COSATU Submission on the Eskom Conversion Bill Presented to the Public Enterprises Portfolio Committee, 9 May 2001

Table of Contents

1. Introduction

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. Our involvement in this process dates back to 1998, and our engagement around the Eskom Amendment Act which laid the basis for the Eskom Conversion Bill under discussion today. The principle underpinning our engagement has always been the optimum structure and conditions for Eskom to carry out its national public mandate namely the provision of affordable universal electricity. In our specific socio-economic conditions this entails in particular the electrification of poor, rural, and working class households. COSATU believes that it is only through public ownership and control that basic services such as electricity can be universally provided on an affordable and sustainable basis to all South Africans.

The objections which we raised to the Eskom Amendment Bill in 1998 have been vindicated by what has unfolded since then. Expectations of higher tariffs for consumers (up to 50% increases have been projected by government’s consultants); a 40% cut in the budget for electrification; and an increasing commercial orientation reflect to an extent the flawed route which has been pursued, in a context of contractionary macroeconomic policy, despite the warning bells we sounded earlier. This experience leads us to reiterate the position which we advocated in 1998. We still do not believe that corporatisation is a correct route for Eskom to follow, and that it will undermine the central objective of universal affordable service. Rather than taking forward the mandate of accelerating transformation, the legislation under discussion today would take us backwards. In the light of this we call for the repeal of the Eskom Amendment Act and the withdrawal of the Eskom Conversion Bill. Eskom should remain exclusively in state hands, and government should exercise its mandate to ensure that Eskom’s universal service obligations are met.

If government insists on going the corporatisation route, again against our warnings, it should at the very least make sure that no negative consequences will follow. This would mean putting Eskom firmly in state hands so that no shares could be sold without the approval of parliament and the NFA, ring-fencing an adequate allocation to Eskom to finance the accelerated meeting of universal service obligations, and putting various other safeguards in place (detailed below in our submission, with various proposed amendments).

The key concern which we raise in this submission is that the Bill will facilitate the future partial or full privatisation of Eskom through the selling of Eskom shares. Should government insist on corporatisation, it should at a minimum ensure that a legislative process would be required subjecting any such decision to parliamentary approval and that it is subject to agreement in NFA structures. Parliament has a duty to act as guardian of Section 195 of the Constitution, governing accountability of the public sector as a whole, including public enterprises, to ensure that public enterprises, which belong to the people as a whole, are dealt with in a way which advances the interests of the majority.

Other specific areas of the Bill with which we raise concerns are the sections on powers and duties of Eskom; memorandum and articles of association; judicial power of electricity prices; and the procedure for issuing regulations in terms of the Act. There are two further concerns which arise from the Bill for us: the impact of corporatisation on the job security and conditions of employment of Eskom workers; and the impact of taxation on Eskom’s ability to roll out affordable electricity. The repeal of the Eskom Amendment Act and withdrawal of the Conversion Bill would address these concerns. Alternatively they must be concretely addressed through formal commitments as part of this process to ensure that our the negative effects we are concerned about – both on Eskom workers and on communities – do not materialise.

The Eskom Conversion Bill is being introduced in the context both of the broader restructuring of the electricity sector (to be discussed further below) and processes around the restructuring of state assets in general. With respect to the latter, COSATU has recently announced its intention to file a Section 77 Notice around privatisation. This puts in motion processes which, if our concerns are not resolved, will culminate in mass action including strikes by our membership. The Bill’s opening up for future selling off of Eskom shares is part of our broader concerns in this regard.

COSATU strongly supports the need for overarching legislation to govern the restructuring of state assets. Members will recall that such legislation had been on this Committee’s programme for last year, but was subsequently withdrawn/never tabled by the Department. We believe that such a framework is necessary to provide a clear and transparent framework to guide this process and would ensure the effective oversight by elected representatives over public assets; an approach which has also informed our perspective on the Eskom Conversion Bill.

