dpe shareholder oversight – methodology and impacts presentation to portfolio committee – 14...
TRANSCRIPT
DPE Shareholder Oversight – Methodology and Impacts
Presentation to Portfolio Committee – 14 September 2010
Strictly confidential 2
Contents
• SOE in a developmental State
• DPE - Shareholder management process
• DPE Shareholder management in practice
• SOE Impacts
– Transnet
– Eskom
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Government is the only social agent with an intrinsic interest in ensuring adequate investment in infrastructure
Clear strategic signal: security of supply
Particularly important in the context of immature regulatory capability and volatile global supplier markets.
Government investment does not preclude operational partnerships with, or direct investment from, the private sector.
However, while such investment is a pre-requisite to sustaining the economy, it will not enable a transformation of the economic trajectory.
A core role of the SOE is to provide strategic network infrastructure to ensure security of supply and develop key industrial capabilities
The challenge is to accelerate the development of specific technologies and associated advanced manufacturing capabilities and capacity – this will require investment in plant, technology and skills.
Infrastructure investment can create demand conditions for the development of industrial capabilities.
In complex, high risk areas of manufacture, it is vital that the State takes a leading investment role to transform the economic trajectory.
Infrastructure Industrial Development
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Contents
• SOE in a developmental State
• DPE - Shareholder management process
• DPE Shareholder management in practice
• SOE Impacts
– Transnet
– Eskom
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The DPE’s mission is to ensure that the SOE are both financially sustainable and deliver on government’s developmental objectives
To optimize the alignment between the role of the SOE in the national economic strategy and the performance of the DPE’s portfolio of enterprises through delivering best practice shareholder management services and engaging with stakeholders to create an enabling environment for such alignment.
DPE
National InterestEnterprise Interest
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The Shareholder has distinct responsibilities…
• Shareholder owns shares, not enterprise assets.
• These shares give the shareholder specific rights and powers: – Shareholder Minister to appoint all directors after Cabinet approval -
executive directors appointed upon recommendation from Board.
– Approval of significant & material transactions.
– Issuing of a strategic intent statement.
– Conclusion of binding shareholder compact.
– Access information to monitor and evaluate performance.
– Enforce accountability and take remedial action.
– Production of good practice notes.
Shareholder Responsiblity
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…as distinct from the Board and Management….
• Responsible for ensuring the financial sustainability of the company through coherent utilisation of company’s assets
• Responsibility for development and implementation of the strategy:
– Development of strategic and business plans and subsidiary plans. (financial, risk management, operational, marketing, etc).
– Appointment of management and staff.
– Management of all aspect of operations.
– Development of detailed company policies (e.g. remuneration, procurement, etc) within guidelines defined by practice notes and implementation of company practice in adherence to the policy.
Board and Management Responsibility
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…as distinct from policy and regulatory responsibilities
Needs to be independent of policy departments to avoid conflicts of interest:
The resulting institution needs to be separated from policy departments (particularly when there are regulatory responsibilities)
• Funding must ultimately derive from a commercial tariff
• The scale of the infrastructure challenge is too large for it to be funded out of the fiscus alone
• Government needs an enterprise in the sector to ensure continuity of strategic intent
Once the below perspectives are accepted…
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2
Between consumers and SOE interests
Between SOE and private sector
• Prime function of policy is to advance the interest of the consumer
• Where sector policy promotes competition
• Where regulator needs to be seen to independently set a fair price.
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Contents
• SOE in a developmental State
• DPE - Shareholder management process
• DPE Shareholder management in practice
• SOE Impacts
– Transnet
– Eskom
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The shareholder management process integrates national strategic objectives into SOE planning and operations.
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DPE reviews SOE performance (Treasury Regulation 29.3)Isibuko DashboardMinister issues Investor Briefs to SOE Boards on emerging SOE performance trends, highlighting need for corrective action in event of any deviation from agreed key performance areas and indicators. SOE AGMs.SOE reporting to Parliament (PFMA Sec 65).
