EDI RESTRUCTURING UPDATE Presentation to the 60 th AMEU Convention by PHINDILE NZIMANDE

EDI RESTRUCTURING UPDATE

Presentation to the 60th AMEU Convention

by

PHINDILE NZIMANDE

CEO: EDI Holdings

15 October 2007

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Presentation Outline

EDI Restructuring Context

Cabinet Decision: 25 October 2006

RED Establishment Roadmap

The Deal

What support can be expected?

Conclusion

Slide 3Slide 3

EDI RESTRUCTURING CONTEXT

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Industry

Business

Residential

Scheduling

Physical Energy Flow

Financial Flow

Mu

nicip

alities

Metering & Billing

Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flows following the same path

ES

KO

M

Current Electricity Supply Industry Structure

180

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Current industry structure is highly inefficient owing to fragmentation

Absence of economies of scale in respect of investing in assets, sharing of facilities, services, people development

Inadequate maintenance of networks

Estimated maintenance backlog: R5 bn accumulated over the past 10 years

Supply interruptions cost to the Economy: R2.9 bn to R 8.6 bn p.a.**

Inequitable treatment of consumers across the country

Significant variance in average tariffs by Distributors:

Range#: 19c/kWh – 71c/kWh (medium sized business)

16c/kWh – 60c/kWh (domestic customers)

Inconsistent Electrification Performance Access to electricity: ~73 % (National)

Slow and Inconsistent Roll-Out of FBE

Reliability of supply and the ability of the distributors to offer a basic and secure supply to low income households differs markedly across the country

Current rollout is less than 40% of targeted community

Key Challenges Facing the EDI

** Source: 2003/4 National Integrated Resource Plan (NIRP) ; # Source: NUS Consulting Study - 2005

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EDI Restructuring Objectives

Energy White Paper Objectives (1998) EDI Restructuring Blueprint Objectives (2001)

Ensure electrification targets are met Achievement of government’s electrification programme

Universal access to electricity for all South Africans

Provide low-cost electricity Sustainable electricity supply to low-income consumers, regardless of location, at affordable prices

Facilitate better price equality

Improve the financial health of the industry

Future REDs to operate on a sustained, financially viable basis as independent businesses

Improve quality of service and supply Acceptable and sustainable levels of supply security and quality Foster proper co-ordination of

operations and investment capital

Attract and retain competent employees Future REDs to provide secure employment to their employees, provide skills development and training consistent with a high technology, modern distribution business

Transition to be done within the context of a comprehensive human resources strategy and an agreed social plan

Planned and managed transition

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RED ONE Experience

RED ONE commenced operations on 1 July 2005, in line with Presidential deadline

Area of supply consisted of the area of jurisdiction of the City of Cape Town

SDA signed between the RED & CCT

Operating agreements were in place between the RED, City of Cape Town and Eskom whilst finalising transfer of business arrangements

Issued with a license by the NERSA

Had 6 Independent Board Members

CEO, CFO & COO were appointed

No electricity distribution assets were transferred to RED ONE

The company has since been dissolved

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Implementation Challenges

Experience

First RED created as a Municipal Entity

Delays and tardiness in executing requisite activities to create viable operation

entities

Ambivalent support by some stakeholders towards the achievement of the

national objectives

Lessons

Absence of an enabling legislative framework

Incompleteness and misalignment of existing legislative regime

The negotiated nature of restructuring makes it impossible to assure the

anticipated objectives and results within the stipulated timeframes

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25 OCTOBER 2006 CABINET DECISION

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Having considered technical submissions on:

The financial viability of the different RED models;

The institutional and governance arrangements for the REDs; and

How the various models respond to the restructuring policy objectives.

The Cabinet approved the following:

That 6 wall to wall REDs be implemented;

That the REDs be established as public entities and be regulated according to the PFMA and the

Electricity Regulation Act;

That Eskom becomes a shareholder in the respective REDs for a transitional period and that

they reduce their shareholding over time;

That DME, through EDI Holdings, will oversee and control the establishment of REDs;

That a roadmap will be put in place to move from the current scenario into the future industry

structure

That a strategy needs to be developed to deal with capital investment requirements for the REDs

That EDI Restructuring legislation will be introduced; and

That a National electricity pricing system will be developed.

