DPE Shareholder Oversight – Methodology and Impacts Presentation to Portfolio Committee – 14 September 2010.

DPE Shareholder Oversight – Methodology and Impacts

Presentation to Portfolio Committee – 14 September 2010

Strictly confidential 2

Contents

• SOE in a developmental State

• DPE - Shareholder management process

• DPE Shareholder management in practice

• SOE Impacts

– Transnet

– Eskom


Government is the only social agent with an intrinsic interest in ensuring adequate investment in infrastructure

Clear strategic signal: security of supply

Particularly important in the context of immature regulatory capability and volatile global supplier markets.

Government investment does not preclude operational partnerships with, or direct investment from, the private sector.

However, while such investment is a pre-requisite to sustaining the economy, it will not enable a transformation of the economic trajectory.

A core role of the SOE is to provide strategic network infrastructure to ensure security of supply and develop key industrial capabilities

The challenge is to accelerate the development of specific technologies and associated advanced manufacturing capabilities and capacity – this will require investment in plant, technology and skills.

Infrastructure investment can create demand conditions for the development of industrial capabilities.

In complex, high risk areas of manufacture, it is vital that the State takes a leading investment role to transform the economic trajectory.

Infrastructure Industrial Development


Contents




• SOE Impacts

– Transnet

– Eskom


The DPE’s mission is to ensure that the SOE are both financially sustainable and deliver on government’s developmental objectives

To optimize the alignment between the role of the SOE in the national economic strategy and the performance of the DPE’s portfolio of enterprises through delivering best practice shareholder management services and engaging with stakeholders to create an enabling environment for such alignment.

DPE

National InterestEnterprise Interest


The Shareholder has distinct responsibilities…

• Shareholder owns shares, not enterprise assets.

• These shares give the shareholder specific rights and powers: – Shareholder Minister to appoint all directors after Cabinet approval -

executive directors appointed upon recommendation from Board.

– Approval of significant & material transactions.

– Issuing of a strategic intent statement.

– Conclusion of binding shareholder compact.

– Access information to monitor and evaluate performance.

– Enforce accountability and take remedial action.

– Production of good practice notes.

Shareholder Responsiblity


…as distinct from the Board and Management….

• Responsible for ensuring the financial sustainability of the company through coherent utilisation of company’s assets

• Responsibility for development and implementation of the strategy:

– Development of strategic and business plans and subsidiary plans. (financial, risk management, operational, marketing, etc).

– Appointment of management and staff.

– Management of all aspect of operations.

– Development of detailed company policies (e.g. remuneration, procurement, etc) within guidelines defined by practice notes and implementation of company practice in adherence to the policy.

Board and Management Responsibility


…as distinct from policy and regulatory responsibilities

Needs to be independent of policy departments to avoid conflicts of interest:

The resulting institution needs to be separated from policy departments (particularly when there are regulatory responsibilities)

• Funding must ultimately derive from a commercial tariff

• The scale of the infrastructure challenge is too large for it to be funded out of the fiscus alone

• Government needs an enterprise in the sector to ensure continuity of strategic intent

Once the below perspectives are accepted…

1

2

Between consumers and SOE interests

Between SOE and private sector

• Prime function of policy is to advance the interest of the consumer

• Where sector policy promotes competition

• Where regulator needs to be seen to independently set a fair price.


Contents




• SOE Impacts

– Transnet

– Eskom

Strictly confidential

The shareholder management process integrates national strategic objectives into SOE planning and operations.

10

DPE reviews SOE performance (Treasury Regulation 29.3)Isibuko DashboardMinister issues Investor Briefs to SOE Boards on emerging SOE performance trends, highlighting need for corrective action in event of any deviation from agreed key performance areas and indicators. SOE AGMs.SOE reporting to Parliament (PFMA Sec 65).

Performance Monitoring &

Evaluation


The DPE has also developed an electronic dashboard (Isibuko) to systematise reporting & analysis

The Isibuko dashboard has been developed to allow for timely reporting & enable rapid access to information in key areas including: • financial• operational• capital investment• capitalisation• intra-governmental policy• socio-economic, • risk, etc

Ensures clear, comprehensive & timely SOE performance reporting & monitoring that provides adequate information to make key strategic decisions :

• SOE inputs key performance data required by DPE for monitoring process.• SOE validates & approves submitted data.• DPE adds analysis & reports on SOE performance.• SOE & Portfolio Performance is available via the Dashboard.


