PRESENTATION STANDING COMMITTEE ON APPROPRIATION 05 SEPTEMBER 2017

PRESENTATION STANDING COMMITTEE ON APPROPRIATION 05 SEPTEMBER 2017 -Confidential 1

TABLE OF CONTENT • • Areas of under/over expenditure. 2016/17 Departmental performance information. Reasons for non achieved targets. Progress on MTSF/NDP targets. Progress on AGSA findings SOCs key risks. SOC Opportunities. Progress on SCOA recommendations (ESKOM).

Areas of under/over expenditure Per Programme 1. Administration 2. Legal & Governance 3. Portfolio Management and Strategic Partnership TOTAL 300 000 Final Appropriation R’ 000 Actual Expenditure R’ 000 (Over)/ Under Expenditure % Spent R’ 000 155 792 153 788 2 004 98. 7% 25 906 23 303 2 603 90. 0% 86 278 76 688 267 976 253 779 9 590 14 197 88. 8% 94. 7% Per Economic Classification 250 000 200 000 150 000 100 000 50 000 0 Final Appropriation R’ 000 Actual Expenditure R’ 000 Variance R’ 000 • COE G&S T&S 162 150 101 521 439 148 321 101 159 434 Final 13829 Appropriation R’ 000 362 Actual Expenditure R’ 000 5 Capital assets 3 866 3 865 Variance R’ 0001 Total 267 976 253 779 14197 YTD the department has overall spend of 94. 7% (R 253. 78 mil of R 267. 98 mil). The underspending of 5. 3% is due to vacancies which are as the result of the re-alignment of the organisational structure. -Confidential 3

2016/17 DEPARTMENTAL PERFORMANCE UNIT NO OF TARGETS ACHIEVED % OF ACHIEVEMENT Corporate Management 2 1 50% Legal, Governance and Risk 3 2 67% Manufacturing Enterprises 4 4 100% Transport Enterprises 3 3 100% Energy Enterprises 4 4 100% Economic Impact and Policy Alignment (EIPA) 3 2 67% Strategic Partnerships 3 2 67% 22 18 82% TOTAL -Confidential 4

REASONS FOR NON ACHIEVED TARGETS UNIT Corporate NON ACHIEVED TARGETS • Management IM: 4 business cases implemented COMMENTS ON NON ACHIEVEMENT The delays in procurement processes affected the achievement of the target. The Share. Point project is already in the testing phase. Legal, • Governance Outcomes-based shareholder The Department did not receive adequate proposals Risk Reporting modelling from the market on the services required to deliver on and Risk the project. The request for proposals has been reissued. EIPA • DPE Black Industrialists The Department lost human resource critical to the Programme approved achievement of the target in the middle of the financial year. The service level agreements are being fast- tracked for the tertiary institutions to assist in developing the concept for the project. Strategic Partnerships • Capital Optimisation Structure Further consultation required on the Capital Structure developed Optimisation -Confidential- Strategy. To ensure that the project 5

Acceptable of achievement Progress on MTSF Impact Indicators Progress lagging behind Number Impact Indicator Progress rating Minister responsible for reporting Baseline 2019 Target Progress to date v 6 244 MW procured and 2 904 MW already being supplied to the grid 10 000 MW through REIPP added v 2 127 MW through Eskom’s build programme Currently there is excess power in the grid due to 19% supressed demand delivery of build program Draft Road Freight Strategy has been 2% more per completed and approved annum by ESEID cluster. The strategy is on its way to Cabinet. 1 Adequate electricity generation capacity commissioned Energy 44 000 MW (Eskom, 2013) 2 Electricity generation reserve margin increased Energy 1% 5 Road freight moved to rail Transport Zero base 6 Increased tonnage moved on rail Public Enterprises 207 mtpa 330 mtpa by 2019 7 Improved operational performance of seaports and inland terminals Transport 28 average crane moves per hour v DCT- Pier 1: 45 35 average v DCT – Pier 2: 55 crane moves v CTCT: 53 per hour v NCT: 63 - Confidential - Year to date is 219. 1 million tons by end of March 2017. 6

