ESKOM FACTOR 2.0 PREAMBLE AND ACKNOWLEDGEMENTS This report has been commissioned by the Chairman of the Board, senior management, and the Climate Change and Sustainable Development (CCSD) Department of Eskom. The execution of the Eskom Factor 2.0 project was led by a dedicated team from Eskom’s CCSD to completion in October 2018, under the guidance of a steering committee consisting of the Executive Committee and selected members of the Board of Directors. Data and insight were provided by an internal working team comprised of Eskom experts from a wide range of functional divisions. A team from The Boston Consulting Group (BCG) provided external expertise and independent support for assessment of Eskom’s footprint. BCG is a global management consulting firm with a presence in South Africa and a leading advisor on business strategy. The World Business Council for Sustainable Development (WBCSD) sponsored the development of the Measuring Impact Framework that was used as a template to develop a tailored methodology for the Eskom Factor 2.0. The WBCSD is a CEO-led global association of around 200 companies dedicated to issues of sustainable development in business. We would like to thank all those who have contributed to this company-wide assessment for their commitment to increase transparency and awareness of Eskom’s footprint in South Africa. DISCLAIMER Material in this report prepared by BCG was designed for the sole use of the Eskom board of directors, senior management and CCSD. BCG prepared the material using information and methodologies which BCG believes reliable, but including material provided by Eskom as well as public and other data which BCG did not independently verify. 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CONTENTS STATEMENT BY THE GROUP CHIEF EXECUTIVE 2 EXECUTIVE SUMMARY 3 INTRODUCTION 10 Objectives of the Eskom Factor 2.0 10 About Eskom 11 METHODOLOGY 12 THE ESKOM FACTOR 2.0 13 Driving the economy 13 Providing reliable, predictable and competitive electricity 16 Reducing Eskom’s impact on the environment 19 Contributing to national transformation imperatives 22 Impacting on local communities 24 Being a good employer 27 Building internal and external know-how 30 Governance and leadership 33 SUPPORTING THE NATIONAL DEVELOPMENT PLAN 35 COMPARISON AGAINST GOALS SET BY THE 2011 ESKOM FACTOR REPORT 40 CONCLUSION 42 APPENDIX 44 Eskom Factor methodology 44 Benchmarking methodology 45 GDP contribution and employment methodology 46 Table of abbreviations 51 Data sources 51 ESKOM HOLDINGS SOC LTD | 1 STATEMENT BY THE GROUP CHIEF EXECUTIVE development. However, the report also highlights significant areas of improvement which include public finances, fatalities, greenhouse gas emissions, air quality, as well as governance and leadership. As Eskom we are proud to note some positive results, such as the fact that a significant percentage of South Africa’s GDP can be traced back to the consequence of Eskom’s direct spend and impact on its suppliers from both its operational and capital expenditure. We have also made a considerable positive contribution to South African employment, employing consistently in excess of 40 000 people between FY12 and FY18. The negative results of our assessment of governance and leadership are no surprise, given the significant amount of allegations relating to governance and corruption in the recent years. We have made good progress in rooting out corrupt behaviours of some of our employees and remain committed in eradicating corruption across all levels of the business as demonstrated by the actions we take against implicated individuals. The Eskom Factor is a publication outlining Eskom’s With regards to public finance, regrettably in order to footprint in South Africa. Although Eskom’s mandate sustain our business we have to keep borrowing money. is to provide a stable electricity supply in a sustainable This is unsustainable and so we are seeking ways to deal and efficient manner, we also have a developmental role, with the debt. which is supporting transformation, broad-based black As a responsible state-owned company, Eskom is economic empowerment, job creation, economic and committed to fulfilling our mandate as well as our skills development, as well as other national initiatives. regulatory obligations. As such, we remain committed I am proud to launch the Eskom Factor 2.0 Report, which to the principle of Zero Harm to our people and builds on the insights gained from the first Eskom Factor the environment. Unfortunately, despite our intense report released in 2011 which was the baseline from commitment to safety, Eskom still faces the challenge of which we continued to build on our transparency and instilling a culture that supports safe behaviour to prevent positive impact on the South African society. fatalities. Eskom is also facing a range of challenges with its compliance to air-quality requirements and, as a result, we The Eskom Factor 2.0 Report provides a comprehensive are engaging Government to seek solutions. assessment of our direct and indirect economic, social and environmental impact on the country for the six In conclusion, we operate within a complex landscape year period 2012 to 2018. The report looked at the which involves many different stakeholders with diverging impact through three lenses: the primary lens was objectives and, as such, we have to carefully balance three the performance of the entity across 224 metrics; the roles while delivering on our primary mandate, namely benchmarking lens, which looked at key metrics against supporting socio-economic development, ensuring a relevant peer group; and the third lens that looked at regulatory compliance and maintaining commercial viability. Eskom’s contribution to the South African development My heartfelt thanks go to all who made this publication agenda. Eskom’s impact was measured according to eight possible, and who will continue to actively increase the pillars of influence which are similar to the pillars of the transparency of Eskom’s footprint into the future. 2011 report; however, a noteworthy additional pillar is Governance and Leadership. In summary, the results show that Eskom made positive contributions to South Africa in many areas, including contributions to gross domestic product (GDP) and Phakamani Hadebe availability of electricity, employment, equity, and local Group Chief Executive 2 | ESKOM FACTOR 2.0 EXECUTIVE SUMMARY The Eskom Factor is a collective term explaining our footprint in South Africa, which was quantified through a comprehensive external assessment of our economic, social and environmental impact on the country, both positive and negative, for the period from 2012 to 2018. As the primary electricity producer, transmitter and An estimated 3.1% of South Africa’s GDP in 20173 can be distributor in South Africa over the past 95 years, the traced back to the ripple effects of Eskom’s direct spend impact that Eskom Holdings SOC Ltd (Eskom) has had and impact on its suppliers from both its operational on the country is significant. Not only is Eskom a key and capital expenditure. This is referred to as Eskom’s enabler of economic growth and development, but the direct contribution to GDP and is a decrease from company also has an impact on the environment and the estimated 3.6% direct contribution in 2011. Eskom society at large. The Eskom Factor 2.0 Report is intended is estimated to have made an economy-wide GDP to be a thorough assessment of the entity’s impact and contribution4 of around 6.3% in 2017, a decrease from contributions across these areas, both directly and the estimated 7.2% in 2011. The decrease in direct and indirectly, and covers both the positive and negative economy wide GDP contribution was primarily the impacts. result of a relative reduction in capital expenditure and associated impact between 2011 and 2017. The report builds on the Eskom Factor Report from 2011 utilising an improved methodology based on the While there was a relative decrease in Eskom’s capital WBCSD1 framework. In this version, Eskom’s impact has expenditure between FY12 (R58.3 billion) and FY18 been measured according to 224 indicators which have (R47.5 billion), Eskom’s large-scale capital expansion culminated into eight pillars of influence. programme remains an important stimulus to the economy and one of the largest capital build programmes Driving the economy in recent years. Over the last seven financial years, Eskom is a major driver of the economy not only through Eskom injected a cumulative R394 billion into the its role as primary provider of electricity, but also by way economy through its capital investments. At completion, of the economic stimulus provided through its operations the new build programme will have added 10 896MW and significant capital expenditure. Eskom provides to total generation capacity5 in the country. It is noted, more than 90% of all electricity in South Africa, a critical however, that the occurrence of rotational loadshedding input to most major industries. Eskom produced a total over recent years has had a negative impact on GDP turnover of more than R177 billion in FY182 . through the resultant loss in productivity, and has impacted investor confidence in South Africa. 1. World Business Council for Sustainable Development. 2. Throughout the report, FY refers to Eskom’s financial year (1 April to 31 March). 3. Estimated by Quantec, an independent economics consultancy. Financial and labour statistics for Eskom from publicly available data sources and annual reports were used to estimate the national economic footprint of Eskom in 2011 and 2017, using detailed input-output (IO) analysis and a comprehensive supply and use table (SUT) based multiplier model for the South African economy. Detailed methodology and assumptions included in the appendix of this report. 4. Economy-wide impact is estimated as the sum of the direct, indirect and induced economic impact. Indirect economic impact refers to when Eskom’s suppliers purchase goods and services from their suppliers who remunerate their employees and pay taxes. Over and above this, employees of Eskom and its suppliers re-spend their salaries and wages in the economy which again generates further economic activity. The latter is known as the induced impact of Eskom. 5. From Kusile (4 800MW), Medupi (4 764MW) and Ingula (1 332MW). ESKOM HOLDINGS SOC LTD | 3 ESKOM FACTOR 2.0 PILLAR SUB-PILLAR Contribution Contribution to Driving the economy to GDP public finances Employment Providing reliable, Pricing and predictable and Availability Predictability competitiveness competitive electricity Reducing Eskom’s Greenhouse End-user Water Air gas energy Renewables Biodiversity impact on the environment use quality emissions efficiency Contributing to national Employment equity Contribution to local suppliers transformation imperatives Impacting on Investment in local communities Externalities for local communities local communities Employee Employee value Being a good employer Labour relations Fatalities wellness proposition Building internal and Training and skills Supplier monitoring and Driving external know-how development development innovation Governance Governance and ethics Legal contraventions Leadership and leadership Mostly positive Both positive and negative Mostly negative 4 | FACTOR 2.0 REPORT Eskom made a considerable positive contribution to South Africa now has an electrification rate of about 90% South African employment over the period, employing (compared to 34% in 1991). This figure is significantly consistently in excess of 40 000 people between higher than the 51% average for Africa. Eskom has been FY12 and FY186. It is estimated that Eskom provided a major contributor towards achieving the National employment to more than 124 000 people7 in 2017 as a Development Plan (NDP) electrification target 12 years result of its own employee complement in operations ahead of planned timelines9. plus third party contractors it had direct control over through its capital expansion programme 8. However, when one considers perception around the quality of Eskom’s services, one notes a decreasing trend. However, in terms of contribution to public finances, One objective measure of the quality of Eskom’s services three important criteria suggest that Eskom had an is the “Products and Services” component of the RepTrak increasingly negative impact on government finances Pulse survey conducted by the Reputation Institute. between FY12 and FY18. Total tax contributions In 2017, Eskom’s aggregate score for “Products and decreased to R9.6 billion (FY18) from R11.3 billion (FY12). Services” was 32.9 compared to 39.2 in 2012. Any score Government made an equity injection of R23 billion below 40 is considered poor/bottom tier10. The average into Eskom in FY16, and there was a conversion of state-owned company (SOC) score for “Products and a R29 billion loan to equity in that year, in effect Services” was 44.9, while the best performer under forgoing any interest on this loan in the future. Most SOCs scored 55.1. notably, the absolute debt levels and exposure held by government have increased rapidly. Net debt increased Considering predictability, the data shows that Eskom to R391 billion (FY18) from R143 billion (FY12), with 62% has improved since 2011 in terms of both duration now guaranteed by government. The substantial amount and frequency of interruptions. Interruption duration of debt guaranteed by the government poses a significant is measured through the system average interruption risk to the South African economy. duration index (SAIDI) (average outage duration for each customer served), which improved from 45.8 hours Another, often overlooked aspect, of Eskom’s expenditure to 38.9 hours. Frequency is measured through the is the value of contribution beyond commercial system average interruption frequency index (SAIFI) imperatives included. Eskom’s developmental mandate and (average number of interruptions that a customer associated obligations imply that it makes positive social would experience), which improved from 23.7 to contributions both through its direct social expenditure 18.9 occurrences. Despite the improvements, Eskom is and implicitly through the social contribution in its core still far behind international utility benchmarks (including business. These contributions have a positive impact utilities from both developed and developing nations). on the broader South African community, but they also significantly add to Eskom’s operational commitments and It is important to note that these metrics are influenced ability to operate profitably. by a high proportion of the Eskom distribution network (more than 70%) being above ground, and therefore The combination of the abovementioned factors more easily damaged. In terms of the transmission places significant strain on public finances, and Eskom component, Eskom’s system minutes lost <1 minute for is determined to alleviate some of this pressure FY18 was 2.09, a significant improvement relative to the going forward. FY12 figure of 4.73 minutes. No major incident >1 minute was recorded in FY18, compared to one incident in FY12, Providing reliable, predictable and and a target of two per financial year. Eskom’s energy competitive electricity availability factor (the availability to produce energy as a Eskom is committed to making electricity universally percentage of the energy that could have been produced available in South Africa. Approximately five million at full capacity) for FY18 measured 78%, which is in line additional homes have been electrified since 1991, and with the target, but is down from 82% in FY12. 6. The employee complement (permanent employees plus fixed-term contractors (FTCs)) for Eskom company over the period was 41 202 (FY12); 43 402 (FY13); 42 923 (FY14); 41 787 (FY15); 42 767 (FY16); 41 940 (FY17); and 41,316 (FY18). These figures do not include the employee complement for Eskom subsidiaries (7 312 in FY18) or third-party contractors engaged at either Eskom company or Eskom subsidiaries. 7. Employment estimates by Quantec. Detailed methodology and assumptions in appendix of this report. 8. This compares to employment of more than 158 000 in 2011, with the difference in 2017 primarily the result of lower capital expenditure and associated construction employment. 9. NDP target was set for 90% electrification by 2030. 10. All four elements of the “Products and services” component decreased between 2012 and 2017 and now rank below 40 on the RepTrak scale. “High quality” decreased from 44.7 (2012) to 35.6 (2017); “Value for money” decreased from 36.9 (2012) to 30.7 (2017); “Stands behind products” decreased from 39.3 (2012) to 36.3 (2017); “Meets customer needs” decreased from 36.1 (2012) to 29 (2017). ESKOM HOLDINGS SOC LTD | 5 EXECUTIVE SUMMARY continued In terms of affordability, the public’s concerns are coal production for 2017. Lower levels of coal usage understandable given the steep increases in electricity imply that the mining industry’s output and employment prices since 2012 (9.8% per annum)11. This is further in the sector will be adversely affected. The coal mining amplified by differences between direct Eskom and industry remains an important provider of employment municipal tariffs, where the latter tend to be higher in the overall South African mining industry, estimated to and not within Eskom’s control. Future price increases have employed 82 248 people in 2017, an increase from will depend largely on the tariff increases granted to the 60 187 people employed in 1994. The employment Eskom by the National Energy Regulator of South provided by the coal industry is even more important Africa (NERSA). However, it should also be noted that considering that overall employment from the mining South Africans still have access to competitively priced industry is estimated to have decreased from 611 018 in electricity relative to other countries globally, both 1994 to 462 870 in 2017. in absolute and relative terms (considering household income). In 2017, South Africa’s average price of While Eskom’s installed renewables capacity is a small electricity was 7 US cents per kWh against an average proportion overall, Eskom is an enabler of renewable of 15 US cents per kWh for a selected peer group of energy within the country. Eskom provides the IPPs with countries (which includes other African countries). connection to the grid, and also enables renewable IPPs to operate intermittently by providing base load capacity Reducing Eskom’s impact on the and balancing supply to meet the hourly system demand. environment It is also noted that from a broader South African perspective, renewable energy capacity in the country Indirectly, through the provision of electricity, Eskom has increased at 21%13 per annum between 2008 and has numerous positive environmental impacts, such as 2017, surpassing that of several other African countries reduced indoor air pollution. However, given its coal- (detailed further in “Reducing Eskom’s impact on the dominated electricity generation activities, Eskom has environment – Renewables” on page 22). an adverse effect on South Africa’s environment through resource use (mainly coal and water), greenhouse gas Contributing to national transformation emissions (206Mt of CO2 in FY18), as well as particulates imperatives (57kt in FY18), SOX (1 802kt in FY18), and NOX (859kt in FY18) emissions. Resource use and emissions have Eskom continues to make significant contributions to decreased since 2012, predominantly as a result of lower national transformation imperatives, although there are electricity production. On a normalised basis, emissions areas for improvement. Between FY12 and FY17, Eskom were relatively stable over the same period. was consistently rated as either a level 2 or 3 B-BBEE contributor, and was certified as a level 2 contributor Future reductions in Eskom’s impact on the environment in FY17. However, Eskom was rated as level 8 in FY1814. largely depend on the Integrated Resource Plan (IRP) This low rating is due to state-ownership no longer given that the IRP determines the forward-looking being considered as being black-owned under the new energy mix. A lower reliance on coal will reduce adverse B-BBEE Codes of Good Practice, and is thus out of emission effects, including the health effects of emissions. Eskom’s control. However, this decision poses two important trade-offs to South Africa. Eskom continues to make a strong contribution to employment equity in South Africa both from an overall The first trade-off relates to affordability. Within the employment perspective as well as representation at South African context, the primary energy unit cost of various management levels. In FY18, 85% of all Eskom coal electricity (R309/MWh) is still significantly less than employees were black, 34% were female, and 29% were the current primary energy unit cost of IPP12 purchases black females. Furthermore, 3% were employees with (R2 222/MWh). This is largely driven by the fact that disabilities. In FY18, Eskom was ranked first among Eskom can make use of existing power stations for much the South African corporate peer group for black of its coal-fired power generation. This is, however, representation in both the top and senior management a short-term view as the cost of renewable energy is categories. Eskom also ranked second in its peer group expected to decrease over time. Also, the cost of new in FY18 for female representation in senior management. build projects should be factored into the sustainable However, one area for potential improvement is female cost of coal use going forward. Both factors will reduce and specifically black female representation in top the absolute difference between the energy unit cost of management, where representation decreased between coal and IPP purchases. FY12 and FY18. In top management, Eskom is ranked among the lowest in the South African corporate peer The second trade-off relates to the impact on the South group for female representation. African coal mining industry. Eskom procured 115Mt of coal in FY18, approximately 45% of South Africa’s total 11. Average price charged by Eskom (c/kWh) growth rate per annum from FY12 to FY18. 12. Independent power producers. 13. IRENA Renewable Capacity Statistics, 2018. 14. More specifically, until June 2018 when the relevant certificate expired. 