Finance Minister Enoch Godongwana has withdrawn Eskom’s exemption from some aspects of the Public Finance Management Act (PFMA) that require the power utility to disclose irregular, fruitless, and wasteful expenditure in its annual report and financial statements.

Godongwana told MPs on Wednesday 5 April that he has decided to withdraw the exemption of Eskom from the PFMA “for now”, giving him the space to have further consultations with the Auditor-General’s office. 

Eskom was granted an exemption from disclosing irregular, fruitless, and wasteful expenditure for the next three years in its annual report and financial statements after Godongwana signed a special Government Gazette dated 31 March 2023, the last day of the government’s financial year.

Godongwana plans to issue another gazette on Thursday 6 April, confirming the withdrawal of the initial gazette that spells out Eskom’s exemption from the PFMA, which has since sparked outrage across the political and civil society spectrum.

Granting the exemption, which the Treasury described as a “partial” one, would have the effect of Eskom not having an obligation to disclose irregular, fruitless, and wasteful expenditure in both its annual report and financial statements — as required by provisions of the PFMA.

Eskom would still be required to report such expenditure and losses that occur through criminal activity, such as theft and corruption, in the financial statements. While other instances of irregular, fruitless and wasteful expenditure not linked to corruption, such as contraventions of day-to-day/ordinary accounting rules and the processes of recovering funds, would need only be disclosed in the annual report. Eskom will also still need to continue to report in accordance with International Financial Accounting Standards and the JSE Debt Listing Requirements, adding another layer of disclosure. 

The alarm caused by Godongwana’s move

Some critics have argued that the exemption will be used by Eskom’s management and board to hide wrongdoing at the utility, which was a key site of State Capture corruption. 

Read more in Daily Maverick: Our Lady of Perpetual Exemption: Eskom’s latest saga alarms already bruised South Africa 

A similar exemption was given to the state-owned transport group, Transnet, in early 2022.

Godongwana offered a mea culpa in Parliament, saying the National Treasury didn’t have “extensive consultations” with the Auditor-General’s office about giving Eskom some exemptions from the PFMA. 

“We had detailed and extensive discussions with the Auditor-General on Transnet [when granting it exemptions from the PFMA]. The consultations with the Auditor-General’s office were not as extensive in Eskom’s case. They [the Auditor-General’s office] need further details on Eskom, which is a different beast,” Godongwana said in a briefing to five parliamentary committees. 

Unlike Eskom, Transnet has gone for over 20 years without financial support from the government through bailouts or guarantees. The government has a large financial and risk exposure to Eskom, which has received bailouts and guarantees for many years. State-owned entities (SOEs) use guarantees from the government to raise debt from lenders to fund their operations. If SOEs fail to pay back the debt (the guaranteed portion), then the government will be on the hook for debt repayments. 

The exemption of Eskom from some PFMA provisions will still be on the table, with the Godongwana saying he plans to issue another gazette once his talks with the Auditor-General’s office are concluded. He plans to publish another gazette as early as the end of May when Eskom is expected to submit its next set of financial statements for auditing. 

Godongwana said if he doesn’t grant Eskom the partial exemption, the power utility would pose a “serious risk on the fiscus”. “We don’t have the intention to hide corruption at Eskom,” said Godongwana. 

Treasury officials argued in Parliament that some provisions of the PFMA are cumbersome on SOEs, and often create confusion and questions on their compliance with accepted accounting and reporting standards.  SOEs are required to continuously include previously identified irregular, fruitless, and wasteful expenditure in the latest financial statements — even if corrective and remedial actions are being taken by SOEs. In Eskom’s case, the Treasury said publishing such 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. 

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 further negative view of Eskom, and lenders would see the power utility as being at risk of defaulting on its debt obligations. This would increase Eskom’s borrowing costs when it plans to raise more or new money from lenders to fund its operations. 

Godongwana’s move to grant Eskom a partial exemption was largely aimed to assist Eskom to achieve an unqualified audit (a more favourable audit opinion) and avoid its debt being rated deeper into junk territory by credit rating agencies. 

MPs quizzed Treasury officials on whether Godongwana’s sudden withdrawal of Eskom’s exemption from the PFMA was prompted by possible behind-the-scene concerns raised by credit rating agencies about the lack of disclosure on the power utility’s financial affairs in the future. 

Duncan Pieterse, who heads the Treasury’s assets and liability management unit, said no discussions have happened with credit rating agencies in the moments leading up to Godongwana signing the gazette on Eskom. The last discussions with credit rating agencies were when the budget was tabled in February about its contents, he said.  “It was a process independently aimed at resorting Eskom’s financial sustainability,” said Pieterse, adding that reforming the power utility’s financial situation includes the government’s plan to takeover R254-billion of Eskom debt. 

Read more in Daily Maverick: Government comes to Eskom’s rescue by taking over R254bn of its debt BM/DM

Article updated to include more comments from Godongwana and Treasury officials.

This article was amended to include the National Treasury’s comments. The article was also amended to indicate that the irregular and fruitless expenditure of Transnet and Eskom relates to previous years.