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COSATU Parliamentary Submission on theEskom Amendment Bill [B6-98 ] (1 )Presented to the Portfolio Committee on Public Enterprises, 24 April 1998 |
Contents
- Introduction
- Purpose and Basis of the proposed legislation
- Procedural and Substantive concerns about Bill
- Summary of Recommendations
- Introduction
We wish to thank the Portfolio Committee on Public Enterprises for the opportunity to address members on the Eskom Amendment Bill.
Our submission should be understood in the context of COSATU’s view that Eskom has a vital role to play in economic development and social transformation, including the extension of basic service delivery to historically under-serviced communities.
Presently, Eskom is one of the top five electricity producers in the world in terms of size and sales, and it is comparatively a low cost producer supplying 98 percent of South Africa’s electricity requirements which amounts to more than half of the electricity generated on the continent. Most significantly, it has already achieved the electrification of over 1 million homes in terms of its target to connect 1 750 000 homes between 1994 and 2000.
Eskom’s historical record and its future potential are important to achieving the objectives of reconstruction and development. Widened access to electricity is life changing for households who have previously had to rely on other energy sources. A cheap reliable electricity supply boosts overall economic performance.
South Africa’s electricity supply capacities and know-how could play a crucial role in sparking what has come to be known as Africa’s Renaissance. COSATU believes that members need to satisfy themselves that no unintended negative consequences are likely to flow from the proposed amendment, which could jeopardise what is currently a successful formula. At the same time COSATU fully supports the need for the issue of legal ownership of Eskom to be resolved.
- Purpose and Basis of the proposed legislation
COSATU has the following understanding of the objectives of the Eskom Amendment Bill.
The first objective of the proposed legislation is to incorporate Eskom as a limited liability company "with a share capital as contemplated in the Companies Act". It also clarifies the question of the state’s ownership of Eskom as its entire share capital will be issued to the state. (2)
The second objective of the legislation is to remove Eskom's exemption from the payment of income tax, stamp duties, levies or fees. The Bill proposes that the removal of this exemption be triggered through notification by the Minister of Finance in the Government Gazette.
According to the "Memorandum on the Objects" of the Eskom Amendment Bill, the amendments are necessary in order to bring Eskom’s governance structures in line with government policy as outlined in the Protocol on Corporate Governance in the Public Sector ("the Protocol").
Before outlining COSATU’s procedural and substantive concerns with the proposed legislation, it is useful briefly to interrogate the extent to which the proposed amendments do in fact reflect the terms of the Protocol.
Corporatisation of Eskom in terms of the Companies Act
The Protocol notes the lack of proper accountability by public enterprises to government and notes "a degree of ambiguity as to the ownership of certain public enterprises [including Eskom]" (3). While noting further the moves "since the late eighties" towards commercialisation and the registration of certain public enterprises in terms of the Companies Act, the Protocol makes no specific recommendation as to the precise legal form which Eskom should be given.
On the contrary, instead of outlining a specific legal form for Eskom the Protocol restricts itself to "a broad outline of principles of corporate governance" (4) including an outline of responsibilities of boards of directors and councils, responsibilities of management and responsibilities of auditors.
Therefore, it is submitted that the Memorandum on the Objects of the proposed legislation ("the Memorandum") is misleading to the extent that it suggests that "the Protocol envisages an Eskom that is registered as a company in terms of the Companies Act". The Protocol requires that there be legal certainty as to the state's ownership of Eskom not that this ownership must take a particular form under the Companies Act.
Removal of Eskom's tax exemptions
The Memorandum is again misleading when it states that "the Protocol requires that all state-owned enterprises be registered for income tax purposes and fully comply with the provisions of the Income Tax Act". The protocol does not make an explicit recommendation on the question of taxation.
Furthermore, the Memorandum's reliance on the National Framework Agreement's (NFA's) clause on the need for domestic and international competitiveness of state owned enterprises to justify Eskom's compliance with the Income Tax Act is similarly misleading. On this point the Memorandum imputes a particular interpretation and application to the agreement in relation to Eskom which has never been discussed in the structures created in terms of the NFA.