6 | ESKOM FACTOR 2.0 Eskom produced mixed results in terms of contribution the supplier development and localisation section of the to local suppliers between FY12 and FY18. Procurement current report. In addition, Eskom has positively impacted from black-owned businesses in FY18 amounted to local communities through electrification of households 33% of total spend, and is a notable contributor to (more than 215 000 in FY18, majority of which are in rural transformation given the value (R53.5 billion). In FY18, areas), which not only provides convenience and comfort, procurement from B-BBEE attributable suppliers but also reduces indoor pollution and risks associated with amounted to R97 billion, an increase from R72 billion burning of fuels. reported in FY12. However, there was a decrease in percentage of spend to B-BBEE attributable suppliers On the other hand, Eskom also has adverse effects on over the period under review. However, it should local communities. The most prominent example of this be noted that within the new B-BBEE codes, certain are relocations where people are requested to move elements can no longer be claimed when calculating from their homes to alternative accommodation. Since total measured procurement spend. Initiatives are being 2011, approximately 746 households were relocated implemented by Eskom to address and improve the due to various Eskom projects. Eskom’s policy is to B-BBEE performance. Despite the decline in some areas, compensate these families to the same level or better. the overall value of procurement spend on attributable Relocated families are offered both financial support suppliers, and other categories, is a substantial for relocation (on average R327 000 per household) contributor to forwarding transformation. as well as support through counselling services. Other adverse impacts include the effects of Eskom’s emissions Impacting on local communities which reduce the quality of air for people living near coal-fired power stations. These emissions can cause Eskom remains an important contributor to the severe respiratory conditions for the people living in development of local communities. This is evidenced affected communities. To mitigate this impact, retrofits through the work of the Eskom Development have taken place to improve air quality performance at Foundation, which committed R192 million in corporate Eskom’s power stations. Air quality offset programmes social investment (CSI) spend in FY18 (more than have also been implemented. R1.05 billion cumulatively between FY12 and FY18). This includes investments in maths and science education, Being a good employer primary health care, schooling infrastructure and small business development. In addition to this contribution, As one of the largest employers in South Africa, Eskom’s Eskom also engages in other types of socio-economic relationship with its own employees constitutes a critical development activities through its various divisions. part of its total impact on society. One of the clear These include salaries and training spend for bursars, challenges facing Eskom in this respect is maintaining a learners, interns, and scholarships as well as the constructive dialogue with the labour unions. Notably, construction of old age homes and the donation of labs, there have been a number of high-profile disputes and computers, and educational tools to schools. industrial action over recent years. While this remains a challenge, the internal relations between employees Eskom contributes to local infrastructure through and Eskom management appears to be improving based investments in road, rail, telecommunications, sewage, and on the ability to resolve employee grievances through other infrastructure supporting Eskom’s own new build internal avenues. projects. For example, over R2.1 billion has been spent on local infrastructure at Medupi since the inception of the In the employee wellness space, Eskom has several project (August 2007), with the majority of this investment mandatory and voluntary programmes in place to being R1 billion spent on new housing and a further encourage good health across the company. While this R750 million on the contractor village. Further to this, process has been fragmented in the past, there has over R204 million has been invested in road infrastructure been progress made to centralise these initiatives. This and bridges. Additional projects have included the centralisation enables monitoring and improvements development of electrical infrastructure, a sewage plant, for initiatives in the future. One of these initiatives is a schools, community centres, and public buildings such as series of voluntary health screenings that has resulted police cabins, clinics, and wellness centres. At Kusile, an in 87% of employees knowing their HIV status. Another estimated R200 million has also been spent on CSI-related is the “know your numbers” programme – a health initiatives over the lifetime of the project. screening initiative that has been running in Eskom since 2014. This programme includes the screening of five key Through its various new build projects, Eskom also health metrics: blood pressure, glucose, cholesterol, BMI generates sizeable construction-related local employment. and waist circumference. Eskom also runs an Employee At Medupi and Kusile alone, nearly 40 000 people were Assistance Programme (EAP) of psychosocial services directly employed at the peak of construction. In addition including counselling, financial wellness and trauma to the employment created, these opportunities led to assistance. permanent skills development, which is described under ESKOM HOLDINGS SOC LTD | 7 EXECUTIVE SUMMARY continued In terms of employee safety, Eskom remains committed between FY12 and FY18, a decrease of 29% for engineers to the Zero Harm philosophy. A total of 30 000 employee and more than 83% for non-technical learners. However, safety trainings were conducted per year, further it should be noted that the decrease in FY18 followed promoting this. Importantly, the lost-time injury rate a historically large intake of 2 448 individuals in FY17, (LTIR) decreased by over 50% from FY12 to FY18. Despite particularly of engineers (824) and technicians (878). these efforts, there were fatalities both within Eskom Considering the total number of learners trained over (15) and in the general public (26) through Eskom-related the period FY12 to FY18 (38 364), the contribution activities in FY18. made by Eskom to training individuals through these learnerships remains a significant contribution to training Eskom’s employee value proposition15 remains key to and skills development in the country. attracting and retaining the best talent. Eskom is well positioned to attract talent in the engineering field, In terms of procurement, in FY18 Eskom procured where it rates as a top employer for both students and approximately R18.5 billion worth of local content professionals. However, it should be noted that Eskom through supply contracts for major projects such as rates as less attractive in other fields of specialisation, Medupi, Kusile and Ingula. More than 11 000 individuals where attracting talent is more of a challenge. Retention were trained by suppliers over the lifetime of these within Eskom is also positive, as employee turnover major projects as a direct result of contractual is among the lowest of comparable peers. Key results obligations. Furthermore, Eskom allocates CSI funds of the employee engagement survey show that some for the development of suppliers through its Enterprise aspects of job satisfaction are rated highly, whereas Development initiatives. The Enterprise Development areas for concern for employees are career progression CSI budget increased to R35 million (FY18) from opportunities and remuneration. R16.1 million (FY12), with a total investment of more than R240 million over the period under review. Building internal and external know-how Eskom’s annual research and development (R&D) budget Eskom invested more than R11.4 billion in training and decreased to R111 million (FY18) from R186 million skills development between FY12 and FY18. This includes (FY12). However, the outcomes of Eskom’s investments training for Eskom employees, learnerships, as well as in this area have remained relatively consistent. The external bursaries and scholarships. In FY18, Eskom outcomes of Eskom’s investments in R&D over the invested R1.4 billion16 in employee training and skills period are illustrated through the number of patents development (approximately R28 000 per employee)17. registered in FY18 of 19 – an increase from 17 (FY12). Total training and skills development spend in FY18 was The number of patents registered by Eskom was 5.2% of total employee benefits, down from 6.3% in consistently at 19 per annum from FY15 to FY18. FY12. However, Eskom still had the highest training and Furthermore, Eskom contributed/supported a total skills development spend per employee among its South of 11 research papers in FY18, equal to the FY12 level; African corporate peer group18. 30 research papers were contributed in FY13 along with A key component of Eskom’s training and skills 17 patents19. development contributions are the learnerships it provides to engineers, technicians, artisans, and also Governance and leadership some non-technical positions. Considering the recent Significant damage has been done to Eskom’s corporate drive within Eskom to create a more streamlined reputation over the last few years as allegations of organisation, the focus has shifted primarily to providing corruption and mismanagement have been widely to the needs of the Eskom business as opposed to reported in the media. The extent of damage done to training for the broader country-level skills needs. Eskom’s corporate reputation is evidenced by the fact Aligned with this, total new learner intake in FY18 was that Eskom was ranked last out of 50 South African down to 726 individuals from 1 794 in FY12. Learners companies surveyed in the 2018 RepTrak Pulse survey currently enrolled in the system across all categories conducted by the Reputation Institute. (technical and non-technical) decreased significantly 15. Employee value proposition broadly refers to a set of associations and offerings provided by an organisation in return for the skills, capabilities, and experiences an employee brings to the organisation. 16. Includes training spend on own employees as described in the report in “Building internal and external know-how – Training and skills development” on page 30, as well as bursaries and scholarships. 17. Training expenses excluding bursaries and scholarships, divided by total group full time employees, excluding contractors. 18. It should be noted that Eskom’s total training spend includes all expenditure associated with the Eskom Academy of Learning (EAL), Eskom’s in- house training facility located in Midrand. At the time of finalising this report, a further detailed breakdown of Eskom’s training and development expenditure had not been provided. 19. Further details on, for example, Eskom’s investments in low carbon technologies and innovative partnership programmes it engages in had not been made available at the time of finalising this report, thereby limiting the scope of innovation that could be assessed. 8 | ESKOM FACTOR 2.0 The irregular expenditure20 and fruitless and wasteful Comparison against goals set by the 2011 expenditure over recent years have raised questions Eskom Factor Report around the potential governance shortcomings at Eskom. Eskom concluded its previous Factor Report with Notably, Eskom received a qualified audit opinion in identifying five key areas of improvements in terms of FY17 – when the external auditors could not rely on its footprint in South Africa. Those five areas were: the processes in place to ensure the completeness availability and reliability of supply; efficient use of of irregular expenditure reported. Following the electricity; environmental footprint; electrification; and implementation of improved governance processes, health and safety. The extent of improvement in those irregular expenditure identified in FY18 increased to areas is a combination of positives and negatives as more than R13.3 billion from around R2.7 billion in FY17. described below. Eskom has instituted a recovery plan aimed at recovering Despite specific targets not being set by the Eskom funds related to fraudulent or corrupt contracts. At FY18 Factor 2011, one can still assess how Eskom has year end, around 98% of 205 contracts over R1 billion performed against these proposed improvements in the and 91% of 6 998 contracts under R1 billion awarded over period since. a period of three years had been reviewed. Eskom has also terminated or suspended contracts with suppliers • As discussed previously in the section on shown to have a corrupt relationship with Eskom. availability, Eskom has made great effort to increase electrification, reaching the NDP target 12 years in Investigations conducted by Eskom’s forensic audit advance of the deadline, thus meeting improvement team have increased significantly in the past financial ambitions in that area. year, particularly in the area of irregularities. A total of • In terms of availability and reliability of supply, 237 investigations were conducted in FY18 compared to environmental footprint and health and safety, despite 175 in FY17. As a result, six criminal cases were referred the slight improvements, Eskom is still far behind to the police between January and September 2018. benchmarked peers. Furthermore, seven Eskom senior managers including executives resigned in FY18 following allegations related • On efficient use of electricity, Eskom has declined in to corruption and misconduct. performance, as energy savings through the integrated demand management programme have significantly The 2018 Integrated Report highlights corporate decreased over the period. This is largely due to the governance and ethics as a key priority going forward, past success of the 49M campaign and the change in with significant improvements to be made, particularly in behaviour amongst electricity users who now use the areas of quality of information, governance structures electricity more efficiently. It is also partly due to the and ethics. increase in the electricity price. Currently, there is a reduced necessity for demand side management as available capacity has increased and customer demand has decreased. 20. The Public Finance Management Act, 1999 (PFMA) defines irregular expenditure as “expenditure, other than unauthorised expenditure, incurred in contravention of or that is not in accordance with a requirement of any applicable legislation”. This should be very clearly distinguished from fruitless and wasteful expenditure, which means “expenditure which was made in vain and would have been avoided had reasonable care been exercised”. ESKOM HOLDINGS SOC LTD | 9 INTRODUCTION Objectives of the Eskom Factor 2.0 This approach has been tailored to encourage open As the primary electricity producer, transmitter and dialogue around Eskom’s contribution, both positive and distributor in South Africa, Eskom’s impact on the country negative, to the country. The approach also creates the is significant. Not only is Eskom a key enabler of economic opportunity to reflect on how the operating environment growth and development, but the company also has an and Eskom’s performance have evolved between the impact on the environment and society at large. 2012 and 2018 financial years, and to understand the key potential areas for improvement. As a historical Eskom’s economic, environmental, and social responsibility review of performance, the report is intended to be is even greater as a state-owned enterprise, as is the an input for discussions about the future of Eskom, but need for transparency around how the entity’s operations not provide any judgement about past choices and any affect these dimensions. The Eskom Factor 2.0 Report recommendation for the future, except to the extent that is intended to be a thorough assessment of the entity’s mitigating actions are planned or have been implemented. sustainable development impact and contributions across these areas, both directly and indirectly. This Factor The Eskom Factor 2.0 Report does not replace Report also seeks to build on the insights and engagement compliance reporting, such as the Integrated Report, of the first Eskom Factor Report which was published in or any other regular Eskom publication. While the 2011, and reviews the performance of the company in the Integrated Report is a review of the company’s financial intermediate period. performance and performance against the stated strategy and objectives, the Eskom Factor Report aims The report is based on a robust assessment methodology to comment on both the direct and indirect, economic, that spans eight pillars which encapsulate Eskom’s areas social, and environmental impacts of Eskom, and provide of impact. The primary assessment of impact is the some judgment as to whether the impact is generally performance of the entity across numerous metrics, based negative, generally positive, or has both positive and on internal company data. This has been augmented with negative attributes. The Eskom Factor Report is also not benchmarking of key metrics against a relevant peer group, an annual publication, but rather assesses Eskom’s impact and the review of Eskom’s contribution to the South over a multi-year period. African development agenda. In addition, a diverse panel of individuals has been engaged to ensure an outside-in The transparent outcomes of this report, as provided perspective is incorporated. through the objective assessment of Eskom’s contribution, are of particular importance as Eskom The pillars within the report are broadly aligned with rebuilds its reputation and works towards re-establishing Eskom’s five key strategic objectives which guide its its position as a state-owned entity that positively focus areas and associated actions. As such, the Eskom impacts the lives and livelihoods of South Africans. Factor 2.0 provides insight into the progress made across these dimensions. The strategic objectives can be briefly summarised as follows: 1. Ensuring a financially viable and sustainable Eskom; 2. Providing reliable, affordable and predictable electricity; 3. Making a transformative socio-economic contribution; 4. Being environmentally responsible; and 5. Providing focused research and development. 10 | ESKOM FACTOR 2.0 About Eskom21 Eskom’s mandate is to provide stable electricity supply Eskom Holdings SOC Ltd is a state-owned company in a sustainable and efficient manner, in order to assist (SOC), wholly owned by the South African government in lowering the cost of doing business in South Africa through the shareholder ministry, the Department and enabling economic growth. Added to this is the of Public Enterprises (DPE). It also answers to the developmental role of supporting socio-economic Department of Energy (DoE), as the ministry which sets development, transformation, broad-based black energy policy, and the National Treasury, which provides economic empowerment, job creation, and skills financial oversight. development. As the provider of electricity to industrial, mining, commercial, agricultural, and residential Eskom is South Africa’s primary energy supplier, customers as well as redistributors, Eskom’s ability to providing around 90% of electricity used in the provide affordable and reliable electricity is foundational country, and around 40% of electricity used on the to the social and economic prosperity of South Africans. African continent. The core operations of Eskom in In order to play this role in a sustainable and ethical the electricity value chain include the generation, manner, Eskom prescribes to the following core values: transmission, distribution, and sale of electricity, as • Zero harm well as the construction of new power stations and infrastructure, backed by support functions across • Integrity the value chain. Eskom operates 30 power stations, • Innovation providing most of the base load and peaking capacity to • Sinobuntu (caring) the national grid, although there is an expanding role • Customer satisfaction being played by independent power producers (IPPs) within this system. The electricity industry is governed • Excellence by the National Energy Regulator of South Africa Eskom operates not only in South Africa, but also as a (NERSA) which is responsible for providing licences to supplier and buyer of electricity within the Southern operate and regulations, as well as setting the tariffs African Development Community (SADC) through the which Eskom can charge. Southern African Power Pool (SAPP). Eskom imports electricity from Mozambique, and is a major supplier of electricity to neighbouring countries such as Lesotho, Zambia, and Zimbabwe. However, international sales form less than 10% of Eskom’s demand. For this reason and others, Eskom’s international impact is not the focus of this report, yet the importance of Eskom internationally should not be underestimated. 21. Based on details from the 2018 Eskom Integrated Report. ESKOM HOLDINGS SOC LTD | 11 METHODOLOGY Eskom adopted a structured methodology for the Eskom Factor 2.0 which is based on a four-step framework developed by the World Business Council for Sustainable Development (WBCSD). The methodology is similar to the one used in the 2011 Eskom Factor Report. Define KPIs and Define framework measure impact 1 • Objective(s) for 2 • KPIs assessment • Methodology and data • Geographical scope Define requirements Define KPIs and • Business areas framework measure • Data request • Key socio-economic and impact • KPI calculation environmental topics • Peer benchmarks 3 Synthesise and Develop Synthesise and Develop report contextualise report contextualise impact impact • Storyline write-up • Key insights and • Stakeholder 4 strategic imperatives engagement • Compare to peers • Internal stakeholder alignment • Summarise storyline Further details on the methodology can be found in the appendix from page 44. 12 | ESKOM FACTOR 2.0 THE ESKOM FACTOR 2.0 The Eskom Factor 2.0 assesses the total economic, environmental, and social impact of Eskom in South Africa. The individual indicators which have been measured for An estimated 3.1% of South Africa’s GDP in 201722 this assessment have been aggregated into the following can be traced back to the ripple effects of Eskom’s eight pillars: direct spend and impact on its suppliers from both its • Driving the economy operational and capital expenditure. This is referred to • Providing reliable, predictable, and affordable as Eskom’s direct contribution to GDP and is a decrease electricity from the estimated 3.6% direct contribution in 2011. The decrease in direct GDP contribution was primarily • Reducing Eskom’s impact on the environment the result of a reduction in capital expenditure and • Contributing to national transformation imperatives associated impact over the period. These numbers take • Impacting on local communities into account only initial impacts and first-round effects in the economy. However, when considering economy- • Being a good employer wide effects, Eskom’s contribution to GDP is estimated • Building internal and external know-how to be around 6.3% for 2017. It is noted, however, that • Governance and leadership Eskom’s monopoly position in South Africa as the main generator, transmitter and distributor of electricity These eight pillars are further made up of sub-pillars, creates an environment where its impact on GDP cannot each of which is evaluated in detail in the following be anything short of substantial. sections of the report. Eskom’s contribution to the South African economy Driving the economy ranges from its core business, the generation, The first pillar highlights Eskom’s role in driving the South transmission and distribution of electricity to its African economy through its contribution to GDP, public support of the various suppliers that provide inputs to finances, and its role as a major employer in the South this core business. In addition, Eskom also supported a African economy. range of other industries that supply it with goods and services including coal, petroleum, metals, engineering Contribution to GDP and construction services as well as various other Eskom remains a major driver of the South African ancillary services. For example, Eskom spent more than economy in its role as both the primary provider of R85 billion in FY18 procuring goods and services required electricity and major purchaser of goods and services. to produce primary energy. This included the purchase In terms of overall size, Eskom had a turnover of of 115Mt of coal in FY18, approximately 45% of South R177 billion in FY18. Africa’s total coal production for 2017. 