ESKOM HOLDINGS EXEMPTION

On 31^st March 2023, the Minister of Finance granted a partial exemption to Eskom Holdings SOC Ltd (“Eskom”) from section 55(2)(b)(i) of the Public Finance Management Act (PFMA) and Treasury Regulation 28.2.1 for a period of three years whilst declining exemptions under sections 55(2)(b)(ii) and (iii) of the PFMA.

This exemption still requires Eskom to disclose financial and non-financial information on irregular, fruitless and wasteful expenditure but only in its annual report. All other institutions are required, by law, to report irregular as well as fruitless and wasteful expenditure in the annual report and the annual financial statements as set out in the PFMA section mentioned above. Whilst the historical (i.e. previous year) information was also reflected in the annual financial statements, a separation in the reporting of irregular and fruitless and wasteful expenditure across the annual report and annual financial statements was made for all institutions from the 2022/2023 financial year.

This new approach to reporting on irregular and fruitless and wasteful expenditure is in line with the response of President Ramaphosa to state capture and corruption, which noted in point 6.1.8 some of the challenges facing State-Owned Entities and departments in government: “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 cited in paragraph 5.3.2.3” and return to the original intent of the PFMA to let managers manage, while holding them accountable

By allowing Eskom to report on irregular and fruitless and wasteful expenditure in its annual report and not in its financial statements, the National Treasury ensures that reporting transparency and accountability is 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. Eskom is not exempted from ensuring that it takes effective and appropriate steps to prevent irregular and 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.

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, which will 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.

Eskom continues to be bound by more onerous reporting requirements of International Financial Accounting Standards (IFRS) as well as JSE Debt Listing Requirements. 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. It should be noted that the actual conditions are not set out in the gazette, but in a letter from the Minister of Finance to the Chairperson of Eskom.

In addition, 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 publish 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.

Text of letter from Eskom chairperson:

Mr. Enoch Godongwana,

Minister of Finance

Private Bag X115

Pretoria, 0001

Per email: [email protected]

Dear Minister Godongwana

REQUEST FOR EXEMPTION FROM SECTION 55(2)(b) OF THE PUBLIC FINANCE

MANAGEMENT ACT, NO 1 OF 1999 AND APPROVAL TO DEPART FROM NATIONAL

TREASURY REGULATIONS, INSTRUCTIONS AND CONDITIONS ISSUED IN TERMS THEREOF

PURPOSE

1. The purpose of this letter is to request in terms of section 92 of the Public Finance Management Act,

No. 1 of 1999 (PFMA), for Eskom Holdings SOC Ltd (“Eskom”) to be exempt specifically from section 55(2)(b)(i), (ii) and (iii) of the PFMA, as to permit Eskom to include material losses due to criminal conduct, irregular expenditure and fruitless and wasteful expenditure, as well as any losses recovered or written off in its annual report and not in its annual financial statements.

2. Eskom requests that the period of this exemption covers each of the 2022/23, 2023/24 and 2024/25
financial years.

3. Together with the exemption described above, Eskom requests approval to depart, in terms of section
79 of the PFMA, from Treasury Regulation 28.2.1 which requires that the disclosures made in terms of section 55(2)(b) of the PFMA are recorded as a note to the annual financial statements. As stated above, Eskom would make the necessary disclosures in its annual report and not in its annual financial statements, thus its obligation of accountability and transparency will be satisfied.

4. The effect of such exemption and departure approval, collectively, is that material losses due to
criminal conduct, irregular expenditure and fruitless and wasteful expenditure, and appropriate consequence management (including criminal prosecutions, disciplinary charges and losses recovered or written off), will continue to be reported by Eskom. However, those particulars will no longer be subject a to full statutory audit by the Auditor-General South Africa. As such, the threat of a qualified audit for reasons relating to PFMA non-compliance will be alleviated. This will provide relief to Eskom in circumstances where its financial position is constrained and the cost of borrowing is a major concern in its financial recovery efforts. As may be agreed with the Auditor-General of South Africa, the disclosures in the annual report could still be subject to an assurance audit or review.

5. In addition to the above, Eskom requests approval to depart, in terms of section 79 of the PFMA, from
those paragraphs of National Treasury Instruction No. 4 of 2022/23 (PFMA Compliance and Reporting Framework) which require disclosure to be made in its annual financial statements. This new reporting framework was published on 10 January 2023.