Performance Monitoring &
Evaluation
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The DPE has also developed an electronic dashboard (Isibuko) to systematise reporting & analysis
The Isibuko dashboard has been developed to allow for timely reporting & enable rapid access to information in key areas including: • financial• operational• capital investment• capitalisation• intra-governmental policy• socio-economic, • risk, etc
Ensures clear, comprehensive & timely SOE performance reporting & monitoring that provides adequate information to make key strategic decisions :
• SOE inputs key performance data required by DPE for monitoring process.• SOE validates & approves submitted data.• DPE adds analysis & reports on SOE performance.• SOE & Portfolio Performance is available via the Dashboard.
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The DPE has developed a comprehensive risk management framework
The risk management process consists of the following main steps:
1. Objective setting (what is our mandate, objectives, etc)
2. Risk identification (what can go wrong, what can prevent objectives being achieved, causes of risk?)
3. Risk analysis (what are the chances of the risk occurring [LIKELIHOOD], what will be the effect when it occurs (IMPACT]).
4. Risk response (avoid, accept, reduce or share the risk by developing controls, procedures, etc to reduce risk to acceptable levels).
5. Control activities (policies and procedures are established and implemented to ensure the risk responses are effectively carried out).
6. Information and communication (information is captured and communicated so that people are able to carry out their risk management duties).
7. Monitoring (ongoing management activities and separate evaluations).
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Example of risk analysis - Transnet
SOE top 10 risks: Revenue
Capital investment
Regulation
Non compliance
Environmental
Funding
Input costs
Assets
Human capital
Commodity
DPE top 10 risks: Inadequate infrastructure
Tariff regulation
Operating efficiencies
Business interruptions
Safety
Skills shortage
Procurement / Fraud
Rolling stock
Corporate Structure
Cost of funding & liquidity
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A procurement policy to entrench supplier development in each transaction has been developed
Organisation ProcessGovernance & controls
People/Change Management
CSDPStrategy
Other Policies
Procure-ment PolicyProcurement Policy2
1
Systems
3 4 5 6
7
Inte
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dev
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fram
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• Integrate supplier development concerns in all procurements.
• The development of the strategic plan is the tip of the iceberg – now need to embed the process in the organisation.
• Implicitly encouraging best-practice procurement as demand forecasting is the key to supplier development.
• Top management continue to focus on the major procurements
Comments
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A procurement policy to enable fleet procurements has also been designed
• Objective is to enable procurements that are long term and go beyond the capabilities of the balance sheet and consequently the Board mandate, i.e. that require systematic government support.
• There are seven gateways in the procurement process which give government an opportunity to ensure that localisation objectives are integrated and related risks are managed.
• The policy ensures that a business case for the procurement is constructed around the value of the procurement to the efficiency and viability of the business, as well as its impact on investment by customers and suppliers and broader “externalities”.
• Ensuring that required government support to achieve localisation objectives is systematically coordinated with the procurement process.
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Intended to equip SOE Board directors with: knowledge, skills and understanding of SOE’s government ownership expectations.
Assist directors’ meaningful contribution to effective stewardship and successful performance of SOE
DPE developed a toolkit addressing the following, amongst others: The specialist nature and complexity of SOEs; The challenges of SOE risks and ensuring performance and delivery; The unique nature of the SOEs shareholder, policy and administrative
relationships; The specific public sector regulatory environment, Public Finance
Management Act (PFMA), Treasury Regulations, etc. The exposure associated with demanding fiduciary duties, legal and
regulatory requirements, liability of Directors, best practice governance and business requirements, etc.
The ability of experienced Directors to contribute to the knowledge and development of inexperienced Directors through their interaction;
The DPE has developed a comprehensive Board Induction programme
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Oversees implementation of internal SOE skills development:
Ensure SOE participates in initiatives to support National Skills Development Agenda.
Ensure scarce and critical skills defined in shareholder compacts and monitored on dashboard.
Ensure increased skills collaboration across DPE SOE.
Promote and coordinate optimal utilization of SOE training facilities to contribute to additional artisan training for national pool.
Solicit funding from DHET/NSF and SETAs to fund training of additional artisan trainees for national pool.
Monitors SOE supplier network skills development related to infrastructure investment programmes and maintenance programmes through dashboard.
Facilitates partnerships with SOE, DHET, SETAs, NBI, FET Colleges and relevant stakeholders to collaborate on initiatives to maximise and support artisan training to increase the national pool of artisans.
