Strategic Supplier Engagement Forum July 2021 NM Agenda 1 Safety Briefing 2 Welcome, introductions & Setting the scene 3 GCE address 4 Next Steps 5 Q&A session with the GCE 2 NM Agenda 1 Safety briefing 2 Welcome, introductions & setting the scene 3 GCE’ address 4 Next steps 5 Q&A session with the GCE 3 NM Agenda Theme: Building Strategic Supplier Relationships with Existing Suppliers Objectives of the Supplier Engagement Forum – Share Eskom’s strategic direction – Outline significant shifts in the energy industry – Share Eskom’s response and financial transformation plans – Invite suppliers to participate in Eskom’s transformation journey (Shared Value Partnering) 4 NM Agenda 1 Safety Briefing 2 Welcome, introductions & Setting the scene 3 GCE address 4 Next Steps 5 Q&A session with the GCE 5 AR Changes in the macro environment is impacting the electricity industry and Eskom’s overall strategic direction Threats Opportunities • International availability of >R100bn of green funding to assist Eskom’s Just Energy Transition and become • Paris Agreement commitment to shift away from large financially sustainable over the next 5 years scale coal assets towards cleaner, decentralized systems which will change Eskom’s purchasing patterns • 60% decline in the costs of renewable technologies over the past 5 years, and an expected further 30% decrease, making it feasible for Eskom to adopt Global • SA has unique challenges, and a constrained fiscus with growth further inhibited by COVID which inhibits • Opportunity for electricity supply industry to reignite Governments financial support to Eskom the economy and create 110 000 jobs through • High unemployment and poverty place greater reindustrialization sparked by renewable energy rollout South Africa limitations on government’s support for increased tariffs • Attractive foreign investment opportunity due to energy • Some municipalities are not financially sustainable, security and price certainty leading to increasing Eskom debt ESI • The electricity supply industry is undergoing fundamental changes with a need to increase capacity on • Eskom can refocus resources to become financially both the generation and Grid infrastructure and operationally sustainable through repositioning • ~23GW of renewables to come online by 2030 its role in the reconfigured industry according to IRP19 Eskom • Severe financial challenges driven by under-recovery of costs (inadequate tariff, reducing sales, municipal debt, high cost structure), giving rise to high borrowing and • Eskom aims to utilize green financing to repurpose debt burden existing sites to be decommissioned, reduce emissions and improve energy security • Operating challenges: maintenance constraints, unplanned outages, diesel cost, load shedding • Eskom intends to become a competitive player in the new energy industry by leveraging its infrastructure • Environmental emissions: non-compliance, cost of addressing (~R300bn) 6 AR Eskom is looking towards the future and will adapt to market trends in an agile manner Current Future • ~85% Coal fired, 4% Nuclear, ~6%OCGT • Reduced role for coal as per IRP19, Energy Mix and ~5% Renewables opportunities for solar, wind and natural gas • ~R411bn gross debt (Feb 2021) and • Profitable business with improved Financial reported a R20.5bn loss (March 2020) financial ratios in line with industry norms • 62% EAF and occurrences of load • >72% EAF, new capacity to be added Operational shedding to eliminate loadshedding • Transmission grid expanded to allow for new generation to be connected • Vertically integrated, monolithic • Unbundled and agile Structural organisation • ITSMO established to enable new generation capacity • Business focus to drive efficiency 7 AR To become sustainable in the long term, Eskom is leveraging the JET to pivot to a transitioned utility while work on the Turnaround plan sets it up for success Focus area Eskom Turnaround plan Transitioned utility  Strengthen Balance sheet  Improve Income statement (reduced cost Short Long  Achieve net zero emissions by structure) Term Term 2050 factoring in the need to Triple Bottom  Build High Performing Culture Line continuously nurture economic  Improve Operations Sustainability growth  Drive restructuring  Ensure effective and equitable JET access to electricity by Just Energy modernizing our power  Accelerate the repurposing and Transition system repowering of stations  Actively pursue share in renewable  Facilitate competitive energy energy allocation in line with IRP industry for the future  Implement an integrated socio-  Financially and operationally economic strategy including reskilling stable 8 AR Eskom will be a major driver of demand for goods and services in the SA economy – we intend to be a preferred customer Generation Transmission Distribution / Retail • R128bn to be spent on reliability • Catching up on maintenance on the grid ~ • Electrification remains a priority – developing maintenance. Arresting deteriorating plant approximate R 5bn required over the micro grid solution targeting remote areas performance through increase quality next 5 years and SADC – Rollout of microgrid maintenance – solutions to 13% of the • Rapid expansion and strengthening of grid to support the roll out of integrated resource plan population that requires electrification • Four projects underway to drive • Approximately R150 bn will be • 200 000 smart meters per Priorities repurposing of end-of-life station in line with spent modernizing the