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EOH resets rules of engagement over legacy govt contracts

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Megan Pydigadu, EOH group finance director.
Megan Pydigadu, EOH group finance director.

EOH says the settling of controversial public sector contracts has opened an opportunity for the firm to reset its relationship with government, a sector it says remains core to its operations.

The relationship between the JSE-listed technology services organisation and government hung by a thread in the past two years, as the parties negotiated solutions to problematic legacy contracts.

Public sector business contributes a significant chunk of EOH’s revenue, but recent relations had negatively impacted on its finances.

This, EOH said last week, is changing as it is seeking to solidify its business relationship with the state.

In an interview with ITWeb, Megan Pydigadu, EOH group finance director, said the bickering over legacy state contracts is almost over, and the new management wants to reset rules of engagement and continue to provide services to government entities.

In the past two years, EOH and the state had been negotiating settlement of legacy contracts that were found to be problematic by an ENSafrica forensic investigation.

EOH had appointed ENSafrica to conduct a proactive, comprehensive investigation into the company’s contracts and identify any wrongdoing or criminal conduct in the acquisition, award or execution of contracts.

The probe found R1.2 billion worth of suspicious transactions at EOH, which mostly involved those within public sector contracts.

EOH, which recently announced it was inching closer to tearing down the flagged legacy contracts, told ITWeb last week that relations have been mended and the public sector remains core to its operations.

Core customer

Pydigadu said the public sector remains a valuable sector to the group and it will continue working with state entities.

“The public sector is still very much a core of our business and makes up about 20% of our revenue. I think what we had said is that we wanted to exit legacy public sector contracts, which have now been negotiated. Public sector is definitely a core for us.”

She said out of the eight public sector contracts, five had already been closed and EOH expects to conclude negotiations on the remaining three by the end of June.

Among the remaining contracts is the critical Department of Home Affairs biometrics tender, which EOH said had been ceded as of end of March.

The botched Automated Biometric Identification System tender was supposed to be up and running after 12 months but this hasn’t happened yet. The contract was awarded in 2015.

“What is left is the arbitration between ourselves and the Department of Home Affairs. We do have an independent administrator working on that and we should have closure on it by the end of June,” Pydigadu said.

“We are not that concerned about the administrator, the claim is from both parties. We also have fines that we are paying for over-invoicing that came out of the ENSafrica investigation.”

Pydigadu said the fines related to two specific contracts.

“One is with the Department of Defence, which we have already settled; we agreed on a fine of just over R40 million, which we are paying over three years. That was dealt with in October last year, and on the other one, we had over-invoiced for licences related to the Department of Water and Sanitation. We are busy negotiating to close that one too.”

Quality yields

Looking ahead, Pydigadu said EOH had seen progress in its key strategic initiatives, including optimising the cost and capital structures, and is now focusing on quality of earnings.

She explained that from EOH’s perspective, it had been focusing on revenues and exiting non-core businesses to reduce debt.

“Revenue reduction has been very much of the plan, as we exited non-core business and sold assets to reduce the debt. For the first time, we had operational profit of R59 million, which is significant for EOH.”

Pydigadu added it’s the first time since the Stephen van Coller management team took over that EOH posted operational profit. CEO Van Coller took over the firm in 2018, and since then, the group has significantly reduced costs.

“We think the core business is performing.”

EOH said it delivered better-quality earnings in the six months to end January,

In the period, EOH’s revenue declined by 29% to R4.38 billion, mainly due to disposals and legacy contracts. The company generated positive operating profit of R59 million, compared with a R915 million operating loss in the prior period.

EOH’s cost optimisation exercise saw it lower costs, as it cancelled leases of properties occupied by some of the business units.

Furthermore, the company last week announced it had reduced headcount by a further 1 566 due to asset sales and contracts that weren’t renewed.

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