INTRODUCTION

6. Eskom has been engaging with various stakeholders from National Treasury and the Department of
Public Enterprises on its proposal to seek the Minister’s approval and support in relation to this exemption and departure application. Eskom requests the Minister’s support for a timely consideration of Eskom’s requests for exemption and departure, so that the approval, if granted, can be applied by Eskom in preparation of its financial reports for the 2022/2023 financial year.

7. Exemptions are provided for in section 92 of the PFMA which permits the Minister of Finance, by
notice in the Government Gazette, to exempt an organ of state from any provisions of the PFMA for a period determined in the notice. Section 79 of the PFMA provides for departures from Treasury Regulations, National Treasury Instructions, or any condition imposed by PFMA, by approval of the National Treasury.

8. At a meeting held on 26 October 2022, the Energy Procurement and Finance Workgroup of the
National Joint Operational and Intelligence Structure supported Eskom’s intent to request the exemption departure and to request approval thereof from the Honourable Minister.

9. Eskom will continue to respect and co-operate with supervisory authorities including the Minister of
Public Enterprises as its Executive Authority, the National Treasury, the Auditor-General of South Africa and Parliament, and will continue to report on material losses, irregular expenditure and fruitless and wasteful expenditure in accordance with the new Instruction. The difference is that disclosure will be made in the Eskom’s Annual Report, as opposed to its Annual Financial Statements.

10. We set out below the background to this application and, the details of and grounds for Eskom’s
application for

10.1. partial exemption in terms of section 92 of the PFMA from the requirements of section 55(2)(b)(i) to (iii) (paragraphs 19 to 24 below);

10.2. departure in terms of section 79 of the PFMA, from the requirements of Treasury Regulation 28.2.1 (paragraphs 19 to 28 below); so as to permit Eskom to report on current year material losses, irregular expenditure and fruitless and wasteful expenditure in its annual report and not in its annual financial statements.

11. Eskom has every intent to continue investigating and determining irregular expenditure and fruitless
and wasteful expenditure and will continue with appropriate consequence management proceedings.

BACKGROUND TO THIS APPLICATION

12. Eskom has published its consolidated and separate financial statements for the year ended 31 March
2022. The independent external auditors issued a qualified audit opinion due to:

12.1. inadequate systems of internal control to timeously detect and record irregular expenditure, and fruitless and wasteful expenditure;

12.2. inadequate controls to ensure appropriate assessment of expenditure arising from violations of supply chain management processes, investigations, and tracking of internal audit and forensic report findings;

12.3. some incidents that were previously logged for assessment were removed without tests being adequately conducted;

12.4. opening balance adjustments were made which could not be substantiated by supporting evidence;

12.5. expenditure amounts not always corresponding with underlying supporting documentation;

12.6. primary source registers tracking cases contained missing numbers in the sequence; 12.7. use of an outdated methodology for estimating non-technical revenue losses;

12.8. inability to obtain sufficient and appropriate evidence that the losses reported due to criminal conduct were completely and accurately recorded – this is due to inadequate systems of internal control to detect and record these losses; and

12.9. potential losses associated with fuel oil usage and losses arising from poor coal quality were not assessed due to inadequate systems of internal control to evaluate, investigate and monitor unusual fluctuations in fuel oil and coal usage.

IMPLICATIONS FOR ESKOM OF EXISTING REGULATORY REQUIREMENTS

13. The consequences of a qualified audit for Eskom are severe. It could possibly include a downgrade
of Eskom’s corporate rating and baseline credit assessment by credit rating agencies, and breaches of Eskom’s debt covenants.

14. Sections 55(1) and (2) of the PFMA regulate, inter alia, financial record keeping and reporting of the
annual financial statements and annual reports of public entities. Sub-section 55(1)(d) provides for the submission of annual reports and annual financial statements to the relevant treasury, the responsible Executive Authority and, if the Auditor-General did not perform the audit of the financial statements, to the Auditor-General. Treasury Regulation 28.2.1 requires material losses, irregular expenditure and fruitless and wasteful expenditure to be reported in the annual financial statements.

