Eskom on its Annual Report 2010/11

Meeting report

The Chairperson welcomed everyone to the meeting, in particular Mr Zola Tsotsi, the newly appointed Chair of the Eskom Board. The Chairperson congratulated Mr Brian Dames, Eskom Chief Executive, for his appointment to the executive committee of the World Business Council for Sustainable Development.

Eskom Audited Annual Results Presentation for the year ended 31 March 2011
Mr Zola Tsotsi, Eskom Board Chairperson, said that he was comfortable that, from a management perspective, Mr Dames and his team were very switched on. Eskom was one of the most fortunate organisations in that it had extremely gifted employees. From an operational performance standpoint, the Committee could rest in the comfort and knowledge that Eskom was being properly run. The Board, responsible for Eskom’s strategic direction, was comprised of a team of outstanding individuals whose capacity to understand Eskom as a business was quite incredible. The level of motivation was also outstanding. For these reasons Mr Tsotsi was very confident that “the ship was being steered with confidence”. With respect to the Shareholder, the Minister had made it clear that he was an “activist” shareholder. In actual terms, this meant that the Minister was very interested and proactive in Eskom.

Mr Brian Dames, Eskom Chief Executive, said Eskom had built up significant capacity over recent years and the country had not experienced load shedding since April 2008. Other major successes by Eskom included the initiation of the “49M” campaign to educate South Africans about the importance of saving electricity as well as Eskom’s uninterrupted provision of electricity during the 2010 FIFA World Cup. A major milestone for Eskom was its having electrified four million households since the inception of the electrification programme. The Eskom “build programme” was also on track.

It was significant that, for the first time within the electricity market, there had been active participation of Independent Power Producers (IPPs), who were supplying electricity and hopefully growing in their capacity to do so. Eskom could not meet electricity requirements on its own and needed the assistance of IPPs.

Eskom posted a second consecutive year of strong financial performances. Eskom had recently received a credit rating of BBB+ from Moody’s and Standard and Poor (S&P). The current year’s surplus of R8.4 billion (up from R3.6 billion in 2010) would be reinvested in the business to help fund its capacity expansion programme. The increased surplus was mainly a result of increased electricity tariffs which had been adjusted upwards toward cost-reflective levels. Eskom had received extensive financial support and guarantees from the South African government. This covered Eskom’s significant funding gap and allowed Eskom to put in a funding plan for its capital expansion programme scheduled for the next seven years. Seventy-one percent of sourced funds had been secured through local and international bond markets and other sources.

Capital expenditure was R55.5 billion for the year. This was below the budgeted amount because Eskom had delayed construction at Kusile for some time. He noted that Eskom had recorded expenditure of R41.9bn on Broad-based Black Economic Empowerment.

Eskom had accrued total debt of R160.3bn as of 30 March 2011, up from R105.9bn the previous year. Most of Eskom’s capital was funded by the issuance of debt securities. It was important for the company to remain financially stable so that it would be able to repay its debt in the long term, especially considering that debt would need to increase over the next few years to fund Eskom’s capital programme. Eskom managed to meet all but two of its key performance indicators set out in the shareholder compact: Eskom had failed to meet its 2011 electricity generation capacity target of 625MW, falling short at 315MW; secondly Eskom fell short of its transmission lines target by 3km, mainly because of problems regarding access to land and servitudes.

Mr Tsotsi said Eskom’s executive remuneration policies were currently being debated against the backdrop of extreme inequality and poverty in South Africa. Government was currently discussing the issue of executive remuneration for all state owned enterprises (SOEs). Remuneration of executives was not linked to the profits or financial performance of the company but rather to the exco member’s contribution to the business and the meeting of organisational objectives. Bonuses were awarded if these objectives were met.

Of major concern to Eskom was the number of fatalities suffered by employees (6), contractors (18), and the public (43). Vehicle accidents of coal suppliers and mined goods contributed highly to these fatalities. For this reason, Eskom urged the transportation of coal to be moved off the roads and onto rail. The safety of staff and contractors, as well as the public, was and would be a primary focus going forward. Electricity theft remained a problem for Eskom.