The DPE has developed a comprehensive risk management framework

The risk management process consists of the following main steps:

1. Objective setting (what is our mandate, objectives, etc)

2. Risk identification (what can go wrong, what can prevent objectives being achieved, causes of risk?)

3. Risk analysis (what are the chances of the risk occurring [LIKELIHOOD], what will be the effect when it occurs (IMPACT]).

4. Risk response (avoid, accept, reduce or share the risk by developing controls, procedures, etc to reduce risk to acceptable levels).

5. Control activities (policies and procedures are established and implemented to ensure the risk responses are effectively carried out).

6. Information and communication (information is captured and communicated so that people are able to carry out their risk management duties).

7. Monitoring (ongoing management activities and separate evaluations).

12


Example of risk analysis - Transnet

SOE top 10 risks: Revenue

Capital investment

Regulation

Non compliance

Environmental

Funding

Input costs

Assets

Human capital

Commodity

DPE top 10 risks: Inadequate infrastructure

Tariff regulation

Operating efficiencies

Business interruptions

Safety

Skills shortage

Procurement / Fraud

Rolling stock

Corporate Structure

Cost of funding & liquidity


A procurement policy to entrench supplier development in each transaction has been developed

Organisation ProcessGovernance & controls

People/Change Management

CSDPStrategy

Other Policies

Procure-ment PolicyProcurement Policy2

1

Systems

3 4 5 6

7

Inte

rnal

dev

elo

pm

ent

fram

ewo

rk

• Integrate supplier development concerns in all procurements.

• The development of the strategic plan is the tip of the iceberg – now need to embed the process in the organisation.

• Implicitly encouraging best-practice procurement as demand forecasting is the key to supplier development.

• Top management continue to focus on the major procurements

Comments


A procurement policy to enable fleet procurements has also been designed

• Objective is to enable procurements that are long term and go beyond the capabilities of the balance sheet and consequently the Board mandate, i.e. that require systematic government support.

• There are seven gateways in the procurement process which give government an opportunity to ensure that localisation objectives are integrated and related risks are managed.

• The policy ensures that a business case for the procurement is constructed around the value of the procurement to the efficiency and viability of the business, as well as its impact on investment by customers and suppliers and broader “externalities”.

• Ensuring that required government support to achieve localisation objectives is systematically coordinated with the procurement process.


Intended to equip SOE Board directors with: knowledge, skills and understanding of SOE’s government ownership expectations.

Assist directors’ meaningful contribution to effective stewardship and successful performance of SOE

DPE developed a toolkit addressing the following, amongst others: The specialist nature and complexity of SOEs; The challenges of SOE risks and ensuring performance and delivery; The unique nature of the SOEs shareholder, policy and administrative

relationships; The specific public sector regulatory environment, Public Finance

Management Act (PFMA), Treasury Regulations, etc. The exposure associated with demanding fiduciary duties, legal and

regulatory requirements, liability of Directors, best practice governance and business requirements, etc.

The ability of experienced Directors to contribute to the knowledge and development of inexperienced Directors through their interaction;

The DPE has developed a comprehensive Board Induction programme


Oversees implementation of internal SOE skills development:

Ensure SOE participates in initiatives to support National Skills Development Agenda.

Ensure scarce and critical skills defined in shareholder compacts and monitored on dashboard.

Ensure increased skills collaboration across DPE SOE.

Promote and coordinate optimal utilization of SOE training facilities to contribute to additional artisan training for national pool.

Solicit funding from DHET/NSF and SETAs to fund training of additional artisan trainees for national pool.

Monitors SOE supplier network skills development related to infrastructure investment programmes and maintenance programmes through dashboard.

Facilitates partnerships with SOE, DHET, SETAs, NBI, FET Colleges and relevant stakeholders to collaborate on initiatives to maximise and support artisan training to increase the national pool of artisans.

The DPE has established a unit to manage skills development


Contents

• SOE in a developmental State.

