Eskom's R20bn irregular spending does investor sentiment no favours, experts say

Eskom has said that its coal supply problems are linked to Tegeta.
Eskom has said that its coal supply problems are linked to Tegeta.

Eskom's irregular spending of almost R20bn feeds directly into negative investor sentiment and indirectly into the power utility’s need for government guarantees, Momentum Investments economist Sanisha Packirisamy told Fin24 on Monday.

"Additional guarantees add to government balance sheet risks and raise sovereign ratings pressure. It is through this conduit that pressure on the currency can arise, inflation can escalate, and growth can suffer," she said.

Fin24 reported earlier on Monday that Eskom announced at a results presentation that it suffered a net loss of R2.3bn in 2018, compared with a R0.9bn profit the previous year.

CEO Phakamani Hadebe said the poor results were compounded by allegations of corruption and mismanagement, challenges of governance and negative investor sentiment.

The power utility said its net cash from operations declined from R45.8bn to R37.6bn, as it struggled with leadership and operational challenges.

Eskom Chair Jabu Mabuza also said there had been R19.6bn in irregular expenditure since 2012, with much of the irregular expenditure being reported in 2018.

"This was a result of us shaking the cupboard so hard that so many skeletons came tumbling down," he said.

Economist Mike Schüssler told Fin24 that Eskom's irregular expenditure of R19.6bn is about similar to a 1% VAT increase. He pointed out, however, that VAT money goes to government and Eskom is paid via consumers' electricity bills.

"That said, of course we underwrite much of Eskom's loans via our taxes, so it does make it our (consumers') problem," he added.

For Schüssler the bigger issues are that one is very likely to see much higher than inflation electricity price increases for the next few years and some of this will be due to the irregular expenditure.

"SA consumers will pay more for electricity. Municipalities are already R14bn behind with payments, and that says to me that many already cannot afford electricity at these prices," said Schüssler.

"The price of power is critical to the economy in creating jobs; the ability of consumers to spend; confidence and the like. So the R20bn in irregular expenditure is a massive concern for me - and it might not be all."

He said any firm that has more than 10% of turnover in costs that need not have taken place and then increases the price of its product or service "did not have leadership or management".

"That firm only had incompetence and thieves. Simply put, the people who lead Eskom need to be brought to courts of law as they have stolen from South Africans in the form of higher prices of power and they have resulted in fewer jobs for South Africans," said Schüssler.

The Organisation Undoing Tax Abuse (OUTA) said in reaction to the latest Eskom results that it "does not see much light at the end of the tunnel".

For OUTA the irregular expenditure by Eskom means R19.6bn was spent outside the prescripts of basic public finance management legislation, not including any unauthorised or fruitless or wasteful expenditure.

“While Eskom’s team said that the irregular expenditure included unreported items from as far back as 2012 and did not necessarily mean it was wasteful expenditure, we believe that irregular expenditure on that scale points to deliberate, systemic manipulation of finances and procurement. This was not accidental,” said Ronald Chauke, OUTA’s portfolio manager for Energy.

The fact that Eskom's debt is due to expand from the current R387bn to R600bn within four years indicates to OUTA that there is borrowing for operating expenses and repaying debt.

"Although Eskom’s liquidity has improved slightly, it still faces significant risk as a going concern. This is not helped by the decreasing sales, the expense of Medupi and Kusile while generation capacity exceeds demand, and the failure to recover this capital expenditure from operating revenue," said Chauke.

“This makes us concerned about a potentially irreversible debt spiral that will ultimately need to be buttressed by taxpayers’ money in the future.”

At the same time OUTA welcomes the clean-up at Eskom headed by by new chair Jabu Mabuza and CE Phakamani Hadebe, particularly the indications that their investigations into finances are going back years.

OUTA is concerned that former Eskom CFO Anoj Singh was paid R2.5m to leave because of “discrepancies” in disciplinary action against him and that former CE Brian Molefe hadn’t repaid the R30m pension paid to him by the end of the 2017/18 financial year.

“It is critical for Eskom’s new leadership to start quantifying the cost of the corruption,” said Chauke.

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