PRESENTATION TO PORTRFOLIO COMMITTEE ON PROVINCIAL AND LOCAL GOVERNMENT PHINDILE NZIMANDE CEO-EDI HOLDINGS 31 MAY 2005 31 May 2005

Background Presentation to joint Portfolio Committees on Provincial and Local Government & Public Enterprises – 2 March 2005 Joint research on: Key issues Clarity on stakeholder roles Co-operation of municipalities and other stakeholders Final document being finalised for submission to Portfolio Committees 31 May 2005

Background Key issues & emerging trends Institutional reform: Enabling environment for restructuring Restructuring legislation necessary to govern the process & reduce the risk of non-achievement of desired end-state Legislation would also contain provisions, inter alia, to: Regulate the transfers of businesses to the REDs Streamline existing legislation governing the EDI Regulate RED operations, reporting and oversight requirements Strengthen s. 93C co-operation procedures between municipalities Contain essential provisions of Service Delivery Agreements Safeguard unforeseen exits from REDs Standard set of by-laws 31 May 2005

Background Key issues & emerging trends Legal form of entity: Municipal Entity, Public Entity or Special Purpose Entity Agreement reached that REDs will be Municipal Entities with certain exemptions. Exemptions required to create a more conducive environment to achieve the objectives of restructuring Ownership and control: Shareholding structure of the RED Municipalities to have majority shareholding Eskom and National Government to hold the rest of the shares 31 May 2005

Background Key issues & emerging trends Transfer instrument: DAY ONE: Operating Agreement between the RED and CCT and the RED and Eskom Key attributes: Services will be provided by Eskom & City of Cape Town Eskom & City of Cape Town will report to the RED on performance against national standards and other regulatory requirements Eskom and City of Cape Town will continue to be responsible for making new investment and serving new customers in their service areas The RED will introduce operational improvements through standardisation of processes and integrating operations. This will be done in conjunction with an action plan to address maintenance backlog. RED ONE will develop tariff framework in its area, subject to the City’s tariff policy and the NER’s regulatory approval (as at present). 31 May 2005

Background Key issues & emerging trends Transfer instrument: End State: Transfer Agreement Key attributes: Full business transfer including assets, liabilities & staff Incorporation of all municipalities RED delivering all services SALGA currently reviewing transfer agreements in order to standardise across all municipalities 31 May 2005

Background Key issues & emerging trends Compensation: Recommended approach is to use a weighted combination of asset values, income stream and profits The compensation of existing owners is neither intended to generate windfall gains, nor should it result in unreasonable loss of income or security Impact on customers to be minimised 31 May 2005

Areas of focus Financial implications for Municipalities Other implications for Municipalities Effects on Free Basic Electricity Co-operation from Municipalities and other Stakeholders 31 May 2005

Areas of focus Financial implications for Municipalities Other implications for Municipalities Effects on Free Basic Electricity Co-operation from Municipalities and other Stakeholders 31 May 2005

Financial Impact on Municipalities Guidelines from the 2001 Blueprint on EDI Restructuring Local Government should not suffer financially from the creation of REDs Current levels of financial transfers from electricity local government should be maintained, through an explicit levy on tariffs and dividends Levy on electricity should be transparent. Local government levy or charge on electricity should be applied as a percentage to all customers except poor households 31 May 2005

Financial Impact on Municipalities The following principles are adopted to guide the restructuring process These principles are subject to agreement among key stakeholders Principle Impact Risk mitigation Leverage on Credit control It is important for municipalities to continue using electricity as a leverage for credit control This can be achieved through Service Level Agreements Billing, accounting & credit control principles Surpluses There is a need to harmonise calculation of surpluses across municipalities This can be achieved through a Compensation model A 15% on gross expenditure is regarded as an acceptable norm Overhead costs There is a need to harmonise the method of handling and calculating overhead cost. Allocations varies from municipality to municipality A 7,5% on gross expenditure is regarded as an acceptable norm 31 May 2005

