EDI Holdings 2006 Annual Report; Bee Codes of Good Practise; Department of Trade and Industry: briefing

ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE
28 February 2007
EDI HOLDINGS 2006 ANNUAL REPORT: BRIEFING; BEE CODES OF GOOD PRACTISE: DEPARTMENT OF TRADE AND INDUSTRY BRIEFING

Acting Chairperson: Ms P Temba (ANC, Mpumalanga)
Chairperson: Ms N Ntwanambi (ANC, Western Cape)

Documents handed out:
Electricity Distribution Industry Holdings Annual Report presentation
Codes of Good Practice for Broad-Based Black Economic Empowerment presentation

Audio Recording of the Meeting

SUMMARY
EDI Holdings presented its Annual Report for 2005/06. The presentation detailed achievements such as the establishment of RED1 and their future plans in the electricity distribution restructuring process. The Committee objected that the presentation was very limited in its detail on the finaincial statements and it was agreed that the company would again brief the Committee on this aspect in a future meeting.

The Department of Trade and Industry presented details of the Codes of Good Practise derived from the Broad-Based Black Economic Empowerment Act. It pointed out that the codes were guidelines for companies and industries to properly implement Black Economic Empowerment and to speed up transformation. The Committee welcomed the codes, but was somewhat concerned about its enforcement, the possible exemption of multinational companies and the incentives for accelerated skills development.

MINUTES
EDI Holdings presentation

Mr Thabo Makoto, Chief Financial Officer, informed the Committee that EDI Holdings is a 100% state owned company, established in 2003 to restructure the electricity distribution industry (EDI) in South Africa. EDI Holdings is based in Tshwane and has regional representation in Cape Town, Nelson Mandela Bay and eThekwini. Their mandate is to restructure the EDI into financially viable and sustainable Regional Electricity Distributors (REDs).

Their 2006 Annual Report complied fully with the Public Finance Management Act (PFMA). It outlined its business, the performance of the company against predetermined objectives and financial position at the end of the year in terms of the Generally Accepted Accounting Practice (GAAP). The annual financial statements are the responsibility of the Accounting Authority, which is the Board of Directors of EDI Holdings. The Auditor-General audited EDI Holdings’ financial statements.

Their mandate is guided by the White Paper on Energy for South Africa (1998) and the Blue Print on EDI Reform (2001). Their main objective is to restructure the electricity distribution industry and invest in financially viable independent REDs in South Africa in accordance with National Government Policy to ensure a more effective and efficient EDI capable of providing affordable and accessible electricity to consumers.

The EDI Holdings Board directs and guides the business in compliance with applicable legislation and has instituted the necessary policies and monitoring procedures through the following Board Committees: Audit and Risk Management Committee, Human Capital and Remuneration Committee, Finance and Procurement Committee and Operations Management Committee.

EDI Holdings maintained a world-class system of corporate governance by being observant of all principles of corporate governance and complying with relevant shareholder requirements in all their dealings with stakeholders.

The first RED was launched in the City of Cape Town (CCT) on 1 July 2001 and represented an instructive pilot project for the overall EDI restructuring process. After the Cabinet’s decision of 14 September 2005, the company started preparatory work for the establishment of Metro REDs, established a Multi Stakeholder Forum and developed a model to determine the viability of establishing a national RED and/or other REDs.

EDI faced a number of challenges which included the absence of enabling legislation, development of a shared vision among stakeholders and preparation and readiness for RED Day One. Legal procedures were followed before CCT chose RED1 as the service provider. EDI Holdings registered RED1 as a company on 2 November 2004 and the CCT established it as a Municipal Entity on 31 May 2005. It started operating on 1 July 2005.

EDI Holdings was highly responsive to the changes in the restructuring environment and deemed it necessary to review the company’s strategic approach. Their organisation structure has been realigned to the revised strategy and a three-year plan has been developed to ensure implementation of the Cabinet decision and was submitted to the Department of Minerals and Energy (DME).

