Financially distressed power utility Eskom has been exempted from having to disclose irregular and fruitless expenditure in its annual financial statements until 2025.
The surprise exemption was made in terms of Section 55 (2) (b) (i) of the Public Finance Management Act (PFMA) of 1999 and Treasury Regulation 28.2.1 of section 76 of the Act and published in the Government Gazette on Friday (31 March 2023) by Minister of Finance Enoch Godongwana.
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The exemption is applicable to Eskom’s 2022/23, 2023/24 and 2024/25 financial years but the notice did not provide any explanation for the exemption.
National Treasury’s special exemption for Eskom coincided with the release of the utility’s 2022/23 interim financial results.
Section 55 (2) (b) (i) of the PFMA states that the annual report and financial statements for a public entity must: “Fairly present the state of affairs of the public entity, its business, its financial results, its performance against predetermined objectives and its financial position as at the end of the financial year concerned.”
It states that this must include particulars of:
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Any material losses through criminal conduct and any irregular expenditure and fruitless and wasteful expenditure that occurred during the financial year.
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Any criminal or disciplinary steps taken as a consequence of such losses or irregular expenditure or fruitless and wasteful expenditure.
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Any losses recovered or written off.
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Any financial assistance received from the state and commitments made by the state on its behalf.
Treasury Regulation 28.2.1 made in terms of section 76 of the PFMA states that: “Any material losses through criminal conduct and any irregular and fruitless and wasteful expenditure must be disclosed as a note to the annual financial statements of the public entity.”
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National Treasury reportedly said on Sunday it had issued the gazette in response to a letter from Eskom chairperson Mpho Makwana, adding that Eskom would still be required to disclose all information required by International Financial Reporting Standards (IFRS) and general debt listing requirements.
National Treasury further said that in granting the exemption, Godongwana will set conditions for the exemption, including that:
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All irregular, fruitless, and wasteful expenditure must still be detailed in the Eskom annual report.
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Irregular expenditure that occurs through criminal activity or losses must still be disclosed in the financial statements and the annual report.
Organisation Undoing Tax Abuse (Outa) CEO Wayne Duvenage said on Monday that any exemptions of this nature do raise concerns around transparency and they do not do government any favours in terms of trust in government.
However, Duvenage said such exemptions are not new and have been granted to Transnet, Telkom and others in the past.
He said Outa is more concern about fruitless and wasteful expenditure than around irregular expenditure.
Read: Transnet disputes qualified audit finding
Duvenage noted that irregular expenditure is not necessarily wasteful and happens sometimes just to speed up procurement processes because the regulations can slow down procurement and get in the way in emergency circumstances.
“But the fruitless and wasteful expenditure is a concern for us and we are writing to the Finance Minister to ask for the rationale for why this is the case and then we will take it from there,” he said.
Knee-jerk reaction
Duvenage added Outa is also concerned about the knee-jerk reaction by government so often when dealing with these issues and the lack of thought by government about the implications and consequences of such statements.
He said one would first of all not want any exemptions because the PFMA and other Acts are there for a reason.
“One can understand that they can be restrictive in times of emergency and there might be some exceptions for a brief period.
“But without the explanations being given and the rationale it creates all this distrust and more concerns around the government leading into the next elections.
“What are they wanting to hide? Why aren’t they being transparent? Those concerns are very valid,” he said.
Energy analyst Chris Yelland said on Monday he did not believe the exemption was justified but did not know the rationale behind it.
He has asked Eskom for the rationale for the exemption but has not yet received a reply.
Timing of the exemption
Yelland said it is telling that the exemption notice was published on the same day as Eskom published its interim financial results for the first six months of its 2023 financial year.
He said the interim financial results published by Eskom for this reporting period did not disclose any irregular, fruitless and wasteful expenditure because Eskom had the exemption that was published on the same day as it released its interim financial results.
He added that he had it on good authority from analysts, but stressed this was speculation, that the exemption was granted in order that Eskom did not have to publish any details of irregular, wasteful and fruitless expenditure in its interim financial results.
“One reason for this could be to try and avoid a qualified audit stating that Eskom is not a going concern. Not only that, but such a statement in the financial statements could trigger a breach of the debt covenants of lenders to Eskom,” Yelland noted.
He said another interesting fact is that Eskom has always had a briefing for analysts and the media to interrogate its financial results but did not have these briefings this time.
“I asked why there was no media briefing, but I was not given a straight answer,” he said.
