Eskom starts slow, grueling turnaround
Eskom’s Interim Financial Statements (IFS) to September 2017 raise both hope and concern, following years of mismanagement that has left Eskom with a massive debt and a compromised liquidity position. However, the recent turn of events after the appointment of the new leadership has sparked new hope with the new board’s apparent determination to clean up.
Eskom starts slow, grueling turnaround
“Eskom’s interim financial results were, as expected, not encouraging, given the fact that auditors expressed a matter of emphasis on the going-concern status of Eskom due to the compromised liquidity position. Eskom is still navigating stormy waters as reflected in the state capture allegations unfolding at the Parliamentary Portfolio Committee on Public Enterprises Inquiry,” says Wayne Duvenage, OUTA’s CEO.
OUTA was further encouraged by comments from Eskom’s new Chairperson, Jabu Mabuza, who indicated at the IFS release that the new Eskom Board’s mandate is to: (a) find solutions to the liquidity situation; (b) strive to restore the credibility and integrity through inculcating a culture of good corporate governance; and (c) ensure the release of Eskom’s interim financial results as a going concern before the end of January 2018.
However, despite the two-month delay in the release, the interim results were better than the 2017 Integrated Report -- with its R3 billion in irregular expenditure -- and the honesty of the new management team in the face of such a mammoth task was refreshing.
OUTA was encouraged by the frank admission by interim CE Phakamani Hadebe that Eskom’s situation is a result of poor leadership and failure to abide by the prescripts of good corporate governance, as depicted by the previous executives.
Eskom finally confirms that it is pursuing the recoupment of the R1.6 billion paid to McKinsey and Trillian. The IFS says the McKinsey contract “has been cancelled and the board is pursuing recovery from McKinsey in order to minimise the loss to Eskom”. On this note, McKinsey management has previously indicated their intention to return these funds to Eskom and OUTA urges they do so, sooner rather than later.
OUTA is also encouraged that Eskom’s IFS reflected that its three-month guarantee granted to the Guptas’ Tegeta Exploration & Resources is in breach of the Public Finance Management Act, which is in sync with OUTA’s charges filed against Eskom’s previous CFO Anoj Singh on this matter last year.
OUTA is pleased by the promise that the board is dealing with executives facing allegations of serious corruption and other acts of impropriety. We hope that criminal charges will be laid accordingly.
While OUTA welcomes Eskoms mention of a recovery plan which aims to review 160 contracts over R1 billion, we urge Eskom to ensure that this includes reviewing the so-called “evergreen” coal supply contracts with suppliers, which equate to billions of rand each year and require scrutinising.
Outa supports the frankness displayed in the presentation of the interim results as the new executives did not sugar-coat the bad news.
Extracts from the interim financial statements revealed that as at 30 September 2017:
Sales were down 1.9%.
Municipal arrear debt to Eskom was R12.2 billion, up from R9.2 billion year on year.
Total overdue debt to Eskom was R19.4 billion (including municipalities), up from R16 billion, with Soweto arrears increased by more than R400 million.
Net profit after tax was down to R6 billion from R10 billion.
Net cash from operations was down to R22 billion from R32 billion.
Liquid assets (cash) dropped to R9 billion from R30 billion.
The debt is now R367 billion, a R34 billion increase from a year ago.
Gearing is at 70% and this is not sustainable.
Cross border debt arrears are R600 million from three countries including ZESA (Zimbabwe).
OUTA believes that the new board and management are faced with a challenge to overcome the unnecessary interference and lack of leadership displayed by Minister of Public Enterprises Lynne Brown.
OUTA is concerned over the strong hints of future price hikes, which is a real problem given the years of flagrant waste and corruption, and the reminder that Eskom is pursuing the Regulatory Clearing Account applications. However, OUTA is encourage by the options raised by Eskom to suggest to Government to get an equity partner/s to assist in the recapitalisation of the utility.
In conclusion, OUTA fully supports the suggestion that Eskom’s operating model and capital structure must be reviewed – including the cost drivers – and that this should be initiated sooner rather than later.