Dr Willem J. De Beer, Chief Operations Officer, EDI Holdings (Pty) Ltd,

South Africa 23November 2010

“The process of dealing with the EDI maintenance backlog:

Can we catch up? ”

Electricity Supply Chain

Transmission LinesGENERATION

TRANSMISSION (765/400/275 kV)

TRANSMISSION

SUBSTATION

DISTRIBUTION (132/88/66/44/33 kV)

MV Lines 22 and 11kV

Reticulation Lines & Cables

DISTRIBUTION

SUBSTATION

Distribution Lines (HV Lines & Cables)

LV Lines 380/220VSERVICE

CONNECTION

ELECTRICITY DISTRIBUTION INDUSTRY (EDI) FOCUS

Electricity sold (%Y/Y) and real GDP

Source: Statistics South Africa, EskomData as at September 2010

% y/y

Price and Economic Growth Projections

Source: Eskom, Stats SA, RMB FICC Research Data as at September 2010

Index

127%

18%

Electricity Demand

Source: RMB FICC Research, University of PretoriaData as at September 2010

% y/y

Eskom ’s Reserve Margin

Source: EskomData as at September 2010

An Update on Eskom ’s Build Project

Source: EskomData as at September 2010

mw

Electricity Demand and Supply Projections

Source: Eskom, FICC ResearchData as at September 2010

‘000

MW

h

Electricity Distribution Industry (EDI) Profile

• Revenue : ~ R40 bn

• Customers : ~9.2 m

• Staff : ~31 000

• Replacement Asset Value (2008) : ~R260 bn

• Energy Purchases (ESI-2008) : ~224 TWh

• Energy purchases (EDI-2008) : ~120 TWh

• Distribution Lines : >400 000 km

• Distribution Cables : >210 000 km

EDI Insights• Maintenance plans and implementation thereof is not evident in most municipalities’

electricity departments.

• Maintenance investment is not consistent or in line with NERSA recommendations.

• Average age of asset base 45 yrs.

• Capital investment plans are not clearly defined on a consistent basis.

• Capital investment is < 5% of actual revenue from electricity in a large percentage

of municipalities.

• In terms of electricity, municipalities on average achieved approximately 47% of

their total electricity budgeted capital investment.

• Approximately 1000 constrained feeders in Eskom Distribution which cannot

accommodate more load.

• Recruitment, training and retention of skills are significant EDI sustainability risks.

• Ability to continue to provide reliable and affordable electricity at risk.

• The pockets of good performance are decreasing.

EDI Challenges in Context• The EDI is currently generating revenue however the business model is not

sustainable

• The EDI in South Africa is currently experiencing significant challenges as a result

of amongst others;– Under investment in asset maintenance

– Lack of refurbishment investment

– Under performing industry– Shortage of skills

• Maintenance, refurbishment & strengthening backlog ~ R27.4bn (2008)

• An additional ~R2.5bn / annum maintenance and refurbishment required• In general the current practices in the EDI do no guarantee for business

sustainability and economic growth

• Supply chain process within most municipalities does not support accelerated implementation of projects and procurement turn around times

• While there are pockets of good performance; to avoid a collapse of the EDI it is

essential for an urgent structured intervention• The increased operation of under maintained plant is a recipe for disaster

Slide 12

In addition to the lack of investment in generating capacity, the South African electricity

distribution network is (according to industry experts) also in a state of critical under-

investment. Eskom is responsible for 95% of generation and 100% of transmission.

Distribution, however, is owned about 50-50 between Eskom itself and the “munics”

(municipality-owned distribution companies). As a rule of thumb, distribution

companies should be investing at a rate of about 10% of asset value per year.

However, for a number of reasons beyond the scope of this report, investment rates in

many (especially non-Eskom) distribution companies are as low as 1-2% per year.

Thus, while much of the focus has been on generating capacity, a major threat to

efficient energy supply is distribution.