2. Background of the process

There is a long history to this process, which can be summarized as followed:

1. The basis for this Draft Bill was laid with the Eskom Amendment Act (1998). This Bill was not tabled at the NFA six-a-side prior to being tabled in Parliament in April 1998. The Bill sought to create certainty on the ownership of Eskom, to corporatise the entity in terms of the Companies Act and to subject it to tax payment. COSATU and affiliates supported the need to clarify the ownership of Eskom, but objected to the corporatisation of the enterprise and raised concerns about the impact of taxation and tariffs.

2. This unilateral corporatisation of Eskom led to mass protest. The objection was twofold; firstly, that the Bill was introduced prior to discussions on government’s energy policy. This meant that the legal form of Eskom was being finalised in a manner that would preempt debates on energy policy. Secondly, there was a concern that taxation of Eskom would squeeze resources available for carrying forward the electrification programme. Further, corporatisation was seen as a precursor to full scale privatisation. High level meetings involving the alliance leadership was convened to resolve the impasse.

3. Ultimately, a compromise position was adopted allowing the bill to move to the next stage, including a provision that any restructuring proposal would have to be approved by parliament. The Alliance agreement to suspend the Bill at the NCOP stage pending negotiations on the matter was however not implemented.

4. Further, then-Deputy-President Mbeki wrote a letter of reassurance to the COSATU leadership that government was not intending to privatise Eskom. Specifically of relevance to the current issues, the letter also stated that "the envisaged changes do not give the Minister the power to change the shareholding structure, for which the concurrence of parliament would be necessary" and further that "the proposed changes contained in the Bill will not adversely affect the commitment of Eskom to provide electricity at affordable prices".

5. The Eskom Amendment Act laid the basis for the Draft Bill which was published by the Department towards the end of last year. The Draft Bill was discussed at an electricity sector meeting between COSATU and the Departments of Public Enterprises and Minerals and Energy 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. Government apologised that this had not taken place, and made a commitment that there would indeed be meaningful consultation between COSATU and government before any further processes around the proposed legislation.

6. COSATU subsequently made a submission outlining our concerns with the Draft Bill and alternative proposals (1). In our submission we also proposed that the engagement with government take place in the first half of December 2000, and that government should propose suitable dates. A meeting was finally convened in February, where it was agreed that government and COSATU should revert to a bilateral process and attempt to reach consensus on the issues.

7. In line with this process a meeting was convened on 9 March between COSATU and officials from DPE. The Department indicated that they had not felt it to be necessary to amend the Draft Bill in the light of our or any other concerns, and that it was now a Bill and was now ready to go through to Parliament. The officials were also unable to respond satisfactorily to any of the substantive concerns raised by COSATU, and contradicted some of the representations made by DPE officials at the previous meeting.

8. Despite subsequent political agreement at the NFA between the COSATU General Secretary and the Minister of Public Enterprises (26 March 2001) around the process to be followed to address our concerns, this was again flouted by the Department by processing the Bill in Parliament without such engagement taking place.

Our engagements with the Department around the Eskom Conversion Bill and the history of the last few years, going back to the Eskom Amendment Bill, have thus been an extremely frustrating experience. Agreements to resolve matters in a particular way have not been honoured. We have not gone into all the details and flaws of the process here, as there is now an agreement with the Department that our concerns with the Bill will be addressed politically between the leadership of COSATU and the Ministry of Public Enterprises, prior to any further processing of the legislation through Parliament. Given the importance of this issue, and current public concern about restructuring, it is important that the substance of these concerns are addressed both through this bilateral process and through the parliamentary process itself.

3. 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 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.

4. Concerns with the Bill

The proposals that follow are premised on our belief that the best approach would be to withdraw the Bill. If this is not done, these amendments would seek to achieve the same objective.

4.1. Ownership of Eskom shares

Our fundamental concern with the Bill is that it opens the way for the selling off of Eskom shares in future. While the Department has argued that the Bill does not directly or explicitly commit to privatisation, they have indicated that partial privatisation is indeed their intention.