15. These instruments have the effect of requiring disclosure by Eskom, in the public domain, of matters
that extend far beyond what Eskom is required to disclose in accordance with International Financial Accounting Standards (IFRS), and the JSE Debt Listing Requirements to which Eskom is bound. This expansion beyond the “ordinary” financial reporting standards applies both as regards the extent / materiality of the impact of such expenditure on Eskom’s financial position, and the duration of the continued obligation to report on historical losses, irregular expenditure and fruitless and wasteful expenditure several years beyond the financial year in question. Disclosures made in the annual financial statements, by implication, are subject to full statutory external audit. Even if the past is resolved, there remains a significant risk for a qualification because of the very onerous financial accounting compliance requirements.

16. The effect of relevant provisions of section 55 of the PFMA, read with Treasury Regulation 28.2.1 and
National Treasury Instruction No. 4 of 2022/23 is that even cases of administrative or non-substantive non-compliance with legislation, which caused no loss to the State, must be reported in the annual financial statements.

17. Eskom has made huge strides in the past three financial years to establish systems, procedures and
checks, balances designed to reduce the extent and risk of fraud, corruption and irregular expenditure. A summary of the various measures Eskom has put in place to address these risks is contained in paragraphs 4 to 7 of Annexure A hereto.

18. Notwithstanding the efforts to implement consequence management in relation to historic irregular
expenditure and fruitless and wasteful expenditure, and to reduce the extent and risk of ongoing irregular expenditure, the sheer breadth of the disclosure requirements which Eskom is subject to, and the broad historical reach thereof, creates ongoing negative perceptions of Eskom’s financial position amongst its stakeholders, which has a continuing impact on its ability to attract funding and investment.

REQUEST FOR EXEMPTION AND DEPARTURE APPROVAL

Exemption from section 55(2)(b)(i) to (iii) of the PFMA and departure from Treasury Regulation 28.2.1

19. Section 55(2)(b) of the PFMA states that the annual report and financial statements must include
particulars of (amongst other matters):

19.1. any material losses through criminal conduct and any irregular expenditure and fruitless and wasteful expenditure that occurred during the financial year;

19.2. any criminal or disciplinary steps taken as a consequence of such losses or irregular expenditure or fruitless and wasteful expenditure; and

19.3. any losses recovered or written off.

20. Eskom requests to be exempt from the above provisions which would enable it to record material losses due to criminal conduct, irregular expenditure and fruitless and wasteful expenditure that occurred in the relevant financial year in question (and for the comparative year as per National Treasury Instruction No. 4 of 2022/23) in its annual report (or in an appendix thereto) and not in its annual financial statements.

21. Eskom requests that the period of this exemption covers each of the 2022/23, 2023/24 and 2024/25 financial years.

22. If the exemption requested above is granted, Eskom seeks approval to depart from Treasury Regulation 28.2.1, which provides that any material losses through criminal conduct and any irregular and fruitless and wasteful expenditure must be disclosed as a note to the annual financial statements of the public entity.

23. In support of this application for exemption and departure we highlight that:

23.1. while section 55(2) of the PFMA identifies those matters to be reported in the annual report and financial statements, it does not specify whether those matters must be addressed in both or either the financial statements and the annual report. Applying the ordinary rules of interpretation, the statement that the “annual report and financial statements ... must” contain certain information means that taken together, they must contain that information. It does not mean that both the annual report and the financial statements must contain all of that information. That leads to purposeless duplication;

23.2. section 55(2)(b)(i) of the PFMA, which requires disclosure of material losses, irregular expenditure and fruitless and wasteful expenditure, is limited to those losses and that expenditure “that occurred during the financial year;

23.3. the consequences of having to report ALL irregular expenditure and ALL fruitless and wasteful expenditure in the annual financial statements, are severe and in most cases entirely disproportionate to their relevance to Eskom’s financial position. Given the wide definition of irregular expenditure (“expenditure... incurred in contravention of or that is not consistent with a requirement of any applicable legislation...”), even administrative non-compliance, which may not result in any loss and which has no adverse effects on Eskom’s financial position, becomes auditable by virtue of section 55 and must be quantified and reported. It is difficult for investors, lenders and other stakeholders to distinguish between irregular expenditure which should be of concern, and irregular expenditure which is immaterial for their purposes; and

23.4. a qualified audit opinion is hugely detrimental to Eskom’s attempts to reduce and refinance its debt, and to attract new funding; and impacts directly on the cost of funding, which in turn has an adverse impact on the public through electricity tariffs and on the fiscus through the increasing necessity for government guarantees and bail-outs.