Mr Dames reported that the first Medupi unit was scheduled for 2012 and Eskom was conducting a detailed assessment to ensure that contractors were meeting their deadlines. Eskom was concerned about the progress of some contractors, its boiler contractors, in particular, and was assessing to what extent contractors would be able to deliver on time. Funding had been secured for Eskom’s full construction programme which would be completed in 2018.

There had been an improvement in outstanding municipal debt which Eskom monitored very closely. An amount of R123 million was outstanding as at 31 March 2011. Soweto and municipalities in the Free State had large amounts of outstanding debt.

Discussion
Dr S Van Dyk (DA) asked if the seven-year funding plan supported by government was sufficient for Eskom’s infrastructure investment programme. How would the programme be funded beyond the seven years?

Mr Dames replied that the support received from government was sufficient for Eskom to complete its Kusile plant as well as provide for all the necessary refurbishment capital. Seventy percent of the funding had been raised off the back of this support. There had been due consideration as to how to protect South Africa’s sovereign rating and make sure that Eskom was viable in the event. Not all the money could be raised in the local bond market and so Eskom had tapped into the international bond market. A South African bond programme of R65 billion would be expanded over the next few years to reach a total of R100 billion. Eskom had been very successful with this programme. A US bond programme of US$1.75 billion had also been very successful.

Mr Dames said that Eskom had completed its financial and corporate plans based on the seven-year plan, up until the completion of Kusile. Eskom had not yet worked out what funding would be required beyond Kusile. The Integrated Resource Plan (IRP) asked that South Africa double its capacity and so the funding plans of Eskom beyond its current seven year needed to be seriously considered. Eskom and its shareholders were considering what type of options it would need to consider.

Ms C September (ANC) said it was of concern that the government and Eskom were in debt with large amounts of money spread over the long-term. Was Eskom’s reliance on debt a sustainable path for it to follow? To what extent could one expect the citizenry to shoulder this burden? How did Eskom plan to reach a stage that it would not be reliant on such debt. How did the global financial crisis impact on Eskom’s debt? Would the crises not escalate Eskom’s debt? How was Eskom cushioning itself against these realities?

Mr Tsotsi replied that the shareholder had begun to consider this matter as Eskom could not continue to stress its balance sheet in the way it had been forced to. Secondly, tariff hikes were not necessarily the direction to take due to the issue of affordability. In terms of its other options, some level of flexibility in terms of equity engagements with future capital developments should be looked at. Eskom should start to look at public-private partnerships to alleviate the pressure on Eskom’s balance sheet and alleviate the pressure on government to become involved in Eskom's financing. This approach was being carefully analysed and assessed. Eskom had had to pull back from its other business and income-generating activities because of the manpower and other resources required for the “new build” programme. The shareholder also believed that Eskom should be creative enough to create other income opportunities for itself.

Ms September sought to clarify that the Chairperson was not alluding to privatisation.

The Chairperson replied that Eskom would remain under government ownership and that privatisation was not what he had meant.

Mr Dames replied that the South African fiscus and debt markets were not large enough to fund what Eskom, Transnet, and the rest of the country needed and so national and international debt markets had to be tapped into. Bearing the financial crisis in mind, Eskom had no intention of approaching international debt markets in the short term.

Mr Chris Forlee, Deputy Director-General: Energy and Broadband, Department of Public Enterprises, said that Eskom needed to fund off its own balance sheet. There was a hybrid funding model in place up to 2017. After this, there was no more money from government. Events beyond the seven-year funding model largely fell under the domain of the Department of Energy because it falls under the IRP. There was a need to unlock private sector balance sheets to support national infrastructure in the future.

Mr Dames said Eskom needed to return to Parliament to have a focused discussion on these matters.