22. Estimated by Quantec, an independent economics consultancy. Financial and labour statistics for Eskom from publicly available data sources and annual reports were used to estimate the national economic footprint of Eskom in 2011 and 2017, using detailed input-output (IO) analysis and a comprehensive supply and use table (SUT) based multiplier model for the South African economy. Detailed methodology and assumptions are included in the appendix of this report, from page 44. ESKOM HOLDINGS SOC LTD | 13 THE ESKOM FACTOR 2.0 continued Eskom’s suppliers, in turn, purchase goods and services These significant investments will ensure that as the from their suppliers who remunerate their employees primary electricity supplier, Eskom will continue to and pay taxes. This is referred to as Eskom’s indirect enable much of South African industry, especially impact on the economy. Over and above this, Eskom manufacturing and other heavy users of electricity. It employees and its suppliers spend their salaries and is noted, however, that the occurrence of rotational wages in the economy which further generates economic loadshedding over recent years has had a negative impact activity. The latter is known as the induced impact of on GDP through the resultant loss in productivity. In Eskom. Considering all these different elements, around addition, power outages impact investor confidence in 6.3% of South Africa’s GDP can be traced back to the South Africa. direct, indirect and induced impacts of Eskom. This is typically referred to as a company’s total economic Eskom also has a negative economic impact to the footprint or economy-wide impact. The economy-wide extent that natural resources are depleted, and the impact of Eskom in 2011 was estimated at around 7.2%, indirect impacts of Eskom’s supply chain pose a cost to with the reduction between 2011 and 2017 primarily the government. For example, the poor air quality and the result of relatively lower capital expenditure and consequential illnesses result in additional healthcare associated economic impact in 2017. costs. Through the purchase of coal, Eskom is also indirectly responsible for acid mine drainage which While there was a relative decrease in Eskom’s affects the quality of water in the area. Dealing with capital expenditure between FY12 (R58.3 billion) the problem of decanting acid mine drainage can have and FY18 (R47.5 billion), Eskom’s large-scale capital substantial financial implications. expansion programme remains an important stimulus to the economy and one of the largest capital build Contribution to public finances programmes in recent years. We consider Eskom’s contribution to public finances based on three primary criteria: 1) Eskom’s total The focus of this large-scale capital expansion contribution to taxes; 2) its returns to government as programme has been the building of new power stations shareholder23; and (3) its impact on the debt burden and such as Medupi, Kusile, and Ingula – injecting a cumulative associated credit rating of the South African government. R394 billion into the economy over the period. Eskom’s large new build project has a total planned capacity of Our tax analysis considers the net effect of 1) company 10 896MW. Of this planned capacity, 4 513MW has been tax, 2) VAT, and 3) all other levies and taxes for the added to date from three units at Medupi Power Station year24. Eskom’s total tax contribution based on its annual (2 382MW), one at Kusile (799MW), as well as the financial statements (AFS) was around R9.6 billion in pumped storage station at Ingula (1 332MW). FY18, down from a total of R11.3 billion in FY12. Net-debt level, R billion 173% 400 350 300 250 200 150 100 50 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Debt guaranteed by SA Government, % 42% 51% 48% 49% 52% 56% 62% Note: Net debt for 2014 to 2018 calculated by adjusting gross debt for related payments made in advance, derivatives held for risk management and net market-making assets Source: Eskom AFS 23. Measured as equity injections made by government/dividends paid to government over the period. 24. Other levies/taxes include primary energy, environmental levy, treasury withholding tax and customs duty. 25. While the absolute total tax contribution of R12.2 billion in FY16 was higher than the FY12 level, totals for all other years were below FY12 levels. 14 | ESKOM FACTOR 2.0 A decrease in corporate tax related to a reduction in The third, and arguably most important, aspect earnings was the primary driver behind the lower tax considered is the impact of Eskom on government’s debt figure over the period. Eskom’s absolute contribution to burden and by implication its sovereign credit rating. taxes has therefore decreased over the period25. Eskom’s net debt burden increased significantly over the period from R143 billion (FY12) to R391 billion (FY18), Secondly, contributions of Eskom to the government with the major new infrastructure build programme as shareholder can be measured by the net impact of undertaken over recent years being a major driver in dividends paid (positive) and equity injections (negative) this26. The majority of this debt is now guaranteed by the over the seven-year period under review. In this regard, South African government. Whereas only 42% of Eskom’s government made an equity injection of R23 billion debt was guaranteed in FY12, 62% was guaranteed in into Eskom in FY16. There was also a conversion of a FY18 – equal to more than R242 billion of Eskom’s net R29 billion loan to equity in FY16, in effect forgoing any debt burden. Coinciding with this increased debt burden, interest on this loan in the future. Eskom’s credit rating across all major rating agencies has dropped significantly over the period27. The substantial Company, VAT and other levies/taxes per annum, R billion 14 12 10 8 6 4 2 0 -2 FY12 FY13 FY14 FY15 FY16 FY17 FY18 All other levies/taxes for the year (AFS) VAT for the year (AFS) Company tax for the year (AFS) Note: Other levies/taxes includes primary energy environmenta levy plus treasury witholding tax plus custom duty. Source: Eskom AFS amount of debt guaranteed by the government poses Eskom’s recent operational performance has undoubtedly a significant risk to the South African economy. In the added to its increased debt burden and the pressure on event of default, cross default provisions on other public finances. However, the additional cost associated government debt would potentially be triggered which with Eskom’s contributions beyond commercial could have severe knock-on effects and place pressure imperatives should not be underestimated. Apart from on the fiscal framework. It has been reported that Eskom its role as primary electricity provider, Eskom has a clear debt being called in could collapse the economy. developmental mandate that involves significant social contributions beyond commercial imperatives. Eskom’s In summary, our three main criteria for contribution contributions include direct social spend (CSI, donations, to public finances all suggest that Eskom has had an learnerships etc.), as well as implicit social contributions increasingly negative effect on government finances through its core business as a result of contractor and between FY12 and FY18. Total tax contributions have procurement requirements. This additional expenditure decreased, significant cash injections were made by has an undeniably positive impact on the community, but government to sustain operations, and most notably the also adds to Eskom’s operational commitments and the absolute debt levels and exposure held by government pressure on its profitability. have increased rapidly. The combination of these factors places significant strain on public finances. 26. It should also be noted that Eskom has significant debt owed to it by municipalities. Total invoiced municipal arrear debt increased significantly, to R13.6 billion (including interest) at year end (March 2017: R9.4 billion). 27. S&P’s rating decreased from BBB+ (FY12) to CCC+ (FY18); Moody’s rating decreased from Baa2 (FY12) to B2 (FY18); Fitch long-term (zaf ) decreased from AAA (FY12) to BB- (FY18); and Fitch short-term (zaf ) decreased from FI+ (FY12) to BB- (FY18). ESKOM HOLDINGS SOC LTD | 15 THE ESKOM FACTOR 2.0 continued Eskom identifies a clear action plan in its 2018 Integrated the economy. If one considers the employment impact Report to address both lack of profitability and increasing of Eskom’s own operations, capital build programme debt burden. Specifically, liquidity will be managed and its direct expenditure on suppliers, Eskom provided through increased revenue through cost-reflective price employment to more than 275 000 people in 201733. increases from NERSA and increasing sales to energy- intensive consumers; cost containment aimed specifically If one considers only the estimated 124 000 jobs at employee benefit spend, maintenance, and third- associated with Eskom’s own employee complement party spend; improved borrowings through the further and the third party contractors it had direct control utilisation of government guarantees; a clear strategy for over in 2017, this is equivalent to 0.78% of total South the collection of municipal arrear debt; restricting capital African employment. Furthermore, if one assumes on expenditure; implementation of the recovery of RCA 28 average that each one of these people supports three balances; and balance sheet optimisation through working other family members, these jobs support approximately capital optimisation and the sale of non-core assets. 496 000 people. Employment Other employment related indicators for Eskom also In FY18, Eskom group provided employment to reflect positively during the period under review. 48 628 people29, relative to 43 943 people30 in FY12. Remuneration packages for bargaining unit employees These figures include employment provided at an at Eskom have kept track with inflation over the Eskom company level as well as its subsidiaries. Eskom seven-year period (FY12 to FY18), increasing by on consistently employed in excess of 40 000 people average 6% per annum. Turnover of employees at between FY12 and FY18, with the overwhelming majority Eskom was comparatively low at 4.6% in FY18, relative of these appointed in permanent positions. to a corporate peer average of 13.4% and utility peer average of 6.1%. Another important element of Eskom’s impact on employment to be considered are the third party Providing reliable, predictable and contractors that Eskom employs in particular through its competitive electricity large scale capital expansion programme. It is estimated The second pillar addresses Eskom’s role and that Eskom provided employment to more than contribution to South Africa in terms of making 124 000 people in 201731 as a result of its own employee electricity available, reliable, and affordable, as well as complement in operations plus third party contractors ultimately ensuring that customers are satisfied with the it had direct control over through its capital expansion services provided. programme32 . Availability However, Eskom’s impact on employment extends Universal access to electricity does not currently exist much further than its own operations and capital in South Africa, with an estimated 1 million households build programme. Many of the industries that Eskom without access to power. However, if one considers the supports as suppliers to its core operations can be country’s position at the start of the major electrification considered labour intensive. The coal industry in programme – significant strides have been made. Eskom particular stands out – Eskom purchased 115Mt of coal has been instrumental in supporting the government’s in FY18, approximately 45% of South Africa’s total coal objective of advancing electrification in South Africa. production for 2017. As a result, Eskom was directly At the start of the electrification programme in 1991, responsible for more than 30 000 job opportunities in only approximately 34% of households had access to the mining and quarrying sector in 2017. electricity. Since then, Eskom has helped to electrify approximately five million homes, resulting in 90% of Over and above Eskom’s support of the coal industry, South African households having access to electricity by Eskom spent more than R25 billion in FY18 on other the end of the 2018 financial year. products and services used in daily operations, ranging from repairs and maintenance, transport and other Comparing South Africa to other African countries34 also business services. This expenditure again supports a large shows a positive picture where South Africa is clearly number of suppliers and jobs at various skill levels across ahead of the curve. 28. The Regulatory Clearing Account (RCA) is a balancing mechanism between what was awarded by NERSA on the basis of a forecast through the multi-year price determination (MYPD), and what actually materialised (Eskom’s audited financial statements). 29. 40 572 permanent employees and 744 fixed-term contractors (FTCs) at an Eskom company level plus an additional 5 478 permanent employees and 1 834 FTCs at its subsidiaries. 30. 40 802 permanent employees and 400 FTCs at an Eskom company level plus an additional 2 671 permanent employees and 70 FTCs at its subsidiaries. 31. Employment estimates by Quantec. Estimates provided for total employment (formal plus informal employment). Detailed methodology and assumptions in the appendix of this report, from page 44. 32. This compares to employment of more than 158 000 in 2011, with the difference in 2017 primarily the result of lower capital expenditure and associated construction employment. 33. The comparable figure for 2011 is estimated to be 315 000. 34. African countries have an average electrification rate of 51%. 16 | ESKOM FACTOR 2.0 Electrification rate of African countries, % of households in 2017 100 South Africa 80 60 Africa average 40 20 0 Source: World energy outlook 2017 special report Both points illustrated above show that making electricity Universal indicators for assessing the predictability of available to South Africans has been a top priority electricity utilities are the system average interruption for Eskom for almost three decades. While Eskom no duration index (SAIDI) and the system average longer funds electrification, it is still the provider of interruption frequency index (SAIFI). SAIDI measures construction services, and as such, has enabled the the average outage duration for each customer served, realisation of the NDP 90% coverage ambition 12 years whereas SAIFI measures the average number of earlier than the 2030 target. interruptions that a customer would experience. Eskom’s performance has improved across both dimensions in Predictability recent years with shorter (38.8 against 45.8 hours) and As acknowledged by Eskom in the 2018 Integrated less frequent (18.7 against 23.7 occurrences) system Report, customers have raised concerns about the interruptions. However, when comparing SAIDI and quality and predictability of supply. This applies to SAIFI to other utility companies (in both developed various customer segments, including large industrial and developing nations), Eskom ranks last on both companies, smaller businesses, and residential customers. dimensions. It is important to note that characteristics Most residential users perceive unreliable supply as a of the Eskom distribution network, which may not nuisance, however, for certain individuals it can have an be similar for other international utilities, impact impact on their lives and livelihoods. From a commercial these metrics. Specifically, more than 70% of the perspective, it can impact productivity and financial Eskom network is above ground, which makes it more results of businesses. susceptible to damage from external factors such as One objective measure of the quality of Eskom’s services lightning strikes, fires and collisions. is the “Products and Services” component of the RepTrak Pulse survey conducted by the Reputation Institute. In 2017, Eskom’s aggregate score for “Products and Services” was 32.9 compared to 39.2 in 2012. Any score below 40 is considered poor/bottom tier35. The average SOC score for “Products and Services” was 44.9, while the best performer under SOCs scored 55.1. 35. All four elements of the “Products and Services” component decreased between 2012 and 2017 and now rank below 40 on the RepTrak scale. “High quality” decreased from 44.7 (2012) to 35.6 (2017); “Value for money” decreased from 36.9 (2012) to 30.7 (2017); “Stands behind products” decreased from 39.3 (2012) to 36.3 (2017); and “Meets customer needs” decreased from 36.1 (2012) to 29 (2017). ESKOM HOLDINGS SOC LTD | 17 THE ESKOM FACTOR 2.0 continued System average interruption duration index (SAIDI), System average interruption frequency index (SAIFI), hours events 40 30 30 20 20 10 10 0 0 Peer 10 Peer 11 Eskom Eskom Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 Peer 9 Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 Peer 9 Ranking Ranking 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 Source: 2017/2018 company integrated reports and sustainability reports Considering the transmission component, Eskom’s Electricity tariff setting is regulated by NERSA based system minutes lost <1 minute for FY18 was 2.09, which on a methodology that focuses on the cost of supply. is both a significant improvement relative to the FY12 While Eskom is responsible for most of the electricity figure of 4.73 minutes as well as being under Eskom’s generation in the country, it only sells and distributes stated target of 3.5336. No major incident >1 minute was 54% of national power to end users, with the remaining recorded in FY18 compared to one incident in FY12. The 46% being sold and distributed by around 180 municipal target listed in Eskom’s KPIs is two per financial year. power departments. The municipalities purchase electricity from Eskom at wholesale prices to which they Another measure of predictability is the energy add the costs for distribution infrastructure as well as a availability factor (EAF) which reflects the plant or unit’s profit margin. Given the current distribution structure, availability to produce energy as a percentage of the municipal tariffs can and do appear to differ widely. In energy that could have been produced at full capacity many instances the price paid through the municipality over the reference period. The EAF for FY18 was 78%, is significantly higher than the equivalent tariff an Eskom which is in line with the 2017/2018 Eskom target, but customer pays. For example, research has shown that ‘a down from 82% in FY12. medium-sized foundry pays 30% more for electricity in In the South African context, the experience of Ekurhuleni per kilogram of output than a similar foundry predictability and reliability of electricity can be vastly sourcing power directly from Eskom.’38 While prices different depending on location. For example, outages increases can have a significant impact on the profitability may last longer in rural areas given that it takes time to of businesses, the unpredictability of the increases is an travel to these places for repairs to be effected. additional burden for corporate customers who need to plan and budget. In short, Eskom has made efforts to improve predictability of electricity as shown by the positive In terms of Eskom’s direct pricing to customers (as trend in the major indicators. Still, SAIDI and SAIFI opposed to prices charged by municipalities), average lag significantly behind international peers, and there prices increased by 9.8% per annum since 2012, exceeding remains room for improvement. CPI inflation over the same period by about four percentage points per annum At a disaggregated level, Pricing and competitiveness the price of electricity for residential, commercial and Eskom’s recent application for an increase in tariffs by 15% mining customers has increased at approximately 7.3%, per annum has been met with widespread criticism from 9.7% and 10.4% per annum respectively, with absolute individuals, civil society groups and opposition parties37. increases between 2012 and 2018 ranging from 53% to 36. System minutes are a global benchmark for measuring the severity of interruptions to customers. One system minute is equivalent to the loss of the entire system for one minute at annual peak. 37. https://businesstech.co.za/news/energy/268639/south-africans-cant-afford-to-pay-15-more-for-eskoms-mismanagement-and-corruption/. 38. https://mg.co.za/article/2018-05-22-south-africas-municipal-electricity-tariffs-are-hurting-the-economy. 