Workshop title: WS 2.6 Clean Energy – Corruption and

Conflicts of Interest in the Electricity Sector

Davida Wood, World Resource Institute

13 November 2010

Name: Gary Pienaar

Organisation: Idasawww.14iacc.org

www.iacconference.org

www.twitter.com/14iacc

(second logo possible here)

UN and AU Conventions

• United Nations Convention Against Transnational Organised Crime, 2000

• United Nations Convention Against Corruption, 2003• African Union Convention on Preventing and Combating

Corruption, 2003• South Africa has signed and ratified these treaties, which

require:– Independent anti-corruption agency– Transparent, effective, objective procurement systems– Effective access to information regime– Transparency, accountability in the management of public affairs

SA Constitution, 1996

• Human dignity and equality – s.1• Supremacy of the Constitution and the rule of law – s.1• Democracy to ensure accountability, responsiveness and

openness – s.1• Access to information – s.32• Just administrative action – s.33• ‘Values and Principles of Public Administration’ – s.195:

Efficient, effective, impartial, fair, equitable, without bias, responsive, accountable, transparent, timely and accurate information

Failure 1: Independent anti-corruption agency

• All three require the establishment of specialised and independent anti-corruption agencies:– UNCAC - Article 36– AUCPCC - Article 5(3)– UNCATOC - Article 9(2)

• Scorpions (2000 – 2008):– Unit of NPA: ‘without fear, favour or prejudice’ – s.179(4) of the

Constitution) – High Court: “right hand of the judiciary”

• Hawks (2009) within SAPS: – Accountable to Commissioner of Police and a Ministerial

Committee– Complaints Mechanism – retired judge - unlawful abuse of

power or political interference

Failure 2: Recruitment

• AUCPCC – Art. 7.4– transparency, equity and efficiency

• UNCAC – Art. 7.1(a)– efficiency, transparency and objective criteria such as

merit, equity and aptitude

• Constitution – s.195– ‘Good’ HR practices: ability, objectivity, fairness, need

to redress imbalances of the past – Broadly representative (affirmative action)– High standard of professional ethics

Reason: Deployment1997, ANC’s national conference resolution:

• National Working Committee (NWC) should deploy ANC ‘cadres’ to all state institutions, including judiciary, public service, local government administration, statutory bodies, parastatals, security forces, central bank, public broadcaster

• Ensure “deployees” remained “informed by and accountable to” the ANC

• Cadres bound to defend and implement the will of ANC leadership with “maximum political discipline”

• Implication: state officials to implement ANC decisions rather than fulfil their Constitutional obligations – Independent action >> dismissal eg Vusi Pikoli, former National Director

of Public Prosecutions, when he refused to drop fraud charges against now-President Jacob Zuma

• Effect: eliminated the constitutionally crucial concept of the separation of party and state

• Does SA remain a constitutional democracy?

Failure 3: Code of conduct and Declaration of interests

• UNCAC – Arts. 7 and 8– Duty to report corruption– Declarations of interest– Conflicts of interest

• AUCPCC – Art. 7.1– on assumption of and departure from office

• UNCAC – Art 8.5– ‘outside activities, employment, investments, assets and

substantial gifts or benefits from which a conflict of interest may result’

• SA: Has codes for executive, legislators, public servants (excluding public enterprises), judiciary (forthcoming)

Failure 4: Party funding

• AUCPCC – Art. 10– ‘Each State Party shall adopt legislative and other measures to:

(a) Proscribe the use of funds acquired through illegal and corrupt practices to finance political parties; and(b) Incorporate the principle of transparency into funding of political parties.’