24. Eskom is of the view that the constitutional requirements of accountability and transparency can be satisfied by disclosure of material losses from criminal conduct, irregular expenditure and fruitless and wasteful expenditure in its annual report, rather than as a note to its annual financial statements.

25. Disclosure in the annual report rather than in the annual financial statements would also: 25.1. be consistent with generally accepted accounting practice;

25.2. remove issues pertaining to non-material irregular expenditure and fruitless and wasteful expenditure from the ambit of the audit performed by the Auditor-General of South Africa or other external auditors, thereby releasing Eskom from the risk and threat of possible audit qualifications arising from compliance-related matters as opposed to financial matters; and

25.3. be familiar to investors and lenders, who regularly question the reasons for and the relevance of reports on irregular expenditure and fruitless and wasteful expenditure.

26. The disclosures in the annual report could still be subject to an assurance audit or review, as may be agreed with the Auditor-General of South Africa.

27. In summary, Eskom’s proposal, in the event that its exemption from section 55(2)(b) and departure approval from Treasury Regulation 28.2.1 is granted, is for Eskom to report on material losses from criminal conduct, and any irregular expenditure and fruitless and wasteful expenditure in its annual report (or in an appendix thereto) and not in its annual financial statements. This request is made in respect of the financial years 2022/23, 2023/24 and 2024/25.

28. Eskom assures National Treasury that it will continue to implement its consequence management procedures in respect of non-condoned irregular expenditure and unrecovered fruitless and wasteful expenditure which occurred in prior financial years.

Conclusions

29. Accordingly, we humbly request that for the financial years 2022/23, 2023/24 and 2024/25 Eskom be granted:

29.1. exemption from the requirements of section 55(2)(b)(i), (ii) and (iii) of the PFMA, to the extent that it requires material losses due to criminal conduct, irregular expenditure and fruitless and wasteful expenditure to be disclosed in its annual financial statements;

29.2. approval to depart from the requirements of Treasury Regulation 28.2.1, to the extent that it requires material losses due to criminal conduct and all irregular expenditure and fruitless and wasteful expenditure to be disclosed as a note to its annual financial statements;

30. Eskom will report material losses due to criminal conduct, irregular expenditure and fruitless and wasteful expenditure which was incurred in the relevant financial year (and comparative period), in its annual report (or in an appendix thereto).

31. The requests for exemption and departure approval summarised in paragraph 29 above are shown in
the table below for ease of reference.

32. We request your urgent attention to this request and confirm our availability to discuss and address
any concerns.

Yours sincerely

Mpho Makwana CHAIRMAN

Date: 09 March 2023

Cc: Mr Pravin Gordhan, Minister of Public Enterprises

***

Text of Finance Minister’s reply:

MINISTRY: FINANCE

REPUBLIC OF SOUTH AFRICA

Private Bag X115, Pretoria, 0001 Tel: +27 12 323 8911 Fax: +27 12 323 3262
P O Box 29, Cape Town 8000 Tel +27 21 464 6100 Fax +27 21 461 2934

Website : www.treasury.gov.za , email : minreg@treasury.gov.za

Ref: M4/1/5(304/2023)

Mr. Mpho Makwana

Eskom Board Chairperson Eskom Holdings SOC Ltd PO Box 1091

JOHANNESBURG

2000

Dear Mr Makwana,

RE: REQUEST FOR EXEMPTION FROM SECTION 55(2)(b) OF THE PUBLIC FINANCE MANAGEMENT ACT, No. 1 OF 1999 AND APPROVAL TO DEPART FROM NATIONAL TREASURY REGULATIONS, INSTRUCTIONS AND CONDITIONS ISSUED IN TERMS THEREOF

1. Your letter dated 09 March 2023 with regards to the above bears reference.

2. It is understood in your letter that Eskom requests an exemption from section 55(2)(b)(i)(ii)

and (ii) of the Public Finance Management Act, 1999 (Act No. 1 of 1999 – “PFMA”) and departures from Treasury Regulations 28.2.1 and National Treasury Instruction No. 4 of 2022/2023 not to disclose the following in their annual financial statements (AFS) –

(a) any material losses through criminal conduct and any irregular and fruitless and wasteful expenditure that occurred during the financial year;

(b) any criminal or disciplinary steps taken because of such losses or irregular expenditure or fruitless and wasteful expenditure; and

(c) any losses recovered or written off from irregular expenditure of fruitless and wasteful expenditure.