• DPE - Shareholder management process.


• SOE Impacts

– Transnet

– Eskom


Transnet’s mandate is to assist in lowering the cost of doing business in South Africa, enabling economic growth and security of supply through providing appropriate ports, rail and pipeline infrastructure as well as operations in a cost effective and efficient manner within acceptable benchmark standards.

Transnet’s strategic mandate is focused on enhancing national competitiveness in port and rail logistics


1) Improving service levels and efficiencies across the organisation and creating strong disincentives for poor performance.

2) A sustainable capital investment approach whilst maintaining the health of the Transnet balance sheet.

3) Ensuring new capital investment is translated into tangible improvements in transport services (improving the levels of productivity and reliability experienced by customers).

4) Meeting the policy and regulatory challenges in a collaborative manner to contribute positively to government objectives.

5) Participating to achieve “a responsive, economic infrastructure that meets the needs of the growing economy” – as per Outcome 6 in the Medium Term Strategic Framework (MTSF) which reflects government’s mandate for the Infrastructure Development Cluster.

6) Finding innovative means for private sector involvement to enhance the service offering of Transnet and improve the competitiveness of the freight logistics system.

There are six focus areas guiding Transnet’s strategic mandate


KPI UNIT TARGET

FINANCIAL VALUE CREATION

OPEX as a % of revenue % ≤ 60

Return on average total assets % ≥ 8

Cash interest cover times ≥ 3.2

Gearing % 46

INFRASTRUCTURE AND MAINTENANCE

Capital expenditure % of R’m Budget ≥ 90

Maintenance cost % of R’m Budget ≥ 90

HUMAN CAPITAL

Training spend % of personnel costs 3-4

SAFETY

Disabling Injury Frequency Rate – (DIFR Safety) Index ≤0.85

Transnet’s Shareholder Compact has a range of KPI’s at Group level


KPI UNIT TARGET

MARKET SHARE

Volume growth

Export Coal (ton.km) % ≥ 8.5

Export Iron Ore (ton.km) % ≥ 10.5

Containers (TEU’s) % of railable maritime

containers

≥ 33.0

GFB (excluding containers) (ton)

% ≥ 15.0

Average revenue per unit increases (ton.km)

Export Coal % ≤ 3.4

Export Iron Ore % ≤ 13.5

GFB % ≤ 7.3

SERVICE RELIABILITY

On-time departure

Export Coal minutes ≤ 150

Export Iron Ore minutes ≤ 95

GFB minutes ≤ 185

On-time arrival

Export Coal minutes ≤ 250

Export Iron Ore minutes ≤ 160

GFB minutes ≤ 240

LOCO UTILISATION

Gross.ton.km/loco/month

Export Coal GTkm/loco/m (000)

≥ 16 200

Export Iron Ore GTkm/loco/m (000)

≥ 44 800

GFB (mainline locos) GTkm/loco/m (000)

≥ 5 300

WAGON UTILISATION INDEX

Wagon Cycle time

Export Coal Hours ≤ 66

Export Iron Ore Hours ≤ 81

Wagon Turnaround time

GFB Hours ≤ 12

SAFETY

DIFR Index ≤ 0.95

Example of Shareholder Compact targets at Divisional level – TFR

22


Transnet plans to invest over R90bn in capital assets over the next five years

Over the past 5 years Transnet has spent approximately R72.4bn on Capex.

The five year (2010/11-2014/15) forward looking investment plan amounts to R93.4bn (excluding capitalised borrowing costs).

Since the start of the capital investment programme, 21 major projects have been launched – some are still in progress whilst others have been completed.

Despite the economic downturn Transnet is still committed to investing in infrastructure to provide capacity ahead of demand.

Transnet has undertaken extensive capital scrubbing to Re-prioritise the timing of certain projects Identify procurement saving Identify potential cost reductions through value engineering

Projected spending will be within the shareholder compact targets


Significant benefits accrue to: Northern Cape (through which the Iron Ore Line runs),

Kwazulu Natal (which has the busiest port),

Mpumalanga (in which many coalmines are found, and through which a major portion of the Coal Line runs) and

the Eastern Cape.

