After more than a decade of capture, Eskom may finally succeed in breaking the public purse

December 14th, 2018

Load shedding. That’s the stark public reminder of the dire straights Eskom finds itself in. Whether the recent rolling power outages were because of unexpected breakdowns, or were the stick Eskom used to hit home the need for a government bailout, depends on who is asked. But that in itself raises deep concerns over the series of contending interests at play. And if that’s the case, South Africa is in a whole lot more trouble than previously dreaded. Eskom may yet break the public purse.

In July 2018 the ANC mooted the idea of the state-owned asset manager of R2-trillion of government workers pensions and social savings, the Public Investment Corporation (PIC), taking over R120-billion of Eskom debt as equity to ease the debt burden. According to ANC Treasurer Paul Mashatile it was part of discussions to get the economy right for growth and job creation.

If you look at Eskom the debt is seriously high,” Mashatile said.

So we need to look at other approaches, including possibility of changing some of the loans in Eskom into equity, particularly by the PIC. Those are the discussions happening (at Luthuli House).”

But touching the pensions of the 1.3-million public servants turned out a step too far, and that idea was nixed. What remains standing is the other leg of that notion – breaking up the power utility into its generation, transmission and distribution divisions. It’s on public record the functional separation is complete, and the power utility now is looking into the legal separation.

In late November 2018 news broke of Eskom telling an investor road show in London it was looking at government taking R100-billion off its debt book. That would help ease the debt burden Eskom has drawn against R350-billion of government guarantees. But fiscally neutral – the mantra of government in these cash-strapped times – it is not.

The implications of any Eskom debt swap with government are tremendous for a stressed public purse. This would up the pressure on an already concerning debt to gross domestic product (GDP) level that is expected to reach 59.6% by 2023, limiting fiscal policy for economic growth and making government borrowing almost unviable.

This would come at a time when at least three successive years of below target tax collection left a R48.2-billion hole for the 2018/19 financial year. And the R20-billion of the anticipated R23-billion from the value added tax (VAT) hike in April is not ending up in the national coffers, but is used to settle the tax authority’s outstanding refund obligations.

On 6 December 2018 at a briefing at Eskom’s Megawatt Park head office – a week earlier it was the interim results that forecast a R11.2-billion loss for 2018, up from R2.3-billion a year before – Public Enterprises Minister Pravin Gordhan was shy about details.

Debt restructuring is being discussed,” he nevertheless confirmed.

Some time earlier in the new year government as a whole will give you (South Africans) some idea where we are going, with the road map as well.”

That’s important as Eskom is inextricably woven into the political fabric of South Africa. The vortex of political interests, money and governance comes sharply to the fore at local government. Municipal debt to Eskom stood at R17-billion as of November 2018, yet the power utility is asked by government not to pursue cut-offs or legal cases for debt collection. A plan to resolve the power snarlup at local level has been in the making since early 2018, but Cabinet has at least twice delayed decision on the integrated electricity reticulation plan. It is understood to be on the Cabinet agenda now for early in 2019.

Early 2019 is a heady mix of politics and governance: the governing party’s January 8 statement that traditionally sets out the ANC’s priorities for the year is followed by the launch of the 2019 election manifesto the governing party hopes will return it to power, its party lekgotla and ultimately the governing ANC Cabinet lekgotla that leads through to the State of the Nation Address (SONA) in early February and the Budget at the end of that month.

But that something already is under way emerged hours after the Megawatt Park briefing in a gently phrased statement from the public enterprises ministry. Gordhan and Finance Minister Tito Mboweni had met the Banking Association of South Africa (BASA), the bank CEOs on association boards, insurers and asset managers.

The engagement was constructive…” said the statement.

Technical teams from government and banks will continue to work with BASA to develop the most appropriate mechanisms for the short- to medium-term borrowing requirements of SOEs.”

And government could sell its Telkom shares to raise up to R14-billion for Eskom in that fiscally neutral Holy Grail. Asset sales before benefited Eskom, when in 2015 government sold its Vodacom shares for a R23-billion bailout of the power utility.

The sale of the Telkom shares was first mooted to bail out SAA in August 2017 in a Cabinet memo leakedby DA MP Alf Lees. Perhaps it was never implemented because of the political embarrassment of having an opposition parliamentarian release the information. But shedding that asset would end an average of R800-million in annual dividends.

So an Eskom bailout could involve the banks, an asset sale alongside those investors canvassed on the overseas road show. But there are no easy options given the state of South Africa’s parlous public finances, stubborn unemployment and inequality – with the campaigning for the crucial 2019 elections raising expectations amid a potentially unpalatable political price.

It’s a tough decision. And it’s not clear the appetite is there. Or as Intellidex analyst Peter Attard Montalto argued in a recent briefing on Eskom:

Overall we do not believe there is a politically feasible plan at this stage and that whilst panic over Eskom is building in the business community and within government that is not the case in the ANC more broadly and particularly the NEC (National Executive Committee) – a precondition to political capital being deployed and a ‘real’ plan being possible.”

