tag:theconversation.com,2011:/global/topics/lynne-browne-38769/articlesLynne Browne – The Conversation2017-05-29T13:59:53Ztag:theconversation.com,2011:article/784322017-05-29T13:59:53Z2017-05-29T13:59:53ZEskom CEO saga highlights massive systems failure in South Africa<figure><img src="https://images.theconversation.com/files/171320/original/file-20170529-25236-19l94b5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Brian Molefe's return as CEO at South Africa's power utility, Eskom, has caused controversy.</span> <span class="attribution"><span class="source">Alon Skuy/The Times</span></span></figcaption></figure><p>South Africa has, in the past, been credited with taking on innovative corporate governance <a href="https://www.ft.com/content/bb4557d2-5b75-11e4-b68a-00144feab7de">standards</a> and integrated reporting. So it’s particularly depressing to see the spectacle around the country’s largest state-owned enterprise, its power utility Eskom.</p>
<p>The <a href="http://www.timeslive.co.za/politics/2017/05/12/Molefe-didnt-resign%E2%80%9A-says-Eskom.-He-retired">drama</a> has revolved around Eskom’s CEO Brian Molefe, who has returned to the job just months after quitting. The contradictory explanations of his return point to huge flaws in the accountability systems of the country’s state owned enterprises. It’s clear that Eskom flouted many basic <a href="https://www.icaew.com/en/technical/corporate-governance/overview/does-corporate-governance-matter">principles</a> of sound corporate governance.</p>
<p>This poses enormous risks as these systems are imperative for ensuring an ethical public service and society.</p>
<p>When Molefe announced his <a href="https://www.businesslive.co.za/bd/national/2017-05-12-brian-molefe-did-not-resign-that-is-why-we-can-reinstate-him-eskoms-board-says/">departure</a> from Eskom, he specifically connected his leaving to “corporate governance”; he was certainly accurate in that. On top of the issue of his claimed connections to the <a href="http://www.bbc.com/news/world-africa-22513410">Gupta family</a>, the <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">allegations</a> that spurred his exit spoke to breakdowns in information sharing and decision making that were made to benefit only a few.</p>
<p>The National Executive Committee of the ruling party, the ANC, has since ordered that Molefe’s return to Eskom should be reversed, a decision seen to be going against the wishes of its President Jacob Zuma.</p>
<p>There are many flaws that need to be examined in this saga, but let me flag three foundational faults in corporate governance. Firstly, there were serious lapses around Eskom’s senior executive remuneration processes. Secondly, it looks like the basic rules of consultation around critical decision making were flouted. And thirdly, creating a <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">false dilemma</a> between handing Molefe a R30 million payout or allowing him to return to his Eskom job points to a simple disregard of the rules.</p>
<h2>Process failures</h2>
<p><strong>The compensation question:</strong> the question of fair and justified compensation for senior executives looms large in the Eskom saga. There’s still no clarity over why Molefe left Eskom in December last year: whether he “retired” or “resigned” remains a contested point. More recently, South Africans were informed that he was, in fact, on <a href="https://mg.co.za/article/2017-05-22-now-eskoms-molefe-was-on-unpaid-leave">unpaid leave</a> in the months between his departure in December and his return in early May. </p>
<p>Whatever the reason for his departure, Eskom’s board chose to award Molefe <a href="http://www.iol.co.za/news/politics/why-did-brian-molefe-get-a-r30m-golden-handshake-8690587">R30 million</a>. This raises the first potential failure in the accountability system: the responsibility of board members to decide fair and justified compensation for senior executives. </p>
<p>This is true regardless of whether they retire or resign or go on unpaid leave. Each is governed by sets of rules to guide a board’s decision-making. Leaving aside the obvious contradiction that anyone would be paid R30 million for being on unpaid leave, none of the normal remuneration rules seem to have been followed. But without a basic understanding of the terms of his departure, a proper analysis is almost impossible. This failure of transparency in the process makes justifying the award on the grounds that it was in the interests of Eskom’s stakeholders even less likely.</p>
<p><strong>Flouting consultation processes:</strong> The second failure in the governance system is a lack of clarity around the <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">role</a> of the Public Enterprises Minister, Lynne Brown. Her decision to contradict the board and deny the R30 million pay-out triggered an evaluation of what to do about Molefe’s connection to Eskom. In her statement, Brown highlighted the fact that she hadn’t been consulted and referred to decisions that appeared to have been made without the required approvals. </p>
