Eskom: Hey big spender
An Eskom-appointed inquiry by international law firm Dentons shows that the utility failed to obtain meaningful discounts when buying diesel from small companies during its load-shedding crisis
In the three financial years to March 2015, Eskom spent more than R6bn buying diesel from 46 suppliers with whom it had no formal contracts. From these suppliers, many of them pop-up shops created specifically for the purpose of supplying Eskom, the utility failed to use its significant buying power to secure discounts, while it had discount agreements in place with its contracted and established suppliers.
Though it had only three contracted diesel suppliers for the period, Eskom turned to these shadowy players, called “supplementary suppliers”, to supply it with 2.6m litres of the fuel, according to the Dentons report, which Eskom has kept hidden from the public.
This was part of the electricity utility’s R30bn spending spree on fuel for the two open cycle gas turbine (OCGT) stations that it had to rely on to stave off load-shedding at the peak of its problems.
Odd family and professional links were exposed in the probe into some ‘supplementary suppliers’
PetroSA, the state-owned converter of natural gas to vehicle fuel, Masana Petroleum and Afric Oil were the more reliable industry veterans with whom Eskom had secure supply agreements. From them it extracted discounts of 20c-42c/l of diesel purchased.
Dentons says the average diesel price was R10/l for the approximate 3bn litres, giving Eskom a saving of R631m in discounts during the three years.
From the rudimentary suppliers, who included a beauty therapist and a dentist with no prior fuel-trading experience, Eskom managed to secure discounts of only R5.8m from a total purchase of R6.1bn.
This would appear to be far too small. This failure to negotiate discounts increased the average cost of the fuel to Eskom to R11.17/l for the supply of more than 500m litres. The potential wastage to Eskom on these is “in the order of R200m in the past two years”.
Dentons, hired to conduct a forensic probe into Eskom’s near-meltdown in the years to 2015, raised some serious “concerning elements” in its report-back to the electricity supplier.
“A cursory review of the Web for some of these suppliers conducted by an officer [of] Eskom contemporaneously suggested they were not well-established entities,” said Dentons.
Again, and without mentioning names, Dentons raised the allegations that some of Eskom’s employees exploited the utility’s weak governance and oversight to establish companies for family members to take advantage of the business opportunities
Dentons says its review of the incident management database, Eskom’s log of whistleblower allegations, “did not identify
a record of a concern we understand to have been raised by a finance employee as to the bona fides of some of these ad hoc diesel suppliers.
“We can confirm the invoices from the earlier periods for a sample of vendors tested are rudimentary in design, and in fact the invoices for three suppliers, Yem Yem, Finesse and Infinit, show many commonalities,” says Dentons.
In the report to Eskom, Dentons says Matshela Koko, then the executive responsible for overseeing the contracts, restricted Eskom to negotiating with only six suppliers. Eskom would try to obtain discounts of 10c-37c/l on deals with these.
Dentons questioned why Eskom had chosen to do it this way. “There would appear to be a need to understand and critically challenge why it has taken 30 months to only come up with a shortlist of six providers who might be asked to provide discounts of between 10c and 37c per litre,” says Dentons.
Koko told Eskom “he was satisfied that the names on the shortlist were not names he had seen before,” says Dentons. “However, four had been used before.”
The law firm said that taken together with other “red flags” over the bona fides of the diesel procurement process, Eskom’s management of this expenditure “requires closer scrutiny”.
It is not only the supply of diesel that Dentons found was riddled with suspicious transactions and relationships. “A forensic report concludes that a supplier was selected for work on Medupi when an alternative supplier had clearly won the tender. Apparently the selected supplier would accept they had never done anything like this project before,” says Dentons.
That supplier was found by audit firm PwC to have been responsible for a three-year delay.
“The inference drawn is that the supplier was a friend of senior officers and so no contract remedies were sought,” says the
When Dentons was asked to stop its probe in June 2015, it left Eskom with a list of allegations of malfeasance, from employees and from PwC’s forensic investigation, that it said needed further probing.
Instead of digging deeper, Eskom’s board hid the report in a vault, saying last week that it chose to fix the company instead of pursuing the people accused of wrongdoing, at its expense. Eskom’s board also resolved to destroy the evidence of the allegations presented to it.
While a search of companies’ registration records did not show any obvious links between the companies, they still turned up some curious irregularities.
Dentons randomly selected invoices from a sample of diesel suppliers for testing purposes, but did not link them to any specific allegations of wrongdoing or irregularity. Among them are Kekoil, Yem Yem Petroleum, InfinitEnergy Commodity Trading Enterprise, Jakes Africa Energy and Kamoso Fuel & Gas.
Kekoil is owned by Johannesburg dentist Maxine Kekana, who is also its sole director. Company records show that the company was registered in April 2008. InfinitEnergy, registered in August 2005, also has a sole director — Linda Lennox Mjuza.
Kamoso is the company owned by sole director and beauty therapist Monica Nkosi, and was registered only in November 2012. Less than a year later it was supplying diesel to Eskom.
“It is possible therefore that Eskom was conducting business with Kamoso before it had established an invoicing system, which may indicate that it was set up with this specific purpose,” says Dentons.
Kamoso’s company registration documents do not show any auditors or evidence of regulatory filings. Dentons says this company was registered by a Trevor Bhebhe, who gave only a Yahoo e-mail address and a cellphone number. Dentons traced Bhebhe on LinkedIn, where his profile states that he was “credit risk manager/assistant manager finance-credit risk” at Sasol Oil. “This is an unusual relationship and may represent a conflict of interest,” says Dentons.
Dentons pointed out irregularities in the invoices to Eskom from these suppliers. Worryingly, the invoices kept showing different company registration numbers and bank accounts. Of the three Yem Yem invoices seen by Dentons, “the bank
account provided was different on all three occasions”.
Company recoreds suggest Nonhlanhla Dhlomo is Yem Yem’s sole director. Three other directors, Siphiwe Dhlomo, Pitso Madibo and Jabulile Mackade previously resigned their directorships.
Curiously, the record shows that Siphiwe Dhlomo resigned from the company on November 25 2011, the same day Nonhlanhla Dhlomo became director.
Whereas Yem Yem’s website shows only Siphiwe Dhlomo as chairman and director, together with CEO Cindy Smith and Dimakatso Pascaline Sehularo as business development and marketing director, Nonhlanhla Dhlomo is nowhere to be found.
Both Siphiwe Dhlomo and Nonhlanhla Dhlomo had previously been appointed and then resigned four times each as directors of the company in the three years to 2011. Their appointments and resignations have always happened on the same day.
Smith, the CEO of Yem Yem Petroleum, tells the Financial Mail that Nonhlanhla Dhlomo is a shareholder and director of the operating company while Siphiwe is the chairman and director of Yem Yem Holdings. While Smith herself is the CEO of the fuel distributor start-up, she is neither a director nor a shareholder.
She explains the many changes in the directorships of the company as part of the development of the start-up from green fields. “Nonhlanhla and Siphiwe are siblings. It’s a family business and these entrepreneurs would have been switching roles while trying to see who’s suited to play what role,” says Smith.
Yem Yem supplied Eskom for only about 12 months, up to late 2013, says Smith. “We were a top-up supplier that Eskom never used for more than five months at a time. But orders suddenly dried up late in 2013 without any explanation.”
Yem Yem has not supplied a molecule of diesel to Eskom since then, says Smith.