Briefing to the Portfolio Committee on Energy 11 Briefing to the Portfolio Committee on Energy 21 February 2012 For an Equitable Sharing of National Revenue Energy Related Recommendations of the FFC

Outline of the Presentation 22 Outline of the Presentation Challenges with the electricity distribution industry and impact of the current situation Lessons learnt from previous electricity distribution industry reform attempts Update with respect to progress on past electricity and maintenance related recommendations made by the FFC Issues for consideration Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Introduction Importance of infrastructure as a key lever for accelerating growth FFC recommendations for 2009 division of revenue Equally important is maintaining and rehabilitating existing/new infrastructure to ensure sustainable service delivery Critical given commitments on infrastructure made in the 2012 State of the Nation Address Challenges of spending on infrastructure in South Africa are driven by among other things Significant backlogs Underspending on capital budgets Low spending on repairs and maintenance Generally low technical capacity (e.g. engineers) to guide implementation of infrastructure projects Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Introduction A 2009 World Bank study on municipal infrastructure finance, estimates that for the local government sphere to adequately meet its infrastructure investment needs it will require R500 billion over the next 10 years R180 billion for new infrastructure R80 billion for backlogs R240 billion for rehabilitation Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Status Quo within Electricity Sector With respect to the electricity sector: Generation: Satisfactory condition, can meet current demand but major capital investment in new infrastructure is needed to ensure demand can be met over next five years. Risks include ageing infrastructure, new project completion and coal supply Transmission: Satisfactory condition, can meet current demand, major capital investment required to meet needs over next five years Distribution: inadequate operations and maintenance capacity, shortage of skilled personnel, infrastructure is ageing and/or overloaded. Municipal infrastructure is poorly maintained, lack of capacity to meet demand. Big risk is impact on the national economy if significant investment is not made Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Status Quo within Electricity Sector With respect to distribution Restructuring process initiated during the late nineties Aim was to establish six wall to wall regional electricity distributors that would take over assets and functions from Eskom and municipal distributors Significant financial and human capital resources dedicated to this – EDI Holdings set up in 2003, 17th Constitutional Amendment proposed in 2009 Cabinet decision to discontinue the reform process in December 2010 No indication of an alternative At present the Commission is not aware what the way forward is – restructuring remains an outstanding issue Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

The Challenge with Electricity Distribution Industry As at 2008, Department of Energy estimated backlog of R27.4 billion in terms of maintenance, refurbishment short-term strengthening in the electricity distribution industry. Estimated that backlogs grow by R1.6 billion per annum (2011 Infrastructure Report Card, SAICE) Municipalities not increasing portion of budgets dedicated to repairs and maintenance and refurbishment e.g. City of Joburg (City Power) Policy uncertainty as a result of unresolved restructuring process Limited resources in the face of significant non-payment Historically tariffs not cost-reflective (NT, 2011) - move by NERSA to encourage more accurate costing of tariffs in line with Section 74 of Systems Act Is current approach to funding repairs and maintenance appropriate? Presently municipalities fund repairs and maintenance from their operating budgets Energy Related Recommendations of the FFC

Electricity Infrastructure Repairs and Maintenance Opex as % of Total Opex Budget: City of Johannesburg Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Actual Capital expenditure by Sector, 2003/04-2012/13 (Real) Figure highlights declining investment in electricity relative to other sectors Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Implications of the Current Situation Compromised service delivery Higher subsequent repair costs and places strain on public finances Distorted linkages in the economy: impacts on productivity and profitability of companies Contributes to increased backlogs Stalled electricity distribution industry restructuring process creates policy uncertainty, thus affecting investment in the sector Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Lessons from previous electricity distribution industry reform attempt Reform should not be piecemeal but should address the entire electricity value chain (generation, transmission and distribution) White Paper on Energy envisaged a two-pronged, all-encompassing reform process of the electricity sector encompassing electricity distribution industry and the electricity supply industry Address root causes of the challenge Poor performance may be as a result of ill defined mandates, poor regulation, lack of funding, poor managerial skills and leadership capacity, political reasons Differentiated reform approach that recognises variances in performance of individual electricity distributors to be considered Not all municipal distributors perform poorly Energy Related Recommendations of the FFC Briefing to the Portfolio Committee on Energy, 21 February 2012