UBS Investment Research – March 2008

Slide 13

Maintenance Spent vs. Actual Revenue

Source: Ringfenced Financial Statements

Type 6Type 5Type 4Type 3

Type 1

Actual Maintenance Spend vs. NERSA & International Guideline Maintenance Spend

Source: Ringfenced Financial Statements

Source: Relevant Department Listing & HR Close-out Reports, Critical Skills Report

Electricity Skills as a % of Total Vacancies

* - No data

** - No comprehensive vacancy data

*** - All Contractors

Type 6Type 5Type 4Type 3Type 1

Outage Management

Municipality No. of Outages (Monthly) Average downtime per

disruption

# 3 0 (Planned)

20 (Unplanned)3 hrs to 1 week

# 520 (Planned)

30 (Unplanned)

Planned – < 8 hours

Unplanned – < 1 hour

# 116 (Planned)

6 (Unplanned)6 – 48 hours

# 14 8 (Planned)

150 (Unplanned)Not available

# 191 (Planned)

3 (Unplanned)½ hour

# 21 2 1 Hour

# 22 Not available Not available

# 231 (Planned)

2 (Unplanned)2-3 Hours

# 244 (Planned)

9 (Unplanned)3 hours

From research conducted,

unplanned outages mainly occur

due to assets not being well

maintained and lack of capacity to

perform preventative maintenance.

A policy of reactive maintenance is

adopted (rather then preventative

maintenance) as planned

maintenance does not exist in most

municipalities .

Skills shortage and key resource

vacancies a key driver of outages.

Maintenance plans do not exist in

over 50% of the municipalities

researched.

Key Points

Source: Close – Out Annexure Documents

Entity Total Backlog Maintenance RefurbishmentShort term

Strengthening

RED ONE (City of Cape Town) R 3,851,578,245 R 385,157,825 R 1,155,473,4 74 R 2,310,946,947

RED TWO (Ekurhuleni) R 5,132,373,764 R 513,237,376 R 1,539,712 ,129 R 3,079,424,259

RED THREE (Nelson Mandela Bay) R 2,186,296,025 R 218,629,602 R 655,888,807 R 1,311,777,615

RED FOUR (City of Johannesburg) R 6,413,148,398 R 641,314,840 R 1,923,94 4,519 R 3,847,889,039

RED FIVE (eThekwini) R 4,158,350,649 R 415,835,065 R 1,247 ,505,195 R 2,495,010,389

RED SIX (Tshwane) R 5,627,399,914 R 562,739,991 R 1,688,21 9,974 R 3,376,439,948

Total R 27,369,146,995 R 2,736,914,699 R 8,210,744,098 R 16,421,488,197

National Picture - EDI Infrastructure Investment Backlog / RED Region (2008)

Investment Reality• A limited number of municipalities are increasing their investment in the assets

• Municipal Infrastructure Grant (MIG) 2009/10

– 4% of municipalities failed to spend any of their MIG allocation

– 15% of municipalities spent less than half of their MIG allocation

– 37% of all municipalities spent all of their MIG allocation

– ~R2bn is “lying” in municipal bank accounts rather than invested in the assets

• Eskom Distribution

– Additional R1.4bn per annum over next 10 years to ensure that backlog does

not increase

– Strengthening expenditure expect to increase from R3.1bn to R5.4bn in next 5

years

– Refurbishment to increase from R1.5bn to R2.3bn per annum over next 5 years.

Funding the Required Asset Investment

• Improved business performance and efficiencies e.g. address technical and

non-technical losses:

– Eskom (2009/10) - Non technical losses account for 4.3TWh (R1.2bn)

per annum (2.3%)

– Total EDI non technical losses ~ R6,5bn per annum

• Redirect the MIG allocation

• Tariff adjustment

• Grant funding

• Hybrid of the above options

EDI Maintenance Backlog: Can we catch up? ”

• Yes !!!! On condition that:

– Political championship for the asset turn around strategy be addressed

– Approach to Distribution Asset Management (ADAM) plan be adopted as

the turnaround framework

– The funding requirement be addressed

– Dedicated resources be appointed to drive ADAM as a national

integrated solution

– Utility resources be complement to ensure a balanced “day to day”

operational focus and ADAM roll out

Conclusion

• The asset management in the EDI requires an integrated and holistic

approach.

• Accountable and competent leadership is required.

• The attitude towards asset management, inclusive of investment in assets,

must change.

• Tighter regulation of the EDI is required

• There is a compelling case for the EDI reform and it is essential that the

RED establishment programme be accelerated in the interest of the

customers, the economy, business stability and current employees.

THANK YOUTHANK YOU

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