COSATU Submission on the Draft Eskom Conversion Bill Submitted to the Department of Public Enterprises, 23 November 2000

Table of Contents

1. Introduction and Process
2. COSATU’s approach to ownership and governance of Eskom
3. Specific concerns with the Draft Bill

1. Ownership of Eskom shares
2. Protection of Eskom workers
3. Memorandum and Articles of Association
4. Taxation

 

Introduction and Process

COSATU welcomes this opportunity to comment on the Draft of the Eskom Conversion Bill, as published by the Department of Public Enterprises in Notice 3963 of 2000 ["the Draft Bill"]. The proposed corporatisation of Eskom has significant implications for COSATU – in terms of our members who are currently employed by Eskom; the effects on working class consumers of electricity; and the broader role of Eskom in South Africa’s industrial and socio-economic development.

The Draft Bill was discussed at the meeting between COSATU and its relevant affiliates and the Departments of Public Enterprises and Minerals and Energy, led by their respective Ministers, on 16 November 2000. At this engagement COSATU gave an overview of our concerns with the Draft Bill and raised various issues around the processing of the Bill. Specifically, we noted that government had made a commitment during the processing of the Eskom Amendment Act to a bilateral engagement with COSATU prior to the publication of a Succession / Conversion Bill. It is unfortunate that the Department of Public Enterprises nevertheless published the Draft Bill without such consultation. We note the Minister’s understanding that such a process had indeed occurred and appreciate his apology in this regard.

It was agreed at the meeting of 17 November that there would be still meaningful engagement between COSATU and government around the Draft Bill prior to any further processes. This submission thus serves to highlight our concerns with the Draft Bill in advance of such engagement. We propose that such engagement take place in the first half of December 2000. We reserve the rights of COSATU and its affiliates to raise further issues relating to the Draft Bill, both in the upcoming bilateral engagements and in future parliamentary processes.
 

COSATU’s approach to ownership and governance of Eskom

Eskom is a vital player both in South Africa’s economic development and in the meeting of people’s basic needs. Eskom has had considerable success in rolling out electricity to our people. By international standards, South African electricity is also very cheap. Access to affordable electricity is vital for many reasons, including industrial development, the growth of SMMEs, and improving people’s productivity and quality of life.

COSATU thus believes that it is imperative that electricity remains publicly owned and controlled. This allows the state to drive universal service provision, ensure that electricity contributes appropriately to overall energy and industrial policies, and determine appropriate pricing structures. Private ownership or a more commercial operating structure would tend to shift Eskom’s focus towards profit maximisation at the expense of national objectives.

We also note that the Draft Bill is being introduced at a time when the electricity industry, supply and distribution in particular, is being restructured. COSATU is currently engaged in a process with the Departments of Public Enterprises and Minerals and Energy around this restructuring, which is obviously closely related to the proposed corporatisation of Eskom. Among other things to emerge from this engagement is that according to the proposals in the Price Waterhouse Coopers reports commissioned by government, average electricity tariffs are projected to rise by between 22 – 50%, which would clearly have extremely negative effects on access to affordable electricity for the poor. COSATU is concerned that corporatisation could have a negative influence in terms of pushing electricity tariffs higher, particularly if there are intentions of selling of some of Eskom’s share capital in future. We note that in the Department’s briefing to Parliament on the issue, it was stated that the proposed corporatisation would have no bearing on tariffs. We seek a clear commitment from government in this regard.

The Draft Bill arises from (and replaces) the Eskom Amendment Act of 1998, which requires that "The Minister [of Public Enterprises] shall take the necessary action to incorporate Eskom as a limited liability company with a share capital as contemplated in the Companies Act, 1973". COSATU’s submission on the Eskom Amendment Bill [B6-98] ( 1 ) raised various substantive and procedural concerns with that Bill. Of particular relevance here was our opposition to the corporatisation of Eskom. Nevertheless, the Act was adopted with the above clause requiring the future corporatisation of Eskom, which the current Draft Bill aims to provide for. This makes it difficult to prevent the corporatisation of Eskom at this stage, although COSATU still has strong in-principle objections to such a move. This submission is thus focused on avoiding possible negative effects of corporatisation and raising other issues of concern with the Draft Bill, rather than on the issue of corporatisation itself, although this remains highly problematic for us.
 