Lack of clarity as to policy basis of Amendment Bill
Given the above reservations, COSATU is not satisfied that either members of the public or Members of Parliament are fully appraised as to the policy basis for the proposed amendments. There is no certainty as to how the proposed corporatisation and taxation of Eskom will impact on the Eskom’s restructuring, its development potential or on its strategic economic role.
In order to advance a broader appreciation of the policy basis for the proposed amendments, it is one of COSATU’s recommendations (outlined below) that the Committee should request that the Department of Public Enterprises produce a more detailed "Explanatory Memorandum" as to the policy basis and projected impact of the proposed legislation. The production of Explanatory Memoranda is a practice which has been adopted with certain other important pieces of legislation.
- Procedural and Substantive concerns about Bill
It is not clear to COSATU how the amendments which are proposed through the legislation relate to:
- broader processes of state asset restructuring in terms of the NFA process, and
- the reformulation of energy policy in general and electricity policy in particular.
We are concerned that the undermining or pre-empting of these important processes could result in negative substantive outcomes.
Below we outline certain problems with the Bill and conclude with a summary of COSATU’s substantive and procedural recommendations.
- Undermining NFA process
In late 1995 and early 1996 government and labour negotiated a National Framework Agreement (NFA) on the restructuring of state assets. In line with this agreement, in April 1996, a Restructuring and Transformation Committee (RTC) was put in place to oversee the process of restructuring Eskom and one of the proposals put by labour was to vest ownership of Eskom in the state. In December 1996 the Eskom RTC deadlocked and labour called on the Minister of Mineral and Energy and the Minister of Public Enterprises to reconvene the structure under their leadership.
Despite government’s agreement that it would lead the way in this matter, the Eskom RTC has to date not been reconvened. The result being that neither the present Bill, nor the Protocol to which the Bill refers, have been considered by stakeholders to the RTC/NFA process.
In COSATU’s view the tabling in Parliament of the proposed amendments presently under consideration runs against the spirit and the letter of the NFA. The unilateral tabling of the legislation undermines that aspect of the NFA agreement which declared that the "main function of the NFA structure" would be to specifically "explain the government’s position, share and discuss strategic policy documents that have material impact on the restructuring discussion". (5)
COSATU therefore recommends that as part of the broader processes of consultation and policy co-ordination, issues raised in the proposed legislation and the Protocol to which the legislation refers should be referred to the structures of the National Framework Agreement (NFA) for information sharing and negotiation.
- Pre-empting Green Paper on Energy Policy
COSATU is troubled by the fact that the proposed amendment has been tabled prior to the imminent publication of government’s Green Paper on Energy policy.
Despite the fact that officials from the Department of Public Enterprises have suggested that the proposed amendments lay the basis for a broader restructuring of Eskom, COSATU is of the view that certain of the amendments, if operationalised, will have a substantive impact on the restructuring of the electricity industry. The effect of this would be to pre-empt important aspects of the policy discussion as envisaged in the Energy Green Paper process.
The key substantive issues dealt with in the proposed legislation are:
- Ownership
COSATU is in full support of that aspect of the Bill which vests ownership of Eskom in the state (6). Certainty as to state ownership of Eskom is fundamentally important if Eskom is to be accountable to government policies and if it is to be optimally placed to play a developmental role as part of the broader policy commitment to reconstruction and development.
The settlement of the ownership question will bring legal certainty to the fact that the state is the only party that can lay claim to the reserves and other assets of Eskom. The state’s claim to the ‘owner’s equity’ defined as "the assets which remain after all the liabilities have been extinguished" is relevant whatever the legal form which Eskom is given.
COSATU supports this aspect of the legislation as it provides legal certainty as to the fact that no third party can make claims against the state’s ownership of the assets or reserves of Eskom, freeing these resources for the pursuit of RDP related objectives.
