R11 billion irregular expenditure haunts Eskom

Eskom’s finances have been qualified for the fifth year in a row due to incomplete and inaccurate disclosure of irregular expenditure.

This emerged when the office of Auditor-General Tsakani Maluleke, through audit firm SizweNtsalubaGobodo-Grant Thornton, briefed the standing committee on public accounts on the audit of the power utility’s finances for 2020-21. Auditor Siyakhula Vilakazi said they had been qualifying the entity on the same item since 2016-17.

“We found a number of those areas where there is non-compliance with the Public Finance Management Act (PFMA). When we ask for explanations from Eskom as to why those are not disclosed as irregular expenditure, most of the time there are no satisfactory answers,” Vilakazi said.

He added that where there was agreement, there was often no documentation indicating why irregular expenditure was not disclosed. “This is something that has been happening since 2016-17 up until now. We end up having a qualification paragraph … that we as auditors are not in a position to say it is accurate and complete.”

Vilakazi said Eskom often claimed that the irregular expenditure identified by the auditors was linked to legacy contracts from years ago. But, this did not convince the auditors as the audit revealed some was related to recent contracts.

“Even if there may be those relating to old contracts, it is our view because this is not reported for the first time this year. Those kinds of issues were supposed to have been addressed years back to ensure that come 2021 we do not have irregular expenditure relating to legacy contracts,” he said.

MPs also heard that Eskom management was not doing enough to address the matter as it felt it could live with qualification on PFMA non-compliance, a move that may reflect badly on lenders. “We still hope going forward this will be addressed,” Vilakazi said. The report tabled to the Scopa showed that Eskom had incurred R11 billion in irregular expenditure.

The breakdown of the irregular expenditure was as follows: R2bn in use of sole source; R1.3bn incorrect classification as emergency; R3.9bn tender processes not adhered to and insufficient delegation of authority; R1.3bn in flouting the Preferential Procurement Act; R1.5bn in breach of more than one commercial requirement. The report also showed that the irregular expenditure was restated by an increase of R3bn.

“This was the result of a fuel oil contract that was inappropriately procured through the emergency procurement process in the prior year, but was only confirmed as irregular expenditure in the current year,” it said, adding that R1.2 billion had been incurred on the contract in 2020-21.

Vilakazi noted that there had been a reduction in the irregular expenditure reported during the financial year under review. “The disclosed irregular expenditure is not complete and accurate, as described on the basis of qualified opinion,” he said. Vilakazi said the reduction could not be proven as there was uncertainty that the recorded amount was correct after a number of other irregular expenditures were identified and not included.

“The statement that there is reduction will be questionable given that we don’t have enough information if R11bn is complete or not.” Vilakazi told MPs that the audit had made other findings in addition to non-compliance with PFMA. These included material misstatements in the submitted financial statements, expenditure management, procurement and contract management, consequence management and revenue generation.

Speaking on the financial misstatement, Vilakazi said the main areas were around inventory. “When financial statements were submitted to us at the end of May, they were working to ensure that disclosure and figures were accurate. That took very long to get us to a correct figure. We only managed to do that around July.”

On revenue management, Eskom referred to recovering debts from municipalities and big corporations. “When you look at households' accounts, you find there is no evidence of warning letters or notification sent to customers to please pay up. Where customers are disconnected, when we ask for evidence to find s/he was really disconnected, in many instances we did not find that.”

Vilakazi said there was quite a high percentage where they did find effective or appropriate steps taken to recover monies. “Here we talk about money not recovered from customers, money that can be used to kind of address some of the challenges they are facing as far as the performance of power stations is concerned.”

He said the unavailability of records hampered verifying that processes were being followed, and coming up with action plans to address problems. “This record-keeping is an issue to be addressed properly before one can say how we prevent and start addressing issues around irregular expenditure.”