Progress on AGSA findings • During the financial year ended 31 March 2016 the department obtained unqualified audit opinion with the following audit findings: AFS Item Audit Finding Commitment by department Status Contingent Liabilities – Litigation and Claims Understatement of Contingent liability amount presented on the financial statements All current matters as at 31 March relating to litigation and claims should be included in the contingent liability note. Implemented Contingent Liabilities Guarantees Understatement of Guarantees disclosure on the financial statements Ensuring that the information included as part of the contingent liability note in relation to state guarantees is reviewed at appropriate level prior to inclusion on AFS. Implemented Effective steps were not Irregular Expenditure taken to prevent irregular expenditure as required by S 38(1)(c ) of the PFMA (R 3 million) The department to implement adequate controls & processes to ensure compliance to laws & regulations Implemented • The Department obtained a clean audit opinion for the Financial year ended 31 March 2017 7

SOC KEY RISKS Ref 1 Risk Factors Financial Lack of adequate sustainability prices/tariff (unfavourable risk tariff guidelines, methodologies and models) Weak balance sheet Deterioration in macroeconomic environment (low global economic recovery; Sovereign Credit Downgrade, low domestic business and consumer confidence). Impact/Consequen Mitigation SOC Affected ces Negative impact on Proactive cost-containment Transnet, Eskom, credit ratings measures SAFCOL, Denel inability to secure implemented. (Eskomfunding Business productivity programme target of R 60 billion savings in 5 years) Revenue declines Under-utilised assets Capital investment programmes Eskom, Transnet, deferred to manage borrowing SAX, SAFCOL, Alexkor, cost, to maintain positive cash Denel flow and to earn return on assets; Reduced return on SOC specific strategies being to equity pursue sales volume opportunities by diversifying nationally and across the border; DPE critically assessing competitiveness and validity of each of the SOC's current business model and monitoring of pursuit of opportunities in Africa Emergence of IPPs, Under recovery of Initiatives being implemented to Eskom Growing Municipal debt, operating costs energy demand to enhance High Cost Structure collaboration with other state internally; Declining Sales; organs to address the risk Credit Downgrading 8

SOC KEY RISKS Ref 2 3 Risk Factors Impact/Consequenc Mitigation es Operational Inadequate maintenance; High operating costs; Capital investment programmes sustainability Aging assets (e. g. aircraft, Inability to provide a prioritised in terms of their (efficiency and rail network, energy reliable service; immediate impact on operational effectiveness) risk generation capacity); performance Risk of governance Non-compliance with failures legislative and institutional policy; Internal control failures Loss of public trust; Increase in irregular expenditure and fruitless & wasteful expenditure Ministry has requested assistance of SIU to investigate the affairs of all 6 SOCs; DPE monitors financial interest disclosure of Board members; SOC Affected SAX, Transnet, Eskom, SAFCOL, Denel Transnet, Eskom, Safcol, Denel, Alexkor, SAX DPE has a significance and materiality framework signed between Board and Minister to monitor transactions above an agreed limit; DPE monitors SOCs implementation of corrective measures that are designed to address audit outcomes. 4 Policy and Unfavourable regulatory and policy framework that compliance and could impact (e. g. Single alignment risk Transport Economic Regulatory Bill, Maritime Transport Policy, uncertainty in pricing methodology, Rail Policy Failure to maintain DPE leading engagements with Transnet, operating licenses; relevant policy departments to Eskom, Operational ensure that the risk is addressed SAX Inefficiencies 9

SOC OPPORTUNITIES SOC SAX OPPORTUNITIES • • • Improved partnership with SAA –STAR alliance member Increase in international traffic Identify and exploit cargo carrier opportunities Restructuring of the state owned airlines asset portfolio Marketing/product innovation and differentiation Greater collaboration with different spheres of Government and other State Owned Companies • Participation in the Denel South African Regional Aircraft Development Programme e. g. launch customer • Partnership with Local and Provincial Governments on tourism opportunities • Possible maintenance, repairs and overhaul partnerships with Denel • Network expansion – new domestic routes to grow the local economy and increase revenue • Collaboration with other state organs that have capability to develop ICT solutions • Exploitation of existing underutilised infrastructure e. g. municipal airports Transne t • Network expansion - new routes regional • Transformation opportunities: Enhance participation black owned businesses in rail, pipelines and port project opportunities as well as the development of small medium enterprises DPE to facilitate engagements with provincial and local government in order to address spatial planning challenges that affect Transnet’s operations Enhance collaboration in the development of an integrated government incentive framework and other benefits that would support job creation industrialisation materials The manufacturing and maintenance - rolling stock (for freight and passengers), ship repairs, boat manufacturing, cranes manufacturing Transnet International Holdings will form part of the Transnet Group and will focus on • • 10