The DPE has established a unit to manage skills development
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Contents
• SOE in a developmental State.
• DPE - Shareholder management process.
• DPE Shareholder management in practice
• SOE Impacts
– Transnet
– Eskom
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Transnet’s mandate is to assist in lowering the cost of doing business in South Africa, enabling economic growth and security of supply through providing appropriate ports, rail and pipeline infrastructure as well as operations in a cost effective and efficient manner within acceptable benchmark standards.
Transnet’s strategic mandate is focused on enhancing national competitiveness in port and rail logistics
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1) Improving service levels and efficiencies across the organisation and creating strong disincentives for poor performance.
2) A sustainable capital investment approach whilst maintaining the health of the Transnet balance sheet.
3) Ensuring new capital investment is translated into tangible improvements in transport services (improving the levels of productivity and reliability experienced by customers).
4) Meeting the policy and regulatory challenges in a collaborative manner to contribute positively to government objectives.
5) Participating to achieve “a responsive, economic infrastructure that meets the needs of the growing economy” – as per Outcome 6 in the Medium Term Strategic Framework (MTSF) which reflects government’s mandate for the Infrastructure Development Cluster.
6) Finding innovative means for private sector involvement to enhance the service offering of Transnet and improve the competitiveness of the freight logistics system.
There are six focus areas guiding Transnet’s strategic mandate
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KPI UNIT TARGET
FINANCIAL VALUE CREATION
OPEX as a % of revenue % ≤ 60
Return on average total assets % ≥ 8
Cash interest cover times ≥ 3.2
Gearing % 46
INFRASTRUCTURE AND MAINTENANCE
Capital expenditure % of R’m Budget ≥ 90
Maintenance cost % of R’m Budget ≥ 90
HUMAN CAPITAL
Training spend % of personnel costs 3-4
SAFETY
Disabling Injury Frequency Rate – (DIFR Safety) Index ≤0.85
Transnet’s Shareholder Compact has a range of KPI’s at Group level
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KPI UNIT TARGET
MARKET SHARE
Volume growth
Export Coal (ton.km) % ≥ 8.5
Export Iron Ore (ton.km) % ≥ 10.5
Containers (TEU’s) % of railable maritime
containers
≥ 33.0
GFB (excluding containers) (ton)
% ≥ 15.0
Average revenue per unit increases (ton.km)
Export Coal % ≤ 3.4
Export Iron Ore % ≤ 13.5
GFB % ≤ 7.3
SERVICE RELIABILITY
On-time departure
Export Coal minutes ≤ 150
Export Iron Ore minutes ≤ 95
GFB minutes ≤ 185
On-time arrival
Export Coal minutes ≤ 250
Export Iron Ore minutes ≤ 160
GFB minutes ≤ 240
LOCO UTILISATION
Gross.ton.km/loco/month
Export Coal GTkm/loco/m (000)
≥ 16 200
Export Iron Ore GTkm/loco/m (000)
≥ 44 800
GFB (mainline locos) GTkm/loco/m (000)
≥ 5 300
WAGON UTILISATION INDEX
Wagon Cycle time
Export Coal Hours ≤ 66
Export Iron Ore Hours ≤ 81
Wagon Turnaround time
GFB Hours ≤ 12
SAFETY
DIFR Index ≤ 0.95
Example of Shareholder Compact targets at Divisional level – TFR
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Transnet plans to invest over R90bn in capital assets over the next five years
Over the past 5 years Transnet has spent approximately R72.4bn on Capex.
The five year (2010/11-2014/15) forward looking investment plan amounts to R93.4bn (excluding capitalised borrowing costs).
Since the start of the capital investment programme, 21 major projects have been launched – some are still in progress whilst others have been completed.
Despite the economic downturn Transnet is still committed to investing in infrastructure to provide capacity ahead of demand.
Transnet has undertaken extensive capital scrubbing to Re-prioritise the timing of certain projects Identify procurement saving Identify potential cost reductions through value engineering
Projected spending will be within the shareholder compact targets
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Significant benefits accrue to: Northern Cape (through which the Iron Ore Line runs),
Kwazulu Natal (which has the busiest port),
Mpumalanga (in which many coalmines are found, and through which a major portion of the Coal Line runs) and
the Eastern Cape.
