Eskom Enterprises Transformation: briefing

This premium content has been made freely available

Public Enterprises

03 September 2003
Share this page:

Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
3 September 2003
ESKOM ENTERPRISES TRANSFORMATION BRIEFING

Chairperson:
Mr B Martins

Documents Handed Out:
Eskom Enterprises Transformation Powerpoint Presentation

SUMMARY
Eskom Enterprises CEO briefed the committee on Eskom Enterprises' transformation strategy. The implications of the new strategy were discussed, the critical success factors for new business cases were reviewed and important challenges were highlighted. Members felt that they need more detail regarding these matters, but still proceeded to ask questions, including topics like the shortage of skills in South Africa and the expansion into the African continent.

MINUTES
The chairperson welcomed Dr Banda, CEO Eskom Enterprises, and his team, Adv Govender and Mr Zulu, from Eskom Enterprises. Dr Banda explained that the need for this meeting arose after the committee requested clarification after a meeting with the Department of Public Enterprises (DPE) on 18 June 2003. He was aware that the committee was concerned about the sustainability of Eskom Enterprises. On the date the presentation was made by the DPE, it was about a month and a week before the board would adopt the new transformed business plan of Eskom Enterprises. They could therefore not comment on issues relating to Eskom Enterprises' future strategies, until the board of Eskom Holdings could approve and adopt these strategies.

Eskom Enterprises Background
Eskom Enterprises was established in 1999 to carry out the non-regulated activities of Eskom, inside South Africa, as well as into the continent. Forty-eight businesses were inherited from Eskom, including aircraft, land surveying technologies, IT, telecommunications, primus-stove manufacturing, engineering and construction. Some of these were not growing concerns at the time, but divisions of certain concepts, which would be converted to businesses. Eskom Enterprises have a core line of business. This included: infrastructure development, energy business operations, specialised energy services and the pursuit of key opportunities in related or strategy business, like IT or Telecoms.

Eskom Enterprises' reached into the African continent outside of South Africa and stretched as far as North Africa's Libya, Morocco and Tunisia. They were also involved with transmission network design and engineering in Vietnam, India and China. There also were possibilities of expansion to other regions. This led to the resources and management of Eskom Enterprises to be extremely stressed, due to the complexity and enormity of the businesses that they had to carry out. This led to a drop in performance. Between 2001 and 2002 net profit dropped by almost 92%. In addition to the existing businesses taken over by Eskom enterprises, they also started new businesses. These businesses required capital investment, but only in three to five years would they be profitable. Thus, they had an increase in their asset base at the time of low profitability. They realized that the profitability had to be improved.

Transformation for Sustainability
There were some businesses inherited in 1999, for whom there was no hope to be successfully converted into viable growing concerns. Dr Banda mentioned their aircraft business. Eskom Enterprises either had to invest more money into this business, or to recognize that this enterprise was not a viable business, but made sense as an in-house transport facility.

While operating successful businesses, establishing new business and while having inherited businesses that were not successful, they had to establish what their next step would be. They recognized the need to transform, with the view to a sustainable business. Based on the historical operations of Eskom enterprises, they might run out of operating cash, but not assets. The transformation project was designed to determine which of their assets should be disposed of to improve their cash situation.

They embarked on a thirteen week program of business analysis and transformation design, where they looked at a number of areas. These were strategy of the group, organisation design and development, and transformation and enablement. They were now at a stage where they had a "business case for change", which had been adopted by the holding company and which was the basis upon which Eskom would proceed. In the next 12 to 18 months they would be looking to realize this business case. During this phase of implementation, they would be aware that they were a business that needed to be profitable.

Implications of strategic objectives
The management of Eskom Enterprises realized that they must critically evaluate their core business and build focus around this. The design, build, operating and maintenance of generation, transmission and distribution infrastructure was currently Eskom Enterprises' core business. They would focus on business segments where they could build strong strategic positions in attractive markets. SADC region, Africa and the Middle East represented their key market, and that the electricity sector was where they felt comfortable. When they moved away from electricity, or the African continent, their comfort zone diminished quite significantly. Analysis had shown that the value they added was higher in the energy sector, but when they moved away from this sector, and from Africa, the value added actually became negative.

They recognized that they had to focus on their core. They asked themselves the question: "How do we meet our full potential?"

Meeting full potential of core businesses

The full potential needed to be explained within the backdrop of the opportunity. The SADC region represented nearly an R113 billion worth in areas in which they had capabilities. Based on they way in which they were organized, they could only gain R 4 billion of that. This clearly represented a management challenge. When the market shared positions held by Eskom Enterprises were looked at, some sectors were positive and others represented challenges.