Dr Van Dyk said that Eskom had made provision for Independent Power Producers (IPPs) to enter into the production of approximately 30% of the power supply. What was the current percentage of power produced by IPPs? Why were certain IPPs “not very positive” about entering into production?

Ms G Borman (ANC) asked what the status of the IPPs was.

Mr Dames replied that Eskom had signed up all IPPs with the capability of producing electricity privately. Eskom had committed and budgeted to buy electricity from IPPs.

Mr Kannon Lakmeeharan, Divisional Executive: Delivery Unit, Eskom, replied that six IPP projects had been identified in the medium term, four of which were currently operational, the other two of which would be operational in the near future. The municipality generation was working well and their reliability had increased. Eskom had a dedicated unit that offered customer services and support to the IPPs. There were over three hundred IPP applications, totaling 27 gigawatts, for connection to the grid in the waiting.

Mr Lakmeeharan said that government’s policy was to achieve a 70% - 30% mix of publicly and privately produced electricity. The immediate programmes being supported were the procurement of renewable energy power of 3 725MW, as well as diesal/gas-fired turbines of 1 050MW. A decision still needed to be made as to which programmes beyond this immediate five-year period would be for IPPs and which would be for Eskom. The Department of Energy had launched some short two-year contracts, the value of which had been evaluated. There was also the possibility of importing energy.

Dr Van Dyk stated that although there had been no loadshedding since April 2008, certain municipalities had failed to maintain their infrastructure resulting in electricity blackouts. Kroonstad recently experienced a blackout that lasted 8 to 10 days. If local authorities did not sell electricity because of the collapse of local distribution networks, they would not be in a position to buy electricity from Eskom, which would result in a loss for Eskom. What did the contract between Eskom and the municipalities entail? Did the Constitution need to be changed to allow Eskom to assume the distribution of electricity to the end consumer?

Mr Dames replied that this question related to Eskom’s relationship with municipalities. Municipalities had a constitutional obligation to provide services such as electricity. Eskom had a direct contract stipulating what it supplied municipalities as opposed to an obligation to supplying the municipalities’ end customers. Investment in infrastructure was a big challenge faced by Eskom as, without this infrastructure, power would not reach the end consumer. Eskom would assist where it was asked to assist and would continue refocusing its own distribution businesses with a clear focus on strengthening networks in the country.

Mr A Mokoena (ANC) asked for more information about the large amount of debt outstanding from Soweto.

Mr Dames replied that Eskom had taken over supply to Soweto a number of years ago. Agreements had been made to write off some of its debt in the late 1990s and for the communities to pay in exchange for this. There were also challenges in terms of illegal connections. Only 20% of the amount of electricity billed for was collected. Eskom was working with the Department of Public Enterprises and a task team, appointed by the Minister of DPE, to find a sustainable solution to this problem.

Mr Mokoena stated that 54 municipalities in the Free State were struggling to pay Eskom and that Eskom had threatened to cut electricity supply to these municipalities. Had this debt been collected?

Ms Thsolofelo Molefe, Divisional Executive: Customer Services, Eskom, said that this remained a challenge. Municipality payments were erratic and cyclical based on when funds were paid out from National Treasury. Eskom was in talks with one particular municipality in the Free State which had a large amount of outstanding debt. Eskom had issued a termination of power notice but had to follow the processes required by the Promotion of Administration of Justice Act, such as publishing notice of the cut-off in the local newspapers.

Dr G Koornhof (ANC) asked which provinces and municipalities were serial offenders of the R123 million outstanding municipal debt to Eskom. What steps were being taken to address the problem of outstanding debtors?

Mr Dames replied that the Free State was a particularly problematic province. Eskom had received a lot of support from the Premier and the provincial team. Each month Eskom produced a list of the offending municipalities which it monitored carefully. If there was no payment from municipalities, Eskom would go the route of terminating electricity supply. A lot of work was being done by the shareholder and the Development Bank of South Africa to identify where support was needed.

Mr M Sonto (ANC) asked how it was that Eskom’s debt repayment had improved yet the presentation stated that defaulting municipalities were still a major risk factor for Eskom. What difficulties did Eskom experience when it interacted with indebted municipalities?

