KHAYA SITHOLE | How Eskom’s dodgy past hobbles its future as a free-market player

Just over three years ago, Eskom and the National Treasury unwittingly managed the extraordinary feat of uniting political parties and society in opposition to one idea — that the power utility should be granted exemptions from section 55(2)(b)(i) of the Public Finance Management Act (PFMA).

The effect would have been that Eskom could alter its financial reporting regime to separate legacy issues from new issues related to irregularities. The PFMA requires entities to account for irregular, fruitless and wasteful expenditures in their financial statements, upon which the auditor-general issues an audit opinion.

The problem that Eskom had is that as an entity that taps into capital markets by issuing bonds, it has to take cognisance of what that market expects. A good audit report implies that the management of resources is largely compliant with financial reporting standards and relevant aspects of the PFMA. A bad audit report indicates a poor culture of financial management. When bondholders are required by their own internal or stakeholder guidelines to only engage with entities that have clean audit reports, an audit qualification may lead to activation of negative clauses or covenants.

In the case of Eskom, the PFMA’s model of dealing with irregularities is cumulative in nature. This means that old irregularities can still be reflected in financial statements unless they have been resolved through condonation processes, consequence management or the passage of time. For entities such as Eskom and Transnet that engage in long-term contracts and acquire long-term assets, the impact of such contracts being tainted is that the stench of irregularities will persist for as long as the affected contracts or assets remain. Rating agencies also take audit opinions seriously.

A year before Eskom’s exemption request, Transnet had highlighted this dilemma and applied for an exemption from the reporting requirements of the PFMA. Rather than include historic irregularities as part of the financial statements that would be audited by the AG, Transnet requested a distinction between legacy irregularities, which would be reported elsewhere in the annual report, and new irregularities, which would be reported on the annual financial statements and fall within the ambit of the AG’s scrutiny. Once Transnet had implemented this carve-out, it was able to pause its flood of audit qualifications and could finally have constructive conversations with rating agencies.

Once Transnet had implemented this carve-out, it was able to pause its flood of audit qualifications and could finally have constructive conversations with rating agencies

When Eskom made its request, finance minister Enoch Godongwana highlighted the potential upside — if Eskom could obtain the carve-out and end up with better credit ratings, its borrowing costs would be less punitive, and that would benefit the fiscus. Unfortunately for Eskom, its records of audit qualifications and history of corruption meant that the request was interpreted as a request to escape scrutiny and undertake more malfeasance. In response to the backlash, the exemption was withdrawn and has not been proposed since then.

This month, as the war over the fate of Eskom escalated, electricity minister Kgosientsho Ramokgopa indicated that he would ask the cabinet to grant Eskom PFMA exemptions because the utility is expected to lose its monopoly status and become a player in a competitive electricity ecosystem.

The PFMA has some unintended consequences. As an instrument of discipline, it is a necessary tool that sets the guidelines for the public sector at large. However, it creates serious problems for entities that need to operate in a competitive landscape. Seeking to guide procurement decisions in line with the objectives for managing public resources, the act inevitably results in layers of requests, approvals and concurrences.

But enterprises that operate in deregulated spaces where competitors are free to offer the same services need to be able to compete on the same commercial footing. The bureaucratic design of the PFMA amounts to a type of self-imposed red tape that has enormous costs for the state entities and the country at large.

When market opportunities emerge and decisions need to be taken with speed, PFMA red tape may put state entities at a commercial disadvantage. If Eskom moves towards such a market, the directors have the fiduciary duty to ensure that the policy framework and regulatory landscape do not condemn Eskom to inevitable failure. If the utility has lost the fight for liberalisation, as it appears to have, it needs to start deliberations on what the equitable dimensions of the competitive landscape should look like.

To avoid the hysteria that killed the previous exemption request, Eskom and the minister would do well to articulate exactly which carve-outs they seek and why a failure to grant some exemptions would be fatal to Eskom’s prospects in a competitive market. This matters because even in a competitive electricity market, Eskom will remain a central player whose success or failure binds us in an eternal social compact. To deny it a fair chance to compete would be an exercise in national self-immolation.

• Sithole is a CA, activist and academic.