Lessons from previous electricity distribution industry reform attempt Take municipalities on board from the start Electricity distribution is listed as a municipal function in the Constitution, however Municipal Systems Act (Sections 82 and 87) allows for responsibility for service delivery to be delegated to another party If approach is to outsource distribution to a third party, careful consideration should be given to ability/capacity of municipalities to conduct adequate oversight over activities. This is critical in ensuring that social objectives are maintained Ensure that revenue of municipalities are not compromised (revenue from electricity is an important source of income (contributes on average 30% to total municipal revenue) and is used to cross-subsidise delivery of other municipal services) Proper lines of accountability should be defined at the start of the process Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

FFC Previous Recommendations on infrastructure and Electricity Government should implement a fully comprehensive national infrastructure maintenance strategy, especially for those infrastructure classes with a high impact on unemployment and poverty, with dedicated maintenance objectives An Infrastructure Development Bill is to be tabled in Parliament in 2012 Government should work with National Energy Regulator of South Africa to put in place a financing framework that deals effectively with electricity pricing NERSA sets tariffs that Eskom and municipalities can charge for distribution. There is a need to ensure sustainable prices increases that do not lead to high levels of non-payment Increased funding should be directed towards infrastructure programmes that are linked to basic services including water, health, electricity, roads, transport and communication Government has prioritised basic infrastructure Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

FFC Previous Recommendations on infrastructure and Electricity There should be an increased and stable flow of funds for maintenance, rehabilitation and addressing backlogs in the long-term Expenditure should be reprioritised towards repairs and maintenance Municipal statistics show otherwise with municipalities allocating Municipalities are not doing so, FFC analysis shows that spending on this item <5% (FFC, 2011/12) National and provincial government should require and assist municipalities to identify the primary cause of poor performance in billing and revenue collection functions and use the information to design appropriate remedial strategies National and provincial treasuries are providing assistance in this regard Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

FFC Previous Recommendations on infrastructure and Electricity Climate change induces increases in electricity infrastructure expenditures. As a result, Government to consider providing municipalities with a performance-based conditional grant which rewards/incentivises actions that are environmentally efficient and support efficient energy management practices, including minimisation of electricity losses, elimination of illegal connections and energy savings by households and industry Government has accepted the recommendation in principle but noted that it needs to do further work in terms of the design and potential impact of the grant. National Development Plan also in support of efficient energy management practices FFC recommended that Government should actively and specifically pursue development of a more spatially compact urban form for cities, as this will enable efficient electricity infrastructure distribution Government has accepted this recommendation in principle Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Issues to Consider Government to consider an alternative approach to funding repairs and maintenance Rehabilitation fund (once off)? Ring fenced funding (can not be a permanent solution)? Development and implementation of models for life-cycle costing of infrastructure (operational and rehabilitation) to be emphasised Municipalities should prioritise development of maintenance plans, maintenance management system and production of maintenance reports Avoid reactive maintenance but go for preventative maintenance Municipalities should develop comprehensive asset registers Government should develop norms on minimum acceptable maintenance levels Government should provide guidance on the restructuring process - so as to eliminate policy uncertainty in the sector Briefing to the Portfolio Committee on Energy, 21 February 2012 Energy Related Recommendations of the FFC

Thank You. Energy Related Recommendations of the FFC Financial and Fiscal Commission Montrose Place (2nd Floor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House 1685 www.ffc.co.za Tel: +27 11 207 2300 Fax: +27 86 589 1038 Energy Related Recommendations of the FFC