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For the Portfolio Committees of Provincial and Local Government & Public Enterprises

Financial Implications for Municipalities Eskom’s view on how to establish the financial impact of restructuring - as input to the EDIH Finance Sectoral Committee - & related matters March 2005. For the Portfolio Committees of Provincial and Local Government & Public Enterprises.

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For the Portfolio Committees of Provincial and Local Government & Public Enterprises

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  1. Financial Implications for MunicipalitiesEskom’s view on how to establish the financial impact of restructuring - as input to the EDIH Finance Sectoral Committee - & related mattersMarch 2005 For the Portfolio Committees of Provincial and Local Government & Public Enterprises

  2. Economies of scale at risk: Shared overheads Joint purchasing power Portion of municipality with surplus - - Portion of municipality with deficit ++ Services purchased from Municipality Financial surplus transferred Financial ImplicationsInevitable financial impact on split of current entity Overall municipality with zero surplus

  3. Required Financial Analysis • What is the current financial impact? • Value of electricity surplus • Value of shared overheads (economy of scale) • Value of joint purchasing power (economy of scale) • Design cross subsidies to alleviate financial impact • Limit surcharge on electricity to maintain low cost • Make other service charges cost reflective • Create a mechanism to collect charges for payment to municipalities (including key customers) • Use municipal ringfencing to identify financial impact

  4. Some Other Implications of REDs for MunicipalitiesSome thoughts by Eskom • Better service • Local economic growth from improved service to consumers, managed electrification & implemented FBE • Credit management - no cut-offs • In future, municipalities cannot cut-off electricity to support payment for other services • Pension & Benefit Funds - loss of members • Changes in membership may impact investment portfolios • Proposed RED efficiencies • Aggressive cost saving in REDs may cut employment in rural municipalities

  5. Low cost equitable tariffs to all regional consumers Enhanced regional quality of supply Electrification & FBE Regional employee opportunity Financial viability RED controls regional tariff strategy & NER price applications RED identifies entire regional backlog & plans upgrades RED obtains NER approved tariffs to finance upgrade plans RED plans & manages projects within Govt. subsidies RED creates entire regional workforce plan & facilitates secondments to implement entire regional priorities. RED performs financial planning for entire regional viability RED support for National Govt. ObjectivesObjectives from Energy White Paper, including free basic electricity services

  6. No impact of REDs on Eskom FBE serviceSource: MD’s Report to DME, January 2005 • Municipal contracts • Eskom has contracts with 57% of municipalities • Agreements expire every 12 months - complex renewal process • Municipalities identified 597 000 customers • Eskom verified & configured 462 000 customers • Difficult to identify Eskom customer from municipal data • FBE claimed by 227 000 customers in November 2004 • Eskom Actions • Improve placement of vending stations • Automatically issue FBE tokens to qualifying customers • Enhance communication • Propose a perpetual agreement

  7. 1. Valuation, compensation & RED capital structure Objective: lowest cost of capital across the ESI & municipalities 2. Transfer schemes Complex contracts worth R100bn - with tax implications 3. Subsidies & municipal levies Support tariff affordability & municipal viability 4. Billing & collection Provide effective processes & systems for volumes 5. Capital & operations backlog within viability Identify backlog. Obtain NER support for revenue requirements & financial resources 6. Inherited parent contracts Secure service contracts with Eskom & municipal parents 7. RED systems Convert 187 distributors to RED systems 8. Full financial functions Provide RED financial competency & infrastructure 9. Change management Provide training, organisation, communication, etc. 10. People issues Agree s.197 issues & approach with organised labour Progress on Implementation: Key issues

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