3. I have taken note of the challenges raised by Eskom on the risks of disclosing the items

mentioned in paragraph two (2) above and the risk of a qualified audit opinion due to –

(a) inadequate systems of controls to timeously detect and record irregular and fruitless and wasteful expenditure;

(b) inadequate controls to ensure completeness of assessment of expenditure linked to transgression of supply chain management processes, investigations, and tracking of internal audit and forensic report findings;

(c) removal of irregular expenditure from the register prior to conclusion of assessment test;

(d) lack of supporting documentation -

(i) to substantiate adjustment of opening balances; and

(ii) record complete and accurate losses linked to criminal conduct.

(e) use of outdated methodology for estimation of non-technical losses.

4. It is also understood that the risk of a qualified audit outcome may have a negative outlook

on the entity’s corporate rating and credit assessment with the credit rating agencies and an exemption is required for the period of three (3) years starting from the financial year 2022/23, 2023/24 and 2024/25.

Legislative framework in relation to the disclosure of irregular expenditure

5. Section 55 (2)(b) of the PFMA require the accounting authority to ensure that the annual

report and annual financial statements (AFS) of the entity includes – (i) any material losses through criminal conduct and any irregular and fruitless and wasteful expenditure that occurred during the financial year, (ii) any criminal or disciplinary steps taken because of such losses or irregular or fruitless and wasteful expenditure, and (iii) any losses recovered or written off.

6. Furthermore, a public entity is required to disclose in their AFS any material losses through

criminal conduct and any irregular expenditure and fruitless and wasteful expenditure as required by Treasury Regulations 28.2.1.

7. The PFMA Compliance and Reporting Framework issued in terms of the National Treasury

Instruction No. 4 of 2022/2023 require accounting authorities of public entities to disclose in their AFS, any irregular and fruitless and wasteful expenditure incurred in the current year with one year comparative showing (amounts that were under assessment in the previous financial year, amounts relating to previous year but identified in the current year and amounts incurred in that previous financial year.

8. The framework further stipulates that any material losses, criminal conduct and disciplinary

process must be disclosed in the AFS. The detail to these disclosures is required to be reported in the annual report of the entity in line with the reporting guideline provided to institutions (subject to the PFMA).

Conclusion

9. Based on the application received, and after due consideration of the risk of a possible

negative outlook on Eskom’s corporate rating and credit assessment with the credit rating agencies, I hereby grant a section 92 PFMA exemption for Eskom to disclose any amounts of irregular and fruitless and wasteful expenditure that occurred during the financial year in the annual report of Eskom with the exception of items indicated in paragraphs (a) to (c) below which must be disclosed in both the annual report and annual financial statements of Eskom for the financial years starting from 2022/2023 to 2024/2025:

(a) any material losses through criminal conduct¹,

(b) any criminal and disciplinary steps taken as a consequence of such losses or irregular expenditure, or fruitless and wasteful expenditure²; and

(c) any losses recovered and written off³. AND

10. This approval is on condition that the following is addressed by Eskom:–

(a) Eskom must develop an action plan to address weaknesses mentioned in paragraph 12 of your letter and report progress on implementation of the action plan (where necessary).

(b) Report material losses, criminal conduct identified and irregular and fruitless and wasteful expenditure for the current and previous financial year in the annual report of

1 Section 55(2)(b)(i)- the first part of the paragraph

2 Section 55(2)(b)(ii)

3 Section 55(2)(b)(iii)

the entity for the periods starting from 2022/23 to 2024/25 as prescribed in chapter 8 of the PFMA compliance and reporting framework (National Treasury Instruction No. 4 of 2022/2023).

(c) Report quarterly on progress made on irregular and fruitless and wasteful expenditure that is under assessment, determination or investigation and any historical amounts in progress in line with the framework at the following address: [email protected]

(d) The Auditor-General of South Africa is engaged on an agreed upon procedures engagement on items to be disclosed in the annual report of Eskom due to challenges raised in the tracking of internal audit and forensic report findings. The objective is to enhance accountability and oversight by the Board.

I hope you find the content of this letter to be order. Yours sincerely,

ENOCH GODONGWANA, MP MINISTER OF FINANCE DATE: 31/03/2023

ENDS

Statement issued by National Treasury Head of Communications, Cleo Mosana, 3 April 2023