Eskom’s partial exemption from irregular expenditure denied

Finance minister Enoch Godongwana has declined the controversial application by Eskom for a partial exemption from the Public Finance Management Act (PFMA).

The decision comes after extensive consultations with the auditor general as well as Eskom’s auditors, Godongwana said on Tuesday in a statement.

Auditor general Tsakane Maluleke objected to the exemption granted to Eskom last month which would exempt the utility from an audit by the Auditor-General of South Africa (AGSA), lessening the possibility of a qualified audit for non-compliance with the PFMA.

All government institutions are required by law to report irregular as well as fruitless and wasteful expenditure in their annual report and annual financial statements.

Eskom had asked for a partial exemption from disclosing irregular, fruitless and wasteful expenditure and material losses from criminal conduct in its annual financial statements as it is attempting to recover from reputational damage and managing internal corruption.

The utility, which is still looking for a new chief executive officer, has been plagued with corruption allegations that have left it unable to meet electricity demand in the country. Its debt of more than R400 billion has been labelled as the biggest financial risk currently facing South Africa.

An exemption was requested by Eskom board chairperson Mpho Makwana in a letter dated 9 March.

On Tuesday, Godongwana said although he recognised the utility’s commitment to expose fraud and corruption, and the additional compliance and reporting burdens facing Eskom and other state-owned entities (SOEs), he was of the view that “Eskom needs to do more operationally to reduce the scope of fraud and corruption before such exemption can be considered, and for it to be effective”.

Godongwana said: “Eskom attempts to recover from the devastating impact of state capture, and take steps against past and current corruption. It needs to ensure that its anti-corruption strategy is credible and has the support of key stakeholders like investors, lenders, suppliers, customers and the public.”

The decision is an about-turn from the minister, who in April had granted the partial exemption through a gazetted notice, which caused a public outcry.

On Tuesday, Godongwana said the decision to deny Eskom the partial exemption follows 56 public comments covering a broad spectrum of accounting and reporting, auditing, governance, legal principles and public interest issues have been duly considered.

He added that treasury also engaged with audit firms, professional auditing and accounting bodies, a rating agency and other relevant authorities who emphasised that, as part of the Eskom debt relief arrangement, the minister of finance has instituted additional reporting obligations on Eskom, which the entity will be required to submit to parliament and oversight structures. 

“The extensive PFMA reporting requirements makes it more onerous for a state-owned entity compared to a listed company to have its financial statements qualified, even when there is no financial mismanagement or corruption,” he said.

In February, Godongwana announced that the government would take over R254 billion of Eskom’s loans into its balance sheet as the utility struggled to earn enough to service its debt and running costs. 

The treasury granted a similar exemption to Transnet for the financial years of 2021-2022 until 2023-2024. Transnet, which is also struggling to make ends meet, was granted an exemption from disclosing any losses arising from criminal conduct and irregular, fruitless, and wasteful expenditure.

In April, the Mail & Guardian reported that Godongwana acknowledged the public’s outcry over Eskom’s exemption, but insisted that it was not granted to allow Eskom to conceal corruption. Instead it would further protect the fiscus.

“We had to ask ourselves the question: If Eskom’s financial statements are being constrained by these irregularities, what are the implications for Eskom’s cost of capital? If they cannot raise that capital, what are the implications for the fiscus? So we look at it from a fiscal sustainability eye,” Godongwana said.

The Organisation Undoing Tax Abuse (Outa) welcomed the decision as a positive action by the treasury.

“We believe the treasury and the minister took civil society’s concerns to heart and made an informed decision,” they said.

Energy specialist Tshepo Kgadima said according to the PFMA rules, the treasury could not give Eskom the exemption because the utility is not financially stable enough to meet its obligations and continue its business for the foreseeable future.

“Granting the exemption would enable Eskom’s bond holders to enjoy the benefits of cooking the books without accountability. The auditor general would not trust the numbers that they see. Eskom’s request was a feeble attempt to stay clear of being in dereliction of its duty to report its finances,” he said.

Eskom has not responded to numerous requests for comment.