Transnet Investment Impact realised in 2018 calculated as a percentage of provincial GDP in 2008

Province GDP(Rmn) Employment creation

Eastern Cape R11 503 62 186

Free State R3 932 19 531

Gauteng R25 566 144 993

KwaZulu-Natal R30 820 143 455

Limpopo R3 742 20 754

Mpumalanga R10 069 45 767

Northern Cape R12 320 57 214

North-West R5 635 27 732

Western Cape R12 095 64 649

Total impact R115 682 586 267

The Transnet investment programme will also have significant provincial impacts

Transnet Investment Impact in 2018

Total impact (direct/indirect/induced)

Impact on Employment [numbers] 586 267

Skilled 135 871

Semi-skilled 246 935

Unskilled 203 461


Transnet also has a comprehensive internal skills development programme

School of Rail

TFR

School of Port Operations

TPT

School of Pipelines

TPL

School of Ports

TNPA

School of Engineering

TRE

• 8 Campuses Nationally spread

• Rail operations training e.g.:

• Train Drivers• Train Control• Yard

operations

• 1 Campus in Durban

• Port operations training e.g:

• Operators of Lifting Equipment

• Cargo Coordination

• Drivers


• Port authority training e.g:

• Marine Pilot,• Tug-master• Vessel Traffic

services• Marine Global

Best Practice


• Pipeline operations training e.g:

• Technical Pipeline Operations

• Pipeline Controllers, Coordinators and Planners

• 18 Campuses Nationally Spread

• Custodian for Artisan training for whole of Transnet

• Technical rail engineering training e.g:

• Artisans• Trade Hands• Process

Workers

• ‘Schools of Excellence’ are provisionally accredited with TETA and in-progress to obtain full accreditation. • Trade Test Centres are fully accredited with TETA


Transnet has secured three major CSDP transactions

• The current CSDP plan with EMD was finalised in November 2009.• The EMD CSDP plan aims for (1) TRE to become part of their Global Supply Chain for

rebuilt traction motors and diesel engines, (2) to accredit TRE’s maintenance facilities for EMD locomotive maintenance and (3) to localise the supply of at least 10% of the value and/or quantity of the parts listed per the Spare Parts Agreement.

• These CSDP goals will be achieved through the transfer of skills and relevant intellectual property required to carry out the activities mentioned.

• EMD is already actively supporting TRE in acquiring new work in Africa..• Execution of the EMD CSDP plan is well underway

• The contract for the building of the 100 Locomotives was awarded to GE and signed on 17 December 2009.

• GE developed a CSDP plan consisting of 3 main initiatives – training for maintenance development, Lean, Six Sigma and Candidate Engineers; localisation of various components and parts as well as a licence agreement with TRE for the overhaul and modernisation of GE locomotives.

• The signing of the CSDP Plan was concluded on 30 June 2010• The Licence Agreement would allow for TRE and GE to enter into a technology

partnership for locomotive overhauls and modernizations, with GE being the prime contractor and TRE the sub-contractor.

• The GE 100 loco deal is the biggest CSDP transaction to date making Transnet the leader in CSDP execution

• The DPE has indicated their satisfaction with Transnet ‘s CSDP progress thus far

• TRE will be a centre of excellence for locomotive OEMs together with various Tier 2 and 3 suppliers.

EMD:Spare partsContract Value:R550 million

GE: 100 Loco dealContract Value:R2.6 billion

50 “Like new” locomotives

• 50 “Like-new” programme now complete under the equivalent of the CSDP Framework using Transnet Rail Engineering


Transnet has increased its spend with BBBEE suppliers significantly over the past 4 years

• Significant focus has been placed on the BBBEE scorecard ratings

• Emphasis has been placed on improving on Preferential Procurement and Enterprise Development

• Spend with BBBEE companies has increased significantly

• In 2010 Transnet has spent R13.5bn which accounts for 65.35% of total procurement spend against a target of 65% of which:• R1.9bn has been spent on Exempted Micro

Enterprise (turnover below R5m) • R2.7bn accounting for 13.24% of total

procurement spend against a target of 5% has been spent on Qualifying Small Enterprise (turnover between R5m and R35m)

• R837m has been spent on Black Women Owned (30% shareholding)

