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RYK VAN NIEKERK: Last night I spoke to Finance Minister Enoch Godongwana about the withdrawal of the controversial exemptions the National Treasury granted Eskom last week. The exemptions would’ve allowed Eskom not to disclose the extent of any irregular, wasteful and fruitless expenditure in its annual financial statements. However, these still had to be included in its annual report.
This led to widespread outrage from various sectors and contributed to the minister’s decision to withdraw the exemptions. The National Treasury defended the exemptions and said they were intended to prevent Eskom from receiving a qualified audit opinion, and to safeguard its credit rating. This could have led to a reduced borrowing cost for the state utility.
The National Treasury approached Moneyweb today to clarify a few technical issues regarding the withdrawal, and to highlight the process going forward. Shabeer Khan is on the line, the accountant-general of the National Treasury. Shabeer, thank you so much for your time tonight. What are these technical issues you want to clarify?
SHABEER KHAN: Just to preface the discussion, the Public Finance Management Act (PFMA) is the framework that regulates financial management in national and provincial government. The request from Eskom was an exemption for a specific provision within the Public Finance Management Act, and that provision deals with the reporting requirements.
Eskom, like other state-owned companies, is by law required to report in terms of the IFRS (International Financial Reporting Standards) of a global accounting framework which South Africa and the private sector adopt, but also [gives] additional reporting requirements under the PFMA, mainly around how we disclose and report on irregular expenditure, footless and wasteful expenditure, and obviously losses through criminal conduct.
The request was really to see how this matter can be disclosed in a manner that really still promotes the fundamental accounting principles of accountability and transparency.
So, when this request came through on 9 March, and also just to indicate that this request originated from the National Energy Crisis Committee, which also endorsed Eskom approaching National Treasury for this particular exemption.
Read: Treasury withdraws Eskom exemption after outcry
This exemption was processed and consulted on quite broadly with National Treasury. But as the Office of the Accountant-General, it was really important that the principles of accountability and transparency were not diminished in any way through this exemption.
So we followed a process, and obviously the process that was followed really concluded that disclosing this irregular and fruitless and wasteful expenditure in the annual report will not diminish any accountability or transparency, as there was already a precedent in how this accounting treatment happened with the Transnet request. And this principle was then adopted as part of this process.
Engagements
Obviously the key thing that needed to be taken forward was the engagements with the Auditor-General and the auditors of Eskom to entrench the principle of what we call in audit terms an agreed-upon procedures assurance engagement, to ensure that those figures to be the annual report are still adequate reviews done to enable the board, the shareholder, the DPE [Department of Public Enterprises] and parliament to take the necessary oversight steps in this regard.
Read: Eskom is proactively dealing with fraud and corruption: Chair
The exemption was not meant to conceal any fraud or corruption, because the minister in his exemption was quite clear that any losses through financial or criminal conduct must still be disclosed. And those, if you look at how Eskom has reported in the past, really dealt with those matters of fraud and corruption quite decisively and quite transparently in the annual financial statements.
Those matters will still be disclosed, both in the annual financial statements and the annual report. So that risk of concealing any sort of corruption would not have taken place with this exemption.
RYK VAN NIEKERK: I think that is an interesting position. But of course these exemptions were withdrawn – and the minister also alluded to it last night – due to the public outcry regarding it. Was the outcry not foreseen?
SHABEER KHAN: The minister did indicate yesterday in parliament that the Treasury may have underestimated the sensitivity around the entity in which we granted the exemption. And, considering the importance of Eskom and the impact it has on the economy, we should have pre-empted it. And the minister said there are a lot of lessons to learn, and perhaps there should have been a lot broader consultation on the matter.
The law gives the minister the power to really run this exemption.
Obviously, the law doesn’t require for him to be in consultation. But, considering the sensitivity of the matter, the minister took the decision yesterday to consult with the Auditor-General, as well as the auditors of Eskom, to ensure that, if we move forward, whatever mechanism we use to deal with this matter, it tightens. But more importantly, it [should] adequately report on all fraud and corruption. And that’s not, because it’s fundamental that as a state we deal quite decisively with that.
Read: National Treasury on why it exempted Eskom
What the exemption also does is open up a period of comment. So all stakeholders, and interested parties are now welcome to comment on the exemption before the minister takes a final decision.
The minister can now take one of three decisions. It can either keep the status quo, amend it in a way that he strengthens it quite significantly, or withdraw it altogether based on this consultation period.
RYK VAN NIEKERK: So what is the likelihood or the possibility that the National Treasury will reintroduce these exemptions?
SHABEER KHAN: The consultation period and Treasury’s consultation with the Auditor-General and the auditors of Eskom will then determine the actions that will follow.
As I’ve indicated, it could be one of three – amend it, keep the status quo, or completely withdraw it. So that period of consultation will happen, which will then inform the decision that the minister will take in this regard.
RYK VAN NIEKERK: In the correspondence between the chairman of Eskom, Mpho Makwana, and Minister Godongwana, one of the reasons cited for the request to enforce these exemptions, or to allow them, was poor financial controls at Eskom. Of course, Eskom has been one of the state entities that have suffered the most from state capture, and from recent remarks from the former CEO, André de Ruyter, it seems like corruption is ongoing.