18 | ESKOM FACTOR 2.0 Price of electricity per kWh, US cents per kWh (2017) Evolution of electricity price versus CPI inflation in South Africa Normalised index (1988 = 100) Liberia 1 500 Germany Ghana UK US Rwanda Canada Uganda 1 000 Kenya Brazil Zimbabwe Tanzania China Nigeria India 500 South Africa Botswana DR Congo Mozambique Zambia Ethiopia 0 0 10 20 30 40 50 1995 2000 2005 2010 2015 Source: Statista, Eskom, statssa.gov.za Eskom tariff Inflation Source: Statista, Eskom, statssa.gov.za 80% over the period. The price increases are primarily Reducing Eskom’s impact on the environment driven by Eskom’s rising costs of electricity production, The third pillar addresses Eskom’s impact on the as well as external policy which impact levies and IPP environment through the use of resources, specifically purchases. Both Eskom’s primary energy expenses (mainly water; emission of greenhouse gases; effects of pollution coal, IPPs, and environmental levies) and the employee on air quality; use of renewables; efforts to improve end- benefit expense increased by more than 10% per annum user energy efficiency; and biodiversity. over the same time period. This suggests that the price increase is driven equally by market dynamics, policy and Water use internal Eskom factors. Another influencing factor on the Coal and water are the most common resources used by recent price increases is that electricity was historically Eskom for electricity generation. Other resources such underpriced and increased at lower than CPI inflation as uranium, kerosene, diesel, and fuel oil are also used. before the late 2000s. This suggests that the current steeper price increases which consumers face today is In FY18, Eskom burnt 115.4Mt of coal, which is almost partly to compensate for lower historical increases. half of the total coal produced in South Africa (252Mt). In absolute terms, this is a reduction of 10Mt against Based on these figures one can understand the concerns FY12. However, this is solely driven by a lower output around increasing electricity prices. However, it should in the latest year as the kg/kWh produced has remained also be noted that South Africans still have access to level over the period. The main by-product of coal-based competitively priced electricity compared to other electricity generation is the ash created through burning countries globally (including African countries). In 2017 coal. The amount of ash produced has decreased slightly, the average price of electricity for South Africa was even relative to the decline in coal use, as the ratio of kg 7 US cents per kWh against an average of 15 US cents ash produced to kg coal burnt has declined from 0.29 to per kWh internationally. This applies to both industrial 0.27. The percentage of ash recycled also increased from and residential customers. The caveat is that some 6.4% to 8.6% in FY18. of the countries included in this comparison have a higher GDP per capita than South Africa. Due to steep While fuel oil use increased by 44% from FY12 to price increases, South Africa is losing ground to these 313 million litres in FY18, the use of diesel dropped countries in terms of affordability. However, even when dramatically from 222 million litres in FY12 to 37 million factoring in average household income, South Africa litres over the same period. The use of nuclear fuel also still performs better than average. This conclusion is increased over the period, with the 60 units39 used in FY12 consistent whether considering only African countries increasing to 116 in the latest financial year. This being said, or a broader group of international peers. the amount of low-level radioactive waste generated has declined by 1.9% per annum between FY12 and FY18, while intermediate-level radioactive waste generated declined by 3.3% per annum over the same period. 39. The gross mass of a nuclear fuel element is approximately 671kg, with uranium dioxide (UO2), mass typically between 462kg and 464kg. ESKOM HOLDINGS SOC LTD | 19 THE ESKOM FACTOR 2.0 continued As a result of its coal-dominated generation mix, Eskom Greenhouse gas emissions also requires significant quantities of water. There are The high dependence on coal for electricity generation two measures for the level of water use: firstly the by Eskom (and South Africa), results in a significant net raw water consumption, and secondly the specific environmental footprint. From FY12, Eskom reduced water consumption in ℓ/kWh sent out. Based on both emissions by 26Mt to a total of 206Mt in FY18. The of these metrics, Eskom has made improvements. In reduction was driven by a slight reduction in kilograms of FY18, Eskom recorded the lowest value since FY12 on CO2/kWh42 , as well as lower total electricity produced, both these metrics. The FY18 Eskom Integrated Report which does not indicate an increase in efficiency. states that “continued focus on station-specific water strategy implementation plans, water data audits, as well When benchmarked against a set of peers, Eskom has as a focus on improving water management, contributed the highest CO2 emissions per kWh of energy produced to the improved performance. The reduction in energy (0.93 kg/kWh versus an average of 0.59 kg/kWh)43. generated by older power stations, which are less water While this is highly influenced by the large proportion of efficient, has also reduced specific water use.”40 While coal in the Eskom energy mix, the emissions are still on this improved performance is positive, Eskom still uses a the high end when compared to coal specific emission substantial amount of water in absolute terms. While all factors of Organisation for Economic Cooperation and industrial users of water account for approximately 9% of Development (OECD) member countries.44 total South African water usage, Eskom alone accounts for 2% of South African water usage 41. Total CO2 equivalent emissions per kWh produced1, g/kWh 1 000 750 Ø 588 500 250 0 Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 Peer 9 Eskom Ranking 1 2 3 4 5 6 7 8 9 10 1. Total grams per kWh produced. Figure for FY18 of g/kWh sold is 970 Source: 2017/2018 company integrated reports and sustainability reports 40. Eskom 2018 Integrated Report. 41. BCG water analysis: 2030 Water resources group, Department of Water and Sanitation 2015, NPC diagnostic water report 2015. 42. Eskom’s value for FY18 based on sales of electricity is 0.97kg/kWh. This figure is calculated based on total electricity sales by Eskom. Electricity sales consists of total kWh available for distribution (including purchases), after excluding losses through transmission and distribution (technical losses), losses through theft (non-technical losses), Eskom’s own internal use and wheeling. CO2 emissions per kWh of sales is therefore 205.5Mt of CO2 divided by 212 190GWh sales = 0.97 tons per MWh. 43. For benchmarking purposes, production of electricity and not sales is used to ensure consistency. 44. International Energy Agency, CO2 Emissions from fuel combustion, Highlights. 20 | ESKOM FACTOR 2.0 It is important to consider three facts when discussing Eskom is bound by the National Framework for Air Eskom’s impact on the environment and its ability to Quality Management set out by the Department of reduce it. Firstly, Eskom’s energy mix is determined Environmental Affairs (DEA). This includes standards through the IRP. So long as coal remains a dominant part for air quality monitoring and management planning, of the energy mix, it implies CO2 emissions will continue and to this end Eskom has progressed with its air to be high. quality improvement programme. Based on their remaining life and the impact on ambient air quality of Secondly, it is important to consider that most of the potential improvements, power stations are prioritised renewable energy delivered through IPPs relies on the and retrofitted in phases with a variety of emissions- base load being provided through Eskom’s coal-fired reducing technologies. Some of the upgrades being power plants – this is detailed under the renewables conducted include: section of this report. • The installation of low NOX burners – this has taken Thirdly, the use of coal against other energy sources place at Camden power station, and is in progress at presents difficult trade-offs to the country. The first Tutuka, Majuba and Matla. trade-off relates to affordability. The average cost of • The retrofit of fabric filter plants at multiple power Eskom’s electricity production (all sources of energy) stations. is R634/MWh, with the primary energy unit cost of coal electricity amounting to R309/MWh. This is • The installation of a high frequency power supply on all significantly less than the current cost of IPP purchases six units of Lethabo is under way. (R2 222/MWh). This is however a short term view, as As the older power stations are phased into cold coal power station infrastructure in South Africa already reserve over time, the new plants replacing them, such exists. In future, new coal power stations would need to as those under construction at Medupi and Kusile, be built, and the cost of renewable energy is expected to are being fitted with low NOX burners and flue-gas decline over time, with the result that the gap between desulphurisation. As a result, the mix of power stations the two will narrow over time. is becoming cleaner over time from an air quality The second trade-off relates to the coal mining industry. perspective. In addition to this, an air quality offset Reducing coal use would limit both industry output plan is in place, focusing on interventions to switch and associated employment given that Eskom remains households from cooking and heating with coal. Another the largest purchaser of coal in South Africa45. The aspect of this plan is health monitoring. This will take coal mining industry remains an important provider place in communities to measure the success of these of employment in the overall South African mining interventions over time. industry, estimated to employ 82 248 people in 2017, an While the above measures will mitigate Eskom’s impact increase from the 60 187 people employed in 1994. The on the air quality, Eskom is currently not in compliance employment provided by the coal industry is even more with Minimum Emissions Standards (MES). It is noted that important considering that overall employment from Eskom did, through the legally set out process, obtain the mining industry is estimated to have decreased from postponements in 2014/15, and is lodging applications 611 018 in 1994 to 462 870 in 201746. to the National Air Quality Officer for suspensions, Air quality alternative emission limits and postponement for some Eskom is also responsible for the emissions of SOX , NOX , of the power stations emission limits. The reason for and particulates that impact the environment at a local these applications is in most cases due to design-related and regional level. This is a direct result of its extensive limitations of power stations that were constructed (or use of coal-fired power stations. had commenced construction) before the promulgation of the MES. The substantial cost of certain required The absolute amount of SOX, NOX and particulates technologies would also impact the cost of electricity. emitted declined between FY12 and FY18, with lower energy output as a key driver. While emissions per MWh End-user energy efficiency produced went down for NOX (4.1 versus 3.9kg/MWh), To combat the negative consequences of fossil fuel usage it increased for SOX (7.8 versus 8.1kg/MWh) since FY12 on the environment, Eskom attempts to reduce usage on a normalised basis. Compared to peers, the relative from end-users as well as drive internal efficiencies. emissions are about four times higher on both dimensions. By way of integrated demand management, Eskom has In absolute terms, the particulate matter emissions from realised demand savings between 172MW and 595MW power plants reduced from 72.42kt/year (FY12) to per year since 2012. Additionally, through internal 57.13kt/year (FY18). efficiency measures Eskom has saved between 1.4GWh and 45GWh over this period. 45. Coal usage would reduce as coal-fired power stations are replaced by alternative energy sources over time so the decrease would not be immediate, but instead phased over time. 46. Department of Mineral Resources (DMR). ESKOM HOLDINGS SOC LTD | 21 THE ESKOM FACTOR 2.0 continued Renewables As detailed in “Contribution to GDP” from page 13, As mentioned in “Greenhouse gas emissions” from Eskom has an indirect negative impact through its supply page 20, the Eskom- specific energy mix is largely chain. For example, open cast mining which is largely dominated by coal (accounting for more than 91% of the driven by Eskom’s demand for coal, has resulted in the total energy generated in FY18). The remaining energy destruction of Highveld grasslands which has an impact mix is distributed between 6% from nuclear, 0.5% from on both species and ecosystems. renewables, and the remainder from pumped storage and open-cycle gas turbines. The share of renewables within A little known fact is that Eskom manages some of its the Eskom energy mix is clearly limited. vacant land as conservation areas. Eskom has shown improvement in this regard since 2011, both in terms of Eskom’s energy mix is determined through the IRP, hectares as well as percentage of total vacant land. In which implies coal domination is government policy FY18, over 17 000 hectares of vacant land were managed driven. Eskom also has limited ability to change the under conservation practices. The conservation effort energy mix in the short to medium term, as it relies is often driven through partnerships, such as the Ingula on power plants which have already been constructed. Partnership which works to preserve the wetland habitat Eskom itself is currently not permitted to participate near the Ingula Power Station. This wetland habitat is in the RE-IPP programme, although it does provide the home to a diverse ecosystem of fish and bird species. RE-IPPs connection to the main transmission grid. Eskom also enables renewable IPPs to operate intermittently Contributing to national transformation by providing base load capacity, and balancing supply to imperatives meet the hourly system demand. The fourth pillar considers Eskom’s contribution to national transformation imperatives. Eskom’s overall While coal-powered generation is not the only means B-BBEE score is considered, together with employment of providing a stable base load, it is currently playing equity, and the contribution to local suppliers. Eskom’s this role in South Africa where other options such as size in terms of both economic value and number of large-scale hydro are not feasible. While additional people employed implies that it has the potential to be gas capacity is planned, a large nuclear build is not a major contributor to transformation. considered financially viable at this time, according to the 2018 draft IRP. Employment equity Between FY12 and FY17, Eskom was consistently rated as From a broader country perspective, while the either a level 2 or 3 B-BBEE contributor. As recently as renewables capacity is only 7.6% of the total nominal FY17, it was certified to be a level 2 contributor. Eskom’s capacity of Eskom and IPPs, the evolution of renewable target in accordance with the shareholder compact is energy in South Africa should not be underestimated. to achieve a level 4 B-BBEE rating. However, Eskom was Between 2008 and 2017, the renewables capacity rated as level 8 in FY18 48. This low rating is due to SOCs of South Africa increased by 21.8% per annum. This no longer being considered as black-owned under the substantially surpasses several other large economies in revised B-BBEE Codes of Good Practice 49. Africa, including Morocco (6.9% per annum), Kenya (6.8% per annum), and Nigeria (0.7% per annum), with the As at 31 March 2018, 85% of all Eskom employees were average for African countries being 6.8% per annum47. black, 34% were female, and 29% were black female; 3% of all employees had disabilities. These levels were Hence, even though Eskom does not produce much all marginal increases on Eskom’s already relatively high renewable energy itself, it does create the platform for historic employment equity contributions. Relative to others to do so, and in doing so enables the country to the South African corporate peer group, Eskom’s black move towards a cleaner energy mix. employee representation was higher than the average Biodiversity of 78.4%. In terms of biodiversity, one typically considers the In terms of black representation in top management and damage that Eskom causes to species and ecosystems senior management, Eskom ranked first in comparison to because of its activities. An example of this is that Eskom South African corporate peers. When considering female tracks the reported mortality of “red data” (threatened) representation, while Eskom ranks second in senior bird species on Eskom distribution lines. Over the last management, it is amongst the lowest of the peer group couple of years, the number was fairly stable at 200 to for top management. 300 known mortalities per year. The only exception was 2017 when over 500 mortalities were reported. More specifically, black top management representation It should be noted that this number is likely understated, increased to 85% (FY18) from 72% (FY12). Both female as not all lines are monitored. Furthermore, deaths of (FY18: 15% versus FY12: 24%) and black female (FY18: non-threatened species caused by distribution lines, 15% versus FY12: 21%) representation in top management and deaths of all birds (threatened and non-threatened) caused by transmission line collision are not measured. 47. Figures for all countries obtained from IRENA Renewable Capacity Statistics, 2018. 48. More specifically, until June 2018 when the relevant certificate expired. 49. Eskom Integrated Report, March 2018. 22 | ESKOM FACTOR 2.0 Female representation in top management amongst Female representation in senior management amongst SA corporates, % SA corporates, % 45 45 30 30 Ø 30 Ø 24 15 15 0 0 Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Eskom Peer 8 Peer 9 Peer 1 Eskom Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Ranking Ranking 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 Source: 2017/2018 company integrated reports and sustainability reports was down over the period. In FY18, 68% of senior Contribution to local suppliers management were black, 38% were female, and 33% Eskom’s significant size in terms of both turnover and were female and black – an increase of 14 percentage operational expenditure also implies that it is one of the points for all categories relative to FY12. In FY18, 75% of largest procurers of goods and services in South Africa. middle management were black versus 66% in FY12, 38% While Eskom has been criticised in the past for the size were female (FY12: 32%), and 26% were black and female and growth of its procurement spend, it can also act as a (FY12: 26%), an increase of 6% to 10% across these catalyst to transform the economy through spending on categories. Note that all employment equity figures are especially majority black- and women-owned businesses. presented at the financial year end (31 March). Top management representation, % 100 +12% 75 50 -9% -5% 25 0 Top management that is black (%) Top management that is female (%) Top management that is black female (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18 Source: Eskom ESKOM HOLDINGS SOC LTD | 23 THE ESKOM FACTOR 2.0 continued Total nominal procurement spend increased from (i.e. procurement from particular suppliers will no R146 billion (FY14)50 to R161 billion (FY18)51. Eskom’s longer be considered B-BBEE attributable). Initiatives are procurement spend on B-BBEE attributable suppliers being implemented by Eskom to address and improve the was consistently above 80% between FY14 and FY17, B-BBEE performance. but dropped significantly to approximately 60% in FY18. However, it should be noted that a major reason for Eskom’s relative procurement spend on majority black- this decrease in procurement from B-BBEE attributable owned businesses was 33% of total procurement for FY18. suppliers relates to a change in the codes governing Eskom was by far the biggest contributor among South whether or not specific suppliers are considered African corporate peers, spending R53.5 billion on black- B-BBEE attributable. Due to the implementation of the owned businesses in FY18. This significant expenditure on new codes, certain elements can no longer be claimed black-owned suppliers is a particularly powerful tool in when calculating total measured procurement spend transforming the South African economy. Spend on majority black-owned businesses, R billion 60 50 40 30 20 Ø 13.9 10 0 Eskom Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Ranking 1 2 3 4 5 6 Source: 2017/2018 company integrated reports and sustainability reports Procurement from qualifying small enterprises (QSEs) where residents were of the view that Eskom was increased to 6.3% (FY18) from 5.2% (FY14), while not contributing sufficiently to the local community52 . procurement spend on exempted micro-enterprises However, there are also various examples where Eskom (EMEs) increased to 7.6% (FY18) from 5.7% (FY14) based has made substantial and very tangible contributions on available data. to the local community. To assess how Eskom performs from an overall perspective when it comes Despite the decline in some areas, the absolute to investments in local communities, we consider local procurement spend on attributable suppliers, and other job creation and contracting at new build projects, CSI, categories, is a substantial contributor to forwarding infrastructure investments, and other activities such as transformation. electrification. Impacting on local communities One of the largest contributions Eskom makes to local The fifth pillar addresses Eskom’s role in and impact on communities is through the employment created in the South African local communities. We assess the impact new build projects. At Medupi and Kusile alone, nearly through the lenses of investments in and externalities for 40 000 people were directly employed at the peak of local communities. construction. In FY18, the total supplier development and localisation (SD&L) spend of Eskom was R18.5 billion, Investment in local communities creating significant stimulus to the local economy. This In June 2018, coal being transported from Exxaro’s capital expansion not only fulfils the mandate to grow the mine to Eskom’s Arnot power station was blocked supply of electricity, but is also an important contribution by local residents. This is one example of an instance to Eskom’s developmental role in South Africa. 50. Data for FY12 and FY13 was not available at the time of writing this report. 51. FY18 procurement decreased from the FY17 level of R165 billion. 52. https://www.fin24.com/Economy/Eskom/angry-community-chokes-eskom-coal-supply-20180610-3. 