State Capture was much mentioned at Gordhan’s briefing alongside Eskom board chairperson Jabu Mabuza. The damage wrought by State Capture is already outlined in the parliamentary inquiry into State Capture at Eskom whose report sharply criticises former ministers Lynne Brown and Malusi Gigaba for failing their responsibilities, alongside various board directors and executives that bend rules and regulations to use public resources to benefit private interests.

But Eskom was also the site of State Capture 1.0, or the capture of a government asset by the governing ANC as far back as 2006 as the Mail & Guardian reported then.

Chancellor House, the ANC investment arm, received around R50-million as 25% black empowerment partner with Hitachi’s subsidiary, Hitachi Power Africa, until that relationship ended in 2014. A year later, in 2015, the company that had won contracts worth R38-billion for the boilers at South Africa’s new coal power stations, Medupi and Kusile, was find almost $2-million for contravening anti-corruption rules after an investigation by the United States Securities and Exchange Commission (SEC).

Coincidentally, both Medupi and Kusile are over budget and overdue since construction started respectively in 2007 and 2008. Medupi was meant to be completed in 2012 at a cost of R56-billion, but is now estimated to stand at over R200-billion and still not done amid annual cost overruns. Ditto, Kusile.

In 2013 it emerged the welding in the boilers at Medupi was shoddy – and had to be redone. Forward to December 2018 when Gordhan told journalists of shoddy work and substandard repairs.

Not enough money was put into the so-called big repairs themselves,” said the minister, adding that some of that was caused by lack of technical skills and also lack of consequences for those supervising “if contractors don’t do what they were supposed to do”.

That finally put to rest earlier Eskom claims that wet coal was to blame for the load shedding even as the National Union of Mineworkers (NUM) set out a series of supply breakdowns, including Kusile’s unit 6 that was out of action due to “a boiler tube leak…”

What’s not clear is what happened to that Tetris-like maintenance scheduling that one-time CEO Brian Molefe in 2015 enthused in September 2015 as having been the key to ending load shedding.

So when Mabuza says all in South Africa are responsible for Eskom’s woes – “either through our people or our government… but these are problems that we have all caused” – and must take the pain for its rehabilitation, he displayed the tone deafness of so many of his colleagues in the private sector he was seconded from.

The Eskom debacle has seen trade unions National Union of Metal workers Union of South Africa (Numsa) and NUM unite across federation lines, and not only over Eskom management’s ham-fisted 0% wage offer earlier in 2018. Both oppose job cuts – 16,000 are understood to be on the chopping block in the yet-to-be finalised road map – and an independent power producers’ (IPP) programme and firmly put the blame on executives and board directors.

A decade of annual tariff hikes, well above inflation, have left many working class and middle class consumers cutting down on power consumption to cut usage to available cash amid rising prices from petrol to food.

Gordhan’s undertaking that there would be no load shedding for the month from mid-December and cancelling Eskom executives’ festive season holiday may send a PR signal of a power utility at work to keep the lights on, but it does not address the underlying fundamentals.

There is a lot of noise around Eskom. And with months before the 2019 elections that is not a good combination

 

Nedbank repeatedly breaks antiterrorism laws in Mozambique, but who calls it out?

December 11th, 2018

nedbank

Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not represent the views of SME Fusion this is written by Ilham Rawoot

Nedbank was fined twice in 2018 by the Central Bank of Mozambique for violating laws against financial terrorism, but there appears to be a lack of accountability for South African entities conducting illegal activities outside the country.

South African corporations and financial institutions have a questionable ethical record in the rest of Africa.

Telecommunications company MTN has been fined by the governments of Uganda, Rwandaand twiceNigeriain the past three years alone.

In 2016,Standard Bank’s Angolan unitwas fined $800 (R11,000 on 28 November) by the Central bank of Angola for allegedly violating foreign exchange laws.

In 2018 KPMG South Africawas fined $100,000 (R1.37-million on 28 November) by the US Securities Exchange for “improper professional conduct” when it placed great reliance on an audit done by KPMG Zimbabwe, as part of KPMG SA’s own audit of a Canadian firm operating in Zimbabwe in 2014. KPMG SA knew that its Zimbabwean counterpart was not registered with the Public Company Accounting Oversight Board (PCAOB), and hence was not authorised to perform the audit.

One business, Nedbank, has been behaving particularly badly in 2018, and the ease with which it has got away with it is an example of the lack of accountability that South African entities face for illegal activities outside the country. In 2018 alone, Nedbank was fined twice by the Central Bank of Mozambique for violating laws against financial terrorism.

