Eskom / Transnet Capital Expenditure Programmes: briefing by Department and Eskom

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
14 June 2006
ESKOM / TRANSNET CAPITAL EXPENDITURE PROGRAMMES: BRIEFING BY DEPARTMENT AND ESKOM

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
Progress on Infrastructure Investments
Infrastructure Investment History

SUMMARY
The Committee was briefed on Eskom and Transnet’s progress in terms of their Capital Expenditure programme. The Department of Public Enterprises also outlined what it considered to be the major risks involved in the state-owned enterprises’ programmes. Committee Members raised concerns around what SOEs would do to ensure greater local content and procurement despite a currently weakening Rand and the fact that there appeared to be no mention of the jobs that would be created through capital expenditure.

MINUTES
Department of Public Enterprises (DPE) Presentation
Mr Litha Mcwabeni, (DPE Deputy Director-General for Corporate Structure and Services) presented the Committee with an overview of Eskom and Transnet’s initial and revised investment plans. Both plans had increased upon their revision. He also briefed the Committee on what the Department of Public Enterprises believed were the key risks involved in the project, which included tight timescales and skills scarcity. In the absence of a representative from Transnet he also talked the Committee through its strategic focus within the economy, its major projects as well as its core Capital Expenditure (CAPEX) five-year plan.

In conclusion he gave a brief overview of the Department’s infrastructure investment history, and what would be required to meet the growth targets as set out in the CAPEX programme.

ESKOM presentation
Mr Jan Oberholzer (Eskom General Manager: Project Support Enterprises Division) spoke to Eskom’s capacity project funnel that indicated the work done on its various projects. He also briefed the Committee on projects that were still being developed and on the current status of the Camden, Grootvlei and Komati projects in Mpumalanga. The transmission project status was also briefly mentioned. In conclusion he pointed out some of the options Eskom was considering in order to ensure greater reliability and capacity.

Discussion
The Chairperson wondered why the Department of Transport still had not given approval to use their servitude for the Palmiet – Stikland 400 kV line that would go through Somerset West. He asked if the Department was “being difficult”. He asked for details as to why the Department was “handicapping this project”.

Mr Oberholzer replied that Eskom was still in negotiations with the Department These negotiations were difficult and were delaying the project.

Mr P Hendricks (ANC) wondered from whom Eskom was requiring servitude for the 765Kv “Super Grid”.

Mr Oberholzer said that Eskom required servitude from the Department of Transport.

Mr Hendricks said that due to their technical inexperience the Committee responded eagerly to issues related to servitude because this was something it could understand. As Government departments had a common programme, the Committee needed to ask why one department was impeding the progress made by another department. He suggested that perhaps the Committee should have a word with the collegial chairperson of the government committee to find out what was happening.

The Chairperson explained that the Committee was not merely “whinging and whining” about problems but they were also there to offer assistance. If there was anything it could do to assist, it would do that.

The Chairperson said that he did not have the technical know-how to adequately evaluate the Eskom programme. The Committee would use the State-owned Enterprises’ (SOEs) own programmes and own criteria for evaluating their progress and to determine whether they were delivering the outcomes they had committed themselves to.

He commented that Eskom had indicated that it would accelerate some of its programmes. He wondered whether Eskom had not been too modest in what they had set out to achieve. If this was the case it meant that the programmme was merely on track in terms of normal standards. He requested Mr Oberholzer to explain how the project compared to other similar projects across the world.

He said that following consultations and various interactions with the Department in 2005 it was decided that SOEs would give formal quarterly reports on the progress of their capital expenditure (CAPEX) projects. Initially the Committee had thought that it would invite the SOEs themselves. The DPE then indicated that it was responsible for oversight of Transnet and Eskom. The Committee had immediate oversight over the DPE. The DPE would thus give the quarterly report on behalf of the SOEs. This course of action would perhaps need to be discussed more.

He added that it was not fair to expect the Department to have expert knowledge of the activities SOEs were involved in. Senior representatives from Eskom and Transnet should thus perhaps accompany the Department. The quarterly reports should consist of the progress on CAPEX projects as well as the budgetary objectives for that quarter.

Mr J Stephens (DA) pointed out that as far as SOEs were concerned, it was important to bear in mind that the Committee’s perspective should be that of a stakeholder. The Committee should look at the value it received from the investment it had made. If an SOE said that it would do certain things, the Committee should not judge the merits of these intentions, but it should review whether these objectives were met as far as the budget, time frames and challenges were concerned. The Committee should, like a stakeholder, be results orientated and should be aware of any challenges that the SOEs might be facing.