• R3.1bn accounting for 15.33% of total procurement spend against a target of 9% has been spent on Black Owned Enterprises (50% shareholding)

6559

4137

2007

2008

2009

+21%

2010

BBBEE Spend as % of Total Procurement Spend

2009

13,50

2008

6,89

2007

3,88

+87%

BBBEE Spend 2007 -2009 (Rbn)


Eskom’s strategic mandate is focused on energy provision including generation, transmission, distribution and retail and all matters related or incidental thereto

Eskom’s principal strategic objective based on the Strategic Intent can be defined as that of playing a leading role in the electricity supply industry. This includes, but is not limited to,

a) catalysing economic growth and ensuring that this growth is accompanied by the creation of jobs; and

b) establishment of local manufacturing capability in targeted areas (e.g. nuclear), research and development thereto.


1) Ensuring reliable supply of electricity to all South Africans.

2) Ensuring its contribution to adequate future electricity supply for South Africa.

3) Supporting the developmental objectives of South Africa.

4) Ensuring business sustainability of Eskom.

There are 4 focus areas guiding Eskom’s strategic mandate


KPI UNIT TARGET

FINANCIAL VALUE CREATION

Cost of Electricity R /KWh 327.28

Debt : Equity Ratio times 2.50

Interest Cover times 1.0

OPERATIONAL EFFICIENCY

National Load Shedding MW No load shedding

DSM Energy Efficiency GWh 994

Water Usage (Per kWh sent out) L / kWh 1.35

Internal energy efficiency - To reduce non-essential consumption by 15% by 2015.

GWh24GWh

INFRASTRUCTURE AND MAINTENANCE

Generation Capacity Installed (Megawatts) Target (MW)625 MW

Transmission Lines Installed (kilometres of line) Target (KM)446 km

Transmission MVA Installed Target (MVA)3565 MVA

HUMAN CAPITAL

Skills development

Eskom trainees / bursars (Learner Pipeline) 4500

Number of Engineering Trainees / Apprentices 3500

Additional number of non-Eskom learners on Eskom

sponsored learning 10% of internal learners

B-BBEE

Percentage of local content in new-build contracts % 50%

Eskom’s Shareholder Compact has a range of KPI’s at Group level


Eskom plans to invest over R500bn in capital assets over the next five years

Over the past 5 years, Eskom has spent more than R150bn on Capex

The five year (2010/11-2014/15) forward looking investment plan amounts to more than R350bn.

Eskom is however facing funding shortfall issues which are currently being addressed by Government.

Eskom capital projects include the following:

Generation plant Return to Service (including Camden, Komati and Grootvlei)

New build which includes Medupi, Kusile, Ingula, Sere and CSP plants

Transmission (Cape Grid, Northern Grid, Southern and Western Cape)

Identify procurement saving

Identify potential cost reductions through value engineering

Projected spending has been included in the Shareholder Compact targets

Procurement capabilities of Eskom

• Eskom has invested in procurement skills training programmes.

• Since the beginning of the 2010/11 financial year, Eskom has trained 438 procurement and supply chain management practitioners for an average of 2.6 days .

• In its procurement practices, Eskom targets to have at least 50% of local content in new-build contracts.


Durban

Cape Town

461

Eskom’s investment programme will also have significant local and national impacts

Sere (Wind)100 MWR1.2bn

Upington CSP (Solar)100 MWR3.5bn

Medupi PS4764 MWR126bn

(1900 jobs)

Kusile PS (Coal)4800 MWR170bn(12000 jobs)

Ingula Pump Storage1352 MWR22bn(4500 jobs)

Impact on local town’s GDP from each project:Lephalale (Medupi) – up 95%Delmas (Kusile) – up 25%Ladysmith (Ingula) – up 1%

South Africa - GDP impact:•Medupi 0.34% /yr•Kusile 0.34% /yr•Ingula 0.04% /yr•Total 0.72% /yr

Other businesses and infrastructure :• Catering• Laundry• Building companies• House maintenance• Hotels• Entertainment• Training facilities• Security• Schools / education• Policing• Churches• Medical care• Banks & financial services