Section 2 of the Bill provides for the object of the Act as follows:

2. The object of this Act is to convert Eskom into a public 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 with effect from the date of such conversion. [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/ambiguous as to what could happen thereafter (2). A later clause of the Bill, dealing with the effect of the proposed conversion, states that "For as long as the state is the sole or majority shareholder in Eskom [emphasis added], sections 60, 66, 190, and 344(d) of the Companies Act do not apply to Eskom." This, together with the stated intentions of government around the future ownership restructuring of Eskom, clearly 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. If the Bill is not withdrawn as we have proposed, this section would need to be amended. In this case, COSATU would propose the deletion of the words [with effect from the date of such conversion] from clause 2 of the Bill, so that it would read as follows:

2. The object of this Act is to convert Eskom into a public 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 as well as NFA 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.

This proposal is in line with the agreement reached within the Tripartite Alliance in 1998 around the same issue. It is also consistent with a commitment made to COSATU in a letter from then Deputy-President Thabo Mbeki in 1998, which states inter alia that "[the legislation] is designed to ensure that there will only be one shareholder when Eskom is corporatised and that shareholder shall be the state…The envisaged changes do not give the Minister the power to change the shareholding structure, for which the concurrence of parliament would be necessary."

This redrafting of the Eskom Conversion Bill would give effect to this understanding. It would certainly not preclude future restructuring of Eskom’s ownership; it would, however, ensure that such an important move would at least be subject to the scrutiny, input and approval of stakeholders and elected representatives.

4.2. Powers and duties of Eskom

Section 5 of the Bill, setting out the powers and duties of Eskom, is a new addition from the Draft Bill (although certain clauses within it were included in different forms in the Draft Bill). However, as it stands it is very technical and focuses on issues such as Eskom’s right to enter land. We believe that this section should capture, in a more fundamental way, what the essential role of Eskom should be. This is not reflected elsewhere in the Bill, which also replaces the current Eskom Act which does set out the role of Eskom (3). We are cognisant of government’s view that the "responsibility" for electrification should shift from Eskom to government itself. This does not, however, mean that Eskom does not have its own role and responsibilities. These should be set out in the Act.

4.3 Determination of the memorandum and articles of association of Eskom

Clause 6 of the Bill provides inter alia that the Registrar of Companies shall register the memorandum and articles of association of Eskom; and that "the articles of association of Eskom must be as determined by the Minister [of Public Enterprises]."

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, the memorandum and articles of association need to be submitted to Parliament and the NFA for negotiation and finalisation.

COSATU thus proposes the amendment of section 6 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.

4.4. Judicial power over electricity prices

Section 7, which deals with borrowings secured by Eskom’s revenue and assets, allows that a creditor of Eskom may apply to a high court in the event that interest due in respect of securities remains unpaid for three months after it has been demanded from Eskom. The Bill specifically provides that the court may order the increase of electricity prices under certain conditions (4). Even though the power is thus circumscribed, its inclusion in the Act indicates that some power over tariffs is contemplated.

There could be various factors leading to Eskom being indebted, including inadequate allocations from the fiscus or poor management. Whatever the cause, we would have concerns if such a situation impacts negatively on Eskom’s consumers. This would undermine the government’s attempts to deliver affordable electricity to South Africa. We thus propose that the court should not have the power to raise Eskom’s prices and that other mechanisms should be found to deal with such a situation. Our comments in section 5.2 of this submission, around the taxation and general funding model of Eskom, are also of relevance in this regard.

4.5. Regulations

Section 9 of the Bill provides that "the Minister may, by notice in the Gazette, make regulations which are necessary for the achievement of the objects of this Act". Given that the Bill itself is very broad, it is likely that these regulations may well deal with matters of substance. COSATU thus believes it to be appropriate, in the interests of transparency and inclusivity, that the Regulations should be subject to public scrutiny and stakeholder input. We thus propose that the Bill should provide that Draft Regulations should be gazetted for public comment and parliamentary adoption prior to the gazetting of final Regulations. We note that this is in line with other important legislation: for example, the Water Services Act now requires that parliament plays this oversight function over Regulations to be made in terms of the Act.