SOC OPPORTUNITIES cont… SOC OPPORTUNITIES SAFCOL Horizontal integration (across the plantation forestry value chain). Vertical integration (along the value chain e. g. processing of logs). Improving the profitability of IFLOMA. Denel Organisational re-design and restructuring process Abolishment of the Armscor bank guarantee requirement Growing global defence budgets due to fluid geopolitics Conclusion of maritime projects Execution of the SARA project Alexkor Diversification: Alexkor intends to diversify into the coal sector to ensure sustainability. The business case is currently under review SOC Reform: The recommendations from the SOC reform exercise is awaited. Alexkor’s role may be elevated.

Progress on SCA Recommendations (ESKOM) Standing Committee Recommendation Progress Update 1. Eskom continues to present both financial and nonfinancial presentations to various committees of the parliament to provide update and highlight various strategies to monitor both operational and financial sustainability of the entity Submit quarterly reports on Eskom’s financial and non-financial performance to Parliament 2. Develop and set explicit targets and submit quarterly reports on cost containment program, working capital management, procurement effectiveness and its business efficiency Business Productivity Program targeting a saving of R 60 billion was introduced over Multiyear Price Determination Period (MYPD 3). Sinception Eskom saved R 48. 7 billion against the target. The entity remain on course to achieve the target by March 2018 3. Filling all funded vacant posts within the current (2016/17) financial year All vacant positions were filled in 2015/16 financial year with the appointment of the Chairperson, CEO and CFO. The CEO resigned in December 2016 and the interim CEO was appointed. Details are in additional documents. 4. Implement a comprehensive communications and implementation strategy that is transparent and equitable on rolling out prepaid electricity across all customer groupings Eskom is implementing the SMS (Sandton, Midrand, Soweto) strategy for prepaid. All stakeholders are consulted through the process. - Confidential - 12

Progress on SCA Recommendations (ESKOM) cont… Standing Committee Recommendation Progress Update 5. Monitor and evaluate all governance arrangements in Eskom. In particular, the Department must ensure the effective functioning of the Internal Audit and Risk Management Units and Independent Committee in Eskom The Minister and Department monitor the adequacy of all the internal controls in Eskom on a continuous basis. Where gaps are identified, these are communicated through various structure including but not limited to the Chairpersons Forum, Investor briefs and one-on-one engagements between the Minister and the Chairperson as well as the DG and the CEO. The Minister is in the process of filling all vacancies at Board level to strengthen the functioning of the Board and its Committees. 6. Ensure that Eskom prioritises and embed skills transfer in its new build infrastructure programme The build programme continues to contributes towards skills transfer. A total of 3 048 learners were supported in the 2016/17 financial year. The total amount of R 1. 54 billion was spent on training and development. 7. Eskom communicates to the public through their quarterly state of the grid address Eskom communicates clearly and consistently to the public regarding electricity supply issues and related measures needed to address the same - Confidential - 13

Progress on SCA Recommendations (ESKOM) cont… Standing Committee Recommendation Progress Update 8. Eskom reports to Parliament on their turnaround strategy within 6 months Eskom Board approved a turnaround strategy in September 2015 and presented an update on implementation to study group on Public Enterprises on 2 nd March 2016. 9. Eskom continues to prioritise the provision of transmission and distribution infrastructure Eskom continue to prioritise the strengthening of transmission lines. An amount of R 3. 9 billion was spent in the 2016/17 financial year to ensure N-1 compliance. From inception to date Eskom delivered 6 898. 4 km transmission lines and installed and commissioned 34 390 MVA transmission transformer capacity. At Distribution level 1 661 km of lines, 287 km of cable and 1 322 MVA were completed at the cost of R 5. 1 billion 10. Eskom has a dividend policy in place which takes into account the growth and development objectives of the country The entity have a dividend policy in place which is based on forward looking cash flow/modified residual approach in respect of which excess cash accumulated would be returned to the shareholder 11. Eskom sets a differentiated and appropriate pricing mechanism which will ensure that large and energy intensive users are charged differently from the poor to the vulnerable The Energy Regulator approves Eskom Revenue Requirement. Subsequently Eskom submit a suite of tariffs for various customer categories. The Regulator approves the tariffs for implementation by Eskom. - Confidential - 14

Thank you. CONFIDENTIAL 15