24 | ESKOM FACTOR 2.0 Eskom has positively impacted local communities through electrification of households – more than 215 000 in Case study: The Medupi Leadership FY18, the majority of which are in rural areas – which not Initiative only provides convenience and comfort, but also reduces Due to the nature of large build projects such indoor pollution and risks associated with burning of fuels. as Medupi, the employment created is often temporary and peaks during the construction In terms of CSI, Eskom spent R88 million in FY12 and phase of the project. People employed by has consistently spent more than this in each year since, these projects are demobilised once the with R192 million in FY18 (more than R1.05 billion over project phase is complete, which can lead to the period). As a percentage of revenue, Eskom has spent instability in the local community. The Medupi more every year since FY11 with the exception of FY16. Leadership Initiative (MLI) was established Through its CSI activities, Eskom has made an impact on in partnership with the private sector to anywhere between 0.3 million to 1.1 million people and create a sustainable long-term solution for job more than 282 enterprises over the period from FY12 security in the area of the Medupi build, which to FY18. Compared to South African corporate peers, could be used as an example for other large- Eskom reports relatively lower spend (as % of revenue) scale infrastructure projects. The MLI aims on CSI (the average spend as % of revenue is 0.2% versus to reintegrate demobilised workers back into 0.11% for Eskom), however, this only includes the CSI the community and ‘build a bridge to future spent through the Eskom Development Foundation. employment opportunities’. Eskom invests far more than this in socio-economic development through new build projects and its different The MLI focuses around three major areas: line divisions. The largest of these projects have been at creating short- and medium-term transitional Medupi, Kusile, Ingula, the Majuba rail project, as well job opportunities for local demobilised and as the various Transmission infrastructure development community participants; providing training projects. and development opportunities for local people that enable future employment or Over R2.1 billion has been spent on local infrastructure entrepreneurship; and identifying and applying projects at Medupi since the inception of the project development finance opportunities. This has (August 2007), with the majority of this investment resulted in more than 16 000 people being being R1 billion spent on new housing and a further trained in financial literacy, and over 1 000 job R750 million on the contractor village. Further to this, opportunities being created. Some examples over R204 million has been invested in road infrastructure of these are: and bridges. Additional projects have included the development of electrical infrastructure, a sewage plant, • The small-, medium- and micro-enterprise schools, community centres, and public buildings such as (SMME) hub which has incubated over police cabins, clinics, and wellness centres. There have 35 SMMEs been several large non-infrastructure projects, such • Drylands projects which have created as enterprise development and the Medupi Leadership employment for 444 individuals Initiative described in the case study detailed alongside. • Smallholder farmers project which has Eskom has invested more than R200 million on CSI registered 730 farmers initiatives at Kusile to date. These initiatives have focused • Enterprise development for over primarily on the building and renovation of schools 150 SMMEs (117 schools renovated), and have also included the building of other public infrastructure such as a police Lessons learned from the projects so far will station and clinic. Other initiatives at Kusile include continue to be implemented at Medupi as the co-operatives aimed at skills transfer and up-skilling construction phase draws to an end, as well as of individuals. at future capital infrastructure projects. Other community development initiatives Eskom has participated in across the country include the construction of old age homes, and the donation of labs, computers, and educational tools to schools. Eskom also invests in providing other basic services within these communities, such as electricity and potable water. Considering all of the above, Eskom has made a significant social contribution in South Africa and, in particular, actively seeks to add to the development and upliftment that surround its new infrastructure projects. Though the reported CSI through the Eskom Foundation is relatively low, the overall Eskom contribution to local communities is significantly higher. ESKOM HOLDINGS SOC LTD | 25 THE ESKOM FACTOR 2.0 continued Externalities for local communities communities needing to be relocated. Since 2011, a total While Eskom contributes positively to local communities of 746 households have been asked to relocate from their in many ways, there are also negative externalities original homes55 to alternative accommodation. deriving from Eskom’s presence around communities. Being asked to relocate is a very difficult move for people One of the key issues is the reduction of air quality for the as they have a strong sense of belonging within their people who live around power plants. Although the level communities, and may depend on the social structures of pollution produced is highlighted under Eskom’s impact which exist in them. In addition to the location of people, on the environment, the health effects of high ambient disruption is also caused when certain sites of significance air pollution can be substantial. Pollution in priority to the community need to be moved. Eskom acknowledges areas53 is reported to cause respiratory conditions such this and does its best to manage this process to minimise as bronchitis and asthma, and can even lead to death54. the negative impact. Not only does Eskom provide a These impacts are partially mitigated through retrofits to substantial financial compensation for those affected by coal-fired power stations which reduce the emissions, thus the relocations (R327 000 on average), but support is also reducing Eskom’s contribution to ambient air pollution. provided in other ways, such as counselling. One example of relocation from the Venus substation transmission line Another issue relates to relocation of families as a result of can be seen in the case study below. Other related impacts Eskom’s power generation projects and expansion of the to communities are in cases when graves sites need to national power grid. At many of the major build projects, be moved or get disturbed during the construction of such as Medupi, Kusile, and some of the transmission- Eskom’s infrastructure, such as in the case of the Medupi line projects, it is necessary for Eskom to build in areas Power Station. where local communities exist. This can result in local Case study: The Ariadne Eros and Venus transmission lines Two of the major build projects which have resulted in the relocation of people have been the lines from the Venus substation to Ariadne as well as the lines from Ariadne to Oribi and Eros, a total of over 400km of transmission lines. Between these projects, roughly 250 households have been relocated so far, due to the households being in the planned path of the transmission lines and the areas being deemed unsafe for continued habitation. In order to address this, a resettlement action plan has been put in place for both projects in partnership with the African Development Bank (AfDB). For each house which needed to be relocated, the policy was outlined that the affected family should be better off after the disruption than before. The impact to each affected party was individually assessed with special attention paid to vulnerable families within the community, with social monitoring taking place to ensure that all of the beneficiary’s interests were considered, and to make sure that benefits were distributed in a fair manner. The relocation project was of course disruptive to the communities, but the resulting houses which were built with the compensation were life-changing improvements for many families. 53. Priority areas exist when the Minister or MEC reasonably believes that ambient air quality standards are being, or may be, exceeded in the area, or any other situation exists which is causing, or may cause, a significant negative impact on air quality in the area. 54. Groundwork: http://www.groundwork.org.za/archives/2018/news20180315-Eskom_again_seeks_to_delay_compliance.php. 55. Relocations were mostly the result of concerns around air quality or the construction of distribution lines. 26 | ESKOM FACTOR 2.0 Being a good employer the negotiation to determine the next three years of The sixth pillar addresses Eskom’s impact as one of the wage increases. Due to financial pressures to reduce largest employers in South Africa. To determine this employee costs, management offered a 0% increase impact, we assess relations with organised labour, the during the negotiations in June 2018. This was rejected wellness and safety of employees, as well as the employee by the unions, leading to widespread protest and strike value proposition. action. The detrimental effects of this were felt across South Africa through the implementation of rotational Labour relations loadshedding associated with the abovementioned The relationship with labour is considered by focussing dispute and related action by employees. both on Eskom’s relations with organised labour unions and internal relations with employees. Internal relations between management and employees remain difficult, however show a more positive trend, The three major trade unions of Eskom employees as reflected in the number of employee grievances are NUM, NUMSA and Solidarity, which collectively which have decreased by 33% since 2012. More critically, represent over 28 000 employees within Eskom as the proportion of grievances which have been solved of March 2018. These unions as well as some non- internally has been increasing significantly during the members form part of a collective bargaining unit within same time, thereby reducing the need for external Eskom which encompasses over 80% of total Eskom intervention. permanent employees. Although the absolute size of the collective bargaining unit has decreased over the period These improvements reflect the effectiveness of of this report, a larger proportion of this unit is now management structures put in place to improve represented by unions. resolution processes. In measuring this, each department submits an annual employee relations scorecard, Eskom reported specific disputes between itself including measures such as grievances resolved, and and labour representatives during 201856. Disputes disciplinary actions resulting in sanctions. are a common process through which stakeholders can raise their concerns with management, yet it is The two aspects of labour relations tell a mixed story. concerning for Eskom that conciliation attempts have On the one hand, the internal relations with employees not been successful in reaching resolutions for these show significant improvement. Yet, as evidenced by the disputes. This has led to arbitration being required strike action, there is still progress to be made in the from the Council for Conciliation, Mediation and relations with labour unions. Arbitration (CCMA). A major contention has been Total grievances lodged by employees, number Proportion of grievances solved internally, % 600 100 450 -33% 75 300 50 150 25 0 0 FY13 FY14 FY15 FY16 FY17 FY18 FY13 FY14 FY15 FY16 FY17 FY18 Resolved internally 56. As reported in the Eskom 2018 Integrated Report: NUM, NUMSA, and Solidarity lodged a dispute with the CCMA, seeking a ruling that Eskom should have a single bargaining unit for all its employees, or alternatively two bargaining units – one for bargaining unit employees and one for managerial employees. The CCMA issued an arbitration award in April 2018, finding that the current bargaining unit should be extended to include certain levels of professionals and middle management employees. In addition, trade unions are seeking a CCMA ruling that Eskom is not entitled to use temporary employment service providers or subcontractors. ESKOM HOLDINGS SOC LTD | 27 THE ESKOM FACTOR 2.0 continued Employee wellness Fatalities There is a major drive within Eskom to promote a Under safety, we consider both the number of fatalities healthy organisation through employee wellness. One due to Eskom activities, as well as the frequency of aspect of this is the mandated requirement for employee injuries to employees and contractors. health checks and physical fitness for duty assessments. These checks are conducted for all employees every Despite the organisation’s continued commitment two to five years dependent on their function in the to strive for Zero Harm, there were regrettably 15 organisation. There are also various voluntary initiatives employee and contractor fatalities in FY18. There were to promote employee health and wellbeing, including also 26 public fatalities related to Eskom activities, health screening, physical wellness programmes, and including from electrical contact and Eskom-related road psychosocial services. accidents. Eskom has made substantial investments to reduce the number of safety incidents. The results are One of these initiatives is the “know your numbers” evidenced by the reduction of incidents over the past six programme – a health screening initiative which has been years. However, the number of employee and contractor running in Eskom since 2014. This programme includes deaths per 1 000 employees (0.31) is still high compared the screening of five key health metrics: blood pressure, to peer utilities (median 0.23). glucose, cholesterol, BMI and waist circumference. It is designed to promote good health and improve awareness A universal metric for employee safety conditions is the while removing the stigma around health issues. HIV lost-time injury rate (LTIR). LTIR measures the number of awareness is a critical aspect of employee health in lost-time injuries per 200 000 hours worked. Eskom has South Africa, and survey results show that 87% of Eskom shown significant progress in decreasing this by over 50% employees are aware of their HIV status. This is in the since 2012 excluding occupational diseases, and over 40% top quartile of South African companies benchmarked, if occupational diseases are included. Despite having higher yet there is still room for improvement to achieve the than average fatalities, Eskom has performed well in terms United Nations (UN) target of 90% awareness by 2020. of LTIR compared to other utilities. The current LTIR level sits at 0.2057, compared to the international utility Two of the major issues facing these initiatives have been benchmark average of 0.28 and Eskom’s own target of budget constraints and a lack of centralised tracking. As a 0.31. An explanation for this apparent contradiction is the result, Eskom has relied on various branches and NGOs significant proportion of road accident related deaths, in to conduct screenings and assess performance across which South Africa has a particularly poor record58. the country. However, there is a drive to centralise this process, with an aspirational goal of 100% coverage of One potential reason for the improvement in safety is employees over three years (33% per year). In FY18, the increased number of safety trainings conducted. 11 169 full-time employees were screened for at least Since 2013, over 30 000 employee safety trainings three out of the five tests, falling short of the target at have been conducted per year. There have also been roughly 27% coverage. It should be noted that there targeted initiatives to reduce some of the major causes of are instances where screenings take place but are not incidents, including: officially recorded. • Road safety and driver trainings/assessments Among the other services provided by Eskom are • Education around electricity safety programmes focused on sports and recreation to • Appointment of technical specialists to improve safety promote physical wellness. This includes 13 gym facilities of working at heights around the country, which are used for both physical • Communications to improve safety awareness rehabilitation as well as recreational fitness. Eskom also runs an Employee Assistance Programme (EAP) with Despite the investments in safety and positive trends psychosocial services, including counselling, financial seen, further improvement is required to attain the goal wellness, and trauma assistance. Between 2016 and 2018, of Zero Harm. As a result, safety is still considered an an average 11.7% of employees utilised these services area with a mix of positive and negative aspects. per year. This is higher than the public sector average (10.7% in 2018). Eskom compares favourably in employee wellness relative to other South African companies, specifically as a result of the broad voluntary wellness programmes offered and encouraged throughout the company. Still, there remains room for improvement, especially if one considers the targets set both internally and by the UN. 57. Excluding occupational diseases. 58. According to the International Transport Forum Road Safety Annual Report 2018. 28 | ESKOM FACTOR 2.0 Eskom LTIR1 from FY12 to FY18 LTIR1 amongst utility peers 0.75 0.6 -9% 0.50 0.4 Ø 0.3 0.25 0.2 0 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Peer 1 Peer 2 Eskom Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 Ranking Excluding occupational diseases Including occupational diseases 1 2 3 4 5 6 7 8 9 1. Incidents per 200 000 hours worked Source: Eskom internal data Employee value proposition Every year, Eskom conducts an employee engagement In order to be considered an employer of choice, it survey which tests the sentiment within the company is critical for Eskom to continue to attract and retain along multiple dimensions. The results of this survey are top talent. According to a Universum59 survey of over compared across time and across divisions in order to 45 000 students and over 20 000 professionals across highlight some of the key areas where sentiment is either South Africa, Eskom is considered a preferred employer very positive, or an area for particular concern. Across by prospective talent. This is especially true in the the Eskom group, “belonging” and “my job” score highly, engineering and technology fields, where Eskom ranks as well as “safety” – although under the safety heading as the number one employer of choice for students in only 23% of employees within a particular division 2018, and the number three for working professionals. strongly agree that Eskom employees follow safety Eskom also ranks highly for students in the business and rules. Some of the more concerning areas are around commerce fields, where it ranks in the top 10 choices, career development and remuneration and recognition, although it should be noted that Eskom rates as less where specific concerns include equal access to training attractive in other fields. and understanding how remuneration is determined. A pulse survey conducted in October 2017 showed One indicator of employee value proposition from that there was more concern among Eskom employees within the company is the level of employee turnover. In around organisational performance than around negative combined voluntary and involuntary employee turnover, media attention, and that this concern is most prevalent Eskom compares favourably to both other South African between top and senior management. employers and global utilities, with only 4.6% employee turnover in 2018. This is not necessarily an indicator of job satisfaction, however, as in the South African context this could be due to a lack of alternative opportunities in a similar industry. 59. Universum Global is an employee branding company that publishes company rankings based on an annual survey. ESKOM HOLDINGS SOC LTD | 29 THE ESKOM FACTOR 2.0 continued Building internal and external know-how (EAL)60, R612 million related to leaners, R194 million Over and above Eskom’s role as primary electricity for employee trainings and R132 million for bursaries provider and major employer in the South African and scholarships. Total training and skills development economy, it has a key role to play in developing people spend in FY18 was 5.2% of total employee benefits, (inside and outside Eskom) and driving innovation in the down from 6.3% in FY12. However, Eskom still had country. In this pillar, we consider Eskom’s contribution the highest training and skills development spend per to: training and skills development; supplier monitoring employee among the South African corporate peer group and development; and driving innovation in South Africa. (approximately R28 000 per employee)61 – significantly in excess of the second-placed peer (approximately Training and skills development R19 000 per employee). As a result of Eskom’s company- Eskom invested more than R11.4 billion in training wide training initiatives, 42 707 historically disadvantaged and skills development between FY12 and FY18. In South Africans (HDSAs) received some form of training FY18, Eskom invested R1.4 billion in training and in calendar year 2017, an increase in absolute value of skills development, which included R504 million 38 993 in 2012. for training within the Eskom Academy of Learning Investment in employee training, R million Investment in training per employee, R thousand 1 500 30 1 250 1 000 20 Calculated based on total number of permanent group employees, not number of people trained 750 Ø 12.4 500 10 Ø 426 250 0 0 Eskom Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 Peer 9 Eskom Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 Peer 9 Ranking Ranking 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Source: 2017/2018 company integrated reports and sustainability reports A key component of Eskom’s training and skills Learners currently enrolled in the system across all development contributions are the learnerships it categories (technical and non-technical) decreased provides to engineers, technicians, artisans, and also significantly between FY12 and FY18, a decrease of 29% for some non-technical positions. Historically, Eskom has engineers and more than 83% for non-technical learners. funded these learnerships not only to provide to the skills requirements of the company, but also to deliver Eskom continues to make a strong overall contribution more broadly to the skills needs of the South African to training and skills development in South Africa. While economy. However, considering the recent drive within its absolute contribution to learnerships per annum has Eskom to create a more streamlined organisation, the decreased in recent years, its overall contribution to focus has shifted primarily to providing to the needs of learnerships over the period from FY12 to FY18 should the Eskom business. Aligned with this, total new learner still be considered as significantly positive. Eskom’s intake in FY18 was down to 726 individuals from 1 794 in training and skills development spend per employee FY12. Note that this followed a historically large intake of remains the highest of its corporate peer group. Eskom 2 448 individuals in FY17, particularly of engineers (824) invested in excess of R11.4 billion in training and skills and technicians (878). development between FY12 and FY18. 60. Eskom Academy of Learning (EAL) is Eskom’s in-house training facility located in Midrand. 61. Excluding bursaries and scholarships, divided by total group permanent employees. 