grid infrastructure annum to be rolled out to reduce electricity our just energy transition. theft and improve revenue collection • Between 5000-8000 km of Tx • Strengthening of Dx grid and connection of • R167bn to be spent on expansion embedded generation plant will require projects that are focused on improving the lines to be built over the next 10 years modernization of the grid estimated at infrastructure to meet demand • 3000 transformers to support Tx R50bn network 9 AR Eskom has developed a financial turnaround programme which entails procurement optimisation Income statement Balance Sheet statement Revenue recovery Cost reduction Debt and Capital spend Working capital Asset disposal • Tariff correction • Operational efficiencies • Portfolio optimisation • Reviewing supplier • Non-core properties Key focus • Plant performance initiatives areas & • Revenue collection (Soweto • Project scrubbing payment terms & Municipalities) • Asset management • Improving project • Spares optimisation • International sales • PED execution • Procurement • HR initiatives Tariff correction Operational efficiencies Debt Payment terms Non-core properties - Address regulatory - Drive plant improvement - Use of equity to reduce debt - Aligning supplier payment - Disposal of non-core inconsistencies through court - Diesel to gas conversion - Engaging with Shareholder terms in line with market properties underway processes - Maintenance optimisation on long term debt solution norms (excl. Emerging - Private sector partnerships options suppliers) to repurpose buildings Revenue collection Primary energy (coal) - Optimising on lease Levers being implemented - Drive active partnering with - Driving down coal costs through Capital efficiency Spares Optimisation agreements Municipalities price and volume optimization - Improving decision making - Disposal of obsolete stock on the deployment of capital - Limiting procurement of Procurement optimisation to maximize returns and surplus spares/ procuring on - Contract renegotiations sustainability consignment stock basis - Eliminate Eskom price premium - Digitization of the supply - Review of market approach in chain processes order to reduce costs - Building strategic partnerships with suppliers - Introduction of supplier evaluation HR levers includes - 0% rate increases for senior managers, 10 - VSPs and overtime JS Eskom intends to strengthen relationship with strategic suppliers  Eskom views its supplier partners as integral in the execution of its procurement operations/reforms, increasing efficiencies as well as ensuring contribution to Eskom’s financial sustainability.  As part of enhancing its financial position and ensuring operational resilience, Eskom will facilitate robust engagements on the reduction of poor performance, quality issues and unnecessary delays in projects execution in order to drive cost efficiencies.  Some of the challenges and opportunities for improvement identified as follows: a Sustainability & b Transformation c Cost Efficiencies & d Public Procurement e Optimal Execution of Innovation Savings Projects • Defining long-term convergent • Challenges on non value adding • Challenges on escalated prices • Adherence to code of • Delivery on key projects sustainability goals. intermediaries and non-conformance costs. conduct and regulatory • Adherence to Safety • Establishing KPIs to monitor • Challenges in achieving • Need for interventions such as frameworks. requirements, Quality supplier sustainability. transformation mandate through Supplier terms, price • Protects the integrity of requirements • Reduce total cost of Shareholders compact (SHC). verification system and e- procurement systems. • Delays which are due to poor ownership through • Need to supporting local auction, Codification/ • Compliance to Supplier performance. benchmarking and innovation. entrepreneurship. cataloguing of material/stock integrity pack. • Identify and mitigate risk during • Conducting market • Implementing SDL&I items, etc. • Guard against Price execution including cost intelligence for forecasting obligations/targets (B-BBEE • Collaboration required on new collusion /bid rigging escalation items purposes. Compliance, Local Content, and renegotiation of contracts • Improve communication • Improve longer-term planning NIPP, Skills, Subcontracting and including supply chain Enterprise Development) • Encouraging Supplier-enabled innovation. 11 JS To strengthen relationship with strategic suppliers, focus areas for new and existing contracts, procurement reforms and relationship improvement are required 1. Improvement on Relationships 2. New contracting  Supplier Forums  E-auction  Engagement with authority/industry  Price checks bodies  Digital procurement  Partnerships /Alliances Building  Savings opportunities Sustainable Supplier Relationships Improved for Financial Sustainability 4. Procurement reforms 3. Existing contracts Integrity pacts Contract Performance Supplier review Opportunities for cost reduction Process improvements Re-negotiations on selected Transformation 12 JS Suppliers need to align to focus areas for new and existing contracts, procurement reforms and relationship improvement are required Focus Focus Area description I. Work with the authorities on procurement related transgressions (NT, SIU, Improving BEE commission, state capture etc) What we require wider II. Engage Industry bodies, such as CIDB relationships III. Foster co-operation with governmental areas eg