Eskom is in huge trouble

The Auditor General of South Africa (AGSA) has given power utility Eskom another qualified audit for the 2023/24 financial year, raising the alarm over the group’s financial viability amid rising municipal debt.

While the AGSA said that the company remains a going concern, this is purely dependent on continued government debt support and the utility’s ability to resolve its most pressing financial crisis: municipal debt.

Presenting the audit outcomes on Wednesday, the AGSA noted that Eskom’s overall audit position had deteriorated in 2023/24 compared to the year prior, with an improvement in only one area and a decline in three others.

The improved area was generation and improved plant operations. However, the audit reported noted that this was off a low base, and still not in line with the expectations set by government in the National Development Plan.

More concerning, however, were the declines in distribution, finances and oversight.

The AGSA said that Eskom continued to submit statements for audit that contained material misstatements. It identified significant control deficiencies, a breakdown of controls related to compliance with laws and regulations, and inadequate action taken against those who contravened them.

“Failure to implement consequence management encourages a culture where the disregard for legislation, policies and procedures thrives.

“The commitments made over the years by those charged with governance to address these matters have not materialised due to a lack of accountability at various levels in the organisation, inadequate oversight and monitoring processes and ineffective consequence management,” it said.

The AGSA said that part of its mandate is determining whether it is appropriate for auditees to use the going concern basis of accounting when preparing financial statements and to flag material risks to their ability to continue as a going concern.

While Eskom is a going concern in relation to its 2023/24 financial statements, the auditor said that the utility’s various dependencies and internal and external uncertainties could impact this status going forward.

The group has reported operating losses of R57 billion, and its current liabilities exceed its assets by R50 billion, it said.

The utility said it hopes to return to profitability in 2025.

The utility remains highly dependent on the national government for support on its debt-reliant liquidity position, and there is no certainty on price rulings from energy regulator Nersa, nor on what will be done about the mountain of municipal debt that is accruing.

Meanwhile, the group also has to contend with significant electricity losses from theft, illegal connections, vandalism, ghost vending and illicit tokes, which ramp up Eskom’s cost to produce electricity.

“The going concern assumption remains fully dependent on the ongoing positive and incremental impact of the generation recovery programme,” the AGSA said.

Hiking prices won’t help

According to the AGSA, Eskom has very limited options in addressing its financial challenges. It has to cut cost and raise more revenue — but both paths are not looking good for the utility.

Eskom has targetted cost savings of around R10 billion over the next two years (R5 billion each in 2024/25 and 2025/26).

However, the AGSA said that current and historical audits have found that Eskom simply does not have the appropriate systems, processes and controls to quantify irregular, fruitless and wasteful expenditure, nor recover the losses due to criminal conduct.

“Therefore, the targeted savings will not be impactful or sustainable for as long as there is still a culture of non-compliance and continued struggle with (this spending),” it said.

The alternative — to increase revenue through a path to cost-reflective tariffs —is the next option. But, again, the AGSA said that this path is unlikely to work without a massive policy shift and significant interventions. — Business Tech

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