In this sense, the proposed legislation is a breakthrough and constitutes an important part of progressive programme for the restructuring of state assets. Furthermore, this is an aspect which the trade union movement has long called for in discussions with the government on state asset restructuring.
- Legal / corporate form
COSATU does not support those aspects of the proposed legislation which seek to incorporate Eskom as a limited liability company with a share capital as contemplated in the Companies Act (7).
We are concerned that the corporatisation of Eskom as a limited liability company under the Companies Act will weaken the public interest aspects of the electricity provider’s mandate. Limited liability companies are designed for a range of factors including profit maximisation and dividend payments. This is not necessarily the most appropriate legal form for a public utility concerned primarily with the efficient expansion of service delivery.
Most disturbing is the possibility that the reason that the proposed legislation opts for the particular form of corporatisation that it has in order to prepare the way for privatisation. As these matters have not been canvassed this would run counter to the letter and spirit of the NFA and would pre-empt debates on broader energy policy.
A broader discussion on the most appropriate legal form for Eskom needs to be an important aspect of future discussions on electricity policy. Rather than having the imposition of a limited liability company under the Companies Act, more appropriate alternatives such as a specifically created statutory entity which - in order to ensure appropriate systems of financial and managerial accountability - could adopt preferred elements of the Companies Act. In this regard, Numsa’s proposals regarding a representative single-tier structure of governance should be taken into account.
COSATU therefore recommends that there be detailed research into the most appropriate legal form which should be legislated for Eskom. This should be guided by the need for maximum accountability to government and should be a form most appropriate to the needs of RDP delivery in the area of electrification. It is also imperative that these issues be discussed in the structures of the NFA and be co-ordinated with the broader processes of the development of a South African Energy policy.
- Taxation
At this point, COSATU does not support those aspects of the proposed legislation which seek to require Eskom to pay income tax and other levies and duties (8).
The question as to whether Eskom should be taxed requires detailed investigation and it would be premature for parliament to pass this aspect of the proposed legislation without the benefit of detailed research on this matter.
There is an onus on those who wish to begin taxing Eskom to show how the positive effects of doing this will outweigh the possible negative effects, such as:
- an increase in electricity prices and tariff levels,
- a reduction in human resource development and community programmes, and
- the lessening of resources for the extension of services to historically disadvantaged communities, particularly in far flung rural areas.
As an element of the broader development of Energy and Electrification policy a number of important points of principle must be clarified before this aspect of the legislation is passed.
- Would it be preferable that the resources for the extension of electricity supply be drawn from Eskom’s untaxed surplus or should the resources for this programme be drawn from the national fiscus?
- On the other hand, if Eskom is not taxed what mechanisms will need to be put in place to ensure that the extension of electricity services does indeed go ahead at an optimal rate? To what extent would there be a taxable surplus if Eskom continued to reduce tariffs or pursued an accelerated extension programme in South and Southern Africa?
- Thirdly, if Eskom is taxed and the resources for the electrification programme are drawn from the national fiscus would tax revenue raised from Eskom be channeled into reducing the national debt, or be used to fulfill other national priorities, or should it be used to fund expanded electricity provision? If the latter, should tax revenue or levies from Eskom be channeled into a National Electrification Fund to see to it that Eskom is sufficiently funded in order to achieve a well-defined (preferably universal) extension of service? (9)
- Fourthly, if Eskom is taxed would it be sustainable to continue to draw the bulk of the resources for the service extension programme from Eskom’s surplus funds. If so, what would this entail in terms of increased electricity tariffs, how could this be shared amongst users and what implications would their be for households and industry?
COSATU therefore recommends that there be detailed research into the likely effects of the taxation of Eskom and that there be an assessment of the options presented before this aspect of the legislation is passed into law. It would be most appropriate that this research into the finances of electrification be commissioned as part of the broader processes of the development of a South African Energy policy. In this regard there should be broader co-ordination between the Ministries of Public Enterprises, Mineral and Energy Affairs and Finance (10).
