Presentation to Standing Committee of Public Accounts

Presentation to Standing Committee of Public Accounts
Rev 1.2 2019/05/27 22 August 2018 Produced by Procurement Recovery Team

Contents Eskom Delegation Purpose Introduction
Analysis of Deviations and Expansions in Q4 FY2017/18 Concluding Remarks

Eskom delegation is as follows:
Mr. Jabulane Mabuza - Chairman Mr. Phakamani Hadebe – Group Chief Executive Mr. Martin Buys – General Manager (Finance) Mr. Segomoco Scheppers –Chief Procurement Officer (Acting) Ms. Masedi Skosana – General Manager (Group Procurement) Mr. Pieter Le Roux – General Manager (Strategy & Optimisation) Mr. Abram Masango - Group Executive Group Capital Mr. Vuyisile Ncube - Acting General Manager Primary Energy

Purpose and Introduction
Purpose: To present a report of ESKOM’s deviations and expansions for Q4 FY2017/18. Introduction: This is Eskom’s first appearance before SCOPA to present a review of deviations and expansions This report provides a review of 74 cases of deviations and expansions during Q4 of FY2017/18 Internal to Eskom the deviations and expansions are managed through a robust process through various tender committees with defined delegations of authority Recent audits on Eskom’s financial results have revealed compliance weaknesses in the procurement process, as well as shortcomings in the planning and contract management. Eskom is at an advanced stage of finalising an audit recovery programme The Recovery Programme is monitored by the Board’s Audit and Risk Committee. The objectives of the programme are: to address the identified weaknesses with a view to achieve a clean audit to improve performance of the procurement process to improve capital project development and delivery.

Eskom has a robust governance process to sanction expansions and deviations request prior to NT submission Deviation or Expansion required Motivation reviewed by relevant Eskom Tender Committee Approved? Y Application to NT Eskom Tender Committees N Approved? Y Appeal? Y N Implement as per NT decision

Deviations

Deviations: trend analysis Q3 FY2018 to Q1FY2019
The number of deviations submitted is showing a declining trend Eskom submits on average expansions per quarter.

Expansions & deviations are supposed to be exceptions and not the norm
Eskom concluded 9159 new procurement transactions during Q4 2017/18. There were a total of 59 Expansions and 15 Deviations The 74 Expansions and Deviations represent <1% of total procurement transactions (by volume) placed over this period 73.91%

Deviations: overview for period Q4 2017/2018 (1/3)
Eskom submitted 15 Deviations The total value of the Deviations requested during the 2017/18 Q4 is R364 million 9 transaction valued at R196M were not approved by NT 5 transactions valued at R152M were supported by NT 73.91%

Of the 15 deviations, 5 constitute 88% (R323M) of the total* value of the deviations requested Of the top 5 deviations, one transaction (supply of liquid sulphur) was approved. It constitutes 41% (R133M) of the top 5 deviations Three of the Top 5 valued at R174M (88%) were declined. These are # 49 - Limestone handling for Kusile (R75M) #51 - Kendal boiler's super heater (R53M) #46 - Line traps for Distribution and Transmission (R46M) A decision on the remaining single transaction in the Top 5 for the Upgrade of Water Treatment Plant Human Interface at Duvha Power Station (#52) valued at R15M is pending One of the 15 deviations was for the supply of coal to address shortfalls. While NT declined Eskom's initial request an alternative approach was recommended to source the requisite coal * The R364M of deviations does not include the coal purchase transaction Changed in Rev 1.1

Of the 5 deviations that were approved One was a single supply (liquid sulphur) Two were justifiable based on delays (design/inclement weather/land claims) Two were justified on the basis of finalising remaining works to close the projects Eskom has complied with NT decisions where deviations requested were not supported

Expansions

Expansions: Trend analysis Q3 FY2018 to Q1FY 2019
Eskom submits on average 43 expansions per quarter. This is less than 1% of total transactions per quarter (by volume)

Expansions: Overview for period Q4 2017/2018
Eskom submitted 59 expansions The total value of the expansions requested during the 2017/18 Q4 is R24.13 billion 26 expansions valued at R9.48BN (39% of total expansions) were supported by NT 26 expansions valued at R14,46BN (60% of total expansions by value) were not supported by NT 73.91%

Expansions: Analysis of Top 10 for Q4 2017/2018
Top 10 expansions have a total value of R23.2Bn. (Value of all 59 expansions is R24.1Bn) Six of Top 10 expansions valued at R9.3Bn (38% of R24.1Bn) were approved Three of Top 10 expansions valued at R13.8Bn (57% of R24Bn) were declined. These are (#40) Maintenance and outage repair services for Boiler Pressure parts and/or the maintenance and outage repair services for High Pressure Pipework (Valued at R13.6 BN) (#86) Security Services (Valued at R136.8 M) (#33) Upgrade of existing plant, plus construction of new Ash Handling plant at Camden Power Station (Valued at R116.5 M) One expansion valued at R114M is pending. This transaction (#79) relates to Provision of Engineering and Project Management to Kusile Power Station Of the 26 expansions that were approved 13 were for time only. The balance of expansions (13) were approved on the basis of compelling reasons for continuity of services Of the 26 expansions that were not supported by NT, there are 3 cases where the contracts were implemented without proper authorisation

