DPE Shareholder Oversight – Methodology and Impacts

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

Contents • SOE in a developmental State • DPE - Shareholder management process • DPE Shareholder management in practice • SOE Impacts • Transnet • Eskom

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

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. Enterprise Interest National Interest DPE

The Shareholder has distinct responsibilities… Shareholder Responsiblity • 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 appointedupon 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.

…as distinct from the Board and Management…. Board and Management Responsibility • 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.

…as distinct from policy and regulatory responsibilities Once the below perspectives are accepted… The resulting institution needs to be separated from policy departments (particularly when there are regulatory responsibilities) • Needs to be independent of policy departments to avoid conflicts of interest: • 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 1 Between consumers and SOE interests • 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. Between SOE and private sector 2

The shareholder management process integrates national strategic objectives into SOE planning and operations. Performance Monitoring & Evaluation DPE reviews SOE performance (Treasury Regulation 29.3) Isibuko Dashboard Minister 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).

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: • Objective setting (what is our mandate, objectives, etc) • Risk identification (what can go wrong, what can prevent objectives being achieved, causes of risk?) • Risk analysis (what are the chances of the risk occurring [LIKELIHOOD], what will be the effect when it occurs (IMPACT]). • Risk response (avoid, accept, reduce or share the risk by developing controls, procedures, etc to reduce risk to acceptable levels). • Control activities (policies and procedures are established and implemented to ensure the risk responses are effectively carried out). • Information and communication (information is captured and communicated so that people are able to carry out their risk management duties). • Monitoring (ongoing management activities and separate evaluations).

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 13

A procurement policy to entrench supplier development in each transaction has been developed 1 Comments CSDP Strategy • 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 Internal development framework Procure- ment Policy Other Policies Procurement Policy 2 3 4 5 6 Organisation Process Governance & controls Systems 7 People/Change Management

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.

The DPE has developed a comprehensive Board Induction programme • 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 established a unit to manage skills development • 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. 17

Contents • SOE in a developmental State. • DPE - Shareholder management process. • DPE Shareholder management in practice • SOE Impacts • Transnet • Eskom

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

There are six focus areas guiding Transnet’s strategic mandate • Improving service levels and efficiencies across the organisation and creating strong disincentives for poor performance. • A sustainable capital investment approach whilst maintaining the health of the Transnet balance sheet. • Ensuring new capital investment is translated into tangible improvements in transport services (improving the levels of productivity and reliability experienced by customers). • Meeting the policy and regulatory challenges in a collaborative manner to contribute positively to government objectives. • 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. • Finding innovative means for private sector involvement to enhance the service offering of Transnet and improve the competitiveness of the freight logistics system.

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

Example of Shareholder Compact targets at Divisional level – TFR

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

The Transnet investment programme will also have significant provincial impacts • Transnet Investment Impact realised in 2018 calculated as a percentage of provincial GDP in 2008 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 also has a comprehensive internal skills development programme School of Ports TNPA School of Port Operations TPT School of Rail TFR School of Pipelines TPL School of Engineering TRE • 1 Campus in Durban • Port authority training e.g: • Marine Pilot, • Tug-master • Vessel Traffic services • Marine Global Best Practice • 1 Campus in Durban • Port operations training e.g: • Operators of Lifting Equipment • Cargo Coordination • Drivers • 8 Campuses Nationally spread • Rail operations training e.g.: • Train Drivers • Train Control • Yard operations • 1 Campus in Durban • 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 EMD: Spare parts Contract Value:R550 million • 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. 50 “Like new” locomotives • 50 “Like-new” programme now complete under the equivalent of the CSDP Framework using Transnet Rail Engineering • 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. GE: 100 Loco deal Contract Value:R2.6 billion

BBBEE Spend as % of Total Procurement Spend +21% 2007 2008 2009 2010 BBBEE Spend 2007 -2009 (Rbn) 13,50 +87% 6,89 3,88 2007 2008 2009 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)

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, • catalysing economic growth and ensuring that this growth is accompanied by the creation of jobs; and • establishment of local manufacturing capability in targeted areas (e.g. nuclear), research and development thereto.

There are 4 focus areas guiding Eskom’s strategic mandate • Ensuring reliable supply of electricity to all South Africans. • Ensuring its contribution to adequate future electricity supply for South Africa. • Supporting the developmental objectives of South Africa. • Ensuring business sustainability of Eskom.

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.

Eskom’s investment programme will also have significant local and national impacts Kusile PS (Coal) 4800 MW R170bn (12000 jobs) Medupi PS 4764 MW R126bn (1900 jobs) Upington CSP (Solar) 100 MW R3.5bn 461 Ingula Pump Storage 1352 MW R22bn (4500 jobs) Sere (Wind) 100 MW R1.2bn Durban • Other businesses and • infrastructure : • Catering • Laundry • Building companies • House maintenance • Hotels • Entertainment • Training facilities • Security • Schools / education • Policing • Churches • Medical care • Banks & financial services Cape Town 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

Eskom’s investment programme will also have significant impact on employment DIRECT Medupi Kusile Ingula On site construction 8 300 7 200 4 100 Supporting project staff 2 200 2 000 300 Coal mine expansion 2 100 2 000 2 700 Transmission expansion 200 3 000 Crocodile River expansion Ongoing operations 700 600 100 Other projects such as 765kV and RTS provide ~ 11 000 direct employment opportunities during construction and a further ~1 700 during operation Subtotal ~19 000 ~12 000 ~4 500 INDIRECT Social services + local business 1 700 1 700 1 100 Total employed 20 700 13 700 5 600 x 4 x family multiplier (4/family) ~160 000 People directly impacted by Medupi, Kusile & Ingula

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 • 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% ofEskom trainees / bursars (Learner Pipeline). • 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 of which 3780 are in engineering and technical fields • 4075 engineering trainees/apprentices are under training 34

Eskom has also leveraged the training of 6130 people by suppliers. Majority of training takes place in the following disciplines: Coded Welders, Boilermakers, Riggers, Fitters, Technicians, Laboratory technicians and Quantity Surveyors. 35

Eskom has leveraged over a billion rand of investment in manufacture from the build programme • 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 • 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 • 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 Hitachi is investing ~R900m in facilities and training in South Africa Sulzer SA, a local manufacturer of feed pumps, has invested R60mn • Expansion of existing facilities to manufacture MV switchgear locally • R21m invested to date Actom committed to an investment of R84m in local facilities

Eskom has increased its spend with BBBEE suppliers over the years • Below is a summary of Eskom preferential procurement:

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DPE Shareholder Oversight – Methodology and Impacts

DPE Shareholder Oversight – Methodology and Impacts

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