On the eve of the highly-anticipated announcement of Eskom’s tariffs for the coming three years, the Auditor-General South Africa (AGSA) has warned that tariff increases will fail to improve the State-owned company’s financial viability unless they are accompanied by dramatic improvements to revenue management and controls.

It also warns of unintended consequences for municipal indebtedness and illegal connections, given growing affordability concerns.

The National Energy Regulator of South Africa will announce its decision on Eskom’s sixth multiyear price determination (MYPD6) on Thursday, following nationwide public hearings late last year.

During the hearings an overwhelming number of stakeholders objected to Eskom’s application for increases of 36.15%, 11.81% and 9.1% respectively for the 2025/26, 2026/27 and 2027/28 financial years, warning that such hikes would crimp growth and increase poverty.

In an presentation to the Portfolio Committee on Electricity and Energy, made by AGSA officials together with the Deloitte executives who conducted the audit on behalf of the AGSA, alarming details were provided regarding a continuing lack of internal controls and consequence management at Eskom.

“Eskom continued to submit financial statements for audit purposes which contained material misstatements in multiple account balances and disclosures,” the AGSA stated, adding that significant deficiencies in internal controls had resulted in negative audit outcomes for at least the previous five years.

This included the most recent financial statements for the year ending March 31, 2024, which received a qualified audit opinion.

In addition, the release of the statements were delayed until December 19, long past the May 31 deadline for submission to National Treasury and the auditors as required by the Public Finance Management Act.

The delay was attributed to difficulties in finalising the take-on balances to be reflected following the disposal of the transmission business to the newly formed National Transmission Company South Africa, as well as a forensic probe into illegal prepaid electricity tokens, which were shockingly found to have been generated at large scale by Eskom employees with privileged-level access to the vending system.

The AGSA was unable to place a value to the prepaid electricity tokens generated illegally, nor could it provide certainty on whether and where these token had been used. This, owing to a lack of available data logs, which the AGSA said reflected a breakdown of controls in the underlying business processes.

Eskom reported distribution energy losses of 13.9 TWh as a result of electricity theft in 2023/24, when it reported a loss of R55-billion.

While AGSA acknowledged that the MYPD6 decision would be key to increasing Eskom’s future revenue, it also used the platform to raise affordability concerns.

“Increasing tariffs without addressing Eskom and municipal distribution infrastructure and revenue management challenges will therefore not address Eskom’s viability challenges.

“We will likely have an Eskom that is supplying electricity, only for that electricity to be lost through bad debts and non-technical losses, or illegal connections.”

The AGSA was particularly concerned about the potential for the hikes to exacerbate the municipal indebtedness crisis, which it described as the “biggest viability risk to Eskom, after debt service costs”.

At the end of March, Eskom was owed R86-billion by municipalities, and the figure had since climbed to above R90-billion, with many of the municipalities that signed on to the National Treasury’s debt-relief programme failing to comply.

The AGSA noted that R45.2-billion was owed by 34 municipalities that had been categorised as “dysfunctional” by the Department of Cooperative Governance and Traditional Affairs, of which 32, owing R44.7-billion, were participants to the debt relief programme.

It also called for a strengthening of government policies aimed at protecting vulnerable consumers to cushion them from the inflationary impacts of future Eskom tariff increases.

Audits of municipalities by the AGSA found instances of abuse of indigent policies, such as the free basic electricity allowances, which were also not reaching the intended poor beneficiaries.

In some instances, the allowances were being provided to residents who did not qualify, including government employees, and many municipalities did not have controls in place to check when indigent households had reached their limit.