Alarm bells over Eskom

Civil action group Outa says that the National Treasury’s plans to exempt power utility Eskom from disclosing irregular, fruitless and wasteful expenditures will sound alarm bells for ratings agencies and lenders – having the exact opposite effect of the exemption’s intent.

At the start of April, Treasury announced an exemption for Eskom that would allow the embattled company to hide irregular, fruitless and wasteful spending in its financial statements for a period of three years.

In a presentation to MPs on the move, Treasury explained that Eskom would still have to disclose the data in its annual reports and that any money lost to criminality would also have to be made known. The intention was to help Eskom secure clean audits and avoid having its credit rating downgraded – as this would have an adverse effect on the national fiscus.

The move was lambasted and heavily criticised, leading to its withdrawal a few days later. However, Treasury has not abandoned the move and intends to reintroduce the exemptions at a later date.

According to Outa, the government needs to abandon these plans as they are likely to have the opposite effect and rather put rating agencies and lenders on high alert when dealing with Eskom.

“Eskom’s debt is already standing at approximately R400 billion. Removing the obligation for Eskom to disclose irregular expenditure and fruitless and wasteful expenditure in its annual financial statements will create an environment for even more money to go missing and for accountability to be thrown out of the window,” the group said.

“Instead of addressing the root causes that create the prime environment for irregular, fruitless and wasteful expenditure to multiply, the government, in this instance, is continuing to feed the problem.”

Outa said that an important aspect of rating agencies and investment houses’ assessment of Eskom’s ability to manage its cash flow and service its debt obligations relies on trends of a company’s ability to manage and reduce irregular, fruitless and wasteful expenditure.

“The exemption of such reporting will have the opposite effect from that intended, as it will send alarm bells to rating agencies and lending houses. It suggests that these oversight entities would merely see the absence of reporting as equating to the absence of malfeasance, which we believe is most unlikely.”

The group said that the proposed exemption is as an acknowledgement by the government that there is excessive irregular, fruitless and wasteful expenditure at Eskom and that it lacks the controls to reduce or regularise this expenditure.

“We are also concerned that an exemption of this nature will now become a precedent for more reporting exemption requests from other entities and municipalities for similar reasons proposed by Eskom,” it said.

The group said that more transparency was needed, not less.

“The objectives of the PFMA include transparency, accountability and sound financial management. The Auditor-General’s mandate is to act in the best interest of the public and investors rather than the entity.

“It is, therefore, the accounting officer’s responsibility to act in the best interest of the entity and report on matters of irregular, fruitless and wasteful expenditure. The exemption from disclosing such expenditure completely defeats this purpose.”

Treasury’s view

Treasury’s view on the exemption isn’t only about protecting Eskom’s credit rating and borrowing capabilities – the department has a broader view that “irregular” expenditure is not a useful metric and is looking to change the reporting on this entirely.

According to Treasury’s arguments, “irregular” spending encompasses a wide range of issues – from simple accounting oversights to bad faith transactions. Most of this, it said, is not malicious but is treated as such during an audit.

“The definition of IE is broad and captures any spending emanating from a transgression of any applicable legislation, irrespective of the nature and amount of the transgression,” Treasury said.

“For example, the 2020/2021 FY was significantly affected by the R77 billion recorded by the NSFAS for disbursing bursaries without a gazetted funding guideline – a procedural non-compliance.”

Because of this, groups could receive a qualified audit, impacting credit ratings and their ability to borrow. In Eskom’s case, this places the fiscus at immense risk, as the government guarantees R350 billion of Eskom’s debt.

It said that it is more useful to track money lost or wasted to corruption or criminality than the broad category of irregular spending.

Read: Treasury doubles down on ‘nonsensical’ Eskom exemption