should the entity be unable to negotiate lender waivers for these covenants.

“The exemption granted to Eskom will enable it to continue to fund its balance sheet and still maintain accountability, transparency and reporting requirements in its annual reports and annual financial statements,” it added.

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National Treasury said a separation in the reporting of irregular and fruitless and wasteful expenditure across the annual report and annual financial statements was made for all institutions from the 2022/2023 financial year.

It said this new approach to reporting on irregular and fruitless and wasteful expenditure is in line with the response of President Cyril Ramaphosa to state capture and corruption.

A letter by Minister of Finance Enoch Godongwana to Eskom chair Mpho Makwana conditionally approving the exemption highlighted poor financial controls at Eskom and the risk of Eskom receiving a qualified audit opinion due to:

• Inadequate systems of controls to timeously detect and record irregular and fruitless and wasteful expenditure;

• Inadequate controls to ensure completeness of assessment of expenditure linked to transgression of supply chain management processes, investigations, and tracking of internal audit and forensic report findings;

• Removal of irregular expenditure from the register prior to conclusion of assessment test;

• Lack of supporting documentation to substantiate adjustment of opening balances and record complete and accurate losses linked to criminal conduct; and

• The use of outdated methodology for estimation of non-technical losses.

Gondongwana added that the exemption was being granted with the exception of a number of items that must be disclosed in both Eskom’s annual report and annual financial statements for the three-year period.

These exceptions relate to:

• Any material losses through criminal conduct;

• Any criminal and disciplinary steps taken as a consequence of such losses or irregular expenditure, or fruitless and wasteful expenditure; and

• Any losses recovered and written off to the exemption.

Godongwana said the exemption approval is also conditional on Eskom:

• Developing an action plan to address weaknesses mentioned its letter and report progress on implementation of the action plan where necessary;

•  Reporting material losses, criminal conduct identified and irregular and fruitless and wasteful expenditure for the current and previous financial year in Eskom’s annual report for the periods starting from 2022/23 to 2024/25;

• Reporting quarterly to National Treasury on progress made on irregular and fruitless and wasteful expenditure that is under assessment, determination or investigation and any historical amounts in progress in line with the framework; and

• Engaging the Auditor-General of South Africa on agreed upon procedures of engagement on items to be disclosed in Eskom’s annual report due to challenges raised in the tracking of internal audit and forensic report findings, with the objective of enhancing accountability and oversight by the Eskom board.

Energy analyst Chris Yelland said it was misleading that the Government Gazette notice suggested that Eskom had been granted a blanket exemption from disclosing irregular and fruitless expenditure in its annual financial statements until 2025 when it is clear from Godongwana’s letter that the exemption approval was conditional.

Transparency and accountability

Organisation Undoing Tax Abuse (Outa) CEO Wayne Duvenage said the exemption is not good for Eskom, the country and society because transparency and accountability is needed.

He also believes the length of the exemption granted to Eskom is wrong.

Duvenage said Godongwana should have given Eskom one year and not three years to get its governance in place because the exemption is to circumvent a qualified audit and “people see through it”.

“Eskom is having a negative impact on the economy, there [are] a lot of questions around corruption within Eskom and you now have all the resources thrown in there, including a minister.

“This is not the time for asking for exemptions. This is the time to increase your compliance and governance, not to make it worse. It’s wrong and we will look if there is a legal avenue for challenging this,” he said.

Duvenage added that credit rating agencies are not going to duped by the exemption into believing there are not any irregular, fruitless and wasteful expenditure or governance issues at Eskom.

“In fact, it [the exemption] might make matters worse for Eskom and one could find that the international lenders might say it is unacceptable and call in their loans,” he said.

Thabi Leoka, an independent economist, believes there was no other choice because National Treasury had removed the debt from Eskom’s balance sheet to allow the power utility to be a standalone entity that can raise capital.

She said Eskom would not be able to raise capital if its credit rating is bad and it could also lead to an accounting crisis.

“What the state is trying to do is lessen the risk. It’s not ideal and it’s not 100% transparent because they are not putting it [irregular and fruitless expenditure] in their financial statements.

“The public has reacted to this quite negatively without fully understanding why [it was done],” added Leoka.

“But if you have to sit with the problem of accountability and National Treasury deciding on what to do without this entity breaking the fiscus and having it stand alone and raising its own capital, I can understand how they came to this conclusion.”