Eskom exempted from declaring fruitless spending

Eskom has been exempted from disclosing irregular and fruitless expenditure in its annual financial statements in a special government gazette issued by Minister of Finance Enoch Godongwana on Friday.

The gazette, which was published on the last day of the financial year, provides Eskom with an exemption from Section 55 (2) (b) (i) of the Public Finance Management Act (PFMA) for 2022/23 and the following two years.

The applicable section of the Act requires that state entities provide particulars in their annual financial statements and annual reports of "any material losses through criminal conduct and any irregular expenditure and fruitless and wasteful expenditure that occurred during the financial year."

The gazette also exempts Eskom from a Treasury regulation that deals with the same requirement.

Treasury said on Sunday that it had issued the gazette in response to a letter from Eskom chairperson Mpho Makwana. Eskom would still be required to disclose all information required by IFRS and general debt listing requirements. In granting the exemption, Godongwana will also set conditions, which will be laid out in a letter to Makwana. The conditions will include:

All irregular, fruitless, and wasteful expenditure must still be detailed in the Eskom annual report;

Irregular expenditure that occurs through criminal activity or losses must still be disclosed in the financial statements and the annual report.

While the measure has provoked suspicion and outrage, with the EFF issuing a statement condemning it, the Treasury said it would issue a technical explanation soon to explain the rationale behind the measure, which was not an attempt to evade transparency but arose from technical accounting issues brought about the PFMA.

The terms "irregular", "wasteful" and "fruitless" expenditure are not accounting terms. While some irregular expenditure arises from corruption, some arises from contraventions of accounting rules. But because these are key concepts in the PFMA, the Auditor-General considers them grounds to qualify audit findings. Qualified audit findings, in turn, pose a threat to debt covenants between lenders and state-owned entities.

The exemption occurs in a context where both the Eskom board and the Treasury are attempting to restore Eskom's balance sheet to health through debt relief. This will enable Eskom to borrow again to invest, particularly in new transmission infrastructure.-Fin24