Furthermore, a proposal has been made to legislate on the basis that the taxation matters will be resolved through ongoing discussions and co-ordination between the Ministry of Finance and the Eskom management regarding the details of the entity's tax burden (including any exemptions, concessions or depreciations to which it could be entitled). We do not believe that this would be correct since it prematurely selects one of the options before the necessary research and policy decisions have taken place.
- Ownership
- Summary of Recommendations
COSATU wishes to make the following substantive and procedural recommendations.
Substantive Recommendations
- Pass those aspects of the Amendment Bill which clarify the issue of state ownership, that is, at s1 of the Amendment Bill by the insertion of s2A(1) and S2A(2).
- Exclude that aspect of the Amendment Bill which seeks to incorporate Eskom as a limited liability company in terms of the Companies Act, that is, at s1 of the Amendment Bill by the insertion of s2A(3).
- Exclude that aspect of the Amendment Bill which seeks to remove Eskom’s exemption from the payment of income and other taxes, that is, at s2 of the Amendment Bill by the insertion of s24.
Procedural Recommendations
In order to deepen discussion and policy co-ordination on those aspects of the Amendment Bill, which pursuant to COSATU’s substantive recommendations may be excluded from the proposed legislation, we would recommend that the Portfolio Committee on Public Enterprises consider overseeing the following processes:
- The Department of Public Enterprises could be asked to produce a more detailed "Explanatory Memorandum" on the policy basis and projected impact of the various aspects of the proposed legislation. Such an Explanatory Memorandum could be submitted for discussion in the broader energy policy debate.
- As part of the broader processes, issues raised in the proposed legislation and the Protocol to which the legislation refers should be referred to the structures of the National Framework Agreement (NFA) for information sharing and negotiation.
- There should be detailed research into the most appropriate legal form which should be legislated for Eskom. This should be guided be the need for maximum accountability to government and should be a form most appropriate to the needs of RDP delivery in the area of electrification. It is also imperative that these issues be discussed in the structures of the NFA and be co-ordinated with the broader processes of the development of a South African Energy policy.
- There should be detailed research into the likely effects of the taxation of Eskom before this aspect of the legislation is passed into law. It would be most appropriate that this research into the finances of electrification be commissioned as part of the broader processes of the development of a South African Energy policy.
- The Public Enterprises Portfolio Committee should, jointly with the Portfolio Committee on Minerals and Energy, appoint a Special Oversight Task Team whose responsibility it will be to see to it that future decisions on the legal form of state ownership of Eskom and on a future taxation framework is via a properly constituted process which takes into account:
- procedures outlined in the National Framework Agreement, and
- developments with regard to the Green Paper which aims at establishing a new South African energy/electricity policy.
Footnotes
Except where the contrary is indicated, this legislation is based on the version of the Bill as amended and tabled in Public Enterprises Portfolio Committee on 15 April 1998.
COSATU is aware that some problems have been ironed out of earlier versions of the legislation. It is our understanding that the original text was concerned with the transfer of Eskom's reserves and assets to the state raising concerns that Eskom would be left only with its liabilities and that this was amended in response to the argument that it could have led to the possible default of Eskom's loans.
Protocol on Corporate Governance in the Public Sector ("the Protocol") at para. 2.4 (p4)
The Protocol at para. 2.4 (p5)
National Framework Agreement at para 6.2
Insertion of s2A.(1) and (2) as in Eskom Amendment Bill
Insertion of s2A.(3) as in Eskom Amendment Bill
Insertion of s24 as in Eskom Amendment Bill
This may entail a mechanism similar to the Telecommunications Act's Universal Service Agency and Universal Service Fund which provide for the subsidisation of the costs of provision or use of telecommunications for needy communities and for the extension of service through license obligations.
Inter-Ministry co-ordination is vitally important for integrated policy development. For example, if there is a break down of co-ordination and taxation policies are put into place by the Department's of Finance and Public Enterprises while at the same time the Department of Minerals and Energy are discussing the possibility of levies to a National Energy Fund the possibility arises that the electricity industry will be subject to two sets of taxes. (See submission of Energy and Development Research Centre, 15 April 1998).