Transnet Investment Impact realised in 2018 calculated as a percentage of provincial GDP in 2008
Province GDP(Rmn) Employment creation
Eastern Cape R11 503 62 186
Free State R3 932 19 531
Gauteng R25 566 144 993
KwaZulu-Natal R30 820 143 455
Limpopo R3 742 20 754
Mpumalanga R10 069 45 767
Northern Cape R12 320 57 214
North-West R5 635 27 732
Western Cape R12 095 64 649
Total impact R115 682 586 267
The Transnet investment programme will also have significant provincial impacts
Transnet Investment Impact in 2018
Total impact (direct/indirect/induced)
Impact on Employment [numbers] 586 267
Skilled 135 871
Semi-skilled 246 935
Unskilled 203 461
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Transnet also has a comprehensive internal skills development programme
School of Rail
TFR
School of Port Operations
TPT
School of Pipelines
TPL
School of Ports
TNPA
School of Engineering
TRE
• 8 Campuses Nationally spread
• Rail operations training e.g.:
• Train Drivers• Train Control• Yard
operations
• 1 Campus in Durban
• Port operations training e.g:
• Operators of Lifting Equipment
• Cargo Coordination
• Drivers
• 1 Campus in Durban
• Port authority training e.g:
• Marine Pilot,• Tug-master• Vessel Traffic
services• Marine Global
Best Practice
• 1 Campus in Durban
• Pipeline operations training e.g:
• Technical Pipeline Operations
• Pipeline Controllers, Coordinators and Planners
• 18 Campuses Nationally Spread
• Custodian for Artisan training for whole of Transnet
• Technical rail engineering training e.g:
• Artisans• Trade Hands• Process
Workers
• ‘Schools of Excellence’ are provisionally accredited with TETA and in-progress to obtain full accreditation. • Trade Test Centres are fully accredited with TETA
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Transnet has secured three major CSDP transactions
• The current CSDP plan with EMD was finalised in November 2009.• The EMD CSDP plan aims for (1) TRE to become part of their Global Supply Chain for
rebuilt traction motors and diesel engines, (2) to accredit TRE’s maintenance facilities for EMD locomotive maintenance and (3) to localise the supply of at least 10% of the value and/or quantity of the parts listed per the Spare Parts Agreement.
• These CSDP goals will be achieved through the transfer of skills and relevant intellectual property required to carry out the activities mentioned.
• EMD is already actively supporting TRE in acquiring new work in Africa..• Execution of the EMD CSDP plan is well underway
• The contract for the building of the 100 Locomotives was awarded to GE and signed on 17 December 2009.
• GE developed a CSDP plan consisting of 3 main initiatives – training for maintenance development, Lean, Six Sigma and Candidate Engineers; localisation of various components and parts as well as a licence agreement with TRE for the overhaul and modernisation of GE locomotives.
• The signing of the CSDP Plan was concluded on 30 June 2010• The Licence Agreement would allow for TRE and GE to enter into a technology
partnership for locomotive overhauls and modernizations, with GE being the prime contractor and TRE the sub-contractor.
• The GE 100 loco deal is the biggest CSDP transaction to date making Transnet the leader in CSDP execution
• The DPE has indicated their satisfaction with Transnet ‘s CSDP progress thus far
• TRE will be a centre of excellence for locomotive OEMs together with various Tier 2 and 3 suppliers.