Expansions: Unauthorized contract implementation
#50 - Provision of Engineering and Project Management Services valued at R66M: NT letter was received after task order expiry. The task order was extended and continued for 3 months after initial expiry date. The matter is currently under investigation and condonation from NT will be sought. #85 - Medupi Catering valued at R691M: NT recommendation of an open tender was implemented, after several appeals to NT to reconsider the decision. However, due to management concerns about security and stability at site in the event of disrupting provision of meals to the construction workers, the contract was extended from 31 Jan‘18 until the new one started on 1 Aug’18.The matter is currently under investigation and condonation from NT will be sought. #86 - Security Services (Dx) valued at R136.8M: National Treasury letter was received after contracts expiry. Due to the nature of the services the work continued under once-off PO with the same suppliers. A new contract based on an open tender process will be placed in September The matter is currently under investigation and condonation from NT will be sought.

There is a strong leadership focus on ensuring compliance
Concluding Remarks There is a strong leadership focus on ensuring compliance Leadership commitment GCE and CFO will continue to drive leadership compliance with PFMA and PPPFA through initiatives that instill discipline, ethical behavior and professionalism Consequence management Eskom will continue to implement consequence management and remedial measures for contraventions in line with current policies Awareness training will be rolled out with the Procurement Tender Committees Treasury and Department of Public Enterprise alignment Reporting to Treasury and Department of Public Enterprises will be improved to ensure alignment on PPPFA Audit and Risk The Eskom Board Audit and Risk Committee will continue to provide oversight to the process to deliver an unqualified audit opinion.

THANK YOU

Deviations: detailed notes

Deviations Supported by National Treasury – 5 submissions in Q4 2017/18
NT Ref Project Description Deviation Value Reason for Deviation 40 Generator Services Workshop R Delays in design phase 41 Construction of Dumasi Hombe 132KV R Delays due to weather and land claimant 44 Pre strengthening phase 3C- TYPE FILTER SHUNT CAPACITOR BANKS R Contractor could not complete the remaining work as the resistors for three (3) sites were delivered in February 2017 45 Supply, delivery and off-loading of Liquid Sulphur to various Power Stations R The supplier is the only manufacturers of liquid sulphur 47 Heritage Management Project at Medupi Power Station Project - To finalise the closure phase

Deviation pending support by National Treasury - 1 submission at the end of Q4 2017/18
NT Ref Project Description Deviation Value Why Status 52 "Upgrade of Water Treatment Plant Human Interface at Duvha Power Station" R Continuity of service Still awaiting NT feedback

Scope of work has not been completed
Eskom Deviations not supported by National Treasury – 9 submissions in Q4 2017/18 : Slide 1/2 NT Ref Project Description Deviation Value Why Status 39 Approach current suppliers from closed RFP for Coal Shortfall for various Eskom Power Stations (Primary Energy) Not stated Shortfall in coal NT recommendation was implemented with Eskom issued another confined market request if the other two processes do not fulfill the coal shortfall – contract now in place 42 Storm water Controls for the Kendal Ash Dump (Generation) R Continuity of service Recommendation from NT implemented, work was not carried out 43 Small aperture terminal connectivity for substations fitted with closed circuit television (Distribution) R Minimise new infrastructure costs The recommendation from NT to extend the contract for 12 months was implemented, while Eskom finalise a new process 46 Manufacture, testing, supply, delivery, off-loading and erection of estimated quantities of Line Traps (Transmission & Distribution) R To finalise the competitive bidding process Contract was not modified, as it was not supported by NT 48 Design, Site Monitoring/Supervision and Construction Services to the Steam Generator Replacement Container Laydown Area and storage facilities at Koeberg (Nuclear) R Scope of work has not been completed As the single source approval request was rejected by NT, the end user is preparing documentation to issue a tender to the open market.