Mr Makoto presented graphs detailing their staff establishment. The graphs illustrated employees by management level, by gender classification, by racial composition, male employees by racial composition and female employees by racial composition. Their employment equity figure showed 72% Black, 66% female and 4% disabled employees.

The annual financial statements noted that there were no major acquisitions as well as a 25% reduction from last year due to depreciation of assets. Current assets saw a reduction of 50% in cash and cash equivalents. There was a 57% reduction in trade and other payables due to cash utilised to settle creditors and a reduction in provisions for utilisation of consulting services previously provided. Government grants were reduced by 32% from R99 million to R64 million due to previously received grant income deferred and only recognised last year. There was a 67% reduction in administration costs from R66 million to R21 million due to a reduction in technical preparatory work executed in the previous year. Staff costs increased by 27% from R26 million to R32 million due to scaling up of resources at EDI Holdings to undertake and accelerate restructuring projects.

Their plans which were approved by the Cabinet included establishing six wall to wall REDs, establishing the REDs as public entities to be regulated according to the PFMA and the Electricity Regulation Act, ESKOM to become a shareholder in the REDs for a transitional period reducing their shares over time, DME would oversee and control the REDs, a roadmap would be put in place to move from the current scenario into the future industry structure, a strategy needs to be developed to deal with capital investment requirements for the REDs, EDI Restructuring legislation will be introduced and a national electricity pricing system would be developed.

Discussion

Ms N Ntwanambi (ANC, Western Cape) said it was extremely unfortunate that there was no prior confirmation of the meeting. There was no time to prepare and go into more detail concerning any issues the Committee might raise. It is evident that electricity distribution is important and when the Committee considered the Electricity Regulation Bill this information would be relevant.

The Acting Chairperson agreed with Ms Ntwanambi adding that EDI should have recognised the Select Committee as well as the Portfolio Committee, since this Committee is directly linked to the provinces.

Mr D Gamede (ANC, Gauteng) agreed and said there was no time to thoroughly look at the financial statements.

Mr Sipho Mogezi, EDI Capital Executive, apologised for the glitches in administration and accepted the blame; adding that they were respectful of the Select Committee.

Mr Mokoto added that they were willing to return and brief the Committee in more detail.

The Acting Chairperson accepted their apology and said that a meeting at a later date should be arranged.

Department of Trade and Industry (DTI) briefing

The Chairperson presided over this part of the meeting

Ms Polo Radebe (Chief Director: Empowerment) who was involved in the drafting process of the Codes of Good Practise began by giving some background information. The government needed some form of coherent strategy for transformation and the Broad-based Black Economic Empowerment Act, 2003 was therefore created to provide a legislative framework. The Codes of Good Practise were needed to ensure that Broad-based Black Economic Empowerment (B-BBEE) worked properly and consistently. The B-BBEE Codes of Good Practice Framework gave guidelines which listed the following: Generic or Sector-specific BEE Scorecards, BEE Definitions and Principles, BEE Indicators, Weightings and Targets, Guidelines to draw up BEE charters and Guidelines to maintain the Institutional Framework.

The actual Codes were numbered beginning at 000 and ending with 800. The Codes were the Conceptual Framework for B-BBEE and had General Principles and the Generic Scorecard; Ownership, which measures effective ownership of enterprises by black people; Management Control, which measures control of enterprises by black people; Employment Equity initiatives intended to achieve equity in the workplace; Skills Development which targeted the extent to which employers carried out initiatives designed to develop the competencies of black employees; Preferential Procurement which guided the extent to which enterprises bought goods and services from BEE compliant suppliers as well as black owned entities; Enterprise Development which guided the extent to which enterprises carried out initiatives contributing to enterprise development; Socio-Economic Development which guided the extent to which enterprises carry out initiatives contributing to social-economic development and Qualifying Small Enterprises, which measures the extent to which enterprises received contributions made by qualifying small enterprises.

