LONDON — This week’s release of financial results from South Africa’s State-owned electricity supplier Eskom was always going to be worth watching. It marked the first public engagement of a fresh board of directors installed 69 days earlier by a forceful new political head. The occasion lived up to its billing. Those who plundered a now quantified R19bn from Eskom are going to be pursued for as long as it takes. Which is bad news for a number of multinationals led by consulting group McKinsey which earlier this month repaid almost R1bn in fees it received from the parastatal. It now transpires that McKinsey’s malfeasance was merely the tip of an iceberg… – Alec Hogg
This is The Rational Perspective. I’m Alec Hogg and in this episode, Eskom seeks revenge after a R19bn plundering spree. This week’s release of financial results from South Africa’s state-owned electricity supplier Eskom, was always going to be worth watching. It marked the first public engagement of a fresh board of directors that had been installed just 69 days earlier by a forceful new political head. The occasion certainly lived up to it’s billing. Those who had plundered (now quantified) R19bn from Eskom are going to be pursued for as long as it takes and that’s bad news for a number of multinationals led by consulting group McKinsey, which earlier this month, repaid almost R1bn in fees that it had received from the parastatal. It now transpires that McKinsey’s malfeasance was merely the tip of an iceberg. Here’s Eskom’s chairman, Jabu Mabuza.
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For the period there has been irregular expenditure. Our ability, our systems, and our controls could not be relied on. This issue of irregular expenditure has been found to be incomplete. We also have been found to not be in compliance. We reported at the year end-March 2017, irregular expenditure of R3bn. Today, we are reporting irregular expenditure of R19bn. This R19bn is primarily a function of us having gone as far back as 2012. Secondly, it’s been a function of us shaking this cupboard so hard that all skeletons are coming out. We are not able to tell you today that all the skeletons have come out. We will continue to shake this cupboard. There may be more that would still have to come. Since our inception, we have seen several executives and staff members implicated in serious allegations and misconduct fall by the wayside.
Some criminal proceedings have already been initiated. We continue to pursue wrongdoing and take corrective action. I believe that our commitment to improving our governance practices has in the medium term, resulted in a greater number of issues of irregularity and impropriety coming to light.
Mabuza is a straight-talking entrepreneur who famously started his career as a taxi driver. He’s fully aware of the stakes. Having recently turned 60, his own focus has switched from accumulating to serving. Apart from chairing Eskom, he also holds the same position at Business Leadership South Africa.
We unfortunately also find ourselves in a position where we still do not know what we do not know and as we further scrape the barrel, we could find other issues that could result in further irregular expenditure reported in the 2019 Annual Financial statements due to transgressions from the past.
Mabuza’s appointment was an important part of the new broom that was wielded by Pravin Gordhan (South Africa’s corruption-fighting Minister of Public Enterprises) who returned to the national cabinet when new President Cyril Ramaphosa took office in February. Gordhan was twice dumped as Finance Minister by former President Jacob Zuma – most famously in a midnight reshuffle last March – when the last remaining bulwarks against rampant corruption were removed by the then President. Instead of leaving politics, Gordhan spent the next ten months as a backbencher, keeping up pressure on the plunderers with a starring role in numerous parliamentary inquisitions but now that he’s back in the saddle he’s certainly not holding back. Gordhan was on hand to add his own comments at the Eskom gathering.
This was one of the key institutions that was at the heart of State Capture and so each time you begin to peel this large onion and take off a layer, you can see the level of excitement it causes (of the positive kind and not-so-positive kind) and I’m sure you can decipher that for yourselves. Part of that excitement is the skeletons that he’s looking for. I thought that it was only in anatomy classes and medical schools you would find skeletons but he’s discovering skeletons here. That needs to be understood as well, as a process. It’s a process as i.e. each contract is looked at, whether service was delivered or not. As in the case of McKinsey and Trillian, very little seems to have been delivered, the pricing was at an overcharged rate, or invoices were submitted without valid services being offered or goods being offered.
The second point after that would be to say, “Did we get value for money?” if something was delivered. The third point is – if you didn’t get value for money – “How do you recover that money?” The fourth – if there’s criminality involved – then the board must take the necessary steps to go to the relevant authorities and lay the charges. The fifth…laying charges is one thing. Having people prosecuted is quite another and that’s the issue. I think in the interactions between the board, the management, and the relevant authorities needs to be taken up otherwise there’s no credibility given to the kind of work that is going on here.
The former Head of South African Revenue Services is also not in a forgiving mood. Not even to McKinsey whose new global chief Kevin Sneader – then only a week in office – made a special trip to South Africa three weeks ago to say he’s sorry.
So the board has reported today what they’ve been doing on corruption but this is probably going to go on for another 18 months or more as more effort is put into this process. Certainly, we’re going to get to a point where more charges will be laid but organisations like Trillian and others should know that the game is up. The information is out there in the public domain. Don’t they want to also go to the NPA or whomever and confess their sins, and return the money that is due to Eskom? That’s one example that McKinsey might have set in the positive sense. As I said earlier on, where criminal charges need to be laid, they must follow the process that I’ve outlined but I still want to (very naively) say that those like T-Systems, Trillian, Regiments and others should come forward voluntarily and say, “I confess. This is what I took illegitimately and I’m going to pay it back on whatever basis needs to be created.”
I’m sure the board will have a flood of requests to meet them in order to pay back the money – a favourite slogan in South Africa.
Among those assembled was the new Eskom Chief Executive, Phakamani Hadebe – the man charged with repeating processes that he applied in 2008 at the state-owned Land Bank where corruption was so rampant, it pushed the institution into bankruptcy. Softly-spoken Hadebe is a highly-respected leader. His departure last May after three years at Absa sparked the resignations of almost two dozen of his fellows. They were apparently angered because Hadebe had been overlooked for the position of Absa’s Head of Corporate and Investment banking.