30 | ESKOM FACTOR 2.0 Total engineering, technician, artisan and non-technical learners in the system, number 3 000 -21% -29% 2 000 -83% -2% 1 000 0 Total engineering learners in the system Total technician learners in the system Total artisan learners in the system Total non-technical learners in the system FY12 FY13 FY14 FY15 FY16 FY17 FY18 Source: Eskom Supplier monitoring and development Some of the key CSI Enterprise Development initiatives Eskom plays an important role in developing local driven between FY12 and FY18 include the business suppliers both through the value of its procurement investment competition, small business expo, business spend and specific initiatives to train and develop local incubators, and the Eskom Contractor Academy suppliers. These initiatives also tie into South Africa’s described in the case study on the next page. The broader developmental and transformation agenda by approved budget for the Eskom Contractor Academy raising up a new, more transformed industrial class. was reduced to R13.4 million in FY17 against R19 million in FY13; the number of beneficiaries decreased to In terms of procurement, in FY18 Eskom procured 150 from 225 over the same period 62 . approximately R18.5 billion worth of local content through supply contracts for major projects such as Eskom continues to make strong contributions to Medupi, Kusile, Ingula, and power delivery projects. supplier monitoring and development both through Furthermore, more than 11 000 individuals have been the local content and training provisions of its major trained by suppliers over the lifetime of these major projects, such as Medupi, Kusile, and Ingula. The CSI projects as a direct result of contractual obligations. initiatives aimed at Enterprise Development also make positive contributions to supplier development, especially Eskom’s CSI expenditure specifically allocates funds for through initiatives such as the contractor academy where the development of suppliers through its Enterprise emerging contractors are trained to play an even larger Development initiatives. The Enterprise Development role in Eskom procurement in the future. CSI budget increased to R34 million (FY18) from R16.1 million (FY12), with more than R240 million allocated over the period. 62. In FY18, the approved budget for the Eskom Contractor Academy was R16 million, with the number of beneficiaries yet to be confirmed. ESKOM HOLDINGS SOC LTD | 31 THE ESKOM FACTOR 2.0 continued Case study: The Eskom Contractor Academy The Eskom Contractor Academy runs an eight-month “Fundamental Business Management Programme” designed to equip emerging contractors (especially black women-owned and black youth-owned companies) with the skills they need to successfully start and grow a sustainable business. The project is aimed at entrepreneurs, often current subcontractors on Eskom projects, who wish to gain business management and other competencies required to become main contractors. The program blends training and mentoring with practical experience, requiring students to attend one week of classes every month where a broad range of topics are covered in the modules are covered, including: • Business sustainability and finance • Safety, health and Aids in the workplace • Project management • People management • Supply chain management • Understanding the tender process Since 2008, 1 311 students from all nine provinces have successfully graduated from the Eskom Contractor Academy - which boasts a 97% success rate. Of these Graduates, 41% have been women and 50% are youth. Upon graduation, students are awarded a certificate from the University of Limpopo. Despite the recent slight decline in funding for the Eskom Contractor Academy, from R19 million in FY13 to R16 million budget in FY18, the success of the Academy to uplift South African entrepreneurs is clear. As of July 2018, over R3 billion worth of contracts have been awarded to graduates of the program since 2010. Driving innovation remained relatively consistent. The outcomes of Eskom’s Eskom’s contribution to building know-how in South investments in R&D over the period are illustrated Africa extends also to driving innovation through its through the number of patents registered in FY18 of annual R&D spend through its research, testing, and 19 – an increase from 17 (FY12). The number of patents development facility. registered by Eskom per annum was consistently at 19 per annum from FY15 onwards. Furthermore, Eskom Among the initiatives that Eskom is pursuing in this regard contributed/supported a total of 11 research papers in include the support of black-owned businesses (specifically FY18, equal to the FY12 level; 30 research papers were black youth owned and black women owned) in technical contributed in FY13 along with 17 patents63. areas that are currently viewed as monopolised in the market. Eskom will take a minority share in the relevant While Eskom continues to make positive contributions business, which will be accompanied by an initial five-year to R&D, sustained decreases in funding for R&D may supply contract to Eskom. This arrangement will support limit the outcomes related to innovation at Eskom in the relevant business and also provide Eskom with the the future. Furthermore, given pressing issues such required skills in key technical areas. as renewable energy, water security, reliability of supply etc. which are relevant to Eskom, the question Eskom’s annual R&D budget decreased to R111 million around whether more needs to be done from an R&D (FY18) from R186 million (FY12). However, the perspective remains. outcomes of Eskom’s investments in this area have 63. Further details on, for example, Eskom’s investments in low carbon technologies and innovative partnership programmes it engages in had not been made available at the time of finalising this report, thereby limiting the scope of innovation that could be assessed. 32 | ESKOM FACTOR 2.0 Governance and leadership Eskom has instituted a recovery plan aimed at recovering Significant damage has been done to Eskom’s corporate funds related to fraudulent or corrupt contracts. At FY18 reputation over the last few years as allegations of year end, about 98% of 205 contracts over R1 billion and corruption and mismanagement have been widely 91% of 6 998 contracts under R1 billion awarded over a reported in the media. period of three years had been reviewed. Eskom has also terminated or suspended contracts with suppliers shown This, in turn, has raised questions around leadership and to have a corrupt relationship with Eskom. governance within Eskom. We consider this crucial pillar by evaluating governance and ethics, legal contraventions The 2018 Integrated Report highlights corporate and leadership indicators. governance and ethics as a key priority going forward. Significant improvements need to be made particularly in addition, we detail the actions taken thus far in in the areas of quality of information, governance addressing both corruption and mismanagement as well structures, and ethics. In this regard, Eskom is as Eskom’s future strategy in this regard. implementing a five-point plan to transform governance, Governance and ethics which has the following key elements: Eskom received a qualified audit opinion in FY17 as 1. Strengthening the internal ethics and fraud framework external auditors could not rely on the processes in place with a specific focus on consequence management. to ensure the completeness of irregular expenditure 2. Implementing independent lifestyle and conflict of reported. Following the implementation of improved interest audits on senior management and other levels, governance processes, irregular expenditure 64 identified as deemed necessary. in FY18 increased to more than R13.3 billion from around R2.7 billion in FY1765. Fruitless and wasteful expenditure 3. Terminating of all irregular supplier contracts of more than R534 million was identified in FY17 within and work. Eskom company, with a further R56 million in FY18. 4. Enhancing the commercial governance process Of concern is not only the high value of irregular as to ensure robust scrutiny, and strengthening the well as fruitless and wasteful expenditure identified delegation of authority framework. over the period, but also the potential magnitude of 5. Instituting disciplinary charges and taking legal action, such expenditure that may have gone undetected over if required. previous years. Legal contraventions Concerns around the quality of Eskom’s governance Eskom has been criticised in the past for not taking processes have also been evident from the view provided decisive action on allegations of misconduct relating to, by the governance dimension of the 2017 RepTrak in particular, senior executives. Eskom acknowledges Pulse 66 survey conducted by the Reputation Institute. the magnitude of these issues, and it is a key priority for Eskom scored 25.8 (out of 100) on RepTrak’s governance Eskom to address them. Some significant actions have dimension, significantly lower than the SOC industry already been taken in the area of increasing the number leader (51.5) and the SOC peer average (39.3). In of investigations undertaken by the Eskom forensic terms of RepTrak’s scaled international benchmarking audit team and the suspension of senior executives. methodology, any score below 40 is considered poor and Even more can and should be done in the area of in the lowest tier. consequence management related to corruption, financial Eskom does have existing policies in place specifically mismanagement and other serious misconduct. relating to ethics, declaration of interest, anti-corruption Investigations conducted by Eskom’s forensic audit and private work. In FY18, 6 140 individuals completed team have increased significantly in the past financial Eskom’s code of ethics training, 28 975 individuals made year, particularly in the area of irregularities. A total of a declaration of interest, 20 329 individuals completed 237 investigations were conducted in FY18 compared Eskom’s anti-corruption policy training and 998 to 175 in FY17. As a result, six criminal cases were individuals made private work applications67. Eskom also referred to the police in the 2018 calendar year to date. has a fraud and corruption hotline, which encourages Furthermore, seven Eskom senior managers including whistle-blowing, and is operated by an independent executives departed in FY18 following allegations related service provider. Eskom is currently investigating almost to corruption and misconduct. 250 cases reported through whistle-blowing channels. 64. The PFMA defines irregular expenditure as “expenditure, other than unauthorised expenditure, incurred in contravention of or that is not in accordance with a requirement of any applicable legislation”. This should be very clearly distinguished from fruitless and wasteful expenditure, which means “expenditure which was made in vain and would have been avoided had reasonable care been exercised”. 65. Irregular expenditure identified for Eskom group in FY18 was R20.7 billion. 66. Reputation House, Eskom National Pulse, Deep Dive Report – Q1 2017. 67. Eskom does not specifically report the number of individuals that completed these trainings/declarations as a % of those required to do so. In some instances internal targets, such as training, are set on the basis of the number of training sessions held and not the number of individuals trained. ESKOM HOLDINGS SOC LTD | 33 THE ESKOM FACTOR 2.0 continued Number of investigations conducted by Eskom Forensic Audit 237 240 210 4 61 19 173 175 2 154 160 32 139 144 50 61 3 6 116 9 25 48 38 38 46 47 80 115 89 91 79 86 71 66 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Irregularity Fraud Corruption Sexual harrasment Source: Eskom Forensic Audit While the increased number of investigations and recent investigations into suspended executives. Seven senior senior management departures do signal Eskom’s intent managers (including executives) departed as a result of to improve enforcement and consequence management this process and action by the new Board. for transgressions, this remains a key priority for Eskom. In the area of legal action, this speaks specifically to In FY18 alone, there were three changes in interim point five of Eskom’s action plan – instituting disciplinary CEO, a change in CFO and several other changes in the charges and taking legal action when required. executive committee 69. These departures are the latest in a period of significant leadership instability. The frequent From an environmental perspective, Eskom reported turnover of senior leadership in Eskom has undoubtedly 30 environmental legal contraventions in FY18, which is added to the negative perception around governance and down from the 50 contraventions reported in FY12. leadership at Eskom. Leadership However, it should also be noted that Eskom’s own The leadership dimension of the 2017 RepTrak Pulse 68 internal leadership evaluation scorecard showed an survey provides a clear indication as to the concerns improvement to 3.84 (FY18) from 3.72 (FY13) over the around the quality of leadership at the time. Eskom period (out of a maximum of 5). Eskom’s leadership scored 26.7 (out of 100) on RepTrak’s leadership scorecard is based on a 360-degree leadership dimension, significantly lower than the SOC industry brand evaluation (LBE) focused on 12 leadership leader (50.2) and the SOC industry average of 38.2. In competencies70. The overall improvement in score over terms of RepTrak’s scaled international benchmarking the period also included improvement in the competency methodology, any score below 40 is considered poor and of “Leadership characterised by good governance”71. in the lowest tier. Eskom’s internal results could suggest that there remain some areas of good leadership within the company In September 2017, Parliament’s Public Enterprise despite the clear challenges in top management over Committee launched an investigation into state capture recent years. at SOCs, including Eskom. As part of a process to strengthen governance at Eskom, nine new board Overall, it is clear that Eskom’s recent performance in members were appointed in January 2018. The new the area of leadership, particularly in senior management, board made it a key priority not only to improve overall falls short of the standards it sets for itself. corporate governance structures, but also to finalise 68. Reputation House, Eskom National Pulse, Deep Dive Report – Q1 2017. 69. A total of four resignations, one temporary appointment, seven new appointments (including one re-appointment after suspension), and one change in portfolio. 70. The 360-degree LBE survey covers the performance of approximately 400 senior managers, general managers, and executives. Direct managers, peers, and direct reports are requested to evaluate these approximately 400 individuals on the basis of 34 questions covering 12 competencies. 71. LBE score for “Leadership characterised by good governance” improved to 3.9 (FY18) from 3.83 (FY13). 34 | ESKOM FACTOR 2.0 SUPPORTING THE NATIONAL DEVELOPMENT PLAN While South Africa has consistently been amongst the largest economies on the continent, and a financial and business hub of Africa, it is still a country recovering from the injustices of the past and the resultant inequality. Since the birth of South Africa’s democracy more than and widely referenced development strategy. As a 24 years ago, substantial progress has been made on secondary input, topic-specific plans, namely the National numerous fronts. However, in 2015 there were almost Infrastructure Plan and the Industrial Policy Action Plan, 22 million72 people (40% of the population) living below have been considered. Lastly, an international lens has the poverty line; in 2018 the unemployment rate is been applied through the review of Eskom’s performance approximately 27%73, and South Africans face a broad against the UN Sustainable Development Goals (SDGs). spectrum of significant development challenges, including a poor system of education and healthcare, housing and Given that the NDP was drafted several years ago and infrastructure gaps, and widespread corruption that has was based on economic growth projections that the undermined the progress of the country. country has fallen short of, both the original targets as well as actual country performance to date have been The National Development Plan (NDP) was intended to taken into account. present an action plan to address many of these issues. More specifically, the NDP is “a plan for the country Eskom’s commitment to supporting the development to eliminate poverty and reduce inequality by 2030 agenda of the South African government is clearly through uniting South Africans, unleashing the energies demonstrated through the numerous sub-pillars of its citizens, growing an inclusive economy, building where performance has been positive. This includes capabilities, enhancing the capability of the state and employment, training and skills development; and leaders working together to solve complex problems”74. contribution to local suppliers. However, several As a state-owned entity, Eskom has a role to play in areas for improvement have been noted, specifically the development and progress of South Africa that around governance and leadership, and greenhouse transcends the generation and distribution of electricity. gas emissions. It is with this in mind that Eskom’s contribution to the Noting that not all sub-pillars have related development South African development agenda has been assessed. objectives and goals within the plans detailed above, Eskom’s impact on the development agenda has been the summary assessment of the relevant sub-pillars is assessed primarily against the objectives and targets as presented on the next page, with a more detailed review laid out in the NDP, as it is the most comprehensive of the sub-pillar performance thereafter. 72. Stats SA. 73. Stats SA. 74. National Development Plan, 2030. ESKOM HOLDINGS SOC LTD | 35 SUPPORTING THE NATIONAL DEVELOPMENT PLAN continued Included Sub-pillar Pillar Sub-pillar in plans? score Driving the economy Contribution to GDP  Contribution to public finances Employment  Providing reliable, predictable and competitive electricity Availability  Predictability  Pricing and competitiveness  Reducing Eskom's impact on the environment Water use  Greenhouse gas emissions  Air quality End-user energy efficiency Renewables  Biodiversity  Contributing to transformation imperatives Employment equity  Contribution to local suppliers  Impacting on local communities Investment in local communities  Externalities for local communities Being a good employer Labour relations Fatalities  Employee wellness  Employee value proposition Building internal and external know-how Training and skills development  Supplier monitoring and development  Driving innovation  Governance and leadership Governance and ethics  Legal contraventions Leadership  36 | ESKOM FACTOR 2.0 Sub-pillar Score Key objective/target of plans Eskom’s contribution to plans Driving the economy Contribution to Increase GDP by 2.7 times by + Revenue of R177 billion was generated in 2018, with nominal growth of GDP 2030; 5.4% real growth over 7.7% per annum between FY12 and FY18 the period +/- Through its operational and capital expenditure, Eskom contributed 3.1% Increase public infrastructure of South African GDP in FY18, a decrease from the estimated 3.6% in spending to 10% of GDP FY12; the reduction is primarily the result of relatively lower capital expenditure +/- There has been a decline in capex spend of 3.4% per annum between FY12 and FY18; however, the absolute spend is still more than R47 billion in FY18 +/- Eskom has negatively impacted GDP through rotational loadshedding and the resultant loss of productivity over the period under review; however, as the main producer of electricity in South Africa, almost all production is in some way enabled through Eskom’s electricity Employment Reduce unemployment to 6% +/- Eskom group provided employment to more than 48 62875 people in by 2030 FY18. Employment from the Eskom company complement and third party contractors over which it has direct control was estimated to Create 11 million additional jobs be 124 000 in 2017, a decrease from the estimated 158 000 in 2011 by 2030, increasing the number of employed people to 24 million + Eskom has consistently maintained a low employee turnover rate (4.6% in FY18) when compared to benchmarked South African corporate peers Providing reliable, predictable, and competitive electricity Availability Increase access to the electricity + According to Stats SA, 90% of South Africans have access to electricity grid to 90% by 2030, with off-grid in FY18 options available for the rest + Eskom implemented more than 215 000 electrification connections during the year Predictability Generate an additional 29GW of + An additional 7.6GW of capacity has been installed between FY12 electricity by 2030, implying new and FY18 build of more than 40GW given – Based on Eskom’s new build programme, a total of 17.3GW 76 of capacity the capacity to be retired is to be added between 2005 and 2023, and approximately 62% of this Provide a reliable and efficient has been completed to date. If the programme delivers on track, after energy service accounting for the additional 6.6GW planned, only 36% of the NDP required 40GW will be completed by 2023, making it unlikely that the 2030 target will be met; however, it is noted that new build is dictated by NERSA and the IRP, and not Eskom directly +/- SAIDI and SAIFI have improved since FY12; however, both metrics are still substantially higher than benchmarked international utility peers + Total system minutes lost for events <1 minute measured 2.09 in FY18, an improvement from 4.73 in FY12 Pricing and Expand access to energy at – The price of electricity has increased by 9.8% per annum between FY12 competitiveness affordable tariffs and FY18, which is above the average rate of inflation over the same period; however, it is noted that historically the electricity increases have been below inflation until the late 2000s + Eskom pricing (as opposed to the rate charged by municipalities) is still competitive when compared to benchmarked utility peers + 90% of South Africans have access to electricity in FY18; access to electricity has been expanded substantially since 1991 when only 34% of households were electrified Reducing Eskom’s impact on the environment Water use Reduce water demand in urban + There has been a slight reduction in net water usage of 2.4% per annum areas by 15% below business as between FY12 and FY18; however, this was during a period of decreased usual electricity production; water usage per GWh produced has also decreased very slightly by 0.5% per annum over the same period Reduce total volume of waste disposed to landfills + The total Ash produced has decreased by 2.2% per annum between FY12 and FY18 Ensure compliance with + The proportion of Ash recycled increased by 5% per annum over this environmental regulations period from 6.4% to 8.6% in FY18 +/- Particulate matter amounted to approximately 57kt in FY18, and decreased by 3.9% per annum from FY12 to FY18; however, this is during a period of reduced production – Eskom reported 30 environmental legal contraventions in FY18 75. 