The Chairperson was curious about why the Committee was told that the CAPEX programme was one of the most powerful and advanced programmes, yet the expected 2010 levels were lower than 1976 levels.

Mr Mcwabeni responded that the graph depicted what the situation would be if there were no CAPEX programme. The DPE would not have done any work in this regard; there would be unemployment and low growth in the economy. If this trend were to continue there would be a 10% deficit in investment. Capital investment would need to be increased by 10% to achieve the goals set out in the CAPEX programme. He explained that the problem did not lie with private sector capital investment but with public sector capital investment, which has decreased.

The Chairperson found it interesting that the private sector investment in infrastructure was fairly consistent. The Committee had been of the impression that the private sector had, since 1994, lost confidence in the new Government. Government was also attacking the private sector for not investing but the figures, which he presumed to be accurate, indicated that all these critics were wrong.

Mr Mcwabeni said that the key sectors government had been speaking to increased their investments - the mining sector was one such example. The argument was that the private sector could have invested more had it received the necessary stimulus from the public sector.

The Chairperson thought that the general risks presented by the DPE gave a good summary of the challenges facing the SOEs. Some of these risks overlapped with what the Committee itself had identified. He wondered what the Department was doing to address these key risks.

Mr Mcwabeni responded said that as far as attracting scarce skills was concerned the DPE had asked SOEs, in particular Eskom and Transnet who had the biggest CAPEX programmes, to assign dedicated people who would take part in the Joint Initiative for Priority Skills Acquisition (JIPSA). This would ensure that the skills SOEs required would be identified immediately. The JIPSA process would then unlock those skills. Eskom and Transnet already had such representatives in place.

Mr Mcwabeni said that some of the input suppliers were linked to other international suppliers. Although the DPE wanted to see significant local content, capacity had been decreasing over time. This was considered to be a risk because it would impact on timeframes. Government needed to decide whether it wanted to resuscitate those sectors where there had been a decline in input or whether it wanted to implement the CAPEX programme. Implementing the CAPEX programme might be the priority but the reality could be that one would have to buy in the international market because it would be faster and prices would be lower.

The DPE was trying to balance these two aspects. At the moment it had set up a forum that all procurement within the SOEs (especially Transnet and Eskom) should give preference to the local market. The arms SOE, Denel, was a very good example as far as this was concerned – they had given themselves 5-10 years in which to build a local manufacturing base for the defense industry. They directed procurement towards achieving this objective. The DPE had found that the procurement processes of SOEs were not really suited to the economy and that people did not consider procuring from the local market.

The Chairperson said that Eskom reported that it was ahead of schedule yet many experts were of the opinion that given the time it would take to get power stations back into action as well as to build new ones, it had started too late with its building programme. The Committee did not have the technical and other knowledge to arrive at any definite conclusions about this matter. He had heard other opinions on this matter and was curious about what the Department as well as Eskom’s take was on the matter.

Mr Oberholzer said that he was involved in executing the programmes and could not comment on their late starting dates. The standard time frames for open cycle gas turbines such as the ones being built in Atlantis and Mossel Bay used to be four years. Eskom envisaged building them in two and a half years. A coal-fired power station usually took nine and a half to ten years for the first unit; Eskom would do it in five years. This should give the Committee an indication of how seriously Eskom saw the programme.

The Chairperson asked whether Eskom was the only institution attempting to complete these projects in these shorter periods or whether other companies had already achieved these time frames. He asked whether Eskom was setting a world standard.

Mr Oberholzer said that for some of these projects Eskom was setting a standard. Some American and European countries have completed coal-fired power stations in the same time frames Eskom was aiming towards. Eskom was limited to 38 contracting packages, much less than these companies.

Mr R Nogumla (ANC) asked what effect the weakening Rand would have on Eskom’s and DPE’s infrastructure investment plan.

Mr Mcwabeni thought that despite the fact that DPE might not necessarily deal with this issue, it was a real problem. As the Rand weakened it had a negative effect on the CAPEX of SOEs. What was procured became much more expensive especially if that procurement occurred in international markets. The DPE was learning that it was useful to implement CAPEX at a time when the exchange rate was low or when the currency depreciated. It was not a variable that could be controlled and put an extra burden on SOEs who borrowed money in the capital markets because when the Rand weakened borrowing requirements increased.