Cabinet Decision: 25 October 2006

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6 Wall-to-Wall RED Boundary Map

RED 1

RED 4

RED 2

RED 3

RED 6

RED 5

Provincial Boundaries

Cape Town UniCityEkurhuleni MetroNelson Mandela MetroJohannesburg MetroeThekwini Metro

Tshwane Metro

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Key Considerations and Implementation Enablers

Key Implementation Enabler Status Update

Governance of the REDs Dealt with within the EDI Restructuring Legislation/RED Establishment Bill

Electricity Restructuring Legislation This Process is driven by DME.. The Bill does make provision for critical outstanding Policy Issues that will be addressed later in Regulations promulgated by the Minister. The RED Establishment Bill is targeted to be promulgated at the end of 2007.

Promulgation of Asset Transfer Framework to enable effective and orderly transfer of assets from local government and Eskom to the REDs

Municipalities and Municipal Entities were, on 5 April 2007, exempted from or in respect of the provisions of sections14 and 90 of the MFMA. The exemption relates to the transfer of ownership or otherwise disposal of capital assets (moveable and immovable), owned by municipalities and used for the provision of electricity reticulation and other electricity services, to REDs or public entities

National Pricing System EDI Holdings has provided input to DME on Wholesale and Retail tariffs as well as a National Tariff Harmonisation Framework to ensure rationalisation of tariffs nationally

Salary Harmonisation Framework At the moment we are focusing on securing signed collective agreements on Transfer and Placement and Migration of Legacy employees into the REDs. A Harmonisation Framework has been developed for discussions with the unions

Capital Investment Strategy for Infrastructure Framework developed to inform the strategy work.

Surcharge Principles Framework Cabinet approved the MFPF Bill on 8 March 2007, and it served before the Parliament Portfolio Committee of Finance on 9 May 2007.On 07 September 2007 the MFPF Act was promulgated

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RED ESTABLISHMENT ROADMAP

Slide 1418 September 2007 Slide 14

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DEAL FORMULATION

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The significant policy issues that have yet to be resolved include the following:

the compensation of Eskom and each municipality for assets contributed;

the valuation methodology to be used for the valuation of assets;

the formulae to be used for the allocation of shares to National Government; Eskom and Local Government;

the capital structure for the REDs;

financial incentives for municipalities to join the REDs;

the transitional nature of Eskom’s shareholding in the REDs;

the impact on the credit rating of Eskom and municipalities;

Ownership of Key Industrial Customers (KICs).

details on conditions of transfer of staff from Eskom and municipalities to the REDs. The RED Establishment Bill provides that staff transfers will take place in accordance with section 197 of the Labour Relations Act, 1995 (Act No. 66 of 1995).

Outstanding Policy Issues: The Deal (… 1)

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The RED Establishment Bill makes provision for these critical outstanding

issues of policy to be addressed later in regulations promulgated by the

Minister.

The Intergovernmental Forum (DME, NT, DPE & DPLG) have commenced

working on these outstanding issues.

EDI Holdings has been mandated to procure the services of Transaction

Advisors to conduct the necessary modelling to quantify the various policy

options

Outstanding Policy Issues: The Deal (…2)

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WHAT SUPPORT CAN BE EXPECTED?

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EDI Holdings Support

Toolkits available for:

Ringfencing

MSA S78

Modeling Information

Financial

Statistical

Funding

NERSA approved, through Eskom Multi Year Price Determination, the allocation of R1,2bn

over a 3 year period

A process has been developed to consider pro-rata funding for projects initiated after 1 April

2006

Establishment of a Central Panel of Service Providers for Ringfencing and MSA S78 to be

finalised by November 2007

Restructuring funding criteria and process has been finalised and will be communicated in

due course

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CONCLUSION

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Conclusion

EDI Restructuring focus is on implementing the October 2006 Cabinet DecisionResolution of ALL outstanding implementation enablersCreation of a conducive and harmonised policy environment

Development of the ‘Deal’Heads of Agreements by all stakeholdersNegotiate and conclude the ‘Deal’

Strong Stakeholder management focus

We remain committed to continue working with all stakeholders to ensure fast-tracking of the

restructuring process in order to ensure the realization of the restructuring objectivesAll municipalities should be encouraged to support the implementation of the Cabinet Decision by:

Signing Accession to Co-operative Agreement,Commencing the preparatory work:

MSA Section 78Ringfencing Due Diligence; and

Participate in the Regional Engagement Forum and Project Governance StructuresFurther delays to the EDI Restructuring would have catastrophic results for the Country

The AMEU to monitor and evaluate progress and provide support to the EDI restructuring process

through assisting municipalities to take preparatory steps

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THANK YOUTHANK YOU

www.ediholdings.co.za