40 572 permanent employees and 744 fixed-term contractors (FTCs) at an Eskom company level plus an additional 5 478 permanent employees and 1 834 FTCs at its subsidiaries. 76. Eskom Integrated Report, 2018. ESKOM HOLDINGS SOC LTD | 37 SUPPORTING THE NATIONAL DEVELOPMENT PLAN continued Sub-pillar Score Key objective/target of plans Eskom’s contribution to plans Greenhouse gas Reduce greenhouse gas emissions + CO2 emissions decreased by 2% per annum between FY12 and FY18 with emissions by 34% below current by 2020, reduced production, while CO2 emissions per GWh produced also and 42% by 202577 decreased slightly by 0.9% per annum over the period Reduce carbon emissions from – Given that approximately 80%78 of South African greenhouse gas emissions 0.9kg to 0.6kg/kWh through use are generated by the energy sector, with electricity comprising 45%, Eskom’s of renewable sources contribution to the required reduction is likely to fall short of the plan – Eskom’s carbon emissions in FY18 amounted to 0.93kg/kWh79 produced, substantially above the target – Overall, Eskom still emits a substantial amount of CO2 , and the highest CO2 per GWh produced when compared to benchmarked international utility peers; however, the high proportion of coal in the Eskom energy mix is a large contributor to this Renewables Increase contribution of + In FY18, 3.9GW of renewables capacity exists, amounting to 7.6% of total renewable energy to electricity nominal capacity (including IPPs) generation + Approximately 80% of IPP nominal capacity is comprised of renewable 20GW of required 40GW new sources build should come from – The proportion of renewables within the Eskom energy mix is still low renewable sources overall, and is far below the target of 20GW; however, as mentioned Increase substantially the share of above, the new build and resultant energy mix are dictated by NERSA renewable energy in the global and the IRP and not Eskom directly, and Eskom does enable renewable energy mix[SDG] capacity through IPPs Biodiversity Reduce the degradation of natural – On average, there are 200–300 known red data bird species fatalities habitats, halt the loss of per year, which does not account for mortalities of non-threatened biodiversity and, by 2020, protect species, or mortalities from collisions with lines and prevent the extinction of + Eskom currently manages more than 17 000 hectares of land as threatened species[SDG] a conservation area Contributing to national transformation imperatives Employment equity Create employment equity by + 68% of Eskom senior management are black, while 38% are female; this is increasing the number of black higher than most benchmarked South African corporate peers people in management + 34% of Eskom’s workforce is female, and 84% are black Achieving equitable + Black representation in top management increased to 85% in FY18, and is representation across the the highest compared to the South African corporate peers benchmarked workforce – 15% of top management in Eskom is female in FY18, which is below average for South African benchmarked peers Contribution to Promote redress though + 60% of procurement is from B-BBEE compliant suppliers in FY18 local suppliers preferential procurement and + Procurement from black-owned entities in FY18 amounted to investment in black owned/ R53.5 billion managed enterprises + Procurement from black woman-owned entities in FY18 amounted to R19.7 billion Impacting on local communities Investment in local Procure through local suppliers + Total Supplier Development and Localisation spend amounted to communities R18.5 billion in FY18; in addition Eskom has significant socio-economic Eradicate backlogs to ensure development spend through new build projects and its different line schools have high-quality divisions infrastructure by 2030 +/- Through the Eskom Foundation, Eskom has invested approximately Make early childhood R38 million in rural school infrastructure between FY16 and FY18, which development a top priority has benefited more than 22 000 learners over the period. It is noted that this budget has been declining at 3.8% per annum over the same period; Improve public transport and however, this is only a slight decline given the recent losses made by systems, including rail and the company enhanced links with road-based + During FY18, approximately R1.6 million was invested in Early Childhood services Development through the Eskom Foundation Provide access to an equal + Eskom has invested R204.6 million in the building of roads and bridges at standard of health care regardless Medupi since 2007 of income + The Eskom Bophelong (Place of Life) mobile health clinic programme was initiated in FY12; through the Eskom Foundation, four mobile health clinics have been deployed to treat primary school children in rural areas around Eskom sites 77. Target extracted from South Africa’s Copenhagen Pledge as referenced in the NDP. 78. NPC Economy Series on Energy, 2018. 79. CO2 emissions per kWh of sales was 0.97kg/kWh. 38 | ESKOM FACTOR 2.0 Sub-pillar Score Key objective/target of plans Eskom’s contribution to plans Being a good employer Employee Significantly reduce the + All Eskom employees have access to voluntary health assessments wellness 80 prevalence of non-communicable annually chronic diseases + Eskom has implemented a sports, recreation, and cultural programme which promotes the physical wellness of employees Prevent and control the burden of HIV/AIDS through education + The Employee Assistance Programme (EAP) offers counselling and other and treatment psychosocial preventive services. The EAP had a 12.6% utilisation rate in FY18, which is above the public-sector average of 10.7% + 87% of Eskom employees know their HIV status; while this is below the UNAIDS 90-90-90 target by 2020, it is not only very close to the target, but is also above that of benchmarked South African corporate peers, with two years to go Fatalities Reduce injury, accidents, and + Eskom’s LTIR (excluding occupational diseases) has steadily declined by violence by 50% from 2010 levels approximately 50% from 0.41 in FY12 to 0.20 in FY18, and is below the average LTIR of benchmarked South African corporates and international Promote safe and secure working utility peers environments for all workers[SDG] – Eskom unfortunately reported 15 fatalities in FY18. This number has increased from FY17, and is significantly higher than benchmarked South African corporates and international utility peers – Eskom also reported 26 public fatalities during FY18 Building internal and external know-how Training and skills Produce 30 000 artisans per year + Eskom currently has more than 1 800 artisans in training, which amounts development to approximately 6% of the NDP target, despite employing less than Provide 1 million learning 0.3% 81 of the total South African workforce opportunities through – The number of artisans in the system has been declining at 3.8% per Community Education annum since FY12 Increase university enrolment by + The Eskom Foundation CSI in education amounted to more than 70% to 1.62 million R54 million since FY16, and has been growing at 6.1% per annum between FY16 and FY18. This investment includes tertiary education Increase the number of students support and school support focussing on mathematics, science, and eligible to study towards computer literacy mathematics- and science-based + Eskom has invested more than R260 million in education grants in FY18, degrees to 450 000 by 2030 benefitting more than 4 500 learners and employees Supplier monitoring Strengthen local supplier + The Eskom Foundation has an approved budget of R34 million for and development development enterprise development in FY18, with 317 beneficiaries + This budget has increased by 13.8% per annum between FY12 and FY18 Driving innovation Expand science, technology, and + In FY18, the R&D investment by Eskom amounted to R111 million innovation outputs by increasing + Between FY12 and FY18, Eskom has registered 128 patents R&D spend – Eskom’s annual R&D budget decreased to R111 million in FY18 from R186 million in FY12 Governance and Leadership Governance and Forward a corruption-free – Substantial accusations of corruption and misconduct have been laid ethics society with high adherence to against Eskom in recent years ethics – Fruitless and wasteful expenditure of more than R547 million was identified in FY17 within the group, with a further R143 million in FY18 Substantially reduce corruption (R56 million for Eskom company in FY18) and bribery in all their forms[SDG] + Action has been taken against implicated individuals, with the departure Provide public service immersed of seven senior managers including executives, and two more still under in the development agenda but suspension insulated from undue political – Recent accusations of corruption and misconduct have been linked to interference political interference – Irregular expenditure 82 of R19.6 billion was reported in FY18 within the Promote clear governance group (R13.2 billion for Eskom company) highlighting the need for structures at SOCs improved governance; however, it is noted that in many instances the issue was not a lack of governance and controls, but rather the management override of these controls, which speaks again to the ethics mentioned above + System and process improvements have been implemented to address shortcomings identified, and to monitor and report irregular expenditure Leadership Promote stable leadership at – Eskom has had numerous CEOs over the past decade SOCs + A new Board of Directors was appointed in January 2018 with a clear mandate to stabilise and restore Eskom 80. The score for NDP contribution is green while overall heat map score is yellow; NDP does not account for Eskom’s internal targets which have been missed. 81. Based on Labour force figures from The Economist Intelligence Unit, and unemployment rate per Stats SA. 82. Eskom Integrated Report, 2018; figure is only expenditure for year, excluding opening balance, condoned and derecognised amounts. ESKOM HOLDINGS SOC LTD | 39 COMPARISON AGAINST GOALS SET BY THE 2011 ESKOM FACTOR REPORT In the 2011 Eskom Factor Report, Eskom refers to eight strategic objectives which would contribute to improve Eskom’s economic, social, and environmental footprint. The eight objectives at the time were: 1. Becoming a high-performance organisation 2. Leading and partnering to keep the lights on 3. Reducing our carbon footprint and pursuing low-carbon growth opportunities 4. Securing our future resource requirements, mandate, and the required enabling environment 5. Ensuring our financial sustainability 6. Setting ourselves up for success 7. Implementing coal haulage and the road to rail migration plan 8. Pursuing private-sector participation 40 | ESKOM FACTOR 2.0 The table below is copied from the conclusion from the 2011 Eskom Factor Report and specifies the five areas of impact identified at the time as key improvement areas. It also includes an assessment as to what extent Eskom realised the improvement in those areas. Area of improvement Description Performance assessment Availability Eskom has been able to eliminate loadshedding since 2008. • Availability of electricity in South Africa has greatly and reliability of However, this was only possible through the contractual improved since 2011, with an electrification rate of roughly supply commitment of some of our largest customers to limit 90% their electricity consumption during peak times and • Reliability has improved since FY12, both in terms of through the operation of expensive peaking power plants. frequency and duration of interruptions Eskom is working hard to continue stable supply while increasing the total available volume of electricity to close the current supply gap of 6TWh, through tight operational controls and support further economic growth in South Africa. Efficient use of • Eskom had a specific focus on demand management during electricity While working towards increasing total electricity supply previous periods of supply constraints capacity in the coming years, Eskom is in the interim also • Both an increase in supply and lower-than-expected working with residential, commercial and industrial electricity demand growth (linked to lower economic customers to reduce the unnecessary use of electricity. growth) has reduced the need for these demand This ultimately assists customers to address the effects of management measures rising electricity prices. • However, Eskom still recorded estimated demand savings of declined 40.2MW (FY18) relative to 365MW in FY12 Environmental • Eskom’s absolute emissions declined; however, this was the footprint Eskom acknowledges its current impact on the result of lower output rather than significant improvements environment and is committed to implementing in the relative emissions per kWh of electricity generated. programmes which will reduce its relative environmental Eskom’s resource use (mostly coal) has remained similar, footprint per kWh of electricity generated. and the mix of renewables by Eskom itself has not increased significantly Electrification Eskom is determined to further drive access to electricity • Eskom has been instrumental in reaching the NDP’s for all citizens by carrying out government policy on target of 90% electrification 12 years in advance of the electrification and providing the necessary infrastructure. deadline; moreover, Eskom is committed to driving further It is Eskom’s aim to support the target to achieve universal electrification thereby achieving universal access (an access. This will be achieved through the use of grid and estimated 1 million households) off-grid technologies, and Eskom will encourage the participation of other service providers. Health and safety With Eskom’s Zero Harm policy, the aim is to reduce the • Eskom has reduced fatalities occurring, both internally and number of fatalities occurring as a result of either its externally; however, it still has a long way to reach absolute operations or its product to zero by continuing safety Zero Harm trainings and reducing the exposure of employees to potentially harmful situations. ESKOM HOLDINGS SOC LTD | 41 CONCLUSION Eskom has identified five key strategic objectives to guide its focus areas and associated actions. These can be briefly summarised as follows: Eskom has also made significant strides in terms of 1. Ensuring a financially viable and sustainable Eskom; employment equity. In FY18, 85% of all Eskom employees were black, 34% were female, and 29% were black female; 2 Providing reliable, affordable, and predictable 3% of all employees had disabilities. Eskom was ranked electricity; second highest among the South African corporate peer 3. Making a transformative socio-economic contribution; group for both black and female representation in the 4. Being environmentally responsible; and combined top and senior management category. However, one area for potential improvement is female and black 5. Providing focused research and development. female representation in top management, where In line with these strategic objectives, the Eskom Factor representation decreased between FY12 and FY18. 2.0 Report was developed to provide a balanced view of Eskom’s socio-economic and environmental contribution, Key areas for improvement including areas where Eskom has improved or There are also key areas of improvement for Eskom, regressed since the 2011 Eskom Factor Report. Eskom’s most notably on the contribution to public finances, contributions were presented along eight key pillars greenhouse gas emissions and air quality, as well as and assessed as positive, negative, or a mix of positive governance and leadership. These areas of improvement and negative. The 2018 Eskom Factor Report identified are aligned to Eskom’s strategic objectives of ensuring not only key areas aligned to Eskom’s overall strategic a financially viable, sustainable and environmentally objectives where it had made significant positive impacts, responsible Eskom. but also areas where it could improve in the future. Eskom has placed increasing strain on public finances, Key positive contributions most notably through its increasing debt burden; equity injections required from government; and its decreasing Eskom’s most positive impacts were on GDP contribution to total taxes. Eskom identified a clear action contribution, employment, employment equity, and plan in its 2018 Integrated Report to address both lack availability of electricity. These are mostly aligned of profitability and the increasing debt burden. However, to Eskom’s strategic objectives of providing reliable, even with a clear plan of action, there remains significant affordable, and predictable electricity and making a work to be done if Eskom is to move to a position where transformative socio-economic contribution. Eskom is it contributes positively to public finances. estimated to contribute around 3.1% directly to South Africa’s GDP and supports employment for more than 124 000 people in South Africa as a result of its employee complement and the third party contractors it has direct control over. Eskom is also committed to making electricity available to all South Africans, having electrified approximately five million homes since 1991, resulting in an electrification rate of 90% (34% in 1991). Through this, Eskom has been a major contributor towards achieving the NDP electrification target 12 years ahead of schedule. 42 | ESKOM FACTOR 2.0 Another area for improvement is Eskom’s impact on Governance and leadership is arguably the most the environment. Eskom is highly dependent on coal important area for required improvement over the for electricity generation, resulting in a significant next couple of years. Significant damage has been done environmental footprint. Benchmarking Eskom’s carbon to Eskom’s corporate reputation over the last two footprint against a set of utility peers suggests it has years as details surrounding the extent of corruption the highest emissions per kWh of energy produced and mismanagement within the company have come (0.93kg/kWh against an average of 0.59kg/kWh), to light. Improving governance and ethics is a key largely due to the energy mix. Eskom’s energy mix is priority for Eskom, and initial steps have been taken determined through the IRP and so long as coal remains to address this important issue. Eskom has instituted an important part of the energy mix, this will coincide a recovery plan aimed at recovering funds related to with comparatively high CO2 emissions relative to its irregular, fraudulent, or corrupt contracts. Investigations peers. Eskom is also responsible for the emission of conducted by Eskom’s forensic audit team have increased SOX , NOX and particulates impairing the environment significantly in the past financial year, particularly in the at a more local and regional level. Similar to greenhouse area of irregularities. A total of 237 investigations were gas emissions, the absolute amount of SOX , NOX conducted in FY18 compared to 175 in FY17. As a result, and particulates emitted declined between FY12 and six criminal cases were referred to the police in the FY18, primarily due to lower energy output. Even with 2018 calendar year to date. Furthermore, seven Eskom constraints related to the use of coal in its energy executives departed in FY18 following allegations related mix, Eskom is determined to reduce its impact on the to corruption and misconduct. However, significant environment. To this end, Eskom has implemented a improvements still need to be made particularly in the multi-phase plan to retrofit active power station units areas of quality of information, governance structures, with a variety of emissions-reducing technologies, such and ethics. In this regard, Eskom is implementing a five- as low NOX burners. These are also being built into the point plan to transform governance, and is resolute about newer units at Medupi and Kusile. improving this area of the business in the future. ESKOM HOLDINGS SOC LTD | 43 APPENDIX Eskom Factor methodology The Eskom Factor 2.0 methodology was developed based on the WBCSD sustainability impact factor and tailored specifically to Eskom’s context. Define KPIs and Define framework measure impact 1 • Objective(s) for 2 • KPIs assessment • Methodology and data • Geographical scope Define requirements Define KPIs and • Business areas framework measure • Data request • Key socio-economic and impact • KPI calculation environmental topics • Peer benchmarks 3 Synthesise and Develop Synthesise and Develop report contextualise report contextualise impact impact • Storyline write-up • Key insights and • Stakeholder 4 strategic imperatives engagement • Compare to peers • Internal stakeholder alignment • Summarise storyline The four-step framework adopted for the Eskom For the Eskom Factor 2.0, all of the indicators Factor 2.0 is laid out below: collected were aggregated into eight pillars of influence which highlight the key areas in which 1. Define framework Eskom impacts on South Africa. Each pillar is The first step in the approach is to set the scope comprised of multiple sub-pillars, representing of the overall assessment. This includes defining different aspects of the pillars which were evaluated the geographical scope as well as identifying which in detail. business units to include. 3. Synthesise and contextualise impact For the Eskom Factor 2.0, the geographic scope was After the data has been collected and measured, limited to Eskom’s South African operations. In terms the third step is to assess the contribution to of business units, we focused on the direct operations development. Each sub-pillar, represented by one or of Eskom hence excluding other subsidiaries. more indicators, is assessed to determine whether 2. Define KPIs and measure impact Eskom’s contribution is positive, negative, or a mix The second step consists of identifying and measuring, of positive and negative. As a starting point, we where possible, the direct and indirect impacts arising used the stakeholder perception for each sub-pillar. from Eskom’s activities and mapping out what impacts We then tested each sub-pillar from three different are within the control of the company and what it can perspectives to obtain an unbiased view of Eskom’s influence through its business. A total of over 200 true performance on that sub-pillar (i.e. test accuracy indicators were considered for in the report. These of stakeholder views against reality). data indicators were based on internally collected and reported information. 