Why Eskom has been spared from irregular spending reports

South Africa will exempt Eskom from having to report irregular spending for three years in its financial statements to avoid harming the company’s credit rating.

In a letter to chairman Mpho Makwana, finance minister Enoch Godongwana said the utility will still need to report losses arising because of criminal conduct and disciplinary measures related to wasteful expenditure in its annual report. His decision was initially disclosed in the Government Gazette on 31 March.

Exempting the company from reporting those costs in its financial statements may reduce the risk of a qualified opinion from the utility’s auditors and in turn protect the company’s credit rating, according to the treasury.

“The consequences of a qualified audit for Eskom are severe,” Makwana said in a 9 March letter to Godongwana released by treasury. “It could possibly include a downgrade of Eskom’s corporate rating and baseline credit assessment by credit rating agencies, and breaches of Eskom’s debt covenants.”

Eskom, which is rated CCC+ by S&P Global Ratings, said in a statement it welcomes the decision. Deloitte said it couldn’t immediately comment.

Reporting transparency and accountability won’t be compromised, while risks that could arise if these transactions are reported in the annual financial statements will be mitigated, national treasury said in a statement on Monday.

By not including the expenditure in the annual financial statements they will no longer be subject to an audit by the Auditor-General South Africa, lessening the possibility of a qualified audit for non-compliance with the Public Finance Management Act.

Auditor’s warning

In December, Deloitte, Eskom’s auditor, said it had identified irregular expenditure, fruitless and wasteful costs, and losses due to criminal conduct. That prompted Deloitte to say that Eskom may not be able to continue as a going concern.

National treasury in February announced it would take over R254-billion of Eskom’s loans as the company isn’t earning enough to cover its debt-service and running costs. As a result, the country is experiencing regular rotational blackouts.

Soon after the announcement, S&P put Eskom’s debt assessment on positive watch, meaning it may upgrade the utility. Treasury’s exemption will be for the just ended financial year and the next two.

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Ismail Momoniat, the treasury’s acting director-general, said the measure wasn’t designed to hide corruption but rather to make it easier for Eskom to operate in a crisis situation. In his interview with Johannesburg-based 702, he said that the utility is subject to more onerous requirements than private companies.

Godongwana, in a letter to Makwana, said the company will need to improve its capacity to track irregular expenditure as a condition of the exemption.

Read: Eskom may source electricity from Karpowership via Maputo

Transnet, the state logistics company, was given a similar exemption at the end of March last year, according to a gazette notice.  — Reported with Prinesha Naidoo, (c) 2023 Bloomberg LP

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