EMD:Spare partsContract Value:R550 million
GE: 100 Loco dealContract Value:R2.6 billion
50 “Like new” locomotives
• 50 “Like-new” programme now complete under the equivalent of the CSDP Framework using Transnet Rail Engineering
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Transnet has increased its spend with BBBEE suppliers significantly over the past 4 years
• Significant focus has been placed on the BBBEE scorecard ratings
• Emphasis has been placed on improving on Preferential Procurement and Enterprise Development
• Spend with BBBEE companies has increased significantly
• In 2010 Transnet has spent R13.5bn which accounts for 65.35% of total procurement spend against a target of 65% of which:• R1.9bn has been spent on Exempted Micro
Enterprise (turnover below R5m) • R2.7bn accounting for 13.24% of total
procurement spend against a target of 5% has been spent on Qualifying Small Enterprise (turnover between R5m and R35m)
• R837m has been spent on Black Women Owned (30% shareholding)
• R3.1bn accounting for 15.33% of total procurement spend against a target of 9% has been spent on Black Owned Enterprises (50% shareholding)
6559
4137
2007
2008
2009
+21%
2010
BBBEE Spend as % of Total Procurement Spend
2009
13,50
2008
6,89
2007
3,88
+87%
BBBEE Spend 2007 -2009 (Rbn)
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Eskom’s strategic mandate is focused on energy provision including generation, transmission, distribution and retail and all matters related or incidental thereto
Eskom’s principal strategic objective based on the Strategic Intent can be defined as that of playing a leading role in the electricity supply industry. This includes, but is not limited to,
a) catalysing economic growth and ensuring that this growth is accompanied by the creation of jobs; and
b) establishment of local manufacturing capability in targeted areas (e.g. nuclear), research and development thereto.
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1) Ensuring reliable supply of electricity to all South Africans.
2) Ensuring its contribution to adequate future electricity supply for South Africa.
3) Supporting the developmental objectives of South Africa.
4) Ensuring business sustainability of Eskom.
There are 4 focus areas guiding Eskom’s strategic mandate
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KPI UNIT TARGET
FINANCIAL VALUE CREATION
Cost of Electricity R /KWh 327.28
Debt : Equity Ratio times 2.50
Interest Cover times 1.0
OPERATIONAL EFFICIENCY
National Load Shedding MW No load shedding
DSM Energy Efficiency GWh 994
Water Usage (Per kWh sent out) L / kWh 1.35
Internal energy efficiency - To reduce non-essential consumption by 15% by 2015.
GWh24GWh
INFRASTRUCTURE AND MAINTENANCE
Generation Capacity Installed (Megawatts) Target (MW)625 MW
Transmission Lines Installed (kilometres of line) Target (KM)446 km
Transmission MVA Installed Target (MVA)3565 MVA
HUMAN CAPITAL
Skills development
Eskom trainees / bursars (Learner Pipeline) 4500
Number of Engineering Trainees / Apprentices 3500
Additional number of non-Eskom learners on Eskom
sponsored learning 10% of internal learners
B-BBEE
Percentage of local content in new-build contracts % 50%
Eskom’s Shareholder Compact has a range of KPI’s at Group level
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Eskom plans to invest over R500bn in capital assets over the next five years
Over the past 5 years, Eskom has spent more than R150bn on Capex
The five year (2010/11-2014/15) forward looking investment plan amounts to more than R350bn.
Eskom is however facing funding shortfall issues which are currently being addressed by Government.
Eskom capital projects include the following:
Generation plant Return to Service (including Camden, Komati and Grootvlei)
New build which includes Medupi, Kusile, Ingula, Sere and CSP plants
Transmission (Cape Grid, Northern Grid, Southern and Western Cape)
Identify procurement saving
Identify potential cost reductions through value engineering
Projected spending has been included in the Shareholder Compact targets
Procurement capabilities of Eskom
• Eskom has invested in procurement skills training programmes.
• Since the beginning of the 2010/11 financial year, Eskom has trained 438 procurement and supply chain management practitioners for an average of 2.6 days .
• In its procurement practices, Eskom targets to have at least 50% of local content in new-build contracts.