Financial Impact on Municipalities Principle Impact Risk mitigation Operational VAT implication It is important that municipalities retain the benefits on reclaimable VAT This can be achieved through Service Level Agreements There is an indication that on average municipalities can forfeit between 5% and 8% of VAT output considering the change in business Stranded costs Municipalities will not be left with stranded costs due to electricity distribution restructuring This can be achieved through a Compensation model Cost will arise from ineffective use of floor space, system utilisation, etc. This amount cannot be calculated until the ringfencing have been completed Tariffs It is important that tariffs will not increase outside acceptable norms NER will control this through their tariff policy and framework The DAY ONE tariff structure will continue as is in the short term 31 May 2005

Financial Impact on Municipalities Principle Impact Risk mitigation Shareholding Valuation No windfall gains will be derived through asset valuation. The community at grass-root level can not pay twice for the same asset This will be addressed through the Shareholding model of EDI Holdings Valuation Methodology Staff harmonisation cost to be carried by the electricity distribution industry Harmonisation of salaries is inevitable This imbalance may exist in all public entities across industries and municipalities This will be addressed with organised labour and through normal processes in the industry. Harmonisation phased over a period of time. Contingent liabilities will similarly be considered in this process. 31 May 2005

Areas of focus Financial implications for Municipalities Other implications for Municipalities Effects on Free Basic Electricity Co-operation from Municipalities and other Stakeholders 31 May 2005

Other Implications Service Delivery Agreement Municipalities remain service authorities and REDs become Service providers Relationship between RED and municipalities to be governed by the Service Delivery Agreement as contemplated in Section 81 of the Municipal Systems Act, 2000 Municipalities and Eskom hold shares in the REDs Viable businesses with positive business case Improved collections Efficient operations Reduction of maintenance backlog Jerry to give example 31 May 2005

Other Implications Benefits to Municipalities Revenue neutrality Surcharges Cashflow Surpluses guaranteed Economic growth Facilitation of Free Basic Electricity Electrification 31 May 2005

Areas of focus Financial implications for Municipalities Other implications for Municipalities Effects on Free Basic Electricity Co-operation from Municipalities and other Stakeholders 31 May 2005

Effects on government policy Restructuring will facilitate: Efficient delivery of Free Basic Electricity Will form part of the Service Delivery Agreement with Municipalities Focus on Free Basic Electricity RED to ensure consistent delivery of Free Basic Electricity across geographical area Execution of electrification programme Focus on Electrification RED to ensure consistent roll-out of Electrification programme across geographical area 31 May 2005

Areas of focus Financial implications for Municipalities Other implications for Municipalities Effects on Free Basic Electricity Co-operation from Municipalities and other Stakeholders 31 May 2005

Co-operation from Municipalities Enrolment still voluntary Restructuring legislation would assist in speeding up enrolment Co-operative agreement Municipalities that have signed the agreement: 18 (March 2005: 9) Municipalities in negotiations to sign the agreement: 19 (March 2005: 8) Ringfencing Ringfencing toolkit available to all municipalities from EDI Holdings City of Johannesburg & Mangaung have independent municipal electricity distribution businesses Municipalities currently in the process of ringfencing: 11 (March 2005: 6) 31 May 2005

Co-operation from other stakeholders Eskom Substantial progress made on migration from 7 to 6 regions to align with REDs establishment requirements Regular interaction and input Overall positive co-operation Labour Transitional Labour Relations Structure established and functional NEDLAC kept informed through quarterly feedbacks SALGA Regular interaction and input (CEO SALTECH; EDIR reference group; NEC) Joint roadshows Other Government Departments Inter-governmental engagement on restructuring between DPLG, DME, DPE & NT RACI Matrix developed 31 May 2005

Industry Vision for Restructuring To Consolidate the South African Electricity Distribution Industry Into Six Financially Viable Regional Electricity Distributors 31 May 2005

THANK YOU 31 May 2005