<p>An effective corporate governance system has clearly delineated processes for both consultation and decision making. </p>
<p>In this case, it seems that steps in that process were skipped over, and key people weren’t consulted, leading to an unsupported outcome.</p>
<p><strong>Creating a false dilemma:</strong> Brown claimed that there were only two options open to her – to pay Molefe R30 million or reinstate him. But by doing so she created a false dilemma that stood to benefit the person who stepped down, rather than the company and its stakeholders. In the process, the board and the minister ignored multiple options that would have likely been better. </p>
<p>For example, if neither the board nor Brown could agree on severance compensation, Molefe could be paid his old salary in the interim, while final negotiations took place (there is a paid leave option in his contract). This type of bridging arrangement would create fairness for him while avoiding disruption to Eskom’s operations. </p>
<h2>A question of ethics</h2>
<p>A fundamental principle of good governance, laid out in <a href="http://www.iodsa.co.za/?page=KingIV">King IV</a> (a set of guidelines for strong corporate governance which companies/directors should comply with and explain their choices), that applies here is that: </p>
<blockquote>
<p>governing bod[ies] should govern the ethics of the organisation in a way that supports the establishment of an ethical culture. </p>
</blockquote>
<p>Regardless of political ideology, it is difficult to see that Molefe’s return to Eskom can be said to be in the best interests of creating an ethical culture. </p>
<p>Strong accountability systems create ethical cultures because everyone knows the rules, and believes the rules are being followed. As a result, people trust that when things don’t go their way, there’s a clear explanation. While they may not agree with choices, they are confident that a decision was made after a known process was followed. </p>
<p>Strong accountability systems can certainly privilege some people over others in different circumstances, but they clarify what gets rewarded and what gets punished. This leads to an ethical culture because there’s a common understanding and, crucially, some levels of shared purpose.</p>
<h2>Not just about following the rules</h2>
<p>Good accountability systems are about more than creating and following rules; while compliance is an aspect of these systems, it is really the bare minimum. They create and support a sense of shared destination, bolstered by agreed processes. </p>
<p>Recently, leaders have too often relied on their legal “right” to do something, ignoring their ethical obligation to the greater good: the good of their company, their portfolio, their electorate, their country.</p>
<p>While the legal grounds for better governance are worth debating and enforcing, South Africans must never neglect the profound ethical impact of failed accountability systems. Eskom’s current situation is about more than fulfilling its legal obligations. It’s a warning that South Africa’s ethical culture might slip through our hands. Let’s hold on tight.</p><img src="https://counter.theconversation.com/content/78432/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy London works for the Allan Gray Centre for Values Based Leadership which receives funding from the Allan Gray Orbis Foundation. The Centre is a part of the Graduate School of Business at the University of Cape Town. </span></em></p>The drama caused by the return of Brain Molefe into South Africa’s power utility, Eskom, signals a failure of accountability and corporate governance within the public sector.Timothy London, Senior Lecturer, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/776422017-05-21T10:43:06Z2017-05-21T10:43:06ZSouth Africa’s power utility is hoping for a tariff hike. It may not get it<figure><img src="https://images.theconversation.com/files/170154/original/file-20170519-12217-qhgoc9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's power utility, Eskom, desperately needs a tariff hike.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>South Africa’s National Energy Regulator (NERSA) is soon to decide if the country’s power utility, Eskom, should be granted an <a href="https://www.moneyweb.co.za/news/south-africa/dear-nersa-we-cannot-comply-eskom/">exemption</a> from a long list of regulatory reporting requirements when it submits a new tariff application next month. </p>