Eskom Deviations not supported by National Treasury – 9 submissions in Q4 2017/18 : Slide 2/2
NT Ref Project Description Deviation Value Why Status 49 Issue Request for Proposal (RFP) for Kusile Power Station limestone handling at Clewer Highveld Steel Complex, to the closed market (Primary Energy) R Cheaper rail logistics solution NT recommendation adhered to, RFQ still to go out to the market 50 Supply and provisioning of data SIM card MV90 metering database (Distribution) R APN with MTN SA which is in use by all Operating Units Recommendation from NT implemented, work was not carried out 51 Kendal Power Station's Boiler Super-Heater Remaining Useful Life Replacement Project at Kendal Power Station (Generation) R Preferred Bidder 53 Radiological Analysis Services for Koeberg Nuclear Power Station (Nuclear) R Continuity of service The single source has been stopped as instructed by NT

Expansions: detailed notes

Expansions Supported by National Treasury - 26 submissions in Q4 2017/18: Slides 1/3
NT Ref Project Description Expansion Value Reason for Extension 30 Provision of IT services R Finalisation of the bidding process 32 Facilities management services to estate within North West Operation Unit and Grid R Continuity of services 35 Medupi Ash Dump R0 Time only -Finalisation of the project 36 Rehabilitation of civil items at First Falls, Second Falls and Collywobbles dams Time only - Delays caused by inclement weather 37 Area E - Pre-fabrication facility at Duvha Power Station Time Only - delays due to design capabilities by supplier 38 The supply, transportation, erection and dismantling of scaffolding and insulation material for 15 (FIFTEEN) Generation Power Stations R Continuity of service 41 Civil works at Gromis and Oranjemond substation 42 The maintenance workshop services (MWS) roof and cladding replacement 43 Cvil works at Upington Substation 45 Design, manufacture, delivery, testing, installation and hot commissioning of the 2 x 275kvAr Filter capacitor installation at Lepeni Substation R

NT Ref Project Description Expansion Value Reason for Extension 47 Provision of Facilities Management Services to Eskom Real Estate (ERE) Corporate Office Buildings in Gauteng Region on as and when required basis R Continuity of service 48 Upington Cabling & Stringing contract for the transmission power delivery projects in the Northern Cape R 49 World Bank Funded Infrastructure for Transmission Power R0 51 Dismantling, Commissioning, of existing Non-Lethal Fence, Reconstruction and Commissioning of Non-Lethal Fence at Delphi Substation 52 Construction of Niewehoop- Upington 400kV Line (SECTION B) 53 Construction of Nieuwehoop- Upington 400kV Line (SECTION A) 56 Construction of the Ash Dump and Dams and Miscellaneous Infrastructure at Medupi Power Station 57 Provision of construction supervision at Ingula Pumped Storage Scheme R 60 Free Carrier Arrangement (FCA) Transporters for haulage R 61 The Consolidated Building Management System at Kusile Power Station Project (P22A) R 65 Panel Contract for Provision of Legal Services R

NT Ref Project Description Expansion Value Reason for Extension 67 The supply and delivery of lubricants to various Eskom Power Stations R Continuity of service 68 Design, manufacture, testing and supply of estimated quantities of Medium Voltage (MV) Electric Motors to various power stations for the Generation Division R0 75 The Upgrade of Lift Platform and Chairlift at Eskom Academy of Learning and Leadership Development Centre Centre Buildings in Midrand R 76 Assessment, design, installation, testing, commissioning of Fire Systems at Duvha Network Management Centre (NMC) 77 Transportation of coal by Rail from various rail sidings to Tutuka, Grootvlei, Camden and Majuba Power Stations R

Expansions pending support by National Treasury - 7 submissions in Q4 2017/18: Slides 1/2
NT Ref Project Description Expansion Value Why Status 54 HV and MV Feeder Protection Schemes R Continuity of service Contract was not extended and expired. Resubmission to NT be done as a deviation. 58 Installation and erection of 160 Newly manufactured low NOX burners at Camden - NT did not support the value expansion, but supported the time extension. 59 Sourcing and delivery of material and services for the Eskom Information center R NT recommendations were implemented. 63 Manufacture, Testing, Supply and Delivery of Various Estimated Quantities of Low Voltage Fuses to Eskom on As and When Required Basis R Contract was stopped. New tender process in progress.

Expansions pending support by National Treasury - 7 submissions in Q4 2017/18: Slides 2/2
NT Ref Project Description Expansion Value Why Status 79 Provision of Engineering and Project Management to Kusile Power Station R Continuity of service Conditional approved - Alternative actions being evaluated 80 Provision of Engineering and Project Management to Medupi Power Station 81 Stringing and Cabling at Various Substations- Central Grid R NT not supported. No work was carried out

Expansions not supported by National Treasury – 26 submissions in Q4 2017/18: Slide 1/7
NT Ref Project Description Expansion Value Why Status 31 Supply and delivery of 66kv and 132kv circuit breakers (Dx & Tx) R Continuity of services The request to extend this contract further was not approved by National Treasury and expired on 31 March The RFQ for the establishment of new contracts is currently being evaluated. 33 Upgrade of existing plant, design and construction of new plant and materials for the Ash Handling at Camden Power Station (Gx) R National Treasury approved the contract extended until 31 August 2018 to carry out the existing works while Eskom is appealing the application. 34 400 MV Switchgear - to modify a contract for the MV indoor primary metal enclosed switchgear to Eskom for a three year period on an as and when required basis (Dx & Tx) R Funds exhausted The request to expand this contract was not approved by NT. The contract expires 30 September Contract not in use.