If you want to have a clear understanding of Eskom, you need to split it into two sections. Then you’ll have the pre-2018 genre and the post 2018-genre. When the new board was appointed, it didn’t work on ‘businesses as usual’. The priority was there. How are we going to clean up this mess? How are we going to stabilise it? If we can do these two things, we can then begin to talk about the long-term strategy of Eskom – the future of Eskom. That demanded quite a lot because some of us had not had experience in the utility industry.
He’s talking about himself, of course. Hadebe is a financial man who hasn’t worked in the electricity sector before but that’s not worrying anyone right now. More important it seems, is retribution for that plundered billions of rands. During the press conference, Financial Mail Deputy Editor Sikonathi Mantshantsha posed the question that the whole nation has been asking.
Mr Hadebe, you and your executives have gotten back only R900m from McKinsey out of the R1.6bn that was stolen from Eskom and you are saying you are pursuing the interest only after we asked about it. Now, have you laid criminal charges of theft against McKinsey, Trillian, and against the people who actually handed over the stolen money that McKinsey has now returned which, and let us repeat again… In possession of stolen property is a crime in South Africa. Have you laid criminal charges of theft, corruption, and conspiracy to commit theft against McKinsey, Trillian, and the people that handed over the money? If not, why not?
We’ve been working very closely with SIU and NDPP. In fact, we are one team now and they’ve been following that with us. We are giving all the necessary information. We meet from time to time. I think the last meeting I had with them was about two weeks back where I was given a report about the development regarding what was happening. We’ve been happy about the progress thus far. With regard to Kusile corruption, the investigations are ongoing. We haven’t stopped the investigations. We have a company that is investigating more and more in Kusile to find out what happened. More and more, we’ll pick up those who did what was not supposed to be done. We keep our eyes open on those.
Kusile is the new power plant which is way over budget. In his closing address, Gordhan outlined another new safeguard.
A board should not be involved in procurement. None of you asked the question but that’s one of the steps that they’ve taken – that there will not be any direct interference or interventions in the procurement process. This is happening in other SOE’s as well. That’s the first of many steps that need to be taken to overcome (if you like) the sins of the past because boards and others played a key role in ensuring that ‘right people’ got the business that they should have gotten at that particular point in time. External audit processes need to be strengthened as well and I think we’re all familiar with the fact that the audit profession has its own challenges – both here in South Africa, but internationally as well. More rigorous standards need to be applied within those firms so that we can get a true reflection of what’s going on and the question has to be asked at some stage, “Where were the auditors all these years when these corrupt acts were actually going on?”
“Whom do we hold accountable for the oversights?” other than the oversight that they should have maintained on behalf of the south African public and government as well? As we go into the review of all of the contracts, that will also be a work in progress. All major contracts in Eskom over the last couple of years that have been entered into should be reviewed. Do we still need the goods or the services? Are we getting it at the right kind of price? Is there an inflation (to put it politely) number that has actually been added? If so, how are we going to re-engineer these contracts? We expect the business community with whom Eskom does business to be supportive of this process at the end of the day as well.
The good news is ‘the sheriff is back in town’ but for Eskom, there are a host of other challenges on the horizon. The biggest of these was articulated by Chairman Jabu Mabuza.
This question of a bloated workforce is one that we have tried to bring into proper context. There has been a World Bank report that addresses this, comparing us with other utilities in our peer group in the world. We have looked at the World Bank report which concluded that in terms of headcount, we should be half the size that we are. When we tried to regularise and harmonise so that we compare apples to apples, we’ve actually found that we are a bit out of kilter. We’ve also recognised that this discussion is not one that should only be confined to bargaining unit. It’s the entire review of our operating model – the kind of resources we need – so that exercise has started in earnest.
And quite an exercise it promises to be. If Eskom is overstaffed by two-thirds…to try and rectify that in a country where labour legislation is amongst the tightest in the world is going to be quite a job but at least in this endeavour, Mabuza will be able to count on political support – perhaps for the first time.
What we want is an efficiently operating Eskom. The cost structure and the cost in this organisation must be brought under some kind of control. You cannot have this imbalance between cost on the one hand and revenue on the other hand. If you look at some of the numbers… In revenue terms, there’s been a massive increase between e.g. 2007 – 2017. The revenue was R39bn in 2007. The number you saw today, was R177bn. That’s a huge increase but it’s not an increase in volume of electricity sold. It’s an increase in tariffs and the accompanying question and responsibility that the board has in the broader context of South Africa and the management has as well, is that my other colleagues in government are asking the question, “How are these tariffs going to be affordable for business?”
On the one hand in the National Development Plan, we say that we want to reduce the cost of doing business in South Africa. Electricity is a key cost in the manufacturing industry, in the mining industry, and other industries as well. How do we maintain this balance from an Eskom point of view but also from an economy point of view? I think we’re getting the same issue coming back at us from citizens in this country and households because we also say to citizens in the National Development Plan that we will reduce the cost of living in South Africa but electricity is a key household cost as well. What we are hearing today is the beginning of a process to ensure that both the external and the internal Eskom factors are going to be taken into account as we look at some of these issues.
Well, as Pravin Gordhan explained Eskom is at the centre of the State Capture disaster that has robbed South Africa of billions it can ill-afford. On the upside, it looks like the vandals who’ve trashed the place have finally been ejected. It’s going to take time and effort to clean up the mess but at least the process has finally begun. This has been The Rational Perspective. Until the next time, cheerio.
