1. PRESENTATION TO PORTRFOLIO COMMITTEE ON PROVINCIAL AND LOCAL GOVERNMENT PHINDILE NZIMANDE CEO-EDI HOLDINGS 31 MAY 2005
31 May 2005

2. Background
Presentation to joint Portfolio Committees on Provincial and Local Government & Public Enterprises – 2 March 2005
Joint research on:
Key issues
Clarity on stakeholder roles
Co-operation of municipalities and other stakeholders
Final document being finalised for submission to Portfolio Committees
31 May 2005

3. Background Key issues & emerging trends Institutional reform:
Enabling environment for restructuring
Restructuring legislation necessary to govern the process & reduce the risk of non-achievement of desired end-state
Legislation would also contain provisions, inter alia, to:
Regulate the transfers of businesses to the REDs
Streamline existing legislation governing the EDI
Regulate RED operations, reporting and oversight requirements
Strengthen s. 93C co-operation procedures between municipalities
Contain essential provisions of Service Delivery Agreements
Safeguard unforeseen exits from REDs
Standard set of by-laws
31 May 2005

4. Background Key issues & emerging trends Legal form of entity:
Municipal Entity, Public Entity or Special Purpose Entity
Agreement reached that REDs will be Municipal Entities with certain exemptions.
Exemptions required to create a more conducive environment to achieve the objectives of restructuring
Ownership and control:
Shareholding structure of the RED
Municipalities to have majority shareholding
Eskom and National Government to hold the rest of the shares
31 May 2005

5. Background Key issues & emerging trends Transfer instrument:
DAY ONE: Operating Agreement between the RED and CCT and the RED
and Eskom
Key attributes:
Services will be provided by Eskom & City of Cape Town
Eskom & City of Cape Town will report to the RED on performance against national standards and other regulatory requirements
Eskom and City of Cape Town will continue to be responsible for making new investment and serving new customers in their service areas
The RED will introduce operational improvements through standardisation of processes and integrating operations. This will be done in conjunction with an action plan to address maintenance backlog.
RED ONE will develop tariff framework in its area, subject to the City’s tariff policy and the NER’s regulatory approval (as at present).
31 May 2005

6. Background Key issues & emerging trends Transfer instrument:
End State: Transfer Agreement
Key attributes:
Full business transfer including assets, liabilities & staff
Incorporation of all municipalities
RED delivering all services
SALGA currently reviewing transfer agreements in order to standardise across all municipalities
31 May 2005

7. Background Key issues & emerging trends Compensation:
Recommended approach is to use a weighted combination of asset values, income stream and profits
The compensation of existing owners is neither intended to generate windfall gains, nor should it result in unreasonable loss of income or security
Impact on customers to be minimised
31 May 2005

8. Areas of focus Financial implications for Municipalities
Other implications for Municipalities
Effects on Free Basic Electricity
Co-operation from Municipalities and other Stakeholders
31 May 2005

9. Areas of focus Financial implications for Municipalities
Other implications for Municipalities
Effects on Free Basic Electricity
Co-operation from Municipalities and other Stakeholders
31 May 2005

10. Financial Impact on Municipalities
Guidelines from the 2001 Blueprint on EDI Restructuring
Local Government should not suffer financially from the creation of REDs
Current levels of financial transfers from electricity local government should be maintained, through an explicit levy on tariffs and dividends
Levy on electricity should be transparent.
Local government levy or charge on electricity should be applied as a percentage to all customers except poor households
31 May 2005

11. Financial Impact on Municipalities
The following principles are adopted to guide the restructuring process
These principles are subject to agreement among key stakeholders
Principle
Impact
Risk mitigation
Leverage on Credit control
It is important for municipalities to continue using electricity as a leverage for credit control
This can be achieved through Service Level Agreements
Billing, accounting & credit control principles
Surpluses
There is a need to harmonise calculation of surpluses across municipalities
This can be achieved through a Compensation model
A 15% on gross expenditure is regarded as an acceptable norm
Overhead costs
There is a need to harmonise the method of handling and calculating overhead cost. Allocations varies from municipality to municipality
A 7,5% on gross expenditure is regarded as an acceptable norm
31 May 2005