<p>The reporting requirements centre around thousands of detailed cost and sales items making up Eskom’s financial and regulatory accounts - information that’s meant to be used by the regulator to determine electricity tariffs. Some of the reporting requirements date back to 2008 and are general to the regulated energy sector. Other information requirements were only recently put into place on the back of concerns that tariff hikes were being made without full disclosure.</p>
<p>Eskom has asked the regulator to waive some of the requirements for its 2018/19 tariff application. It argues that its internal reporting systems aren’t tailored to the format required by the regulator, and that they need to be revised. But that will take time, and Eskom’s only chance for lodging a tariff application is for NERSA to provide it with the exemption. </p>
<p>In years past this would have gone unnoticed. For better or worse, these types of exemptions are often granted to public enterprises. But with legal challenges to regulatory decisions growing in frequency in South Africa, regulators are gradually understanding that the administrative actions they take could be subject to judicial review. </p>
<p>This puts the regulator in a difficult situation. Tariffs need to be set for next year, and time is running out given the lengthy processes involved. But if it allows Eskom to cut corners, it may find itself back in court arguing the legality of its decision. </p>
<h2>In the balance</h2>
<p>A great deal hangs on a case currently before the Supreme Court of Appeal. </p>
<p>The court is to review an August 2016 High Court ruling that found the energy regulator had acted in an “irrational and unlawful” way in deciding Eskom’s tariffs. The court’s ruling was in part based on the fact that Eskom had not complied with certain reporting requirements. </p>
<p>If the High Court’s decision is overturned on appeal and NERSA’s decision making process found lawful, Eskom’s request to forgo reporting requirements might become a moot point. The regulator would be likely to adopt a pragmatic approach and grant Eskom its wish by standing down some of the reporting requirements. </p>
<p>But if the High Court’s judgement is upheld, NERSA, and other South African regulators, will have to pay greater attention to the regulatory rules they have crafted. </p>
<p>This would be a positive step forward. But it does put NERSA in a difficult predicament in deciding whether to condone Eskom’s application to forego certain reporting requirements. </p>
<h2>Between a rock and a hard place</h2>
<p>Waiving existing reporting requirements would amount to an admission that they are impractical to administer, or that they weren’t needed in the first place. That might be difficult for the regulator to swallow given that the reporting requirements are the outcome of years of work.</p>
<p>But more importantly, in applying the regulatory methodology, NERSA is to assess the request to waive information requirements against a range of complex factors such as the impact on business sustainability, tariff stability, efficiency incentives, and the tariff making process. </p>
<p>The regulatory rules also call on NERSA to consider prejudice suffered by Eskom, the public and the economy in waiving the requirements. </p>
<p>On previous occasions it may have been sufficient for the regulator to note that it had considered all these issues, and then move on with its decision. But this too was a point highlighted by the High Court last August in which NERSA was found to have given insufficient attention to similar criteria when making a tariff decision.</p>
<p>And while Eskom’s application covers slightly less than five pages, it cites relevant documents dating back to 2008, covering hundreds of pages of technical material that would also presumably need to be considered. By any standard, this suggests a considerable amount of time and effort to properly support a determination in Eskom’s favour. Anything less would seem destined for the courts.</p>
<p>On the other hand, if the regulator stands by its reporting requirements, Eskom will have to run the gauntlet in submitting its next tariff application. Having just listed some 17 reporting areas that it’s unable to provide to the regulator puts Eskom in an unenviable position, to say the least. </p>
<p>In hindsight, perhaps Eskom should have challenged the reporting requirements through the courts early on. It may now be too late for this. As things stand, Eskom’s tariff application will almost certainly be dead on arrival. </p>
<h2>What are the implications?</h2>
<p>If Eskom’s tariff application is stalled the best guess is that regulated tariffs would remain at current levels – at least through 2018/19. </p>
<p>With flat electricity sales volumes, increasing costs, and no increase in tariffs in sight, the <a href="https://theconversation.com/why-south-africas-power-utility-isnt-in-great-financial-shape-68441">financial implications</a> must be of concern to Eskom. </p>