But the announcement yesterday from the minister does not include any indication that the financial controls within Eskom must be swiftly improved. How big a problem are the financial controls currently within Eskom, according to Treasury, and why are the AG, the auditor-general, and maybe external consultants not being used to aggressively address the shortcomings?
SHABEER KHAN: May I answer it in two ways? Firstly, in terms of the Public Finance Management Act, the board as the accounting authority is responsible for ensuring that Eskom implements the control to adequately address some of these shortcomings we have seen.
So currently the board is tasked with this responsibility, and obviously the shareholder, the Department of Public Enterprises, will then ensure and oversee that these steps and these creative measures are being taken. Obviously, Treasury through the PFMA, provides the legal framework on how these things should unfold. And really the exemption request that was considered by the National Treasury was meant, and would’ve taken into account some of the reforms and the actions that needed to be taken to address this.
So in the minister’s response, one of the things he did indicate is while there is this damage control – and what the control was focused on was the control to enable Eskom to report completely and accurately on irregular expenditure – that there must be an action plan to actively deal with and improve the control environment that enables Eskom to report accurately going forward.
So this period of exemption allows them to then appoint consultants and get the capacity to implement these controls to clean up and improve the control environment.
RYK VAN NIEKERK: But should that not have happened many years ago?
SHABEER KHAN: Absolutely. Some of these matters have been recurring. One of the things that we’ve looked at is that over the last five years Eskom has received a qualified audit opinion from the auditors, and the qualification was mainly due to the reporting of irregular expenditure.
What the auditors have tried to do is that the systems that enabled them to account [for] and to record all these transactions was not up to speed to enable them to report accurately. So this problem is a perennial problem, but obviously this exemption is not meant to deal with every single problem within Eskom, but really to deal with a financial reporting requirement around the disclosure of irregular expenditure.
This request also was considered part of some broader reform that is currently happening within the public finance management space.
The minister of finance also in his budget speech in 2022 indicated that we need to differentiate between corruption and minor transgressions of the rules of policy (inaudible) secrets that are audited as irregular expenditure.
Read: Auditor-General continues to push for accountability
Yesterday in Parliament I also made the point that the focus is generally on the value of the transgression, rather than the loss to the state. The example that I cited was the Nexus One, in which Nexus in a particular financial year incurred quite significant amounts of irregular expenditure, purely from not presenting the funding guidelines.
The value of the transaction was R17 billion, but the loss to the state was zero. The focus was how this was reported generally on the value of these transgression rather than the law. Some of these reforms are really meant to correct some of the misnomers that we see. But, more importantly, National Treasury has issued an Instruction Note No 4 – which is also deals with some of the reforms in irregular expenditure, fruitless and wasteful expenditure. This instruction Note 4, regulates and provide the framework for the entire national government and not just for Eskom.
So the point I’m making is that they either start to look at how these are being reported, but more importantly to fundamentally address it in the legislation as part of the reform.
RYK VAN NIEKERK: Then what would the benefit for Eskom be if these exemptions were reintroduced? Is there a financial benefit that Eskom could receive from it?
SHABEER KHAN: The fundamental issue that they’ve written to us [about] and they’ve cited in the letter is around the rating agencies and how they assess them, but certainly it is around the qualifications that they will get around these traditional requirements, and what that means for their loans with lenders.
And really what that indicates is that these qualifications trigger some of the covenants from the loans, which ultimately put them in a difficult space in that the lenders will immediately require some of these to be immediately paid, unless waivers are agreed [upon].
So this exemption was also considered the broadest part of some of the support that Treasury has given to Eskom, but also part of the broader energy crisis which the president appointed the National Energy Crisis Committee to deal with.
And this request, as indicated as well, has come directly from the National Energy Crisis Committee, who actually endorsed that Eskom approach National Treasury for this particular exemption.
This exemption was only meant to deal with that. And the minister made the point yesterday that ultimately we need to look at it with a fiscal sustainability eye, because Eskom is unable to raise capital in the open market. There are implications for the fiscus.
RYK VAN NIEKERK: You’ve said these lenders could or may call these covenants into play, and that Eskom may need to repay debt sooner than according to previous schedules. Is that a possibility, or will it happen if Eskom does indeed receive a qualified audit?
SHABEER KHAN: A qualified audit often breaches covenants, and with Eskom a large portion of the debt is guaranteed by National Treasury and the state. So immediately, once there is a breach, and the lenders immediately require the full payment, they could use those guarantees to recall and require and request full payment of their loans.
RYK VAN NIEKERK: Is there an amount of possible debt that needs to be repaid due to the breach of the covenants? Is there a number on the table of what could happen if Eskom doesn’t receive a clean audit?
SHABEER KHAN: At the moment there’s no amount on the table. This was to actively deal with that risk, should that risk realise. So at the moment there’s no amount on the table and the Treasury team is working quite closely with Eskom and their treasury team to manage some of the risk.
RYK VAN NIEKERK: Shabeer, thank you so much for your time tonight. That was Shabeer Khan, the accountant-general of the National Treasury.
Eskom, Load Shedding, Eskom, National Treasury, Enoch Godongwana, Ryk van Niekerk, Shabeer Khan
