Eskom counts R2.3 billion in losses as irregular spending blows up to R19.6 billion

Irregular spending at Eskom swelled to R19.6 billion ($1.5 billion) as South Africa’s state-owned power utility comes under pressure to restore its credibility and improve its finances.

Irregular expenditure, or spending incurred in contravention of or not according to applicable laws, “has increased significantly as a result of the cleaning-up exercise” at the electricity producer that generates about 90% of South Africa’s power, it said in a report released Tuesday.

The company and its auditors, SizweNtsalubaGobodo Inc, reviewed all open contracts from April 1, 2015, for compliance with the country’s Public Finance Management Act, Eskom said.

The business that’s facing declining demand for power amid tepid economic growth has been at the centre of scandals involving the financing of transactions and awarding of contracts to firms linked to the Gupta family. They are alleged to have used their connections with former President Jacob Zuma to their benefit. Zuma and the Guptas deny any wrongdoing.

“The damage wasn’t done overnight, so cannot be fixed overnight,” Chairman Jabu Mabuza, who was appointed in January, told reporters in Johannesburg. “We will have to take short-term pain.”

Eskom reported a loss after tax of R2.3 billion for the year ended March 31 from a profit of R900 million 12 months earlier. Sales declined 0.9%, while its gearing ratio, which measures debt relative to equity, went to 72% from 68%, it said.

“Eskom continues to face significant financial and liquidity challenges,” the company said. This is due to the “high debt burden, low sales growth and increased finance costs. The auditors raised uncertainty that may cast significant doubt on the group’s ability to continue as a going concern.”

Chief Executive Officer Phakamani Hadebe, who started earlier this year, has pledged to improve governance as the first step in stabilizing the business. The company has opened 11 criminal cases, five of which involve nine senior executives, he said.

Eskom will reduce non-essential positions among its workforce of 48,628 people, and sees the optimum group-staffing level at about 33,249 positions, which means it’s about one-third overstaffed, according to its annual report.

Pay negotiations with labor that started two months ago resulted in protests and power cuts after the utility said it couldn’t offer an increase to workers. Eskom backed down and has most recently tabled a three-year deal with raises of about 7% annually, compared with the current inflation rate of 4.6%.

Eskom depends on government support to service its R368 billion of debt. It has raised 22% of the funds it requires this year, the company said.

“Ultimately we have to decide about the future of Eskom,” Hadebe said.

“We need to review the business model and see whether this remains relevant. We need new growth markets and products for us to grow this business as we move forward.”


Read: Corruption, contractors and inefficiency – 10 things crippling Eskom and costing South Africa billions

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Eskom counts R2.3 billion in losses as irregular spending blows up to R19.6 billion