Eskom’s financials reveal how deep a hole its executives have dug for the government
If you want to feel your blood boil, download Eskom’s annual financial statements, which contain the most damning audit opinion I’ve read in 17 years of analysing companies.
On page 22 you’ll find SizweNtsalubaGobodo’s qualification.
The basis for the qualification is that Eskom “did not have an adequate system for identifying and recognising all irregular expenditure and there were no satisfactory alternative procedures that we could perform to obtain reasonable assurance that all irregular expenditure had been properly recorded”, say the auditors.
Eskom recorded irregular expenditure of almost R3bn.
But there is much more. The auditors also say they have filed a number of “reportable irregularities”, a technical term for instances of likely fraud that auditors are required to report to the Independent Regulatory Board for Auditors.
The auditors point to “material misstatements” in Eskom’s own disclosures about how well it is doing in meeting targets set by the government on the economic effect of the business.
They also declare that Eskom’s procurement processes do not meet legal requirements including the stipulation that suppliers provide tax clearance certificates.
Then turn to note 48 on page 104 of the financial statements, where you will find the reportable irregularities. There are two of them, and they have to do with the amount of money that the top leadership has sucked out of the company.
First is the disputed R30m pension fund contribution that Eskom made on behalf of former CEO Brian Molefe.
The second concerns the tenders awarded to a company of which a stepdaughter of the subsequent acting CEO, Matshela Koko, was a director.
What the auditors don’t mention is another giant elephant in the room. These financial statements were prepared under the supervision of Anoj Singh as financial director. He is reported to have been flown to Dubai at the Gupta family’s expense five times in 18 months. He reportedly also personally authorised payments to several Gupta companies and associates.
Now, imagine being one of the lenders that has contributed R336.8bn of long-term debt to Eskom. This money is meant to benefit pensioners, development financiers, insurance companies and the like. Lenders often make an assessment through the “four Cs of credit risk”: character, covenants, collateral and capacity. Let’s consider each of these.
On character, Eskom fails dismally. Consider: the qualified audit, the reportable irregularities regarding alleged financial benefits for the two most recent CEOs and the deeply compromised financial director.
Covenants vary from bond issue to issue. The tougher they are, the more of a straightjacket Eskom will be in.
It turns out that shortly before releasing these financial results, Eskom asked the Development Bank of Southern Africa (DBSA) to relax a covenant that forbids Eskom from having a qualified audit opinion. The DBSA refused, so it can theoretically call back its R15bn loan to Eskom at once.
According to the financial statements, Eskom has only R20.4bn in cash on hand, to cover its operations and capital expenditure. So if the DBSA recalls its loans, the state-owned enterprise will face a major liquidity crisis, which would probably trigger other covenants, sparking a cascade that could lead to a large proportion of its debt being recalled.
Then there is the collateral. This refers to the security that lenders are able to obtain in the event of default. The government has guaranteed R218bn of Eskom’s debt, so the security consists of the whole government balance sheet. Should lenders demand immediate settlement by Eskom, the government would have to make good.
The entire borrowing requirement for the government for 2017-18 is R254.4bn, which is 5.8% of GDP. An implosion of Eskom’s balance sheet would lead to a radical deterioration of that position and escalate the financial risk of the whole of the government, potentially triggering a run on R2.7-trillion worth of government debt.
Then there is the final C: capacity. The volume of electricity produced by Eskom has been falling consistently since the 2007 peak. Gains in revenue (8% in the year) have been achieved by sharp increases in tariffs. However, Eskom’s balance sheet was hit with R18bn of losses on foreign-exchange hedges the utility holds. In terms of comprehensive income that meant the utility reported a R6.4bn bottom-line loss.
Other capacity indicators are similarly flashing red: the ratio of current assets to liabilities is 1, though that depends on Eskom actually being able to collect its receivables book of R18.4bn. So it doesn’t look like operating cash flows are going to come to its aid and it has huge cash commitments to its capital expenditure programme. This is, in short, a company whose capacity is deteriorating.
Only after the scale of the backlash from lenders became clear was Singh sent home on special leave. Koko and Molefe are also out. Those are only the first steps towards the mammoth task Eskom has to get its financial reporting, and credibility, back into shape. It has decayed to the point where it imperils the entire government.