32


Eskom’s investment programme will also have significant impact on employment

On site constructionSupporting project staffCoal mine expansionTransmission expansionCrocodile River expansionOngoing operations

Subtotal

DIRECT

INDIRECTSocial services + local business

8 3002 2002 1002 7003 000

700

~19 000

Total employed

1 700

20 700x family multiplier (4/family)

x 4

People directly impactedby Medupi, Kusile & Ingula

~160 000

7 200

600

~12 000

1 700

13 700

4 100

100

~4 500

1 100

5 600

Medupi Kusile Ingula

2 000200

2 000 300

Other projects such as 765kV and RTS provide ~ 11 000 direct employment opportunities during construction and a further ~1 700 during operation

33


Eskom also has a comprehensive internal skills development programme

Eskom invested more than R780 million in the last financial year

Below is a table that summarises Eskom’s training programme

Intervention

Facilities 24 nationally, with 244 on job training venues

Practitioners 530

Instructors 28

Courses offered More than 6000

Leaner days achieved 140000

Eskom also established an Academy of learning, with a council of divisional MDs and Chief learning officers

The aim is co-ordination and integration of all learning

Academy facilities already created which include provision for engineers, technologists, technicians and artisans

5225 learners are already in pipeline of which 3780 are in engineering and technical fields

4075 engineering trainees/apprentices are under training

Eskom also established an Academy of learning, with a council of divisional MDs and Chief learning officers

The aim is co-ordination and integration of all learning

Academy facilities already created which include provision for engineers, technologists, technicians and artisans

5225 learners are already in pipeline

3780 learners are in engineering and technical fields, which is equivalent to 72% of Eskom trainees / bursars (Learner Pipeline).

4075 engineering trainees/apprentices are under training


Eskom has also leveraged the training of 6130 people by suppliers.

Area Committed numbers In Training Training Completed

Medupi 2178 1299 284

Kusile 2234 792 626

Ingula 137 16 5

Power Delivery 1382 1002

Plant and Equipment

199 38 1137

Total 6130 2145 3054

Majority of training takes place in the following disciplines: Coded Welders, Boilermakers, Riggers, Fitters, Technicians, Laboratory technicians

and Quantity Surveyors.


Eskom has leveraged over a billion rand of investment in manufacture from the build programme

▪ 11,000m2 boiler pressure part workshop built in Nigel– Boiler Membrane Wall

Workshop– Two new CNC Benders

commissioned– New welding training centre– CNC header drilling machine

▪ Training facilities in Gauteng– 1400 artisans, 60 engineers,

36 operators, 24 maintenance workers

▪ Sulzer South Africa subcontracted for the production of 96 pumps (36 BFP, 24 CEP, 36 boosters) for Medupi and Kusile

▪ 45% of contract has local content commitments, including manufacture of castings and rotating components

▪ Manufacturing capacity investments by Sulzer expected to be ~R60m

▪ Sulzer revenues increased significantly since 2007

Sulzer SA, a local manufacturer of feed pumps, has invested R60mn

Hitachi is investing ~R900m in facilities and training in South Africa

▪ Expansion of existing facilities to manufacture MV switchgear locally

▪ R21m invested to date

Actom committed to an investment of R84m in local facilities

▪ Plant that saw global manufacture of 275kV insulators move to South Africa▪ Previously manufactured in

Switzerland▪ Investment complete and first

production units rolled off production line

Pfisterer investment of R25m in plant in KZN

36


Eskom has increased its spend with BBBEE suppliers over the years

Eskom 2010 2009 2008

Total Measured Procurement Spend (Rbn)

72.6 73.3 -

Attributable BEE Spend (Rbn) 20.8 46.3 It wasn’t measured in

2008, howeverR23,4bn spent

on BEE

Attributable BEE Spend (%) 28.65 63.17 -

Attributable BWO Spend (Rbn) 2.5 3.7 3.1

BWO as % of attributable Spend (%) 12.02 10.0 -

Below is a summary of Eskom preferential procurement:


The End

38

DPE Shareholder Oversight – Methodology and Impacts Presentation to Portfolio Committee – 14 September 2010.

Documents

shareholder minister

risk management

appointment of management

infrastructure investment

shareholder specific

development of strategic

government investment

adequate investment