Supplier Development Localisation CIVILUTION CONGRESS 2014 April 2014

Supplier Development & Localisation CIVILUTION CONGRESS 2014 April 2014

We have distilled five main development objectives from different government programmes Programmes Development objectives CSDP NIPP B-BBEE NGP NDP Transformation IPAP Skills Development Job creation NIPF Localisation Industrialisation ASGI-SA • We have aligned ourselves along development objectives rather than individual policy and government programmes • This has allowed us to address the requirements of multiple programmes simultaneously, without having to create new departments or functions 2 Source: Introduction to the Competitive Supplier Development Programme; B-BBEE Act 53 of 2003; ESKADAAT 6

This approach has created economic development and significant transformation impact Initiative ASGI-SA NIPF IPAP CSDP NIPP Examples of impact • Guided our initial job creation and skills development achievements • Driving industrialisation and localisation through our Supplier Development and Localisation Plan • Created ~40 000 jobs and developed new local industries • R 722 m invested in plant • We are positioned to drive development further through CSDP 2 B-BBEE • B-BBEE incorporated in all our transactions • B-BBEE spend of R 72, 1 bn - 73, 2% of total spend against a target of 70% in FY 11/12 NGP • Created an Execution Support team to support job creation as part of our overall SD&L capability NDP • Shifting spend to black owned suppliers – will shift 50% of total procurement spend to BO suppliers by FY 16/17 3 Source: Introduction to the Competitive Supplier Development Programme; B-BBEE Act 53 of 2003; ESKADAAT 6

We have learned valuable lessons resulting from our implementation journey Focus • Supplier Development and Localisation won’t happen as a “nice to have” add-on to tenders in the form of “SD&L Targets” Strategy • Distill the core impact areas from a diverse policy environment and concentrate on key development objectives common to all of them Integration • Integrate strategic sourcing, design of technology and our SD&L objectives into our procurement strategies for all transactions Spend • Consolidate our long-term spend forecasts and plans as investment in industry will need time and long-term commitment • Move away from an “arms-length”, transactional based relationship Engagement with suppliers towards a more integrated, partnership based model 4 Source: Eskom Supplier Development and Localisation Department

We are driving five overall priorities to use our spend for economic development Drive economic development through our 5 focus areas… 1 Industrialisation to foster the establishment of new competitive industries, mainly in the energy sector 2 Localisation to develop South African supplier capability relevant to the energy sector 3 Skills development to increase the skill base (number and skill level) of South African workers 4 Job Creation to enable the creation of new jobs by suppliers as a direct result of Eskom business 5 Supplier Development to increase the number and the capability and capacity of specifically black owned suppliers 5 Source: Eskom Supplier Development and Localisation strategy • Accelerating transformation of local industry through Increased focus on Supplier Development to create black industrialists

We have defined our development priorities and designed a clear approach to create impact Our Priorities • Embedding SD&L into our organisation • Enhancing our Strategic Sourcing process • Making transformation a key focus • Creating our SD&L Plan Our Approach 1 2 3 “Design for local” Integrate Supplier Development and Localisation Accelerate transformation • We are reviewing technical specifications to identify spend areas for design for local manufacturing • Supplier Development and Localisation has been included into our strategic and project sourcing process • To accelerate transformation we have identified key spend focus areas as enablers to foster the emergence of black industry 6 Source: Eskom Supplier Development and Localisation Department