He felt that only the National Treasury could resolve this issue. It would be useful if there could be a way in which they could develop some strategies in order to mitigate against these kinds of issues so that when the Rand weakened the balance sheet position of SOEs could still be cushioned, as was the case with South African Airlines (SAA) who was more exposed to the exchange rate and the fuel price.

Mr Stephens said that a large part of this problem related to the imports that would be necessarily for the CAPEX programme to work. He agreed wholeheartedly that the DPE should develop hedging strategies. He emphasised that it was important that very component people implemented such strategies. If one truly hedged one could not suffer any losses. If however one speculated instead of hedging one could suffer extremely bad losses. Many people thought that because they were using derivatives they were hedging, but in actual fact they were merely increasing the risk.

He was of the opinion that the easiest hedge in this type of situation would be to price import purchases in dollars and also to borrow in dollars. This way the exchange rate of the Rand would not play a role: if one borrowed $85 million, what happened to the Rand would not influence the amount one received. If the Rand weakened you would get more Rands and if it strengthened you would get fewer Rands but the cost of the importation would remain the same.

The Chairperson said that if things were as simple as Mr Stephens were making them out to be SAA never should have suffered the losses it did. In August 2004 the Committee was told that hedging was inevitably dicey and almost speculative and that people merely used it in good faith. They were told that criticising SAA was pointless because they could not have anticipated what was going to happen. The Committee did not “buy this story”. If someone had rigorously engaged with the Committee on the matter they would have been able to have a greater impact. He commented that one could indeed learn from the Opposition who were more formally educated.

Mr Mcwabeni said that in Eskom and Transnet the matter might be as straightforward as the Member suggested. In SAA however the matter was more complicated. They transacted using the euro and the dollar. One then had to decide against which currencies one would hedge. Furthermore African countries formed part of SAA’s most significant markets. He said that the Committee could engage in a detailed discussion when SAA reported to it.

There were risks associated with the African markets it engaged with. The exchange rate controls did not allow them to place money where they wanted to. There were no reserves in those countries due to the multiplicity of currencies they used. They had to be engaged so that they could rationalise the currencies they used. But their significant markets were in Europe so they could not use the dollar. The dollar had not been appreciating significantly over the last two years. The general hedging policy that affected SOEs had to be dealt with. The National Treasury and the Reserve Bank might need to work with the SOEs at arriving at a more sensible hedging policy.

Mr Stephens said that he would be happy to share his knowledge of hedging with the Committee. He thought that it was incomprehensible that losses such as those suffered by SAA could be made over such a long period of time and by people who claimed to be hedging. Hedging was defined as a process of making uncertain outcomes certain. If one started making losses that one did not anticipate you were not hedging.

The Chairperson said that since the Committee wanted to expand its technical expertise they would make time early in the 2007 session so that Mr Stephens could brief the Committee on technical issues (without adding a party political line, he warned). This would be very useful.

Mr Nogula thought it important to have such a session since there were so many conflicting opinions. The Committee needed to be adequately informed.

Mr N Kolwane (ANC) asked whether the timeframes would not undermine the initial objective aiming to boost some of the local economic activities. Government was under much pressure when Eskom failed to supply power. The boosting of local industry might be undermined if Eskom did not have enough capacity.

Mr Kolwane asked how this linked with the understanding that SOEs would be creating programmes that would clearly indicate how people especially in rural areas would benefit from these programmes. He said that he might not have the technical ability but he would be able to see whether people were empowered economically. He wondered whether the programme was stall on par as far as this aspect was concerned.

The Chairperson felt that Mr Kolwane had raised a question that was relevant to the Committee. The President in the State of the Nation Address of 2005 or 2006 had said that this CAPEX programme would create 36 000, mostly short-term jobs. The Minister also said that a certain number of jobs would be created. This was a very important aspect yet it was not mentioned in the reports.

Mr Oberholzer said that the Primary Energy department within Eskom was negotiating and concluding agreements with coal suppliers. He said that one of the Black Economic Empowerment (BEE) suppliers, iSizwe were participating actively in supplying coal. When the Primary Energy Department negotiated and concluded contracts BEE, local content and black women organisations benefited.

He reported that about two years earlier Eskom had appointed a consultancy that was tasked with doing a study of the return to service environment in Camden, Grootvlei and Komati. They were also tasked with assessing how many jobs would be created in Mpumalanga. They came up with a figure of 36 000 jobs that included contractors, suppliers, sub contractors and people who would assist with the operating and maintenance of the projects once they had been completed.

The Chairperson requested a breakdown of how many of these positions would be permanent.

