The release of the
State of Capture report by former Public Protector, Thuli
Madonsela, sparked media frenzy. It is still used as a reference in m any
reports related t the Guptas and Brian Molefe.
Many individuals were
implicated to allegedly be under the control of the Gupta
family. A relationship it highlighted in particular is the one the family
has with Eskom.
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| The report fails to really dig deep into how State Capture in the power utility really occurred. Credit: DispatchLive |
Chartered Accountant CA
(SA), Khaya Sithole shares
with us his analysis of the report. Revealing inconsistencies in the Public
Protectors approach, poor management practice by Eskom and Brian Molefe’s part
in trying to restore credibility to the power utility.
And then there is the report itself. The essence of it all
is the question of whether the Republic has been captured by individuals who
are advancing private interests using public resources. The scope of the
investigation was limited to focus on one family and its influence on the
state. The question of whether the scope should extend beyond this is worth
considering.
The report threatened to cover issues relating to multiple
companies, but somehow we end up with a detailed focus on the Eskom contracts.
Key to the problem is the history of the Optimum
Coal Mine and how it ended up in the control of the Guptas. The short version
of the story is as follows:
How it all began
Back in 1993, Eskom signed a contract with Optimum for the
supply of coal from 1993 to 2018. The basis of this contract is the coal supply
agreement (CSA) which has two interesting aspects. One refers to hardships
clause which means that the parties can engage within the 25-year period and
renegotiate aspects of the deal if necessary. The other aspect relates to the
penalty provisions – which allow Eskom to penalise Optimum in the event that
the coal delivered is not useful to Eskom. In this penalty clause, Optimum is
obliged to keep delivering coal but only gets paid a nominal amount of R1 per
tonne until Eskom recovers its losses. In the late 2000s, the Optimum Coal entity
fell into the hands of Glencore.
And then things started going wrong...
At some point in time Optimum started supplying substandard
coal to Eskom. In some consignments, up to 45% of the coal was useless to Eskom
and had to be rejected. This means that Eskom was stuck with useless coal and
had to adjust its electricity generation schedule to cater for the fact that it
didn’t have enough useful coal. The 1993 agreement allowed for Eskom to
actually penalise Optimum when this happened – but Eskom decided not to
implement the penalty clause. Instead, South Africa suffered through load
shedding.
The nature of the agreement signed in 1993 had escalations.
Due to its location, Optimum was responsible for supplying coal to the Hendrina
Power Station in Mpumalanga and has a capacity of 2 000 megawatts. The consequence of
receiving useless coal means that the power generation is compromised and load
shedding results. Rather than penalise the company and drive it to bankruptcy,
Eskom decided it was in their interests to keep the mine operational by
ignoring the penalty clause – and the penalty fee kept rising.
Optimum became aware that Eskom had a deal with Exxaro for the supply of coal which was
economically much better than the deal that Optimum had. In the Exxaro
contract, Eskom paid R1 132 per tonne. In the Optimum contract, Eskom paid only
R150 per tonne. The Exxaro contract expired on 31 December 2015; the Optimum
contract was due to only expire in December 2018. In light of this information,
Optimum then activated the hardship clause which simply means they went to
Eskom and said ‘we can no longer keep supplying coal at R150 per tonne; we want
to charge you R530 per tonne, can we negotiate?’ In this conversation, Optimum
was asked to prove that their cost structure was indeed too high and they could
only remain alive if Eskom paid them more. They struggled to prove this and
kept insisting that they were losing R100 million per month from the Eskom
contract. Eskom remained unconvinced.
Optimum came back with a revised offering saying they could
suddenly survive if Eskom paid them R442 per tonne.
Enter Brian Molefe...
As part of his strategy to turn around the entity, Molefe
engaged his mind in evaluating such contracts. And then – Wits University’s
most successful graduate – Ivan
Glasenberg who owns Glencore – indicated to him that if Eskom wasn’t
willing to pay more than the current price then Optimum would stop supplying Eskom
and load shedding would be a permanent problem. Molefe viewed this as a form of
bullying and then decided to tell Glasenberg that he will activate the penalty
clause on Optimum. At that stage, the money that Optimum owed Eskom in terms of
the penalty clause was R2.15 billion. So we had a company that had a liability
of R2.15 billion to Eskom threatening to cut coal supplies unless Eskom paid
them R442 per tonne – even though the agreement said Eskom needed to pay R150
per tonne. This was a standoff of electric proportions.