Our operations and expansion programme enable us to drive development through sustained procurement spend Our business Generation Transmission Distribution The future picture • Projected spend includes: • Top 20 utility in the world • New build programme will − Operating costs by generating capacity add a total of 17 GW of (maintenance • Net generation capacity by 2018/19 etc. ) of 41, 7 GW with 237 291 • Kusile and Medupi will be − Infrastructure GWh of electricity the world’s 3 rd and 4 th and Projects produced in 2012 largest coal-fired plants (expansion, upgrading and • Our transmission grid • New build programme will refurbishment) spans an area similar to add 9 004 km of new high − Primary energy Western Europe, voltage transmission lines costs reaching across South • 41 645 MVA of installed • The potential Africa with 28 995 km of capacity in substations by spend on our transmission lines and 153 2018/19 portion of the substations Integrated Resource Plan • Connected over 4, 2 m • We plan to reach (IRP) 2010, households since 1991 universal access by 2020 beyond known • The largest power line in support of government’s projects, is still system in Africa with 343 objective of advancing not fully clarified 014 km of distribution lines electrification at this stage 7 Source: Interim Integrated Report for the six months ended 30 September 2012; The Eskom Factor 2011

We are using our comprehensive Supplier Development and Localisation Plan as the key driver for our development efforts SD&L Plan Analysis Identification of extended list of Strategic Focus areas Demand Forecasts 188 Strategic focus areas 42 Spend focus areas Industri alisation Localisa t ion Supply Analysis Skills D Supplie Government objectives 8 Source: Eskom Supplier Development and Localisation Plan Operati onal Projects evelopm Job Cre Identification of key Spend Focus areas ent ation r Develo pment New Bu ild Primary Energy

Transformation is one of our key focus areas and we will support the emergence of black industrialists We are proud of our B-BBEE achievements. We are resolved to further contribute to tangible transformation and we will: • Focus on additional “broad-based transformation impact” • Focus on “changing the ownership patterns” of the local energy supply base • Incorporate transformation and Supplier (Enterprise) Development into all our transactions • Support an increase in the numbers of black industrialists in areas of high value, high impact procurement spend • Improve the capacity and capability of black owned businesses through various intervention mechanisms, e. g. shifting procurement spend and providing dedicated support • Establish strategic internal and external relationships to foster integration and collaboration 9 Source: Eskom Supplier Development Strategy

We will provide emerging suppliers with direct support to become competitive and sustainable We will develop suppliers through: 1 2 3 Creating an enabling environment for new suppliers • Technical and management interventions to address the challenges facing new suppliers wanting to do business with Eskom • This will be achieved through a range of interventions e. g. incubation through established suppliers (such as Roshcon and Rotek) Developing and growing existing emerging suppliers • Targeted interventions to support existing suppliers to increase their capacity and capability to take on larger and more complex contracts Grow emerging suppliers into large and medium enterprises • Assist with access to sustainable work opportunities and innovation to grow emerging suppliers into established, internationally competitive enterprises 10 Source: Eskom Supplier Development Strategy

Interventions of a Supplier Development nature are key to develop a Black Owned supplier base across al Commodity categories Developing and growing existing suppliers Creating new suppliers Large and Medium Enterprises (LMEs) • Established business ‒ Complex governance structures ‒ Aligned strategies and • Improved level of business Emerging Micro Enterprise performance sophistication (EME) management ‒ Refinement of operating ‒ Highly developed model and processes • Operations set up and business operating model ‒ Established value begins ‒ Enhanced capabilities proposition ‒ Market presence established • Turnover of R 5 m to R 35 m per • Turnover >R 35 m ‒ Core business function • Growth levers for further annum launched expansion: • Growth needs include: • Turnover <R 5 m per annum ‒ Annuity revenue ‒ Exposure to more complex • Growth needs include: ‒ Exposure to large business ‒ Gain experience projects ‒ High increase in revenue ‒ Increased revenue ‒ Development of IP ‒ Exposure to and ‒ Skills development ‒ Improvement to generation of best practice ‒ Access to IP governance structures IP Qualifying Small Enterprise (QSE) Supplier type Start-ups Characteristics • Business idea launched off the ground • Business plan created • Financing to be secured • Development needs across all areas of growth Intervention types • Support capitalisation • Work experience & technical skills development through: ‒ Joint ventures ‒ Sub-contracts ‒ Incubation • Managerial and entrepreneurial skills training • Support capitalisation • Access to markets , IP and capability building through: ‒ Enterprise development ‒ Joint ventures ‒ Sub-contracts ‒ Set asides • Managerial training • Facilitate generation of IP through promotion of local designs in commodity strategies • Access to work opportunities through set asides • Technical and managerial training • Limited Supplier Development involvement • Access to more business through set asides