• UNCAC – Art. 7.3 – ‘enhance transparency in the funding of candidatures for elected

public office and, where applicable, the funding of political parties’

• SA– Limited public funding (90:10 – entrenches status quo)– No regulation of private funding – despite undertaking to court

Idasa v ANC and Others

SA anti-corruption and ethics framework

• Public Finance Management Act, 1999– Duty to report corruption

• Prevention and Combating of Corrupt Activities Act, 2004– Duty to report corruption

• Executive Members’ Ethics Act, 1998– Executive Ethics Code, 2000

• Code of Conduct for Members of Parliament, 1999• Code of Conduct for the Public Service, Chapter 2 of the Public

Service Regulations, 2001 (Public Service Act, 1994)• Municipal Systems Act, 2000

– Schedule I: Code of Conduct for Municipal Councillors– Schedule II: Code of Conduct for Municipal Staff Members

• Municipal Systems Amendment Bill, 2010– Clause 56(a) ‘A municipal manager and managers directly accountable

to a municipal manager may not hold political office in a political party, whether in a permanent, temporary or acting capacity.’

Efficacy of SA corruption and ethics framework (2009)

Public Service Commission (Chapter 9 institution):• About 300 high-ranking civil servants are repeat offenders for not disclosing

private business interests to employers• Including directorships and partnerships • Many failed (some refused!) to submit required annual financial disclosure forms• National departments: finance, environment, energy, minerals

Auditor-General (Chapter 9 institution):• 2319 officials were found to be directors of companies or members of close

corporations doing business with the state, to value of R600m• Senior public servants awarded contracts to themselves, family or associates

from August 2007 to July 2008• Little or no departmental disciplinary action taken by August 2009• Inadequate systems in place to deal quickly and decisively with offenders

Parliament’s Standing Committee on Public Accounts• Strong condemnation• Summoned directors-general (accounting officers) to give account

Register of tender defaulters – remains empty

SA transparency andaccountability

• AUCPCC – Art. 7.4– transparency, equity and efficiency

• UNCAC – Art. 9.1– effective transparency, competition and objective criteria in

decision-making• Transparent procurement systems

– Public Finance Management Act, 1999• Effective access to information regime

– Promotion of Access to Information Act, 2000– Protected Disclosures Act, 2000– Protection of Information Bill, 2010

• Parliament’s Standing Committee on Public Accounts– By convention, chaired by an opposition party

SA Procurement Framework

• Constitution, 1996– S.217: ‘fair, equitable, transparent, competitive and cost-

effective’

• Public Finance Management Act, 1999• Treasury Regulations• Code of Conduct for the Public Service, Chapter 2 of the

Public Service Regulations, 2001• Code of Conduct for Supply Chain Management

Practitioners, 2003• Code of Conduct for Bid Adjudication Committees, 2006• Preferential Procurement Policy Framework Act, 2000• Broad Based Black Economic Empowerment Act, 2003

SA Procurement Framework

Public Finance Management Act Section 50(2):A member of an accounting authority may not act in a way that is inconsistent with the responsibilities assigned to the accounting authority or use the position of or confidential information obtained as accounting authority for personal gain or to improperly benefit another personSection 50(3):(a) Must disclose to the accounting authority any direct or indirect personal or private business interest that that member or any spouse, partner or close family member may have in any matter before the accounting authority; and(b) Must withdraw from the proceedings of the accounting authority when that matter is considered, unless the accounting authority decides that the member’s direct or indirect interest in the matter is trivial or irrelevant.’

SA Procurement Framework

Companies Act, 1973Section 234

• A director of a company has a duty to disclose any direct or indirect material interest in a contract which has been or is to be entered into in pursuance of a resolution taken or to be taken at a meeting of directors of the company

• A director must disclose his/her material interest in writing before the meeting of the directors where a possible contract is considered for the first time

• The disclosure must be read out to the meeting or each director present has to state in writing that he/she has read the declaration

• Possible liability for loss arising from breach of duty or trust

Recruitment in the SA public energy sector

• Eskom (national electricity utility with a virtual monopoly):– Eskom Conversion Act, 2001: a public company– Members of Board appointed by Minister of Public Enterprises– Eskom’s Articles of Association: State as shareholder appoints

non-executive directors, the chief executive and, after consulting [not ‘in consultation with’] the Board, the chairperson. Executive directors appointed by Board after shareholder’s approval