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Brain Molefe became the guy who wanted to save the day, to
his detriment. Credit: eNCA
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Once Molefe refused to be bullied into paying this increased
price and decided to activate the penalty clause, Optimum then put itself into
business rescue. When it went to business rescue, it owed R2.9 billion to Investec, Nedbank
and RMB. These were the secured creditors
that needed to be paid first before any change of ownership could take place.
A key feature of the Optimum structure is that Eskom needs
to approve any transaction that results in a change in ownership of Optimum.
The Optimum Coal Mine is one of three entities that make up Optimum
Coal Holdings – the others are Optimum
Coal Terminal (OCT) and the Koornfontein
Mine. OCT is part of the Richards Bay Coal Terminal (RBCT) which is a
consortium of coal suppliers. Optimum Coal (OCT) is a 7.5% member of RBCT which
means that they can provide up to 7.5% of RBCT’s annual exports. The value of
this right is $360 million per year – that is R4.85 billion per year.
Once Optimum was under business rescue, Pembani attempted to make an offer to buy
the mine. The deal collapsed because Eskom said they would still demand payment
of the R2.15 billion penalty from the new owner. Pembani was informed that
Eskom would not approve a deal unless Pembani agreed to pay the penalty. So
Pembani walked away.
After Pembani walked away, KPMG informed Optimum and
Glencore that a new buyer had emerged – and this buyer wanted all three
entities. This buyer was Tegeta which is owned by Oakbay and the Guptas.
What was curious about the Tegeta/Oakbay conversation is
that Eskom suddenly changed two things. Firstly, Eskom was no longer insisting
on charging the R2.15 billion penalty to the new owner – this is different to
what Pembani had been told. Secondly Eskom was now happy to approve the sale of
all entities – contrary to what Pembani had been told. Once Tegeta joined the conversation,
Eskom deleted the two clauses that had made the deal impossible for Pembani.
This was curious.
Cementing the deal
The banks also got involved in the conversation. They were
owed R2.95 billion, by the time Finance Minister, Nhlanhla Nene was fired. In
reality, the company now belonged to the banks and Eskom which was owed R2.15
billion. You would therefore need over R5 billion to buy the company – unless
Eskom wrote off its R2.15 billion claim – which it surprisingly did by
deferring it. Once Eskom had indicated that the R2.15 billion could be deferred
it meant that all one needed to do was to pay off the banks and Optimum could
be transferred. For all practical purposes, this deal made economic sense. Only
one leg of it was odd – the Optimum Coal Terminal (OCT) leg.
As part of its drive to reduce costs, Optimum had stopped
supplying coal to the export market. This is odd because the coal is sold on
the export market for $65 (R875) per tonne – which is much higher than the R150
Eskom was paying and still higher than the R530 Optimum wanted Eskom to pay
under a revised contract. Once all these issues had been sorted and Eskom was
willing to ignore the penalty, Tegeta made an offer that was acceptable to all
parties (the banks and Glencore). The final purchase price was R2.55 billion.
Glencore would pay R400 million and Tegeta – don’t laugh – would pay R2.15
billion. But there’s more…
Mining rights and
their complexities
In any mining operation, there is a legal requirement to set
up an ‘environmental/rehabilitation fund’ which will deal with fixing the
environment once the minerals have been successfully stolen by capitalists.
Such funds are supposed to benefit the communities in the affected area and
established in terms of the National Environmental Management Act. The Optimum
Fund had R1.47 billion and the Koornfontein Fund had R280 million. The funds
are ring-fenced for community activities only and cannot be used for any other
purpose. If an entity uses the funds for any other purpose then the owners of
the fund are guilty in terms of the Income Tax Act (section 37) and need to pay
taxes twice the value of the Fund.
As part of the purchase agreement, the control of the
rehabilitation funds would pass on to the new owner. Tegeta then classified
this as ‘cash available to them’ which would be transferable once the sale had
been finalised. The Bank of Baroda
then treated the cash in the funds as money available to Tegeta and counted it
as Tegeta’s asset. After April, Standard Bank and Nedbank, transferred the
funds to the Bank of Baroda branch in Durban. At that stage the two banks didn’t
question why the money was being moved.
The transactions were illegal, yet no alarm bells were set
throughout the process. The Department of Mineral Resources, run by Mosebenzi
Zwane, is the official custodian of the mining rehabilitation funds.
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| The State of Capture report, revealed serious underhanded deals that happened in Eskom. Credit: Linkedin |
Such funds that are created for community benefit purposes
are only allowed to make transfers after obtaining approval from the Minister
of Mineral Resources – Zwane himself. Once such a transfer happens; SARS is
responsible for charging taxes on this fund – unless the Commissioner decides
not to charge the tax. That is current head of SARS, Tom Moyane.
In order to facilitate this hoax, the Bank of Baroda
prepared a letter to indicate that Tegeta had money. That made it easier for
the South African banks to believe they would get their money. But this was not
enough to cover the purchase price.
Tegeta then went on a drive to raise the money which
involved multiple entities including Trillian
Capital, Oakbay, Regiments and Shiva
Uranium. Unfortunately, after all this was done, Tegeta was still short of
R600 million in order to finalise the transaction – yes, that sounds like the
R600 million offered to former Deputy Finance Minister, Mcebisi Jonas. The
period of 11 to 13 April is the biggest problem for Brian Molefe. I am tempted
to say that Molefe reacted to the bullying antics of Glasenberg in a way that
he thought was prudent.
I am also tempted to think that by the time Molefe arrived at Eskom with the promise of ending load shedding, his most important discovery was that load shedding is the type of thing that had been manufactured by entities like Glencore through their immoral actions.
Saving South Africa
Somehow Brian inherited this superhero complex where he
needed to defeat Glasenberg at this game and also fix a national crisis.
Whether his steps in executing such a mandate were appropriate is the
philosophical dilemma that led us to this point.
It is quite possible that he stepped into a vortex where the
steps towards resolving this fiasco had been set in place long before he
arrived. Unfortunately, he decided to assimilate with what he believed was the
lesser evil and that is the realisation that brought him to tears.
His quest to end load shedding at all costs was the driving
ambition. Unfortunately, it was limited by the reality of the economic
structure that Eskom was stuck with. Molefe’s main error was in seeking to
bypass such a problem by engaging the Gupta contract – and he will regret this
forever. The thing about the Icarus complex is that you are allowed to fly high
and soar as close to the sun as you can. And those who need you will cheer you
on. But as soon as you get close to the sun and start burning, your support
base evaporates and you take the fall on your own. South Africans were very
happy that he ended load shedding. It is the true mechanics of how he did it
that we are now uncomfortable with – and we are letting him burn.
Digging deeper: The missing puzzle
My issue with this entire exercise is just how clumsy the
Guptas have been in facilitating all of this. You would think that the
involvement of Glasenberg and Glencore would have been enough for them to
understand how states are supposed to be captured, right? Dololo strategy!
The curious thing about this state capture saga is that
Madonsela’s report did not unpack the entire journey of the Glencore story –
which is sad. Given the fact that the report is so centred around the Eskom-Glencore-Gupta
alliance, I honestly expected it to unpack the true mechanics of the
transaction; but it only focuses on the small window of shenanigans. This
report is due to be given a second phase – which must be welcomed.
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| Many companies played a role in the current dysfunction of Eskom. Credit: Governance For Stakeholders |
It is in this second phase that we can actually ask a simple
question of how we ever allowed Glasenberg to hijack our coal supply and give
us the idea of load shedding – and we said nothing about it. This next phase
should allow us to interrogate how we could be aware of Marc
Rich stealing $22 billion (R270 million) through tainted oil deals with the
National Party – and we then allowed his company to take over the country’s
coal supply chain. This next phase should really consider how the banks and
KPMG saw nothing wrong with all these shenanigans – until the colour of the
capturer became darker. This report should allow Brian Molefe to finally tell
his version of the story. How he found himself swept into the tornado of a
story that was so much bigger than himself. How he found himself having to
answer to the Saxonwold mafia only because the Swiss mafia were the bigger
bullies. Brian has a fatal flaw – the initiation of the pre-payment to Tegeta.
Beyond that, his is a tragic tale of the man who set out to fix a national crisis – and found himself captured by a crisis of conscience, the politics of patronage and the tragic hysteria of his own ambition.
According to Fin24, the cost of load shedding in South
Africa – at its peak – was R80 billion per month. Molefe staked his reputation
on saving South Africa R80 billion per month – and lost so much more.
The Gupta saga is not just that they are corrupt and
arrogant – it is a tragedy of how they sought out to topple the king of state
capture – and did such a shockingly bad job of it all.
Somebody please get them the Johann Rupert manual next time.
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