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Durban
Cape Town
461
Eskom’s investment programme will also have significant local and national impacts
Sere (Wind)100 MWR1.2bn
Upington CSP (Solar)100 MWR3.5bn
Medupi PS4764 MWR126bn
(1900 jobs)
Kusile PS (Coal)4800 MWR170bn(12000 jobs)
Ingula Pump Storage1352 MWR22bn(4500 jobs)
Impact on local town’s GDP from each project:Lephalale (Medupi) – up 95%Delmas (Kusile) – up 25%Ladysmith (Ingula) – up 1%
South Africa - GDP impact:•Medupi 0.34% /yr•Kusile 0.34% /yr•Ingula 0.04% /yr•Total 0.72% /yr
Other businesses and infrastructure :• Catering• Laundry• Building companies• House maintenance• Hotels• Entertainment• Training facilities• Security• Schools / education• Policing• Churches• Medical care• Banks & financial services
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Eskom’s investment programme will also have significant impact on employment
On site constructionSupporting project staffCoal mine expansionTransmission expansionCrocodile River expansionOngoing operations
Subtotal
DIRECT
INDIRECTSocial services + local business
8 3002 2002 1002 7003 000
700
~19 000
Total employed
1 700
20 700x family multiplier (4/family)
x 4
People directly impactedby Medupi, Kusile & Ingula
~160 000
7 200
600
~12 000
1 700
13 700
4 100
100
~4 500
1 100
5 600
Medupi Kusile Ingula
2 000200
2 000 300
Other projects such as 765kV and RTS provide ~ 11 000 direct employment opportunities during construction and a further ~1 700 during operation
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Eskom also has a comprehensive internal skills development programme
Eskom invested more than R780 million in the last financial year
Below is a table that summarises Eskom’s training programme
Intervention
Facilities 24 nationally, with 244 on job training venues
Practitioners 530
Instructors 28
Courses offered More than 6000
Leaner days achieved 140000
Eskom also established an Academy of learning, with a council of divisional MDs and Chief learning officers
The aim is co-ordination and integration of all learning
Academy facilities already created which include provision for engineers, technologists, technicians and artisans
5225 learners are already in pipeline of which 3780 are in engineering and technical fields
4075 engineering trainees/apprentices are under training
Eskom also established an Academy of learning, with a council of divisional MDs and Chief learning officers
The aim is co-ordination and integration of all learning
Academy facilities already created which include provision for engineers, technologists, technicians and artisans
5225 learners are already in pipeline
3780 learners are in engineering and technical fields, which is equivalent to 72% of Eskom trainees / bursars (Learner Pipeline).
4075 engineering trainees/apprentices are under training
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Eskom has also leveraged the training of 6130 people by suppliers.
Area Committed numbers In Training Training Completed
Medupi 2178 1299 284
Kusile 2234 792 626
Ingula 137 16 5
Power Delivery 1382 1002
Plant and Equipment
199 38 1137
Total 6130 2145 3054
Majority of training takes place in the following disciplines: Coded Welders, Boilermakers, Riggers, Fitters, Technicians, Laboratory technicians
and Quantity Surveyors.
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Eskom has leveraged over a billion rand of investment in manufacture from the build programme
▪ 11,000m2 boiler pressure part workshop built in Nigel– Boiler Membrane Wall
Workshop– Two new CNC Benders
commissioned– New welding training centre– CNC header drilling machine
▪ Training facilities in Gauteng– 1400 artisans, 60 engineers,
36 operators, 24 maintenance workers
▪ Sulzer South Africa subcontracted for the production of 96 pumps (36 BFP, 24 CEP, 36 boosters) for Medupi and Kusile
▪ 45% of contract has local content commitments, including manufacture of castings and rotating components
▪ Manufacturing capacity investments by Sulzer expected to be ~R60m
▪ Sulzer revenues increased significantly since 2007
Sulzer SA, a local manufacturer of feed pumps, has invested R60mn
Hitachi is investing ~R900m in facilities and training in South Africa
▪ Expansion of existing facilities to manufacture MV switchgear locally
▪ R21m invested to date
Actom committed to an investment of R84m in local facilities
▪ Plant that saw global manufacture of 275kV insulators move to South Africa▪ Previously manufactured in
Switzerland▪ Investment complete and first
production units rolled off production line
Pfisterer investment of R25m in plant in KZN
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Eskom has increased its spend with BBBEE suppliers over the years
Eskom 2010 2009 2008
Total Measured Procurement Spend (Rbn)
72.6 73.3 -
Attributable BEE Spend (Rbn) 20.8 46.3 It wasn’t measured in
2008, howeverR23,4bn spent
on BEE
Attributable BEE Spend (%) 28.65 63.17 -
Attributable BWO Spend (Rbn) 2.5 3.7 3.1
BWO as % of attributable Spend (%) 12.02 10.0 -
Below is a summary of Eskom preferential procurement: