The National Treasury has reiterated its intention to reinstate the controversial exemption it granted Eskom from disclosing irregular, fruitless and wasteful expenditure in its annual financial statements for three years.
Acting Treasury director-general Ismail Momoniat told Business Times that the exemption remains in play and was shelved temporarily only to address concerns raised by the auditor-general (AG), and to undertake a public consultation process.
Finance minister Enoch Godongwana had to withdraw the waiver after a huge public outcry when it was announced.
Responding to a letter from Eskom board chair Mpho Makwana, dated March 9, Godongwana noted that the power utility had requested permission to not disclose:
- Material losses through criminal conduct and any irregular and fruitless and wasteful expenditure that occurred during the financial year;
- Any criminal or disciplinary steps taken because of such losses or irregular expenditure or fruitless and wasteful expenditure; and
- Any losses recovered or written off from irregular expenditure of fruitless and wasteful expenditure.
He said this was to avoid the risk of a qualified audit, which would harm Eskom’s credit rating.
“It is also understood that the risk of a qualified audit outcome may have a negative [effect] on the entity’s corporate rating and credit assessment with the credit ratings agencies, and an exemption is required for … three years,” the finance minister wrote.
In granting the exemption, Godongwana imposed a condition that Eskom should continue to disclose criminal and disciplinary steps taken as a result of losses, irregular expenditure, or fruitless and wasteful expenditure; and any losses recovered and written off.
However, labour unions, political parties, pressure groups and analysts cried foul, saying the exemption amounted to slamming the door on transparency at Eskom and could facilitate large-scale looting.
Momoniat said that while the Treasury appreciated concerns expressed by South Africans who want to see tough action on corruption, it would likely approve the requested exemption again after consultation with the AG and Eskom’s auditor, Deloitte.
“We are just withdrawing the exemption for now to allow us to engage further with the concerns that have come to us, and to engage with the AG and auditors of Eskom. Then we will finalise [our] position.”
Momoniat said the government and Treasury were no strangers to suspending decisions when critical viewpoints might not have been taken into account. In this case, they were taking into account the views of those who want to see action against corruption and transparency in financial reporting.
“We were not compromising on reporting. It is about putting the information in a report but not in the financial statements. We just explained that. We continue to engage and take into account other inputs. We are putting out a notice in the [Government] Gazette seeking further comments,” Momoniat said.
Eskom is an important entity for the Treasury, which will not allow it to default because that would have a serious effect on South Africa and other SOEs
— Nedbank economist Isaac Matshego
When asked if this week’s withdrawal had any implications for the exemption granted to Transnet last year, he said the Transnet exemption would remain as it had yielded positive outcomes for the rail and logistics company.
“We don’t intend to withdraw that. We don’t have any grounds to. We take the concerns expressed in parliament and so on to review our process. With Transnet’s one, there was a lot of engagement with the AG last year and all indications are that it has assisted Transnet on the financial side,” said Momoniat.
Economists and financial experts who spoke to Business Times were split on the exemption, with some criticising it and others saying it is necessary to improve Eskom’s credit outlook.
An international banker with experience in bond markets said: “I don’t know how the Treasury thinks ratings agencies are so gullible that they are going to effectively interpret the waiver of reporting irregularities as credit neutral.
“It’s quite the opposite. The agencies will inevitably discount into their Eskom rating irregular and wasteful expenditure, as well as factor in — as the waiver implies — poor governance, which is net credit negative. The waiver makes no sense, the ratings agencies will see right through it.”
The banker said such a waiver would make sense only if it was being sought to avoid an adverse audit opinion.
“If the Treasury said the waiver was necessary to achieve a going-concern audit, without which debt covenants may be triggered, causing a domino effect cascading across the whole funding structure, then you might have some sympathy. But this doesn’t seem to be the argument they are making.”
But economist Thabi Leoka said while bad communication on the Treasury’s part created considerable market confusion, the exemption made sense when considering Eskom’s fraught financial position.
“I think that from a tactical perspective their thinking made sense because they wanted to address the issue around Eskom being able to stand alone as an entity and it being able to raise its own capital. They also wanted to secure Eskom from being downgraded by ratings agencies, which would then impact on its ability to raise money,” she said.
Leoka said in a country where there is a lot of mistrust caused by the government’s poor track record on corruption, the approval of such an exemption was always going to be hard to sell.
“The public would have understood it had it been communicated properly.”
Nedbank economist Isaac Matshego said he understood the rationale behind Eskom's request for an exemption, adding that the Transnet exemption was working well.
“Some of the irregular expenditure is necessary. When it comes to irregular expenditure, particularly for market-facing SOEs [state-owned entities], there should be a clear definition of what is corrupt expenditure and [what is] irregular expenditure that is necessary.
“The public outcry is understandable. In my opinion, if the proposal to basically amend the reporting had been implemented it was not going to have a significant impact on Eskom’s rating. Ratings agencies already include Eskom debt in total government debt.”
Matshego said the Treasury was taking these steps to prevent a possible credit default, which would be bad for all SOEs.
“Eskom is an important entity for the Treasury, which will not allow it to default because that would have a serious effect on South Africa and other SOEs like Transnet. It would trigger credit defaults.”
Some of the irregular expenditure is necessary. When it comes to irregular expenditure, particularly for market-facing SOEs [state-owned entities], there should be a clear definition of what is corrupt expenditure and [what is] irregular expenditure that is necessary
— Economist Thabi Leoka
Prof Raymond Parsons of North-West University Business School said while the decision to exempt Eskom from reporting certain wasteful and unauthorised expenditure was regrettable, the Treasury had learnt lessons from it.
He said well-run, clean SOEs should not have a problem raising money on capital markets without the government having to waive certain reporting requirements.
“It is moot whether any ‘sleight of hand’ with accounting procedures and allocations of the type used for Eskom and Transnet can really help SOEs to raise capital from well-informed financial markets. Empirical data suggests that SOEs that are well run have not experienced difficulty in mobilising money on loan markets through full compliance and transparency, admittedly with onerous requirements.
“Yet South Africa needs to seriously weigh whether the technical ‘fig leaf’ covers of dealing with SOE wasteful expenditure of Eskom and Transnet are worth the reputational risks of possibly forfeiting transparency, credibility and confidence in the longer term,” Parsons said.
The office of the AG said in a statement that it had noted the withdrawal of the gazette notice to allow for consultation with the Treasury, Deloitte and the AG to address any technical issues.
“It is important that any exemptions granted should continue to promote transparency and accountability in the public sector,” it said.
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