<p>Against this background, <a href="http://ewn.co.za/2017/05/13/brown-confident-eskom-s-financially-stable">recent comments</a> by Lynne Brown, the Minister for Public Enterprise, were surprisingly optimistic. Her view (as reported) is that credit rating agencies won’t be able to fault Eskom’s financial stability as they engage in another series of rating reviews. </p>
<p>But with no tariff increases in sight, Eskom’s financial stability will rest on its ability to reduce costs. This won’t be easy to achieve. </p>
<p>Minister Brown’s second surprising insight was that Eskom had assured her that it would reduce “its reliance on state guarantees by R100 billion within the next five years.” </p>
<p>The hard reality is that Eskom may require additional financial support if it’s going to last long enough for South Africans to find out.</p><img src="https://counter.theconversation.com/content/77642/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Labson has previously served as an external regulatory adviser to Eskom Holdings (SOC) Ltd. He has not received any payment or funding for writing this article, and the views stated here are his alone. . </span></em></p>South Africa’s power utility Eskom wants regulatory reporting requirements waived. The country’s regulator faces possible court action if it agrees.Stephen Labson, Director, Trans African Consulting Group, and Senior Research Fellow University of Johannsesburg, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/778042017-05-17T09:29:20Z2017-05-17T09:29:20ZThe CEO of South Africa’s power utility is back. Why the move can’t be justified<figure><img src="https://images.theconversation.com/files/169758/original/file-20170517-24341-jsgsbl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Eskom CEO Brian Molefe addressing the media.</span> <span class="attribution"><span class="source">Alon Skuy/The Times</span></span></figcaption></figure><p>The <a href="http://citizen.co.za/news/news-national/1515927/anc-wants-govt-deal-brian-molefes-return-eskom/">return of Brian Molefe</a> as CEO of South Africa’s largest state owned enterprise, the power utility Eskom, has caused <a href="http://www.timeslive.co.za/politics/2017/05/17/ANC-demands-that-Molefe-be-axed-from-Eskom1">outrage</a> due to the circumstances under which he resigned in December last year.</p>
<p>Molefe left the power utility after a Public Protector’s inquiry alleged that he may have been involved in nefarious activities. The <a href="http://www.ujuh.co.za/state-of-capture-public-protectors-report/">State of Capture</a> report by the then Public Protector, Thuli Madonsela, showed extensive and irregular communication between Molefe and the <a href="http://www.bbc.com/news/world-africa-22513410">Guptas</a>, a family with close ties to President Jacob Zuma. </p>
<p>At the time Molefe’s backers – including board chairperson Ben Ngubane – <a href="http://www.fin24.com/Economy/Eskom/eskom-regrets-molefes-exit-says-its-a-great-loss-20161111">glorified</a> him. They attributed a turnaround in Eskom’s fortunes as a function of the CEO’s 18-month tenure. His supporters branded him as a <a href="http://www.fin24.com/Economy/Eskom/eskom-regrets-molefes-exit-says-its-a-great-loss-20161111">messiah</a> whose departure would have negative consequences for the power utility. </p>
<p>Similar sentiments were expressed more recently by <a href="http://ewn.co.za/2017/05/16/ngubane-s-comes-to-molefe-s-defence">Ngubane</a> and Public Enterprises Minister <a href="http://www.news24.com/SouthAfrica/News/molefe-innocent-until-proven-guilty-lynne-brown-20170512">Lynne Brown</a>. She told a press conference that she supported his return as CEO as he was responsible for the fact that load shedding (organised power cuts) had stopped and the power utility was on sound financial footing. </p>
<p>But was Molefe’s performance as great as his supporters say it was? I suggest not. </p>
<p>It’s true that under Molefe’s reign power cuts across the country were brought to an end. In addition, Eskom reported better financial results last year. </p>
<p>But neither of these two developments had much to do with Molefe’s capabilities as a CEO. The power cuts <a href="http://www.fin24.com/Economy/zuma-we-will-never-have-load-shedding-again-20160506">ended</a> primarily due to a decline in electricity demand – partly the consequence of a weakening economy – and new generation capacity that had been in the pipeline for years. And the improvement in a number of Eskom’s financial ratios was due in large part to massive <a href="http://www.ujuh.co.za/nene-2015-medium-term-budget-policy-statement/">financial support</a> provided by the government in 2015.</p>
<h2>Did Molefe end the power cuts?</h2>
<p>Prior to Molefe’s arrival as CEO in March 2015 the power utility’s finances had been worsening and it was struggling to meet electricity demand. These challenges were largely due to a delay in investment by the government as well as slow increases in tariffs.</p>