Early SD&L strategy development allows us to influence the sourcing process as seen in valves Developing our valve SD&L strategy before the sourcing strategy allows us to influence the sourcing process and proactively develop the valve industry We identified valves as an opportunity to drive localisation • Large portion of our generation spend • New Build Programme has increased our demand • Previous ad hoc approach to use of local industry • Underdeveloped local supply industry • Underutilised downstream foundry business • Designation of valves for local procurement by the DTI • DST has identified valves for technology advancement Source: Eskom Valve Supplier Development and Localisation strategy Our SD&L strategy aims to holistically develop the industry: • Standard valves • High pressure/ high temperature valves • Valve spares • Maintenance and refurbishment • Downstream foundry industry

We are working towards pooling demand where our own demand is not big enough to sustain local industry Valves and actuator market (% revenue by end user) 17 Water Mining Energy Petro- Other Total chemicals Source: Eskom Valve Supplier Development and Localisation strategy • Eskom accounts for 17% of total valve and actuator demand • We are driving consolidation of demand to provide a sustainable demand view through: − Collaboration with mining and petrochemical industry − Establishment of a working group to develop industry wide standards − Standardising specifications

Working together with industry has ensured that all stakeholders have a voice Lessons from our past have taught us to work with industry to drive localisation Mobilising the industry • The Valve and Actuator Manufacturers Cluster of South Africa (VAMCOSA) represents local manufacturers and provides a platform to: ‒ Understand supplier capacity and capability ‒ Work with government to encourage local procurement of valves ‒ To share challenges facing the valve industry ‒ Share long-term investment, localisation and transformation plans “Design for local” Working Groups • Technical working group to review and create “standard specifications” for local manufacture • Despite initial challenges, technical and commercial are working together with government and industry to drive localisation Industry Champions • Appointing industry champions to drive the valve development initiatives • Ensure a deeper understanding of local industry capability Downstream input • Incorporating the downstream foundry industry ensuring there is a sufficient demand picture to upscale their capacity and capability 14 Source: Eskom Valve Supplier Development and Localisation strategy

Realisation of our development efforts will benefit Eskom, local industry and South Africa – without increasing the cost of procurement Driving economic development. . . Enhanced industrialisation Localised energy industry Will benefit…. The South African economy: • Reduced cost of doing business • Investment in plant and technology • Greater export potential • Reduced unemployment and poverty • Larger and more skilled workforce • Increased diversity in work • Improved quality of life Greater local skills base Accelerated job creation Investment in building local communities 15 Source: CSDP; IPAP 2; Group Technology and Commercial Eskom operations: • Reduced supply chain costs • Greater security of supply • Shorter lead times • Improved efficiencies and quality • Co-development of solutions for operation specific problems with manufacturers

To realise these benefits, we need to collaborate and engage on this development journey How can you support us: The opportunity: Engage and communicate with us and your downstream suppliers • Ability to grow your business on the back of sustainable business opportunities Share your innovative development ideas and solutions Collaborate within industry hubs to coordinate development; align capacity to future demand jointly find solutions to challenges Establish strategic long-term relationships with us and emerging suppliers to enable the emergence of BO suppliers • Insight into a consistent way of doing business with us Make sustained development part of your core value proposition – We • Access to a team of professionals to are moving away from a transaction and compliance/process focused support your mind-set development efforts OEMs to integrate development objectives into your long-term plans to • Development of a local up and make SA part of your global supply chain downstream supply chain to support Innovate and invest on the back of long term and sizeable opportunities your operations and to do business with us. Local industry needs to be competitive and strengthen your efficient 16 value chain Source: Eskom Supplier Development and Localisation Department