Specific concerns with the Draft Bill

3.1 Ownership of Eskom shares

Section 2 of the Draft Bill provides for the purpose of the Act as follows:

2. (1) to convert Eskom into a public company…by deeming that it is a company having a share capital as contemplated in section 19(1) (a) of the Companies Act with its entire share capital held on the date of such conversion by the State. [emphasis added]

Our concern with the above clause is that it speaks only to the ownership of Eskom share capital at the time of conversion, and is silent as to what could happen thereafter. A later clause of the Draft Bill, dealing with the effect of the proposed conversion, states that "While the state is the sole or majority shareholder in Eskom [emphasis added], sections 60, 66, 190, and 344(d) of the Companies Act shall not apply to the company." This suggests that a future situation is contemplated where the entire share capital, or even the majority of it, is no longer held by the state.

This raises serious problems for us, relating to the issues discussed in section 2 of this submission above. COSATU thus proposes the deletion of the words [on the date of conversion] from clause 2 of the Draft Bill, so that it would read as follows:

"…by deeming that it is a company having a share capital as contemplated in section 19(1) (a) of the Companies Act with its entire share capital held by the State."

Furthermore, there should be an express provision in the legislation compelling government to follow a legislative process should it wish to sell off some Eskom shares in future, thus facilitating the input of elected representatives and stakeholders on such a far-reaching move.
 

3.2 Protection of Eskom workers

The Draft Bill does not explicitly deal with the effects of the proposed conversion on Eskom employees. COSATU is concerned that corporatisation could shift Eskom’s focus to profit maximisation rather than universal service delivery, and that this in turn could have a negative impact on the conditions of service and job security of the Eskom workforce.

We do note that the Draft Bill states (at 4(4)) that the proposed conversion would not affect Eskom’s debts, liabilities, obligations incurred or contracts entered into by, with, or on its behalf. It is not clear, however, what the medium- to long-term effects of corporatisation on workers would be.

COSATU proposes that the conditions of service and job security of Eskom employees be specifically protected in the legislation itself.
 

3.3 Memorandum and Articles of Association

Clause 5 of the Draft Bill provides that "On the date of conversion, the Registrar shall register the memorandum and articles of association of Eskom in a form determined by the Minister [of Public Enterprises] and notified in the same Gazette as contemplated in section 3."

It is not clear to us from the formulation of the above clause whether the Minister is to determine merely the format of memorandum and articles of association, or the actual content that would be registered by the Registrar. We seek clarity in this regard, and the intended interpretation of the clause would obviously influence our comments on it.

Beyond this need for clarity, the memorandum and articles of association – as essentially the "constitution" of Eskom - will have a significant bearing on the mission, role and operations of Eskom. As such COSATU believes that the memorandum and articles of association should not be determined by the Minister alone, but in a broader process. Specifically, Parliament and stakeholders should have a role in this regard.

COSATU thus proposes the amendment of section 5 to provide both for parliamentary oversight and approval of the memorandum and articles of association proposed by the Minister, as well as opportunity for public comment either through parliamentary hearings of through the gazetting of draft memorandum and articles of association by the Department for public comment.
 

3.4 Taxation

The Draft Bill provides, inter alia, that the section of the Income Tax Act exempting state organs from tax will not apply to Eskom or related associations, corporations or companies; in other words, Eskom will be liable for income tax ( 2 ). In our 1998 submission on the Eskom Amendment Act COSATU made the following points with respect to the proposal to tax Eskom:

• 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?
   
• 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 there 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.

COSATU believes that the above substantive concerns around the taxing of Eskom are still valid. We are not clear as to the extent to which such an investigation has been completed, and would request all relevant documentation in this regard ( 3 ). We thus remain unconvinced of the appropriateness of taxing Eskom, and concerned as to the negative effects that this could have on the rollout of electricity and electricity tariffs.

 

Footnotes:

1. This submission was presented to the Portfolio Committee on Public Enterprises on 24 April 1998 and can be found on COSATU’s website: http://www.cosatu.org.za/docs/1998/eskombil.htm.

2. We assume that the reference in the Draft Bill to section 10(1)(A) of the Income Tax Act is actually a reference to what appears to be section 10(1)(a).

3. It was agreed during the processing of the Eskom Amendment Bill that labour would be part of such an investigation and that the results would be made publicly available with Parliament in particular being briefed on the results.

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