NT Ref Project Description Expansion Value Why Status 39 Manufacture and supply Power - request for approval to expand/ modify a contract for the manufacture and supply of power quality monitoring meters to Eskom on an "as and when" required basis Quality Meters (Dx) R Continuity of service as competitive bid of new contract in process Contract value depleted and no purchase order releases can be done by the business. New tender process at strategy compilation stage. 40 Maintenance and outage repair services for Boiler Pressure parts and/or the maintenance and outage repair services for High Pressure Pipework (Gx) R NT approved a 12 months extension until 30 September Currently preparing a new submission extension for time in order to finalise evaluation process. 44 Qualified Inspection Service during outages 121, 221 AND 222 at Koeberg Operating Unit (Nuclear) R Continuity of service Alternative actions being evaluated

NT Ref Project Description Expansion Value Why Status 46 NEC and FIDIC Training (Group Capital) R Continuity of service Alternative actions being evaluated 50 Provision of Engineering and Project Management Services (Group Capital) R National Treasury letter was received after task order expiry. The task order was extended and continued for 3 months after initial expiry date. The matter is currently under investigation and condonation from NT will be sought. 55 Medium and Low Pressure Valves and Valve Spares (Gx) - Finalisation of competitive bidding process The modification was not implemented, the contract was allowed to expire on 03/03/2018 62 Hyperwave Assurance and ad-hoc support (Group IT) R Recommendation from NT implemented, work was stopped. New contract placed. 64 Procurement of Plant Design, Supply and Installation of Overhead Track Equipment (OHTE) (Group Capital) R Alternative actions being evaluated

NT Ref Project Description Expansion Value Why Status 66 Provision of project and program controls oversight and assurance (Group Capital) R Continuity of service Task order duration was shortened to fit within the 15% expansion limit that was approved by Eskom within its delegation. New Request For Proposal was issued 69 Supply of Three PSA Nitrogen Generation Plants at Kusile Power Station (Group Capital) - NT supported the expansion of time only with no financial implication. 70 Provision of Management Services (Group Capital) R Recommendation from NT implemented, Stopped New Request For Proposal (Task Order 952) was issued 71 Provision of Project Development Services For Transmission Projects Developed by Group Capital: Project Package 3 (Group Capital) R Retain the necessary resources Recommendation from NT implemented, Stopped New Request For Proposal (Task Order 947) was issued

NT Ref Project Description Expansion Value Why Status 72 Provision of Project Development Services For Transmission Projects Developed by Group Capital: Project Package 2 (Group Capital) - Retain the necessary resources Recommendation from NT implemented, Stopped New Request For Proposal (Task Order 947) was issued 73 Provision of Project Development Services For Transmission Projects Developed by Group Capital: Project Package 1 (Group Capital) R Continuity of service 74 Refurbishment of four main insolation valves (Group Capital) R Transaction did not continue. In the process of determining the correct procurement mechanism 78 TUTUKA Ash Dump Increase Project: Concept Development For Vertical extension of the existing Tutuka Ash Dump Facility and additional Thermal Monitoring (Group Capital) R Alternative actions being evaluated

NT Ref Project Description Expansion Value Why Status 82 LV Switchgear replacement project at Matla Power Station (Group Capital) - Continuity of service NT recommendations implemented 83 MV Switchgear replacement project at Matla Power Station (Group Capital) R 84 Printing Services (Group IT) R Finalisation of the bidding process NT recommendations implemented - duration and value were reduced to fit within the 15% expansion limit that was approved by Eskom within its delegation. 85 Medupi Catering (Group Capital) R Continuity of services NT recommendation of an open tender was implemented, after several appeals to NT to reconsider the decision. However, due to site stability reasons for providing meals to the construction workers, the contract was extended from 31 Jan‘18 until the new one started on 1 Aug’18.The matter is currently under investigation and condonation from NT will be sought.

NT Ref Project Description Expansion Value Why Status 86 Security Services (Dx) R Continuity of services National Treasury letter was received after contracts expiry. The contracts expired. Due to the nature of the services the work continued under once-off PO with the same suppliers. The process has been internally condoned. A new contract based on an open tender process will be placed in September The matter is currently under investigation and condonation from NT will be sought. 87 Supply and deliver of 400kv circuit breakers (Dx & Tx) R The contract was not extended. The RFQ for the establishment of new contracts is underway – current tenders being evaluated. 88 Common plant pressure vessels testing and repairs (Gx) R NT rejection was accepted and recommendations carried out

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