In April, and most recently at the end of October, the Mozambican governor of the central bank, Rogerio Zandamela, did what he had been threatening for a long time — to name and shame banks violating anti-terrorism laws. Nedbank, through its Mozambican entity, Banco Unico, received the largest fines both times.

Nedbank is the largest shareholder in Banco Unico, owning 50% plus one share. Information from official releases from the Central Bank show that Banco Unico was fined 32-million Mozambican meticais (R7,644,939) in April for “breaching the Law on Prevention and Combating Money Laundering and Financing of Terrorism”, and two further fines of 400,000 meticais (R95,561) each for “breaching the Law on Credit Institutions and Financial Companies” in the 2015-2016 financial year.

On 23 October, Nedbank was fined 36.8-million meticais (R 8,791,680), again for breaking the same anti-terrorism laws in the year 2016-2017, through “non-establishment of the client’s risk profile”, “lack of special control of certain transactions”, and the rather grave violation of “no immediate reporting of suspicious transactions”.

This transgression means that the Mozambican government cannot timeously investigate potential money laundering, illicit financial flows or cases of fraud.

While Nedbank claims to have informed all its stakeholders about the fine, no Stock Exchange News Service (SENS) announcement appears to have been released, itself a transgression of a basic regulatory requirement.

That Nedbank is the entity receiving these fines is somewhat ironic, since the bank prides itself on the ethics and social consciousness of its operations. In fact, it has an entire committee dedicated to this — the Group Transformation, Social & Ethics Committee (GTSEC). While the amounts are merely pocket-change for Nedbank, they highlight the questions: How were these transgressions not detected by this committee twice in one year? And if they were not detected, how many fines could they have received from the Mozambican government in the past, and what was the gravity of the legal violations?

It is unlikely that these were the first fines that Nedbank received for these breaches, since the governor made the information public out of frustration at a problem that had been going on for too long, says Thomas Selemane, Mozambican economist and independent consultant. He says that “banks have been receiving fines for these anti-terrorism violations for at least 20 years, and the only thing novel about these fines is that the governor took them public.”

After sending detailed questions to Nedbank regarding the fines, its media department replied with the vague non-response to whether it admits to committing these violations, why they were not picked up by the GTSEC, if there will be any repercussions for those responsible, if the board of executives had been made aware and if a SENS announcement had been released.

“Nedbank is committed to good corporate governance and is earnestly and seriously engaged with Banco Unico to improve operational controls where necessary,” the bank responded.

However, in this case, Nedbank clearly did not meet the four basic pillars of good corporate governance — transparency, fairness, accountability and responsibility.

When contacted directly, company secretary Thabani Jali said that he had nothing to add.

This writer also contacted other stakeholders to find out not only if they were made aware of it, but if there were any repercussions for, or admonishment of Nedbank.

Old Mutual, a 19% shareholder, declined to answer questions sent to it about whether it was informed, insisting that it was not their place to respond, but rather Nedbank’s.

The Johannesburg Stock Exchange (JSE) responded that it is not in its mandate to oversee the actions of South African banks internationally. It was not made aware of the fines and says the listings requirements do not require companies to disclose fines.

However, the response also said “the Listing Requirements do however require companies to disclose information that is regarded as price sensitive as defined in terms of the Listings Requirements. In this regard, price sensitive information is defined as ‘unpublished information that is specific or precise, which if it were made public, would have a material effect on the price of the issuer’s securities’ ”.

It appears that if the JSE made the decision that these fines were not “material”, it is likely that violations such as these in other African countries are not important enough for the JSE to invoke the company’s obligation to report.

When the South African Reserve Bank (SARB), was asked about whether Nedbank had been reprimanded or castigated, it responded that it has ongoing interactions with senior management at Nedbank Group level to resolve these issues, and engages with the Central Bank of Mozambique.

Regarding repercussions for Nedbank, it said:

“This forms part of the SARB’s ongoing supervisory interactions with the Nedbank Group and our monitoring of the group from a consolidated and cross-border supervision perspective.”

SARB would not disclose if Nedbank had received previous fines from the Central Bank of Mozambique.

The Department of Trade and Industry said the DTI “does not play any role”.

These responses raise a question: WHO is responsible for holding South African banks and companies to account for their actions internationally, and particularly in Africa, where so many major corporations do business and have entities?

There appear to be no local laws governing or monitoring their questionable activities elsewhere, and even if Treasury, the JSE and government are made aware, there are no repercussions for the company, or at least none that the public is made aware of. While authorities such as the SARB “engage” with Nedbank, the public and shareholders do not know what this entails, and if it has any productive outcome. DM

 

lham Rawoot works with JA!/ Friends of the Mozambique, where she coordinates the campaign against gas extraction in Mozambique. She was previously the co-ordinator for the Southern Africa Campaign to Dismantle Corporate Power, and also works as a freelance journalist, having written for Al Jazeera, the Mail and Guardian and City Press. She is based in Cape Town.