12. Financial Impact on Municipalities
Principle
Impact
Risk mitigation
Operational VAT implication
It is important that municipalities retain the benefits on reclaimable VAT
This can be achieved through Service Level Agreements
There is an indication that on average municipalities can forfeit between 5% and 8% of VAT output considering the change in business
Stranded costs
Municipalities will not be left with stranded costs due to electricity distribution restructuring
This can be achieved through a Compensation model
Cost will arise from ineffective use of floor space, system utilisation, etc.
This amount cannot be calculated until the ringfencing have been completed
Tariffs
It is important that tariffs will not increase outside acceptable norms
NER will control this through their tariff policy and framework
The DAY ONE tariff structure will continue as is in the short term
31 May 2005

13. Financial Impact on Municipalities
Principle
Impact
Risk mitigation
Shareholding Valuation
No windfall gains will be derived through asset valuation.
The community at grass-root level can not pay twice for the same asset
This will be addressed through the Shareholding model of EDI Holdings
Valuation Methodology
Staff harmonisation cost to be carried by the electricity distribution industry
Harmonisation of salaries is inevitable
This imbalance may exist in all public entities across industries and municipalities
This will be addressed with organised labour and through normal processes in the industry.
Harmonisation phased over a period of time.
Contingent liabilities will similarly be considered in this process.
31 May 2005

14. Areas of focus Financial implications for Municipalities
Other implications for Municipalities
Effects on Free Basic Electricity
Co-operation from Municipalities and other Stakeholders
31 May 2005

15. Other Implications Service Delivery Agreement
Municipalities remain service authorities and REDs become Service providers
Relationship between RED and municipalities to be governed by the Service Delivery Agreement as contemplated in Section 81 of the Municipal Systems Act, 2000
Municipalities and Eskom hold shares in the REDs
Viable businesses with positive business case
Improved collections
Efficient operations
Reduction of maintenance backlog
Jerry to give example
31 May 2005

16. Other Implications Benefits to Municipalities Revenue neutrality
Surcharges
Cashflow
Surpluses guaranteed
Economic growth
Facilitation of
Free Basic Electricity
Electrification
31 May 2005

17. Areas of focus Financial implications for Municipalities
Other implications for Municipalities
Effects on Free Basic Electricity
Co-operation from Municipalities and other Stakeholders
31 May 2005

18. Effects on government policy
Restructuring will facilitate:
Efficient delivery of Free Basic Electricity
Will form part of the Service Delivery Agreement with Municipalities
Focus on Free Basic Electricity
RED to ensure consistent delivery of Free Basic Electricity across geographical area
Execution of electrification programme
Focus on Electrification
RED to ensure consistent roll-out of Electrification programme across geographical area
31 May 2005

19. Areas of focus Financial implications for Municipalities
Other implications for Municipalities
Effects on Free Basic Electricity
Co-operation from Municipalities and other Stakeholders
31 May 2005

20. Co-operation from Municipalities
Enrolment still voluntary
Restructuring legislation would assist in speeding up enrolment
Co-operative agreement
Municipalities that have signed the agreement: 18 (March 2005: 9)
Municipalities in negotiations to sign the agreement: 19 (March 2005: 8)
Ringfencing
Ringfencing toolkit available to all municipalities from EDI Holdings
City of Johannesburg & Mangaung have independent municipal
electricity distribution businesses
Municipalities currently in the process of ringfencing: 11 (March 2005: 6)
31 May 2005

21. Co-operation from other stakeholders
Eskom
Substantial progress made on migration from 7 to 6 regions to align with REDs establishment requirements
Regular interaction and input
Overall positive co-operation
Labour
Transitional Labour Relations Structure established and functional
NEDLAC kept informed through quarterly feedbacks
SALGA
Regular interaction and input (CEO SALTECH; EDIR reference group; NEC)
Joint roadshows
Other Government Departments
Inter-governmental engagement on restructuring between DPLG, DME, DPE & NT
RACI Matrix developed
31 May 2005

22. Industry Vision for Restructuring
To Consolidate the South African
Electricity Distribution Industry
Into
Six Financially Viable
Regional Electricity Distributors
31 May 2005

23. THANK YOU
31 May 2005