#StateCaptureReport: Madonsela nails Eskom over Gupta coal tender

Cape Town – Almost a billion rand worth of prepayment by Eskom to Gupta-owned Tegeta Resources & Energy for a coal tender to supply Arnot Power Station was allegedly used to buy Optimum Coal Mine (OCM) from Glencore and may be corrupt, illegal and amount to fruitless and wasteful expenditure.

These findings were contained in former Public Protector Thuli Madonsela’s report, “State of Capture”, which was released on Wednesday after a court ruled it had to be released earlier in the day.

She ordered President Jacob Zuma to launch an independent inquiry into various matters related to his relationship with the Gupta family.

Zuma’s son Duduzane also has shares in Tegeta.

Madonsela said Glencore appears to have been severely prejudiced by Eskom’s actions in refusing to sign a new agreement with them for the supply of coal to Hendrina Power Station.

“It appears that the conduct of Eskom was solely for the purposes of forcing OCM/OCH (Optimum Coal Holdings) into business rescue and financial distress,” she said.

“It appears that the conduct of Eskom was solely to the benefit of Tegeta in that they forced the sale of OCH to Tegeta by stating that OCM could be sold alone,” she said. “Thereafter, it appears, they have allowed Tegeta to proceed with the sale of a portion of OCH in the form of the Optimum Coal Terminal.

"This may constitute a contravention of section 50(2) of the PFMA (Public Finance Management Act) in that they acted solely for the benefit of one company.”

Prepayment used to buy Optimum - Madonsela

Madonsela questioned Eskom's rationale for authorising a high tender rate for coal.

"Eskom was aware that Tegeta was receiving coal from OCM at a rate of R18.68/GJ. Yet still contracted with Tegeta at an initial rate of R22.00/GJ," Madonsela said.

"It is unclear why Eskom chose to contract with Tegeta and not OCM directly. It should be noted that when Eskom concluded contracts with Tegeta to supply Arnot power station, OCM was still owned by OCH and controlled by the BRP’s (business rescue practitioners)."

Financial analysis for the period 29 January 2016 to 13 April 2016 reveals that Eskom paid Tegeta R1.16bn. An additional R47.42m was paid on 26 April 2016, Madonsela said.

Of the R1.16bn paid by Eskom, at least R910m was diverted by Tegeta to fund 42% of the R2.15bn purchase price to acquire Optimum, she said.

"All payments with the exception of the (R47.42m) payment made on 26 April 2016, were made prior to 14 April 2016, the date on which Tegeta settled their portion of the purchase price," said Madonsela.

“The prepayment possibly amounts to fruitless and wasteful expenditure as it appears that the prepayment was not used to meet production requirements at OCM, and was thus made in vain and it appears that it could have been avoided by Eskom had they exercised reasonable care.

“It appears that the conduct of the Eskom board was solely to the benefit of Tegeta in awarding contracts to them and thus it appears to be inconsistent with the PFMA.

“The conduct of the Eskom Board further does not seem to be in line with section 4 of PRECCA (Prevention and Combating of Corrupt Activities Act).”

Solely for the purposes of funding Tegeta

"In light of the extensive financial analysis conducted, it appears that the sole purpose of awarding contracts to Tegeta to supply Arnot power station, was made solely for the purposes of funding Tegeta and enabling Tegeta to purchase all shares in OCH.

"The only entity which appears to have benefited from Eskom’s decisions with regards to OCM/OCH (Optimum Coal Holdings) was Tegeta, which appears to have been enabled to purchase all shares held in OCH. The favourable payment terms given to Tegeta (seven days) need to be examined further.

"OCM clearly had 30 day payment terms with Tegeta for the supply of coal to Arnot power station, and Eskom appears to have been aware of this." 

She said it appeared that Tegeta did not meet all its obligations to OCM as OCM was owed over R148m by Tegeta as at 31 July 2016 and an amount of almost R290m as at 31 August 2016.

"This may amount to a possible contravention of section 38 and 51 of the PFMA, which states that a board needs to prevent fruitless and wasteful expenditure, which in turn is an act of financial misconduct under section 83(1)(a) of the PFMA and subject to the penalties under section 86(2) of the PFMA.

"It appears that the Eskom Board did not exercise a duty of care, which may constitute a violation of section 50 of the PFMA.

"Eskom’s awarding of the initial contracts to Tegeta to supply coal to the Majuba power station will form part of the next phase of the investigation," said Madonsela.

Guptas deny using prepayments to buy Optimum

Oakbay Investments, the Guptas' firm that owns Tegeta, on 20 October denied it used a prepayment from Eskom to inappropriately fund its acquisition of Optimum from Glencore.

It said Tegeta had bought the seven target companies that were owned by Optimum Coal Holdings.

“Tegeta is not – and has never been – in business rescue,” the company said in a statement. “As such, the structure of Tegeta’s consideration for the target companies, was not within the remit or scope of the business rescue practitioners in any shape or form.

“Tegeta received the prepayment, not Optimum,” they said.

“There was no need to inform business rescue practitioners as our negotiations with Eskom has no bearing or relevance to them,” they said.

“The coal being supplied by Tegeta was being purchased from Optimum and for which we had separate agreements from time to time and the business rescue practitioners, who were in control of the business, were fully aware of this.

“We took the necessary steps to ensure an increase in coal supply and even delivered prior to the deadline date.”

Eskom says it complied with PFMA

Eskom said an internal audit review found that the process followed for the procurement and prepayment complied with the PFMA and National Treasury regulations.

“Eskom has not been approached by the Directorate of Priority Crime Investigation (DPCI),” it said in October. “Should the DPCI approach Eskom, Eskom will cooperate with the investigations.”

Eskom CEO Brian Molefe on Wednesday said that he would like to have a close look at the report before offering any comment or observation on the release of the report.

“I haven’t seen the report and once I have had a good look at it I will make my comments. Right now I am not comfortable saying anything about this,” he said.

The Guptas were contacted for comment on Wednesday and Fin24 will update this article when they respond.