• National Energy Regulator of SA: – National Energy Regulator Act, 2004– Members are appointed by the Minister of Energy in a non-

transparent process

Valli Moosa, Eskom Board Chairperson

• Minister of Constitutional Development from 1994 to 1999• Minister of Environmental Affairs and Tourism from 1999 to 2004• Served on a number of boards of public and private companies• African National Congress, National Executive Committee

– manages and controls all ANC national and international assets; and– appoints the National Finance Committee, which reports to NEC at least

twice a year on the finances and budget of the ANC• Appointed as Non-Executive Chairperson of Eskom Board,

approved by the Cabinet on 19 July 2005• Medupi power station – boiler contract• Hitachi Power Africa – second choice• Chancellor House Trust – 25% shareholding in HPA, worth R5bn

Eskom’s Guidelines for Directors, March 2004

• One of the crucial fiduciary duties of any director is to act always in the best interests of the company and to avoid any action or conduct on his part that could be construed to be in conflict with the interests of the company.

• Conflicts of interest could be anything concerning which a director may indirectly gain some benefit, and should be treated with considerable circumspection to ensure that his personal integrity is not compromised, even by association.

• Regardless of having made a general disclosure of the nature prescribed, it is necessary for directors to remind the board of any interest they may have at the beginning of each meeting where a matter is on the board agenda for discussion which could relate to that interest, either directly or indirectly.

• The best policy for a director to adopt, is whenever there is uncertainty as to whether there may be a conflict of interest, is to be transparent and make the disclosure anyway. The remaining members of the board can decide for themselves if there is in fact any conflict or not, whether actual or perceived.

Eskom’s Conflict of Interests Policy, November 2006

• Obligations of employees and directors with regard to conflicts of interest and the declaration and management of these interests

• Eskom, its directors, its employees, its customers, and its suppliers act with integrity and create public confidence by conducting business in a fair, impartial and transparent manner

• A ‘personal interest’ may be an actual or potential, direct or indirect interest of an employee or a director in any business, entity, undertaking, or investment, as a shareholder, director, associate, member, adviser/consultant, or in any other capacity

• ‘It is important to note that conflicts of interest can arise in various situations and are not confined to interests in contracts or direct financial interests’

Conflicts of Interest Policy

Management of conflicts of interest

• Declare conflict of interest

• Recusal unless otherwise agreed by the Board

• Additional responsibilities are imposed on directors and senior managers of Eskom - subject to greater scrutiny

• Non-compliance could amount to misconduct

Alleged conflict of interest

• Allegations reported in the Mail & Guardian• Deloitte investigation at Board’s request: cleared

Chairperson• Complaint lodged by leader of official

Parliamentary opposition, Democratic Alliance • Office of the Public Protector, national ethics

ombudsman• Chapter 9 of the Constitution: ‘independent’ • Public Protector Act, 1994: powers

Public Protector’s findingsReport No. 30 of 2008/9

Did Eskom act unlawfully or improperly by awarding a contract to a consortium in which the ANC has an interest?

• No law or policy prohibited the awarding of the contract to an entity in which a political party represented in government has an interest

• State and not the ANC is the sole shareholder of Eskom• Awarding the contract to the Hitachi Consortium did not make the

State a player and a beneficiary, given the differences between the concepts of “the State”, “the Government” and political parties represented in government

• The latter are private entities whose fundamental rights, including the right to trade freely, are recognised and protected by law

• Comment: Ignored reality of conflation between party and state: party policy of ‘deployment’

Public Protector’s findings: mitigating factors

• Independent audit of the procurement process relating to the Medupi Boiler Contract: – No indication that the ANC in fact exerted political

pressure on Eskom to award the contract to the Hitachi Consortium

– Change of award of boiler contract to the Hitachi Consortium was based on merit and after obtaining independent legal advice

– But auditors apparently unaware of Eskom’s Guidelines or Policy

Public Protector’s findings

• However, it would be naive to disregard the perception that the ruling party could use its political influence to improperly benefit from contracts with public entities

• The issue of whether or not political parties should be allowed to be involved in business dealings with government or public entities, should be regulated by legislation

• Comment: To date, it has not

Public Protector’s findings

• Noted: ANC leadership changed in December 2007, shortly after the awarding of the contract to the Hitachi Consortium

• Noted: New leadership expressed concern about public comment on ANC involvement in contract with Eskom

• Noted: ANC Treasurer-General stated that, because of “governance issues”, Chancellor House would be exiting from the deal with Eskom

• Comment: To date, ANC has not done so

Public Protector’s findings

Did Mr Moosa have a conflict of interests as the Chairperson of the Board of Directors of Eskom because of his private interest in the ANC?

• He was aware of the ANC’s interest when he chaired Board meeting where resolved to award contract to Hitachi Consortium

• He maintained that his membership of the NEC of the ANC did not give rise to a conflict with his duty as the Chairperson of the Eskom Board of Directors

• He had disclosed his membership of the NEC and he was not a director, member, trustee or beneficiary of Chancellor House

• He contended that as he did not benefit from the contract awarded to the Hitachi Consortium and therefore had no material interest in the contract, there could not have been a conflict of interests

Public Protector’s findings

• However, disclosing an interest did not mean that there was no conflict that had to be managed.

• It was not alleged that Mr Moosa had any direct relationship with Chancellor House, other than involvement with the ANC, that owns it

• PFMA, the Policy and the Guidelines do not exclude non-material interests from conflict of interests

• Not consistent with national and international best practice to focus only on material interests when defining and managing conflicts of interests

Public Protector’s findings

• The issue: whether Mr Moosa’s interests in the governing structure of the ANC that controls its finances and assets could have, or could have been perceived to have influenced his objectivity in participating in a decision by the Board to award a contract from which the ANC would benefit financially

• No doubt that Mr Moosa, as a member of the NEC and its Finance Committee owed a duty to the ANC to act in its best financial interests

• Likewise, as the Chairperson of the Eskom Board of Directors it was expected of him to act in the best financial interests of Eskom

• These two interests were therefore in direct conflict at the time when the awarding of the contract to the Hitachi Consortium was considered by the Board

• As Chairperson of the Board, it was reasonably expected of a person of the calibre of Mr Moosa, to have led by example in the application of and compliance with the Policy and the Guidelines and to be seen to be acting in the best interests of Eskom

Subsequent developments• Some time afterwards, Mr Moosa was ‘redeployed’• Ruling party officials, relatives of elected representatives and public

servants frequently benefit from contracts with the State or from BBBEE contracts = ‘repeated re-empowerment’

• No progress in reducing tender irregularities – many commitments• Revolving door: 1 year ‘cooling off’ period mooted by Public

Administration Management Bill (2008)• SACP: ban public servants from having business interests• ANC: has acknowledged it faces ‘moral decay’ and repeatedly

proposes regulating members’ business interests with the State• Parliament’s Members’ Ethics Committee proposed tightening up

Code of Conduct - rejected (2010)• ID: asked the Public Protector to table Eskom report in Parliament• DA: tabled a Private Member’s Bill to ban public servants

contracting with the State – history unfavourable• Minister of Finance: “R25bn misappropriated under

investigation may be the tip of the iceberg” >> rash of new government commitments

Future of procurement in the energy sector

• 1999 ‘Arms Deal’ – R70bn – R1bn in bribes alleged• Draft Integrated Resource (electricity) Plan IRP 2010

– 20 year plan– R1 trillion– Includes a proposed fleet of six nuclear power stations

• SA Nuclear Energy Policy: Extensive executive discretion

• IRP 2 Procurement: IPPs: 30% of new generation capacity

• Protection of Information Bill, 2010: May classify: – All commercial information provided to the State as part of a

procurement process– All matters relating to the protection and preservation of all

things owned or maintained for the public by the State