Mr Oberholzer could not answer this question but indicated that some of these people would move from project to project in the Mpumalanga area.

Eskom had shared its programme for the next seven years with their suppliers at a supplier’s forum of the Enterprises Division. It had already had a supplier’s forum with the DPE. Eskom was doing a lot to see how it could stimulate the South African industry to assist in supplying what needed to be supplied.

Taking note of the fact that stadiums were being built for the 2010 Soccer World Cup, the Gautrain was being built, Transnet was expanding and Eskom was building power stations, Eskom would have its first session with only civil contractors. Informal discussions had already indicated that there would not be enough capacity. Supplier forums were broken up into specific sections. Eskom would share more detail with them in terms of the nature of the tenders that would be requested. This would enable them to assist Eskom in their attempts to grow South African industry.

Mr Mcwabeni thought it was inappropriate to not give clarity as far as job creation was concerned. The DPE should be able to estimate what the number of permanent and contract jobs would be.

The Chairperson said that in the next quarter the Committee would expect figures.

Mr Z Kotwal (ANC) wondered who was responsible for the allocation of subcontracts and whether there was a BEE component to it.

Mr Oberholzer assured the Committee that as part of the tender committee he could confidently state that BEE, black women organisations as well as local content were part of the guidelines for awarding a tender.

He alerted the Committee to Eskom’s objectives for its expansion programme:
-to deliver on the programme;
-to build strong partnerships and strategic alliances;
-to develop critical skills;
-to build and retain the future Eskom leadership;
-technically empower young people (particularly black employees and especially women);
-to promote the development of South African industry including Black Economic Empowerment (BEE) and black women’s organisations’ manufacturing capabilities;
-to maintain Eskom’s position as being the lowest cost producer and
-to ensure that South Africa should remain an attractive investment destination for energy intensive industries.

Mr Hendricks remembered that a while back there had been reports that there were not enough cranes in Cape Town to accommodate the massive construction projects that were taking place there. He asked whether all the skills that were available were being used. One kept hearing that many skilled people, in particular white males, were unemployed. He asked whether these skilled people were being used and given attractive offers that would allow them to get promoted. He also asked what was being done to attract retired engineers back into the sector.

Mr Oberholzer said that in Camden a 68-year old white male had been offered a position because he had worked there before. He believed that Unit six could be brought back mainly because this individual with all his experience was on site.

He added that Eskom took this issue very seriously. In April Eskom had interviewed close to 50 South Africans in the United Kingdom, who used to work for Eskom. This was done in an effort to get them back into the country. White males with the necessary experience and skills were offered contracts. He stressed however that racial and gender equity remained important to Eskom.

The Chairperson wondered what the outcome of the interviews was. He also wondered why these people would come back to South Africa.

Mr Oberholzer responded that in addition to the weather they wanted to come back to make an impact and a change to the country. About 86% of the people who were interviewed wanted to return.

The Committee researcher wondered what the amount of skills transfer was in instances where former employees came back to the company.

Mr Oberholzer said that skills transfer was an important component in such contracts.

Ms N Kondlo (ANC) said that the key risks that the DPE had identified for both Eskom and Transnet were a matter of concern. She wondered whether the presenters thought that they would be able address them effectively. She asked whether Eskom agreed with the DPE’s risk assessment.

Mr Mcwabeni responded that the risks did not apply equally to all the SOEs. The DPE was attempting to formulate a risk framework for CAPEX programmes specifically. It might have to categorise the risks according to the relevant SOEs. He said that he would add issues related to the exchange rate to the list of challenges.

Mr Oberholzer agreed. He said that within Eskom safety was one of the prime risks. He assured the Committee that for each risk Eskom had identified it had a strategy in place. In his department they believed that all incidents were preventable. Their aim was to ensure that colleagues of theirs went home safely every night.

Mr C Wang (ANC) said that X-Ray project indicated 2000 Megawatts on the diagram but later spoke of 16 000 Megawatts. He asked Mr Oberholzer to clarify this point.

Mr Oberholzer apologised for the typing error and confirmed that it should be 2000 Megawatts.

The Chairperson said that the Committee needed a barometer for judging the progress of the CAPEX programme over the next few years. The Committee might ask the DPE to inform the Committee of how it judged and did oversight over the SOEs. The Committee would at the next sitting of the House, ask what criteria the DPE and the Ministry were using to judge the progress of the CAPEX programme.

By the time of their next meeting the Committee should have a clear idea of the barometer they would use.

PMG did not cover the rest of the meeting.