44 | ESKOM FACTOR 2.0 The three different perspectives considered in Benchmarking methodology assessing each sub-pillar: In assessing Eskom’s impact across the eight pillars, an • Eskom internal data trends from FY12 to FY18. important input is the company’s performance against a • Benchmark for Eskom and leading South African relevant peer group. companies and global utility companies. Two different peer groups were selected for the • Contribution to development policies and targets purposes of the Eskom Factor 2.0 Report. Electricity for South Africa and provinces as outlined in the peers in several regions across the globe were used National Development Plan and other policy as a benchmark to compare industry-specific factors, papers. specifically environmental impact. Large South African corporates across diverse industries comprised the Additional context was developed by examining some other peer group, allowing for South African-specific of the details behind the current performance within comparability and accounting for local regulatory and each impact area, including mitigating factors, planned licence-to-operate requirements. improvement, priority areas for development, etc. The peer group was primarily selected from the entities Taking all these perspectives into account, a rating of included within the Thomson Reuters environmental, positive, negative, or a mix of positive and negative social and governance (ESG) database, as this allowed is attached to each indicator. The assessment of for an assessment of the sustainability performance of each sub-pillar is made by combining the various entities as well as the availability of data. Thereafter, peer indicators within them, based on the significance of groups were augmented with additional companies where each indicator’s impact from a socio-economic and relevant. environmental context. This, in turn, developed the assessment for each pillar overall. The following filters were applied to assemble the international utility peer group of 10 entities: 4. Develop report Finally, Eskom is not only seeking insight into its Entity size: Entities filtered based on revenue and number impacts, but is also looking to convert this knowledge of employees to prioritise large intentional utilities. into actions that ensure continual improvement. Sustainability performance: Sustainability laggards excluded By identifying key areas for action and evaluating by applying an ESG cut-off score of 50 on scale of different possible interventions, one can arrive at a 0 to 100. feasible plan to continually improve Eskom’s impact. Energy mix: Operations of peer group aligned through Under the leadership of Eskom’s newly appointed inclusion of utilities which use a large proportion (more than Group Chief Executive, a strategy is being undertaken 40%) of fossil fuels (specifically coal and gas). in support of Eskom’s mandate of being South Africa’s Region: Utilities within emerging economics trusted and reliable electricity provider. Eskom plans supplemented with those from developed countries for to develop a new ambition for the period to 2035, diverse geographical spread. focused on implementation and disciplined execution of actions to ensure the sustainability of the company. In addition to the above, for the purpose of This review is expected to be completed before the benchmarking predictability metrics SAIDI and SAIFI, end of calendar year 2018. The main areas of focus are: a further peer group of utilities from developing nations (including Brazil, Argentina, Kenya, Russia and • Strengthening Eskom’s financial position and its Philippines) was selected. balance sheet. • Reviewing the business model, which could lead to restructuring if warranted to respond to global changes in the energy industry. • Growing the business in existing markets, expanding into new markets, and delivering new products across these markets. ESKOM HOLDINGS SOC LTD | 45 APPENDIX continued The following filters were applied to assemble the South Estimating the company footprints African corporate peer group of 10 entities: This macro-economic impact assessment is based on a detailed input-output analysis and comprehensive 1. Entity size: Entities filtered based on revenue and supply and use tables (SUT)-based multiplier model number of employees to prioritise large South African for the South African economy. Input-output analysis companies. is an accounting framework that provides a snapshot 2. Sustainability performance: Sustainability laggards of the economy at a specific point in time, describing excluded by applying an ESG cut-off score of 50 on the composition and level of economic activity and the scale of 0 to 100. interactions and dependencies (backward and forward 3. Industry mix: Diverse collection of industries linkages) between industries and institutions. incorporated, from financial and telecoms to The SUT offers a complete model of the economy, industrials. focusing on relationships among production activities 4. State-owned companies: Peer group augmented (industries), labour, households, and the public sector. with other SOCs to align operating environment, The SUT also offers insight into the total impact on regulatory requirements etc. employment and income and the distribution among different skills and population groups. For selected KPIs, Eskom’s performance was then compared to one or both of the peer groups, as SUT multiplier models are, therefore, well-suited appropriate. The information for each of the peers for modelling the intricate linkages of industries and was obtained from company integrated reports, annual measuring the economy-wide effects of a specific sector. reports, and sustainability reports. In some instances, These models are often used for economic impact the KPI measured was not reported by all the companies analysis, where the economic implications of a potential within the peer group. In these instances, Eskom’s action (e.g. a large infrastructure investment) or new performance was benchmarked against peers only if policy or regulation can be evaluated prior to taking there were a minimum of three comparisons. that action. The SUT model traces these impacts and provides estimates of total economy-wide impact on GDP contribution and employment GDP, labour remuneration, gross operating surplus, methodology83 taxes, employment, capital formation, and capital stock The work undertaken by Quantec was aimed at requirements. estimating the economic impact of Eskom on the South The SUT analysis begins with an initial injection of African economy as well as the economic multiplier demand into the economy (direct impact) and estimates effects. The following provides a brief description of the the total (economy-wide) impact in the following methodology employed and data sources used in the sequence: analysis. • The initial economic impact (injection) is the result of The project commenced with the collection of financial operational and capital expenditures by the company and labour statistics for Eskom from publicly available and represents Eskom’s own employment numbers, data-sources and annual reports, as well as research capital expenditure and tax contributions. by Quantec Research on the structure of the broader • The first-round effects consider the impact of electricity industry and findings from similar research ongoing spending on and by direct suppliers to the projects (e.g. multiplier studies) around the globe. electricity generation and distribution industries (e.g. The results from the research undertaken by Quantec production, employment and tax revenue stimulated derive mainly desktop research of and imputation from at first-round suppliers). the following data sources: • The sum total of the initial injection (e.g. the total • Published data and reports from official sources, such production/turnover of the company, the intermediate as Stats SA, the National Treasury, the South African goods bought, the salaries and wages paid and the Reserve Bank and the Department of Trade and profits generated by the company) and the impact on Industry; its first-round suppliers constitute the direct impact. • Public documents, supplying information on the • The indirect impact (also referred to as the “rest of company’s key financial statistics, electricity indirect” or ROI) measures the contribution of direct generation and distribution, tax contribution, suppliers who purchase goods and services from their operational expenditure, exports and imports, and suppliers, who in turn remunerate their employees employment and labour remuneration numbers for the and pay taxes. 2017 calendar year; • The supplying sectors and their employees and • Information published on Eskom’s website, as well as households re-spend in the economy, generating that of the National Energy Regulator of South Africa further economic activity. This is known as the (NERSA); and induced impact. • Quantec’s input-output tables for the South African • The total economy-wide impact is the sum total of the national economy (used to determine the national direct, indirect and induced impacts. impact). 83. GDP contribution and employment estimates calculated by Quantec, an independent economics consultancy. 46 | ESKOM FACTOR 2.0 Multiplier analysis Quantec produces SUTs for South Africa at a national, provincial and municipal level in time series format covering 1995 to the most recent year. These tables are then used to calculate a comprehensive set of multipliers using standard Leontief multiplier methodology. The multipliers have various uses including impact analysis where they are used to, for example, estimate the impact of a large capital project on the economy. This document explains how Quantec’s SUT multipliers are compiled, the type of multipliers produced, and provide brief instructions on how they should be used towards impact analysis. There is another document that details how Quantec’s SUT tables are compiled. Methodology used to calculate the multipliers The structure of the Quantec SUTs including mathematical notation Total supply at Total output Industries Final demand purchase prices Other primary inputs at basic prices Commodities Z Y M X Intermediate use Household consumption Total supply at Imports Government consumption purchase prices CIF/FOB adjustment Gross fixed capital Trade margins formation Transport margins Exports Taxes on products Change in inventories Less subsidies on products Residual Primary inputs M Compensation of employees Gross operating surplus Taxes on production Less subsidies on production Total output at X basic prices Wassily Leontief (1905-1999) developed the input-output The SUT contains 91 commodities and industries. The multiplier modelling approach for which he received a intermediate use block, for example, is therefore a 91×91 Nobel Memorial Prize in 1973. The input-output model matrix, but to keep the discussion more general the number depicts economic relationships between different of industries and commodities in the SUT will be referred to agents in an economy by identifying monetary flows as n. The following denotations are therefore made: (expenditures and receipts) between these. Multiplier n the number of industries and commodities. models normally focus on inter-industry relationships at a detailed sectoral level, whereas the macro-econometric i denotes the commodities in the SUT. model emphasises relationships between macro- j denotes the industries in the SUT. economic aggregates as depicted in the national accounts Xi the total output of commodity i which is equivalent of a country. to the total output of industry j. The relationship between the initial spending and the Zij the inter-industry sales of commodity i to industry j. total effects generated by the spending is known as the Yi the total final demand of commodity i. multiplier effect of the sector, or more generally as the Mj the total primary inputs used in industry j. impact of the sector on the economy. For this reason, the study of multipliers is also known as impact analysis. aij the technical coefficient matrix which represents the ratio of input to output. B the Leontief or total requirements matrix. C the closed Leontief matrix. C* the commodity-industry portion of the closed Leontief matrix. V the output multiplier vectors. d share of additional multiplier to output GDPj (for example ). Xj ESKOM HOLDINGS SOC LTD | 47 APPENDIX continued The inter-industry sales of commodity i to industry j are represented by the following block of equations: The inter-industry sales of commodity i to industry j are represented by the following block of equations: X$ = Z$$ + Z$) + ⋯ + Z$+ + Y$ X) = Z)$ + Z)) + ⋯ + Z)+ + Y) ... X+ = Z+$ + Z+) + ⋯ + Z++ + Y+ (1) The technical coefficient matrix may be calculated as follows: 012 a./ = (2) 31 Substitution (2) into block (1) results in the following block of equations: X$ = a$$ X$ + a$) X) + ⋯ + a4+ X+ + Y$ X) = a)$ X$ + a)) X) + ⋯ + a)+ X+ + Y) ... X+ = a+$ X$ + a+) X) + ⋯ + a++ X+ + Y+ (3) Block (3) can be rewritten in matrix notation as: X = AX + Y (4) Solving for X: Y = (I − A):$ ∙ X (5) With the following matrices: a$$ a$) ⋯ a$+ A=< ⋮ ⋱ ⋮ ? a+$ a+) ⋯ a++ X$ X=< ⋮ ? X+ Y$ Y=<⋮? Y+ 1 0⋯ 0 I = < ⋮ 1 ⋱ ⋮ ? a (n x n) identity matrix 0 0⋯ 1 48 | ESKOM FACTOR 2.0 • The matrix A is the technical coefficient matrix, but is These output multipliers may then be used to calculate also known as the direct requirements matrix and is other multipliers such as the GDP, employment, capital used to measure the direct impact of changes in final requirement or import multipliers. Let d denote demand on the economy. The direct impact measures the share of, for example, GDP to output, the GDP the impact of the change in final demand (or the initial multipliers are then calculated as follows: economic impact or injection) as well as the impact on • GDP initial impact = d*VII the output of first-round suppliers. • GDP direct impact = d*VDI • The Leontief matrix is B = (I-A) -1 and measures the direct and indirect impact of changes in final demand • GDP direct and indirect impact (D&I) = d*VD&I (or the initial economic impact or injection) on the • GDP economy-wide impact = d*VEW economy. This combines the direct impact as well as Nomenclature further rounds of impacts on all the suppliers. When reporting the results, a variation on the • The direct and indirect impacts is measured using nomenclature mentioned above is used. This is done to an “open” model, however, to measure the induced avoid confusion between the technical multiplier terms impacts the model is “closed” with respect to and the general understanding of such terms. The initial households. In doing this, the model measures the impact VII is described as the company’s direct impact. impact of all the earnings and subsequent spending by A distinction is then made between the direct suppliers households on the economy, as well. and indirect suppliers, with the sum of these two terms • The matrix C denotes the (n+1) × (n+1) matrix that and the initial impact forming the total value-chain endogenize household income and consumption. impact of a company (given as the direct and indirect VD&I The C matrix is derived exactly in the same way A is above). The induced (or income) impact of household derived, but an additional row and column is added expenditure is taken as the difference between the that contains household consumption and expenditure economy-wide VEW and VD&I. shares as a ratio to total output. The B matrix is then Model limitations used to calculate (I-C) -1. However, for the rest of the Input-output analysis is an accounting framework calculations a sub-portion of this matrix is used C*, that provides a snapshot of the economy at a specific that contains only the sector values calculated. This point in time, describing the composition and level of matrix is used to calculate the economy-wide impact economic activity and the interactions and dependencies which includes the direct, indirect, and induced impact (backward and forward linkages) between industries and of the sector. institutions. There are however several limitations to the These matrices are used to calculate the output model which should be considered when interpreting the multipliers, or vectors V* (n×1) as follows: results. The following limitations of multiplier analysis 1 exist and should be considered when interpreting the 1 estimation results: Initial impact (II): V"" = $ ⋮ ' 1 • Multipliers assume that resources are unemployed, and an increase in output would therefore not influence resource prices. ∑0 a ./ • The structure of the economy remains the same over ⎡ .1/ ⎤ time. ∑0 a Direct impact (DI): V(" = ⎢ .1/ .2 ⎥ ⎢ ⋮ ⎥ • An increase in the resource required (as indicated ⎣∑0.1/ a .0⎦ by the model) does not necessarily imply an absolute increase in the resources used. For example, an increase in employment (as indicated by the model) ∑0 b./ does not necessarily mean an increase in the same ⎡ .1/ ⎤ amount of jobs. It may mean that as the demand for ∑0 b Direct and indirect impact (D&I): V(&" = ⎢ .1/ .2 ⎥ labour increase some workers may work more hours, ⎢ ⋮ ⎥ ⎣∑0.1/ b.0 ⎦ some workers in temporary jobs may be permanently employed, or that the number of shifts may increase. This especially prevalent in times of low economic ∑0 c./ activity. Therefore, it is more prudent to refer to the ⎡ .1/ ⎤ number of jobs supported because of the increase in ∑0 c Economy-wide impact (EW): V89 = ⎢ .1/ .2 ⎥ economic activity and not necessarily jobs created. ⎢ ⋮ ⎥ ⎣∑0.1/ c.0 ⎦ ESKOM HOLDINGS SOC LTD | 49 APPENDIX continued The following assumptions were used in estimating • Household income consists of labour remuneration Eskom’s economic footprint: plus social spending on communities (income transfer). Household income was adjusted from group to General assumptions company and to South Africa based. • Financial information for the company and not the group was used. • Corporate taxes from income statement adjusted for South Africa. • The impact is based on the company’s South African footprint. The geographical footprint for Eskom • Personal taxes based on labour remuneration adjusted was used to determine the South African impact on to South Africa and an average annual tax rate was output, employment, and capital expenditure; for applied (0.13 for 2011 and 0.15 for 2017). output and employment, the percentage of revenue • Information available in financial statements combined for South African operations to total operations were with historical sales (for 2011 and 2017) were used to used and for capital expenditure the percentage of determine the sales structure for Eskom. non-current assets for South Africa to total non- • Information available in financial statements combined current assets were used. with historical intermediate use (for 2011 and • FY2012 and FY2018 were converted to 2011 and 2017 2017) were used to determine the intermediate use calendar years as follows: FY2012 was converted by structure for Eskom. taking nine months of FY2012 and three months of FY2011. The same approach was used for FY2018. Capital expenditure assumptions • Capital expenditure figures were taken from Output and employment assumptions financial statements (additions to property, plant and • Value-added was calculated by taking EBITDA and equipment plus software). adding back compensation of employees. • The capital expenditure figures were adjusted for • Output was taken as revenue generated. South Africa based on the non-current asset ratio. It is • Intermediate use is the difference between output and necessary to reclassify the capital expenditure by asset value added. type, since capital expenditure on plants, for example, contains various asset types. The split was done using • Intermediate use split in intermediate imports, taxes the historical ratios as given by 2011 and 2017 gross on production, subsidies on production, product taxes fixed capital formation by industry. was based on ratios in the broader electricity and gas sector. • The employment figures for the company were used, but adjusted to South Africa based operations and to calendar years. 50 | ESKOM FACTOR 2.0 Table of abbreviations Abbreviation Definition B-BBEE Broad-based black economic empowerment BMI Body mass index CCMA Commission for Conciliation, Mediation and Arbitration CO2 Carbon dioxide CPI Consumer price index CSI Corporate social investment EVA Economic value add GDP Gross domestic product HDSA Historically disadvantaged South Africans HIV Human immunodeficiency virus IPP Independent power producer IRP Integrated resource plan kt Kiloton = 1 000 tons LTIR Lost-time injury rate Mt Million tons MYPD Multi-year price determination NDP National Development Plan NERSA National Energy Regulator of South Africa NOX Nitrogen oxide NUM National Union of Mineworkers NUMSA National Union of Metalworkers of South Africa PFMA Public Finance Management Act, 1999 QSE Qualifying small enterprises RCA Regulatory clearing account SAIDI System average interruption frequency index SAIFI System average interruption duration index SOC State-owned company SOX Sulphur oxide UN United Nations VAT Value-added tax Data sources • BCG analysis • Eskom Factor Report 2011 • Eskom Integrated Reports 2012 to 2018 • Eskom internal data • International Energy Agency • International Transport Forum • IRENA • National Development Plan, 2030 • National Planning Commission of South Africa • Quantec • Stats SA • The Economist Intelligence Unit • Reputation Institute RepTrak Pulse survey • Universum • Various press publications – BusinessLIVE, BusinessTech, ESI-Africa, Mail and Guardian ESKOM HOLDINGS SOC LTD | 51 We only have one world Zero Harm means taking care of the environment - it looks after you every day. Be aware. Take care. Zero injuries. Zero fatalities. Powering your world Zero environmental incidents. www.eskom.co.za Eskom Holdings SOC Ltd Reg No 2002/015527/30 52 | ESKOM Issued by Eskom Risk andFACTOR 2.0 July 2018 Sustainability CONTACT DETAILS Telephone numbers Websites and email addresses Eskom head office +27 11 800 8111 Eskom website www.eskom.co.za Contact@eskom.co.za Eskom Media Desk +27 11 800 3304 Eskom Media Desk MediaDesk@eskom.co.za +27 11 800 3309 +27 11 800 3343 +27 11 800 3378 Investor Relations +27 11 800 2775 Investor Relations InvestorRelations@eskom.co.za Whistle-blowing hotline 0800 112 722 Forensic investigations Investigate@eskom.co.za Eskom Development Foundation +27 11 800 8111 Eskom Development Foundation www.eskom.co.za/csi CSI@eskom.co.za National call centre 08600 ESKOM or Promotion of Access to PAIA@eskom.co.za 08600 37566 Information Act requests Customer SMS line 35328 Customer Service CSOnline@eskom.co.za Facebook EskomSouthAfrica Feedback on our report IRfeedback@eskom.co.za Twitter Eskom_SA MyEskom app Physical address Postal address Eskom Megawatt Park PO Box 1091 2 Maxwell Drive Johannesburg Sunninghill 2000 Sandton 2157 Group company secretary Company registration number Office of the Company Secretary Eskom Holdings SOC Ltd PO Box 1091 2002/015527/30 Johannesburg 2000 JOINT VENTURE [0004] www.eskom.co.za