They acknowledge that their ability to grow was limited by a shortage of certain skills. This problem was not only prevalent in Eskom, but was endemic to the whole of South Africa. The government recognized this. For example, sixteen years ago was the last time a power station had been built in South Africa. The skills used for the designing and building of that power station would have disappeared to other sectors of the economy, or to outside the country. Their ability to grow was thus dependent on how they dealt with this shortage of skills. As they built capacity, they also had to confront the significant amount of maintenance and refurbishing coming up. The maintenance and refurbishing will end in 2009.

The market in the energy sector was actually quite robust.

In order to meet their full potential they re-organized themselves into three simple structures. These were:
Support services: providing support services for the energy supply industry.
Globalisation: identify potential opportunities for the international development of Eskom's product and service offering.
New enterprise development and management (NED & M): identify new opportunities that would leverage existing technologies, capabilities or assets; and to initiate and incubate venture start-up for future hand-over or sales.
They also had their internal, corporate services, including finance, human resources, strategy and transformation, and legal and compliance services.

They recognized that their international projects should be pursued to cover excess capacity in the short term, which would allow them to build expertise. They must also take efficient central control of key business portfolio decisions.

The core and non-core businesses were identified. If a core business was performing, they would invest in it to ensure its continued success. If it was core and not performing, the idea would be to turn it around for improvement. They had the option to restore the non-core businesses to Eskom. The few non-core businesses that did not take off will be closed. Some businesses were identified for selling.

Business Case summary
Based on the needs of the support services business, the globalisation business and the non-core business, Eskom Enterprises produced a business case summary. This focuses on the capitalization requirement for the support services and globalisation and from this, they subtracted the proceeds that would be realized from the non-core portfolio. The Eskom head office agreed to this amount. The capitalization requirement was based on key assumptions from the three pillars: support services, globalisation and NED & M. This will result in Eskom Enterprises being cash positive in 2004.

There were significant business implications for the restructuring and transformation of Eskom Enterprises. The organization had been divided into three pillars to simplify and focus management's attention on what could be delivered. The globalisation business had been organized to provide market intelligence, intellectual property management, marketing and relationship building, opportunity identification, analysis and oversight of businesses outside the borders of South Africa. NED & M was a new business aimed at enhancing the value of Eskom either by reducing costs or adding value to some costs.

They were going to have a very strong chief financial officer to ensure that financial controls were maximised. They also had a clear differentiation between corporate and operational services to enhance governance in relation to areas of policy making, legal compliance and human resources.

They had introduced a balanced scorecard to ensure that people were measured according to their performance rather than any other basis.

There will be a consistent way of doings things when they plan. The will also be a review process and an intricate process of planning again. They also introduced a system of feedback into Eskom Enterprises. They had suggestion boxes to enhance communication from employees and a process had been established to ensure feedback. They also established a platform for union engagement during the implementation phase.

Implementation of transformation
This would pose a major challenge to management. They would have to realize the strategic objectives of Eskom Enterprises by optimising shareholder value, focusing on their core business and support Eskom group's build program, as well as providing support to Eskom Holdings' strategy through expansion in SADC countries, West Africa and the Middle East.

They would have to implement an organisation structure that would support their strategy, design and implement supporting processes, implement revised governance structures and processes, as well as mobilizing the organisation on its way forward.

The transformation process was an ongoing process. Eskom Enterprises completed the analysis and design phase, and was now entering the implementation phase. Dr Banda expressed his hope that after the implementation phase of 12 to 18 months Eskom Enterprises would be on a clear path into the future. The transformation process would cover every aspect of the business in detail.
The challenge for Eskom Enterprises' management was to harness the potential and skills of individuals and convert it into business performance. They had done a mapping of the potential in senior and junior management; they had recognised the available skills and had done an enhancement project. They believe that by enhancing the skills of their members, their performance will improve, which will lead to an improvement for the business. They confronted cultural legacy issues that hampered optimal performance. Eskom enterprise' human resource unit would become a strategic human resource unit to provide a total, enhanced information system for Eskom Enterprises. Dr Banda said that there were some bad habits that they needed to stop, some good ones that they needed to continue, and some better ones that they needed to start as well.

Way forward
Dr Banda mentioned the leadership's commitment to the stated strategic direction as a critical success factor. The commitment and support from Eskom Holdings and an agreement on service contracts were also very important. Competent management was another critical success factor, they had already identified the talented individuals for senior management level. Further critical success factors were a transparent and fair process, and the alignment of performance management, rewards and incentives with required behaviours and outputs.

