Eskom reveals billion rand losses in annual financial results

The bulk of the irregular expenditure — or R6.5-billion — came from modifications to contracts in the procurement process, according to the company’s acting chief financial officer Calib Cassim. (Delwyn Verasamy/M&G)

The bulk of the irregular expenditure — or R6.5-billion — came from modifications to contracts in the procurement process, according to the company’s acting chief financial officer Calib Cassim. (Delwyn Verasamy/M&G)

Eskom as a stand-alone company revealed a loss of R4.6-billion on Monday, when the utility reported its annual financial results for the 2017/2018 financial year.

The Eskom group — which includes entities such as its engineering arm Rotek and its captive insurance company Escap — reported a loss of R2.6-billion.

The company’s irregular expenditure, identified under the terms of the Public Finance Management Act (PFMA), rose to just under R20-billion. This is up from R3-billion in the previous year.

This was after the utility’s new board ordered that spending as far back as 2012 be placed under the microscope.

“It’s been a function of us shaking this cupboard so hard, that all the skeletons are coming out,” said Eskom chairman Jabu Mabuza.

“We are not able to tell you today that the all the skeletons have come out. We will continue to shake this cupboard. There may be more.”

Over R7.5-billion of irregular expenditure was identified in the years prior to 2018, while a further R6.5-billion was identified as having taken place over a year ago.

According to Eskom around 60% of these matters are due to administrative non-compliance, with R10-billion awaiting condonation from the national treasury. 

As a result of failure to comply with the PFMA, Eskom received a qualified audit for the year.

The bulk of the irregular expenditure — or R6.5-billion — came from modifications to contracts in the procurement process, according to the company’s acting chief financial officer Calib Cassim.

Under the law, if a modification on a contract takes place, where the deviation is R15-million or 15% of the value of the contract, Eskom is required to report this to the national treasury.

“Effectively it meant that R6.5-billion should have been reported to national treasury and that was not done,” he explained.

The second largest amount contributing to irregular expenditure, or R4.8-billion, related to sole-source contracts, he continued. If Eskom wants to procure from a sole source or provider it needs upfront permission from treasury.

The almost R1-billion recovered from consulting McKinsey has not been included in these figures.

The work to clean up its procurement procedures was ongoing said Cassim, and Eskom would implement ways to improve its systems and processes for supply chain management. These would include, where possible, the introduction of automation to reduce the impact of human intervention he said.

The extent of the PFMA breaches did trigger covenants on certain loans that Eskom holds with banks and development finance institutions, he added.

“We have engaged with the necessary lenders and obtained waivers from them before the release of these financials … so that issue has been dealt with,” said Cassim.

The company’s external auditors, SizweNtsalubaGobodo, noted that there was a material risk to the company’s status as a going concern.

Although the group’s earnings before interest tax depreciation and amortisation rose by 21% to R45-billion – driven largely through savings – it is having to pay out increasingly large amounts of money towards debt repayments. Its finance costs rose from just under R29-billion in the previous year, to almost R32-billion.

But according to Cassim there were two important processes that would be completed within this financial year that would bring more certainty over whether Eskom could continue as a going concern.

Firstly, the national energy regulator of South Africa (Nersa) would make an announcement in September, on how to phase in the R32.7-billion tariff claw-back that Eskom was recently awarded.

Secondly, Eskom was on the verge of making another tariff application under the multi-year price determination (MYPD) framework set out by Nersa. The MYPD application would be for the upcoming three years noted Cassim, as opposed to the most recent application, which was only made for one year.

By February next year he said, Eskom expected that the decisions on both these processes would provide much-needed certainty. “We believe that having that certainty together with our cost focus we will be able to address the going concern emphasis of matter come March 2019,” said Cassim.

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