<p>The delay in investment was due to government’s <a href="https://mybroadband.co.za/news/energy/122710-here-is-how-government-was-warned-in-1998-about-sas-electricity-crisis.html">indecisiveness</a> over a protracted period of time. And the slow increase in tariffs was the result of a desire to shield consumers from sharp increases and a mistrust of Eskom’s claimed needs. </p>
<p>South Africans lived through a period of extensive <a href="http://www.fin24.com/Economy/EXCLUSIVE-6-reasons-why-Eskom-is-load-shedding-20141124">power cuts</a> in 2007. Electricity generation capacity was unable to keep up with demand. The situation was largely saved by slowing economic growth combined with greater energy efficiency. These factors meant that electricity demand was already well below forecasts prior to Molefe’s appointment and continued this trajectory during his tenure as CEO. </p>
<p>Falling demand created a virtuous cycle in operations: lower demand put an end to the need to impose power cuts. It also opened up the opportunity to do maintenance on infrastructure, leading to greater availability of capacity and an even lower probability of power cuts.</p>
<p>To be sure, Molefe still had to ensure that Eskom continued to get the basics right. There’s little evidence that he did more than that. Instead, it seems that his predecessor, Tshediso Matona, was excessively negative in his outlook. This set up Molefe to appear as though he had pulled-off a dramatic success.</p>
<h2>Molefe’s bailouts</h2>
<p>What of the improvements in Eskom’s financial situation?</p>
<p>The view that Molefe was behind Eskom’s short-term financial turnaround was used to award him a R2.5 million performance bonus for the year ended 31 March 2016. (Molefe appears to have secured a <a href="http://www.news24.com/SouthAfrica/News/molefe-innocent-until-proven-guilty-lynne-brown-20170512">R30 million</a> retirement package when he tendered his resignation. Under the terms of his return to the job this will now no longer be paid.)</p>
<p>But a closer look suggests that Eskom’s financial improvement can’t be attributed to Molefe. In many respects it was the result of extraordinary support afforded to the power utility by the government in 2015. </p>
<p>This support, facilitated by two special appropriation bills passed by Parliament, had two main components. The first was an <a href="http://www.engineeringnews.co.za/article/government-sells-vodacom-stake-to-pic-to-fund-eskom-bail-out-2015-07-01">equity injection</a> through which the National Treasury under which Eskom received R23 billion in exchange for shares. Since government is the sole Eskom shareholder, this translated into a straight cash gift.</p>
<p>The second component was even more significant. This involved government writing-off a <a href="http://www.timeslive.co.za/sundaytimes/stnews/2015/06/21/Eskom-bailout-dressed-up-as-a-loan-turned-into-a-gift1">R60 billion</a> loan which had been approved in 2008 and disbursed in multiple tranches between 2008 and 2010. </p>
<p>If we treat Eskom as a genuinely independent entity, the full cost to national government and therefore the taxpayer of writing off the loan had two parts:</p>
<ul>
<li><p>the remaining principal amount (around R30 billion), and </p></li>
<li><p>an additional R86 billion, the estimated cost of the state foregoing interest payments on the loan. According to the loan conditions, Eskom would have been required to pay this interest in the event that its financial situation improved. </p></li>
</ul>
<p>Whether this financial support was desirable depends on your view of Eskom’s recent history. Many analysts agree that additional government support was overdue. But in relation to Molefe it raises a simpler question: if many of the improvements in Eskom’s financial ratios were due to massive transfers of cash and assets from taxpayers, did it make sense to pay its CEO a bonus that effectively also came from taxpayers?</p>
<p>Either way, closer analysis of Molefe’s supposed successes reveal that they are not what they have been made out to be. Combined with the <a href="http://www.ujuh.co.za/state-of-capture-public-protectors-report/">failures</a> of corporate governance with which he has been associated, the case for reappointing him as Eskom CEO appears to be paper thin.</p><img src="https://counter.theconversation.com/content/77804/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller previously worked for the Parliamentary Budget Office where, at the time of his resignation in 2016, he was leading a project analysing Eskom's finances for parliament's appropriations committees.</span></em></p>A closer look at the supposed successes of Brian Molefe at South Africa’s power utility, Eskom, shows that they are not what they have been made out to be. They are paper thin.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.