The plans they had made were internal, but there were external forces that would have an impact on their business plan. A serious challenge facing Eskom Enterprises was the establishment of a second network operator. The business plan was also dependent on the timely disposal of their non-core businesses and their ability to plough back proceeds from non-core businesses into the business.

Dr Banda ensured the committee that transformation was not a side issue for them and that management recognizes its importance.

Discussion
The chairperson said that this meeting could only be the beginning of a process and that there was a need for another meeting for more meaningful engagement, since the committee only received the document at the meeting, giving them no time study it.

Dr Banda apologized that the committee only received the document on the morning of the meeting. He explained that, since the meeting was public, he could not provide sensitive financial information. A closed meeting would be more appropriate. It was critical to see Eskom Enterprises within the context of the Eskom group. He w also not be able to answer all the questions, but would provide feedback at a later date.

A member asked for a breakdown of the 48 businesses that Eskom enterprises inherited. She asked what feedback Eskom Enterprises got from labour and what impact workers had made regarding transformation. She also questioned profitability and stressed that profitability went hand in hand with development, and that one would like to see Eskom unpacking new ventures. How was expansion in Africa taking place and how did Africa benefit? Dr Banda could not answer all of the questions. He mentioned that the views of transformation were that of the management. He would provide further detail in future.

Mr Theron (DA) asked for more detail on the non-core businesses and asked what programs had been developed and planned addressing the skills shortage. Dr Banda said that they were addressing the shortage of skills issue by Eskom's involvement in a consortium that dealt with the problem, and that they had developed a training program to ensure the necessary skills.

An IFP member asked what plans they had regarding Black Economic Empowerment (BEE), especially regarding the so-called "mothball" power stations (power stations that had been neglected). He also wanted to know why the power station built sixteen years ago was not generating to full capacity. Dr Banda said that BEE played a central role in the improvement of the "mothball" power stations. He could not answer why the power station was not functioning at full capacity.

Mr Rhoode asked whether any jobs would be lost or if they would be taking on more jobs. He also inquired after Eskom's research and development program. Dr Banda said that jobs would only be shed as a last resort, and in the businesses that grow, more people would be employed. He also said that research and development were dropped, but that they must be profitable and that research and development was in nature not profitable. It places undue stress on the company.

Dr Kompela (ANC) mentioned that the president promised people a certain percentage of free electricity and that Eskom had never respected the president's undertaking. He enquired whether there were any problems. He also wanted to know if Eskom was doing as Minister Jeff Radebe told them to and to whom the 48 businesses were accountable. Dr Kompela asked if they had invested in other companies, and if so, who these companies were. Dr Banda deferred the question regarding the president's promise to the managing director of the Eskom group. Minister Jeff Radede held the board accountable for Eskom Enterprises. Dr Banda would provide feedback on the other issues in the future.

The Chairperson reminded the committee that the aim of the meeting was to provide a broad overview, and that Dr Banda could not have anticipated all of these questions, and would therefore be unable to address some of these issues.

A member mentioned that she appreciated the expansion into Africa, but that 'charity begins at home', and that there was a lot to be done in South Africa. She also mentioned that Eskom had a mandate to do human resource development, and that Dr Banda did not mention this mandate. Dr Banda said they were aware of the risks involved on the African continent but that they were moving forward nonetheless, with the mandate of the government and Nepad. They were involved in South Africa through various BEE projects.

Dr Banda said that there clearly was a lot more information to be submitted. The Chairperson said written submissions should be made to the committee clerk.

Mr Theron asked what the impact on the personnel of the business that would be sold or privatized would be. Dr Banda said that they would only sell businesses that were viable, so the impact on personnel would not be great.

A member inquired about a cabinet decision on restructuring and the progress Eskom had made in this regard.

Dr Kompela mentioned that a newspaper reported that the plan presented by Dr Banda was already implemented. Dr Banda assured him that this was not the case. Dr Kompela also expressed that he was uncomfortable with the plan, and that transformation was a political agenda. Dr Banda acknowledged that transformation was a political process.

The Chairperson said that the responsibility of the committee was oversight and that they had a responsibility to ask for clarity from Minister of Public Enterprises.

A member asked about the constitution of the board of directors and if they intend to reconstitute the board. Dr Banda said that their annual general meeting had been held, and that the board's tenure had been confirmed for the following year.

The meeting was adjourned.




Audio

No related

Documents

No related documents

Present

  • We don't have attendance info for this committee meeting

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: