Eskom has become the second state-owned enterprise (SOE) to be granted an exemption by finance minister Enoch Godongwana from disclosing and reporting irregular and fruitless expenditure in its annual financial statements. 

State-owned transport group Transnet was also recently granted a similar exemption from regulations under the Public Finance Management Act (PFMA) that require SOEs to disclose expenditure that does not comply with the provisions of the act.

This time, Eskom was granted an exemption from disclosing irregular and fruitless expenditure for three years as Godongwana signed a special government gazette dated 31 March 2023, the last day of the government’s financial year. 

Irregular and fruitless expenditures are often considered to have been made in vain and could have been avoided if care and duty were exercised. It is expenditure that doesn’t follow the spirit and provisions of the PFMA and can result in adverse audit findings from the Auditor-General’s office. 

The announcement comes amid continuous rolling power blackouts every day so far in 2023. 

The move by Godongwana has sparked outrage across the political and civil society spectrum, with some arguing that the exemption will be used by Eskom’s management and board to hide wrongdoing at the power utility. 

The National Treasury has moved to clarify Godongwana’s decision by saying that Eskom was granted a “partial” and not a full exemption from reporting on irregular and fruitless expenditure.  

The gazette signed by Godongwana provides Eskom with an exemption from Section 55 (2) (b) (i) of the PFMA for 2022/23 and the following two years. This section of the PFMA requires SOEs to report irregular and fruitless expenditure in both their financial statements and annual report. 

Financial statements reflect the income, cash flow, profit or loss reported by a company. Meanwhile, annual reports are wider in scope as they includes a letter from the CEO and board chair about the operational and financial situation of a company as well as the future plans and strategies of the company. In the SOE universe, the financial statements and annual report are usually published separately but at the same time. 

But with the “partial” exemption, Eskom will now be required to report and disclose sullied expenditure mainly in its annual report. 

In a statement issued on Monday, 3 April, the Treasury said Eskom will still be required to report irregular and fruitless expenditure that occurs through criminal activity, such as theft and corruption, in notes accompanying both the financial statements and annual reports. 

“Furthermore, it [Eskom] 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,” the Treasury said. 

This, the Treasury said, will ensure that “reporting transparency and accountability is not compromised and still made public as currently required.”

While other instances of irregular and fruitless expenditure not linked to corruption, such as contraventions of day-to-day and ordinary accounting rules, need only be disclosed in the annual report.

Track the days of power outages since 2015 to date, here.

In March 2022, Transnet was given a similar three-year exemption from the PFMA by Godongwana so that it does not need to include irregular expenditure in its financial statements and annual report going forward. 

Transnet CEO Portia Derby has argued that granting such exemptions would help the SOE be on a level playing field with private sector companies, which are not subjected to the PFMA. 

She said the act was also cumbersome as SOEs are required to continuously include previously identified irregular and fruitless and wasteful expenditure in latest financial statements — even if corrective and remedial actions are taken by SOEs. Derby said the PFMA also tended to cause confusion among international investors, especially the accounting treatment of financial statements.

Transnet relies on the international investment community, which provides it with funding for its operations. 

In Eskom’s case, the Treasury said publishing irregular and fruitless expenditure in the annual financial statements and annual report could result in adverse audit findings from the Auditor-General’s office, known as a qualified audit opinion. This audit opinion means that there is uncertainty in a company’s financial statements as they contain misstatements. 

Godongwana and Eskom board chair Mpho Makwana are concerned that reporting irregular and fruitless expenditure in the financial statement and annual report raises the probability of the power utility receiving an a qualified audit opinion from the Auditor-General’s office. This would make Eskom lenders nervous about the power utility’s ability to pay back the R423-billion debt on its financial books. Credit rating agencies might also be spooked and take a negative view on Eskom, and lenders would see the power utility as being at risk on defaulting on its debt repayments. This would increase Eskom’s borrowing costs especially when the power utility plans to raise more or new money from lenders to fund its operations. 

“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.”

In the SOE universe, Eskom and Transnet are big transgressors regarding irregular and fruitless and wasteful expenditure under the PFMA. 

According to Eskom’s 2022 annual report, the power utility’s irregular expenditure amounted to R67.1-billion, the vast majority of which relates to the previous years. Fruitless and wasteful expenditure amounted to R5-billion at year-end.

In Transnet’s case, the company disclosed transgressions of the PFMA that were worth R105-billion during the year ending March 2022, which included R104.3-billion of irregular expenditure, and R728-million of fruitless and wasteful expenditure. These were not new transgressions and also relate to previous years.  Some of these sullied expenditures and losses recorded by Eskom and Transnet are a direct result of criminal conduct or the modification of contracts. 

SOEs were targeted during the State Capture years, as the corruption that occurred at such entities and the money that was stolen were often classified under irregular and fruitless expenditure. The Zondo Commission of Inquiry heard evidence from investigator Paul Holden that an estimated R500-billion was lost through State Capture corruption and sullied contracts, some of which were granted by SOEs, including Eskom and Transnet. 

Read in Daily Maverick: The total(ish) cost of the Guptas’ State Capture: R49,157,323,233.68

Industry players are deeply suspicious of Godongwana’s decision to exempt Eskom from some provisions of the PFMA. Civil society group Organisation Undoing Tax Abuse (Outa) said the move by Godongwana removes transparency around the financial affairs of the power utility. Without such the transparency that is envisaged by the PFMA, it would potentially create fertile ground for corruption to fester again at Eskom, Outa said in a Tweet on Monday, 3 April. 

The Black Business Council (BBC) has also expressed outrage over the “irrational” decision by the Treasury, saying it will seek an urgent meeting with Godongwana and deputy president Paul Mashatile “to sharply raise this serious anomaly”.

“The BBC views this as an irrational decision that desperately seeks to shield the incompetent former CEO of Eskom, Mr André Marinus de Ruyter, from his lack of compliance with the PFMA. This makes a mockery of our beloved country,” the BBC said in a statement on Monday. 

Meanwhile, the EFF has slammed the Finance Minister’s decision to exempt Eskom from disclosing irregular and fruitless expenditure in its financial statements. Calling the decision “irrational” and “irresponsible”, the red berets said the move would seek to deepen corruption at the parastatal. 

“We are appalled by this desperate and sickening attempt by the governing party, the ANC to hide the rampant corruption at Eskom that has plunged our country into avoidable electricity blackouts. The Minister of Finance and the National Treasury are now operating like a mafia, casting a dark shadow over our democracy and the transparency it requires,” the party said in a statement on Sunday. 

The EFF Statement On The Decision Of The Minister Of Finance To Exempt Eskom From Disclosing Irregular Expenditure pic.twitter.com/CUyx8Hc66e

— Economic Freedom Fighters (@EFFSouthAfrica) April 2, 2023

Western Cape Premier Alan Winde on Monday, also expressed concern over the decision. He questioned the motive behind the exemption: 

“It seems that rather than stopping corruption, it is being formalised at Eskom. This is not moving us away from greylisting. This is making Eskom blackouts, financial blackouts too.”

Winde said he was considering and pursuing “all options to stop this exemption.” BM/DM

This article was amended to include the National Treasury’s comments.

This article was amended again on April 4, at 1.55pm, to reflect accurately, among others, that the irregular and fruitless expenditure of Transnet and Eskom relates to previous years.