Mr Dames answered that debt repayment had improved by the end of the financial year but that debt levels were cyclical and could peak at high levels at various stages of the year. Eskom was concerned because, as the price of electricity increased, the amount of debt during the peaks would increase presenting a major risk at peak debt levels. The ability of municipalities to collect revenue was a point of concern for Eskom.

Mr Sonto asked why Eskom’s strategy was to list slow-paying customers with the credit bureau. It was understandable that communities were up in arms about the affordability of the high tariff increases. An alternative strategy to listing people with the credit bureau needed to be considered.

Mr Dames replied that Eskom was working with communities on this matter. However, a culture of payment for services rendered needed to be put in place in South Africa. Mr Dames acknowledged that Eskom had to find ways of working with communities and that it was reconsidering its strategy to find a sustainable solution.

Mr C Gololo (ANC) asked what benefits, if any, were there for consumers who were supplied electricity by Eskom directly compared to consumers who were supplied with electricity by the municipality.

Mr Dames replied that Eskom invested significantly in its infrastructure and its customers. It spent a lot of time talking to its customers. Furthermore, electricity was Eskom’s core business and so its residential customers might benefit from this. Eskom customers did not receive better electricity prices than municipality customers.

Mr Mokoena asked what was the status of Eskom’s plans to disaggregate some its functions. This issue had been discussed in recent weeks during a workshop with Transnet and Eskom.

Mr Dames replied that this had been raised in the last meeting and that the Board had decided that its first step would be to ring fence the independent system market operator as a division of Eskom to make sure it facilitated the introduction of IPPs. The Board had decided that it would not be in its interest to accelerate this but that it should rather take a phased approach, taking into account all the risks.

Mr L Greyling (ID) stated that, going forward, energy security and affordability were the two major issues at stake. Was the increasing cost of electricity going to price some industries out of market and render them uncompetitive in the global market?

Mr Dames replied that this was a valid concern and that the impact of increased pricing on communities and small businesses had been seen. Recent studies had shown that South Africa’s industrial tariffs were still competitive. Eskom was very aware of the needs of its customers and the struggling economy.

Mr Greyling asked what was Eskom’s response to the criticism that the choice to build the large-scale coal-fired Medupi and Kusile plants had led to Eskom incurring greater costs than would have been incurred had it opted to build smaller coal-fired plants which could have essentially been bought off the shelf. For example, the Indians had built a coal-fired station in Mozambique for a price which seemed to be a third of Medupi’s cost per megawatt. Was our energy price (per megawatt) more expensive than it needed to be?

Mr Dames replied that research on global benchmarks of the costs of Medupi and Kusile had shown that the costs of these plants were globally competitive. South Africa’s plants had longer life-spans (40-50 years) than those built by the Indians and the Chinese (30 years). It was true that the Indians and Chinese were able to build plants at competitive costs. These companies however had not tendered for the Medupi and Kusile contracts at the time that they were published.

Ms Borman referred to the presentation which stated that the quality of coal had deteriorated which affected performance. Considering our dependence on coal, how confident was Eskom in its ability to deal with this problem?

Mr Dan Marokane, Chief Commercial Officer, Eskom, answered that poor quality coal led to rapid degradation of Eskom’s plants, increasing its maintenance costs. Eskom had tightened the range of the specifications of coal delivered to its power stations to ensure that only high quality coal was delivered. If the coal did not meet the specifications it was not loaded on site. The variation in coal quality however was a consequence of the geology of the coalmines; the quality of coal deteriorated with the ageing of the coalmine. Eskom needed to cater for this reality. Better processes for managing coal arriving on site, especially poor quality coal, had been developed.

Ms Borman asked for clarity on the nature of difficulties Eskom faced regarding Eskom’s stated concern about meeting the deadlines for the Medupi power plant.