DTI, DMRE, DPE, NT IV. Current suppliers through forums and 1-1 engagement Innovation and ideas on reducing V. Wider interest groups, including potential suppliers VI. Profiling of suppliers for target engagement risk and improving the supply chain I. Reducing non value adding intermediaries New contracts II. Look at innovation Partnering in transformation III. Address internal improvement is skills, process and technology IV. Use wider platform, e-auction and electronic tender receipts Participation in V. Improve market analysis, CPA and Price checks - Supplier evaluation VI. Seek savings opportunities prior to contracting - Contract management reviews VII. Effect changes in procedure, eg payment terms - Re negotiations I. Seek internal improvement in contract management - Internal/external investigation Existing II. Focus on Contract Performance - Supplier forums contracts III. Seek opportunities for cost reduction IV. Evaluation of suppliers performance across contracts Supplier integrity pact and V. Start re-negotiations on selected reporting of incidents I. Focus on open, transparent and cost effective procurement Procurement II. Improvement on governance, process and competency Join in Divisional engagements reforms III. Driving transformation, innovation and sustainable practice IV. Code of conduct and integrity pacts V. Supplier review process enhanced 13 JS The following roadmap has been developed to ensure that the aspiration for with collaboration existing suppliers is transformed into reality Long term – 24 month and going forward Medium term – 12 months Short term – next 6 months Implementing shared value model Developing shared value model • Tracking of supplier roadmaps • Strategic alliances to be formed with suppliers • Review of join commitment to collaboration Stop the bleeding that support the shared value model • Identifying corrective actions where desired • Divisional Supplier forums kick off outcome have not been met • Jointly identify areas of collaboration and • Eskom to initiate supplier engagements objectives for shared value • Sharing of success stories on suppliers on renegotiations • Development of action plans for collaboration • Eskom and suppliers to jointly engage to areas identify specific areas for cost optimisation • Suppliers to submit improvement roadmaps in response to Eskom assessment Key milestones • 1st round of renegotiation process to be concluded by September 2021 • Engage National Treasury on policy elements that hinder effective supplier relations • Revise payment terms • Eskom to review market approach strategies to Developing shared value model optimise on strategic partnerships • Eskom to undertake individual supplier assessment based on the Suppler Evaluation Framework and provide feedback on supplier categorization by Nov 2021 ▪ Strengthened Divisional ▪ Commitment to collaboration ▪ Assessment of Transformation journey and engagements collaboration outputs ▪ Areas of collaboration outlined Output ▪ Renegotiation outcomes ▪ Supplier improvement roadmaps ▪ Corrective actions to keep Eskom and implemented Suppliers on track to shared objectives ▪ Supplier categorization and ▪ Action plans on areas of collaboration assessment feedback 14 AR In line with the unbundling process, procurement responsibilities have been shifted to divisions Meet the Divisional GEs that will be engaging suppliers further based on their divisional outputs Phillip Segomoco Monde Bheki Stephen Dukashe Scheppers Bala Nxumalo Meyers Group Executive: Group Executive: Group Executive: Group Executive: CEO: Eskom Rotek Generation Transmission Distribution Group Capital Industries For cross divisional supplier engagement, the CFO will initiate and facilitate such engagements 15 AR Conclusion Key takeaways • The energy landscape is changing and Eskom has embarked on a transformational journey to ensure that it is able to be a viable and key player in this market going into the future. • As part of the transformation journey, Eskom will be focusing on strengthening and developing strategic partnerships with its suppliers based on the shared value principle. • Eskom however has requirements that suppliers need to consider in order to make the partnership to work. Therefore Eskom will be introducing a Supplier Evaluation Framework which suppliers will be assessed against. • In the immediate term, Eskom is inviting suppliers to collaborate in an exercise to jointly reduce costs as part of the contracts renegotiation process. • While there are enormous challenges that Eskom faces now, there are also significant collaboration opportunities for Eskom and its suppliers that lie ahead and Eskom would like to invite suppliers on this journey. 16 NM Agenda 1 Safety Briefing 2 Welcome, introductions & Setting the scene 3 GCE’ address 4 Next Steps 5 Q&A session with the GCE 17 NM Next steps • Inputs from suppliers based on supplier engagement forum to be collated and driven through CPO’s office • Feedback on actions to be provided at next engagement • Divisional Supplier engagements forum to kick off from July onwards. • Eskom to initiate focused individual supplier discussions on cost reduction opportunities between July and September – this will be done on a prioritized basis in consideration of savings opportunities • Next supplier forum to be held by October to review progress 18 NM Agenda 1 Safety Briefing 2 Welcome, introductions & Setting the scene 3 GCE’ address 4 Next Steps 5 Q&A session with the GCE 19 Thank you 20