General Principles listed key principles that are considered vital to the successful implementation of B-BBEE. Substance over form means that B-BBEE must be measured and reported on according to the economic reality rather that legal form as this will penalise the use and reporting of pseudo BEE structures and entities. The B-BBEE scorecard is based on seven core elements which are intended to facilitate changes in business behaviour and extend BEE benefits to as many beneficiaries as possible using a systematic and quantifiable approach. The BEE Recognition Tiers and Multiplier Effect which measure companies on a scoring system will receive more recognition for higher BEE compliance. This would foster competition amongst companies and industries as well as monitor BEE compliance. The Parity Principle and the Transitional Period includes a specific amount of consideration as well as a 12-month transitional period to allow for conversion from narrow-based to the scorecard approach.

The Code regarding ownership is measured as an entitlement to both voting rights and economic interest and entities will then be encouraged to facilitate the funding of BEE transactions. The equity equivalents are measured against the ownership element of the scorecard. The ownership principles ensure that the ownership rights include actual participation, with specific requirements and accountability. This would combat those companies that had “dummy” board members who were not allowed to vote or own shares.

The management control and employment equity code will encourage companies to fill positions in junior to senior management positions. The employment equity code is aligned with existing legislation to prevent contradiction in terminology. Skills development must be done in line with the Skills Development Act and includes the parity principle and the use of a learning matrix. This would ensure that the targeted beneficiaries would receive “skilling” and the matrix measures this by clearly defined outcomes of skills development programmes.

The preferential procurement code promotes BEE compliance with specific targets for procurement from Exempted Micro Enterprises (EMEs) and Qualifying Small Enterprises (QSEs), black owned and women owned enterprises. There would be enhanced recognition for procurement. This would encourage transformation throughout the economy. Another benefit would be the creation of sustainable black women, black owned and controlled enterprises. The enterprise development code would include initiatives to inspire access to finance, non-financial assistance as well as monetary or non-monetary contributions by enterprises.

There were also set criteria that would allow micro enterprises with a turnover of below R5 million an automatic level four recognition. Qualifying small enterprises with a turnover between R5 million and R35 million can select four of the seven elements with all of those elements weighing the same because these indicators have been adapted to accommodate the small enterprise. Other companies who had turnover of more than R35 million would have to adhere to the generic scorecard with all seven elements.

Discussion

The Chairperson enquired about empowerment of those who are either blacklisted or have no collateral.

Ms Radebe responded that blacklisting is a legal issue and out of their hands. Collateral is one of the initiatives that they would like to implement by getting businesses to provide funds for a viable business plan.

Mr Gamede stated that it seemed as if the middle and emerging classes would benefit the most considering that although they are the smallest in number they provided the most to Gross National Product (GDP).

Ms Radebe said this was one of the challenges because the legislation does not propose penalties for non-compliance with the codes. The codes are guidelines that may or may not be adhered to.

Mr Gamede asked why multinational companies were exempted from adhering to the codes.

Ms Radebe replied that they were only exempted if they had to choose between the codes and retaining their operations in the country. However if there were no dispute on this then they would have to adhere to the codes. It was noted that the only issue of contention that the multinationals had was on ownership.

Mr Gamede said the codes should explicitly state how financial help would reach the most vulnerable.

Mr J Sibiya (ANC, Limpopo) noted that Bantu education meant that people have very low skills levels. The codes should require targeted programmes for skills development.

Ms Radebe replied that the codes contained a mechanism that awarded points to those companies that provided funds or programmes for skills development.

Ms Temba asked how the provinces are being involved and if the language barrier would be overcome.

Ms Radebe responded that the DTI was working with the Department of Arts and Culture to translate the codes into the other official languages and they would shortly launch roadshows to take the codes to the people.

Ms Temba wanted to know more about the definition of ‘black’.

Ms Radebe responded that the definition of ‘black’ has been expanded to include Coloured, Indian and Asian persons.

The meeting was adjourned.