13 April 2023Analysis

South African energy captive fined by Prudential Authority

South Africa’s Prudential Authority (PA) has imposed an administrative penalty of R5 000 000 on Escap SOC after finding it had breached section 167(1) of the Financial Sector Regulation Act 9 of 2017 (FSRA).

Escap SOC is a wholly-owned subsidiary of South African electricity public utility Eskom SOC and was incorporated to be a captive short-term insurer for Eskom.

The PA found that the board of directors of Escap failed in its oversight responsibility to ensure reliable and transparent financial reporting to the PA. The decision by the board to declare a dividend of R600 million to the shareholder (Eskom SOC) in July 2021, was based on an overstated solvency position.

In addition, the PA found there were no board approved policies and procedures relating to the appointment and dismissal of senior management and head of control functions. Furthermore, the PA found that there was no board approved performance and remuneration standard for senior management and heads of control functions as required in terms of section 8.2 of the Prudential Standard GOI 2.

The PA also found that the former Escap chief executive occupied potentially conflicting roles as an executive director of Escap and holding the position of the general manager for group tax of Eskom SOC.

The board of Escap also did not have a succession plan for board, senior management and heads of control functions.

The PA added that it had found that Escap did not have its own organisational structure that informs the resource needs of Escap or ensures alignment to the Escap internal control structure as an insurance company.