5. Related issues arising from the Bill

5.1. Protection of Eskom workers

The 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 Bill states (at 4(3)) that the proposed conversion does not affect Eskom’s debts, liabilities, or obligations incurred (5). It is not clear, however, what the medium- to long-term effects of corporatisation on workers would be.

While the conditions of service and job security of Eskom employees may not be specifically protected in the legislation itself if government is to proceed with it, we seek some formal guarantee from Eskom and/or government as part of this process that conditions of service and job security of Eskom employees will not be negatively affected.

5.2 Taxation of Eskom

The 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. COSATU has raised concerns around this since 1998, in terms of the impact of taxation on Eskom’s ability to roll out universal and affordable electricity. 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. 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. We are not clear as to the extent to which such an investigation has been completed, and if it has taken place we have certainly not been part of it and the results have not been made public.

In Eskom’s own submissions on the issue of taxation in 1998, they have made it clear that taxation will definitely have an impact on tariffs in the medium to long term. In our engagement with the Department on the Conversion Bill they have stated explicitly that while taxation will not affect Eskom’s prices in the short term as various provisions have been made to buffer the impact, in four to five years time there will certainly be an effect of pushing electricity prices up. This confirms our reservations about the taxation of Eskom, and the negative effects that this could have on the rollout of electricity and electricity tariffs.

Our concerns have further been reinforced by the provisions for electrification in this year’s budget. In the past few years, Eskom has spent about a billion rand a year to extend electricity to poor households, in exchange for not paying taxes. In government’s motivation for bringing Eskom into the fiscal system and taxing Eskom, government had committed itself to putting aside the funds for further electrification. But instead of providing R1 billion (as previously allocated by Eskom), the 2001/02 budget only allocated R600 million a year for electrification over the next three years – an effective 40% cut in this year’s allocation and even greater real cuts in the following two years if inflation is factored in.

As a policy issue directly related to the legislation on the table, we believe that taxation needs to be dealt with as a part of this process. Specifically, mechanisms need to be found to guarantee that the taxation of Eskom and the concomitant allocation of funds from the fiscus for electrification do not prejudice the rollout of affordable electricity. This would require an independent assessment of funding required to accelerate affordable electricity rollout in the medium to long term. It would also need to factor in the costs of the free lifeline electricity undertaken by government. Such an amount would need to be ring-fenced to ensure that it is not squeezed out by other expenditure or revenue constraints. We propose that government make a clear and concrete commitment in this regard as part of process around this legislation.

Footnotes

1. This submission can be found on COSATU's website, http://www.cosatu.org.za/docs/2000/eskomcon.htm.

2. We note the redrafting from the Draft Bill, which had stated: “…with its entire share capital held on the date of such conversion by the State.” While the redrafting does give a different slant, it is still ambiguous at best, and in the light of the Department's approach of not shifting on the issue our interpretation is that the intention remains unchanged.

3. Section 3 of the Eskom Act of 1987 (as amended) states that:

   The objects of Eskom are, subject to the provisions of this Act, to provide the system by which the electricity needs of the consumer may be satisfied in the most cost-effective manner, subject to resource constraints and the national interest, and to perform such other functions as may be assigned to it by or under this Act or the Electricity Act, 1987.

   Section 12 of the same Act also sets out various functions, powers and duties of Eskom.

4. Section 7.2(b)(ii) states as follows:

   in particular, order that any prices for electricity supplied to be supplied be increased to meet the deficit, and for that purpose the receiver referred to in paragraph (a) must exercise all powers as Eskom might have exercised under the Eskom Act in respect of amending its prices for electricity, and the exercise of such powers does not require the sanction of any authority.

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