By Lehlohonolo Lehana.
National Treasury says the decision to exempt Eskom from disclosing irregular and wasteful expenditures was not a ploy to hide corruption within the utility.
Treasury has come under fire from energy experts, trade unions and opposition political parties for his decision to exempt Eskom from reporting its irregular expenditure.
Through a government gazette on Friday (31 March), Treasury exempted Eskom from section 55(2)(b)(i) of the PFMA and Treasury Regulation 28.2.1 for a period of three years.
Under these exemptions, Eskom is no longer required to disclose financial information related to irregular, fruitless and wasteful expenditure in its financial statements.
Treasury said that this was done for several reasons, but primarily to protect Eskom’s credit rating and audit opinion, which could have disastrous knock-on effects on the company’s financials and loans were they to move in a negative direction.
“A major risk of having non-material, non-corrupt transactions reported in the annual financial statements include a higher likelihood of qualified audit opinion – which other listed companies do not face – that triggers loan covenants,” it said.
This would likely further increase Eskom’s cost of borrowing and may result in additional fiscal pressure from Eskom’s debt burden should the entity be unable to negotiate lender waivers for these covenants.
“The exemption granted to Eskom will enable it to continue to fund its balance sheet and still maintain accountability, transparency and reporting requirements in its annual reports and annual financial statements. If the exemptions were not considered, it would place pressure on the fiscus and limit borrowing powers of the SOE,” Treasury said.
The exemptions also feed into another change for Treasury, where its approach to irregular, fruitless and wasteful expenditure is shifting to focus more on identifying suspicious or corrupt spending.
Irregular expenditure is not necessarily corrupt or suspicious expenditure – it’s spending which was not incurred in the manner prescribed by legislation; in other words, somewhere in the process that led to the expenditure, the auditee did not comply with the applicable legislation.
“The National Treasury and the Auditor-General of South Africa (AGSA) are working together to review the usefulness of the concept of irregular expenditure and to focus on identifying corrupt or suspicious expenditure, or expenditure made in bad faith. This is part of an effort to address the Commission’s recommendation and return to the original intent of the PFMA to let managers manage, while holding them accountable,” Treasury said.
By allowing Eskom to report on irregular and fruitless, wasteful expenditure in its annual report and not in its financial statements, the National Treasury said it is ensuring that reporting transparency and accountability are not compromised and still made public as currently required while mitigating the risks that could arise if these transactions are reported in the annual financial statements.
“The exemption also gives Eskom additional time to comply with the new reporting requirements on irregular and fruitless and wasteful expenditure,” it said.
Treasury stressed that Eskom is not exempted from ensuring that it takes effective and appropriate steps to prevent irregular, fruitless and wasteful expenditure.
Furthermore, it is not exempt from taking appropriate criminal or disciplinary steps because of any losses incurred to date.
“All material losses through criminal conduct and any losses recovered or written off from irregular expenditure will still need to be reported in the annual financial statements,” it said.
Eskom also continues to be bound by more onerous reporting requirements of International Financial Accounting Standards (IFRS) as well as JSE Debt Listing Requirements, it added.
“In addition, as part of the Eskom debt relief arrangement, the Minister of Finance instituted various additional reporting obligations onto Eskom, which the entity will be required to report regular updates to parliament and oversight structures.”
The actual conditions for the exemption were not set out in the gazette but in a letter from the Minister of Finance to the Chairperson of Eskom.
Treasury said that, as was the case with a similar exemption provided to Transnet last year, the National Treasury’s Office of the Accountant-General (OAG), which sets the accounting standards in government, also engages with the Auditor-General, to ensure that any information on irregular and fruitless and wasteful expenditure not published in the financial statements is still reviewed, but not as part of the financial statements.
“As indicated, the National Treasury remains committed to publishing further terms of conditions of the loan under the Eskom debt relief arrangement, which is currently still being finalised and will also publish a more detailed explanatory note to outline the process of reporting on irregular and fruitless and wasteful expenditure and its approach to PFMA disclosure requirements as they apply to SOEs, and to do so in a way that protects the fiscus,” it said.
Eskom welcomed the exemption.
Eskom acting Group CEO Calib Cassim said Public Finance Management Act (PFMA) compliance remains a priority as the power utility continues to address irregular, fruitless and wasteful expenditure, including appropriate consequence management proceedings.
This exemption will assist in the dialogue with credit rating agencies, the lender community and key stakeholders.”
Transparency and accountability
Organisation Undoing Tax Abuse (Outa) CEO Wayne Duvenage said the exemption is not good for Eskom, the country and society because transparency and accountability is needed.
He also believes the length of the exemption granted to Eskom is wrong
Duvenage said Treasury should have given Eskom one year and not three years to get its governance in place because the exemption is to circumvent a qualified audit and “people see through it”.
Meanwhile minister of Finance Enoch Godongwana has expressed his sadness after the passing of his Chief of Staff, Percy Mthimkhulu.
The minister’s office on Tuesday confirmed the tragic and untimely passing of Mthimkhulu, who served as his Chief of Staff since 2021.
According to the Ministry, Mthimkhulu died peacefully in his sleep.
Godongwana offers his condolences, and those of the Ministry and the National Treasury, to the Mthimkhulu family, the statement read.