Mr Dames replied that the progress of Medupi had been significant. Eskom however was concerned about the ability of its boiler contractor to meet relevant deadlines for 2012 as it played a critical role in the construction of Medupi. Although Eskom had sought and received assurances from the contractors that they would be able to meet the deadline, Eskom had been and remained very disappointed with the performance of the boiler contractors.

Mr Sonto asked who the major culprits of electricity theft were. Was it the smaller users or the bigger businesses?

Mr Dames replied that the incidence of theft by big business was low but amounted to large volumes of electricity theft whereas incidence of theft by individuals was very high but amounted to low volumes of electricity theft.

The Chairperson asked for more information on the recent prosecution in the high court of an individual accused of electricity theft.

Mr Dames replied that the first successful prosecution of electricity theft had taken place in the last year. Mr Dames did not have all the details but would provide the Committee with them.

The Chairperson suggested that Eskom use “scary images” of electric shock to scare people away from trying to steal cables and electricity.

Mr Dames replied that the team would take on board this suggestion. Cable theft however was not the only problem, but the theft of steel was also an issue.

Dr Koornhof commented that he was extremely impressed by the content and reporting of Eskom’s presentation and stated that it was important to ask how this could be sustained. What was the visibility of Eskom’s leadership amongst its employees in producing its good report? Did the leadership actually go out into the field to find out the problems from the side of Eskom’s clients?

Mr Dames replied that the Eskom leadership had traveled all over the country in the past year, meeting with media, business, mayors, councillors and communities to discussing their issues. In the next three weeks Eskom would be talking to its staff members about safety, its annual report and the company’s strategy. There was also close monitoring by leadership of Eskom’s customer services. Mr Dames personally visited customer service centres to observe how they were operating and how customers were being received. Eskom also monitored the time taken for calls to be responded to at its call centre. The future strategy was to ensure that Eskom focused on its customers and people. A great amount of work was being done to ensure the visibility of leadership.

Mr Tsotsi added that all staff at Eskom had real time visibility of the technical performance of the plants on a central screen giving staff a sense of inclusion in the business.

Mr Kannon added that Eskom was focused on developing all levels of leadership in the business.

Dr Koornhof stated that “fruitless and wasteful expenditure” in Eskom had amounted to R17 million and that total irregular expenditure amounted to R58.7 million. How did the fruitless and wasteful expenditure occur and had Eskom instituted legal action against the culprits?

Mr Dames replied that this matter was being dealt with. In particular, the issue around PN Energy Services was being legally dealt with but had not yet been concluded. The legal action would help recover some of the lost money.

Mr M Nhanha (Cope) commended Eskom on its resolution of its special pricing agreements, two of which were outstanding. SPEs had had quite a significant impact on Eskom’s financial performance in the past year. Were there any other outstanding SPEs at present?

Mr Dames replied that there were only two SPEs outstanding which Eskom was in the process of renegotiating with its customers to find a solution.

Mr Nhanha asked how far Eskom was with reducing the backlog in the electrification of houses, particularly in the rural areas.

Mr Dames replied that Eskom only acted as an agent for electrification and did not fund it or decide how areas were prioritised. Eskom did have a concern around the backlog. One hundred and twenty thousand houses were being electrified per year. At this rate the target of electrifying 1 million houses in the next six years would not be achieved and neither would the target of universal access be achieved in the next twenty years.

Mr Tsotsi added that government had changed the policy for how electrification must proceed which had the effect of significantly slowing down the electrification rate. Shareholders were making input as to what should be done about this and how they could assist in accelerating the rate of electrification. Eskom had the manpower and other resources to assist, it was just a matter of making the necessary arrangements.

Mr Nhanha asked if Eskom was still, as a result of uncooperative farmers, having difficulty accessing land and servitudes when erecting infrastructure. Did Eskom need the Committee to consider passing legislation to enable Eskom to do its work unhindered?

Mr Dames replied that this remained a challenge for Eskom but that work was being done to overcome the issue. It would continue to talk to the Committee about this issue.

The meeting was adjourned.