EDI RESTRUCTURING PROCESS UPDATE AND THE WAY FORWARD AMEU CONFERENCE

PRESENTED BY PHINDILE NZIMANDE, CEO EDI HOLDINGS 17 OCTOBER 2006

Presentation Outline

Purpose of presentation EDI Restructuring Objectives EDI Restructuring Journey to Date EDI Restructuring Mandate RED Creation Progress Experience & Lessons to Date Outstanding Policy and Legislation EDI Holdings Perspective on the EDI Restructuring RED Creation Journey Ahead Conclusion 1 May 2020 2

Purpose of Presentation

The purpose of this presentation is to provide a high level update on the EDI restructuring process and the envisaged EDI reform journey ahead from an EDI Holdings perspective 1 May 2020 3

EDI Restructuring Objectives

Energy White Paper Objectives (1998)

 Ensure electrification targets are met    Provide low-cost electricity Facilitate better price equality Improve the financial health of the industry    Improve quality of service and supply Foster proper co-ordination of operations and investment capital Attract and retain competent employees

EDI Restructuring Blueprint Objectives (2001)

  Achievement of government’s electrification programme Universal access to electricity for all South Africans    Sustainable electricity supply to low-income consumers, regardless of location, at affordable prices Future REDs to operate on a sustained, financially viable basis as independent businesses Acceptable and sustainable levels of supply security and quality   Future REDs to provide secure employment to their employees, provide skills development and training consistent with a high technology, modern distribution business Transition to be done within the context of a comprehensive human resources strategy and an agreed social plan  Planned and managed transition

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EDI Restructuring Journey to Date

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EDI Restructuring Mandate

The need for reform:

The EDI is highly fragmented leading to lost economies of scale; financial disparities between distributors; disparities in tariffs; uneven capacity to extend electricity services to poor households

The Blueprint:

The thrust of the Blueprint for EDI reforms was adopted by Cabinet in May 2001

Six REDs:

A central feature of the Blueprint is the requirement that the EDI be consolidated into 6 financially viable REDs, in order to achieve the objectives of restructuring

Management of the reform process:

National Government has established EDI Holdings to manage the EDI Restructuring process

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EDI Restructuring Mandate

(…2)

Presidential delivery targets:

The President’s 2004 State of the Nation address set June 2005 as the target date for the establishment of the first RED

Establishment of RED1:

RED1 was established on 01 July 2005 as a municipal entity under the sole ownership control of the City of Cape Town

Cabinet Decision of 14 September 2005:

Cabinet decided to proceed with the establishment of 6 metro REDs and investigate (amongst others) the feasibility, through modelling, of establishing a National RED; clusters; and neighbouring municipalities joining the Metro RED

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RED Creation Progress

Metro RED creation governance structures established and operating

Sponsors Committees Technical Steering Committees Work Groups

Metro RED DAY ONE Roadmaps and work plans developed Various municipalities engaged in ringfencing in preparation for the RED creation:

6 Metros in general made good progress 11 Municipalities at various degrees of progress

Eskom restructured its distribution business from 7 Regions to 6 Regions in line with the EDI Blueprint six wall to wall boundary recommendation Transitional Labour Relations Structure (TLRS) established and operating RED 1 RTLRS established and operating Extensive industry modelling completed Industry modelling report submitted to Department of Minerals and Energy 1 May 2020 8

Metro RED Ringfencing Progress

REDS RED ONE RED TWO RED THREE RED FOUR RED FIVE RED SIX Metro Councils METRO Electricity Distribution Business % Ringfenced City of Cape Town Ekurhuleni Nelson Mandela 100% 51% 85% City of Johannes burg eThekwini 100% 95% Tshwane 80% 1 May 2020 9

Experience & Lessons to Date

Experience

First RED created as a Municipal Entity Delays in implementing required critical activities to create viable operating entities Ambivalent support by some stakeholders due to misaligned interests

Lessons

Obstacles to RED creation: Voluntary mode of reform Absence of an enabling legislative framework Incompleteness and misalignment of existing legislative regime Asset transfer from the City of Cape Town to RED ONE is delayed due to lack of prescribed asset transfer framework in terms of the MFMA Asset transfer from Eskom to RED ONE is delayed due to suspensive conditions imposed by Eskom EDI Restructuring Bill is an imperative to set clear policy guidelines for EDI restructuring implementation

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Experience & Lessons to Date

Lessons (continue)

The municipal entity governance regime is cumbersome and constraining Separating out of customers, networks and systems to create a Metro RED is extremely complex and does not contribute towards accelerated RED creation or leveraging existing investments in the Industry To create a Metro RED significant investments are required upfront which will not contribute to improved business performance but merely to meet the boundary reconfiguration requirements The negotiated nature of restructuring makes it impossible to deliver on the anticipated objectives and outcomes within the stipulated timeframes The current performance of the EDI is deteriorating

Challenges

Ambivalent stakeholder support Transfer of business

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Outstanding Policy and Legislation

Unresolved Policy Matters

End State pronouncement Local Government Surcharge Principles Compensation for asset contribution Shareholding Tax issues Ownership and Governance of the REDs Asset transfer framework

Lack of enabling Legislation

EDI Restructuring Bill Exemptions from compliance to onerous legislative provisions contained in, for example, MFMA and Systems Act

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EDI Holdings Perspective on the EDI Restructuring

Government is committed to the EDI reform process and will pursue a model which will serve the best interest of South Africa Based on research, lessons learnt and experience to date, the 6 wall to wall RED model as approved by Cabinet in May 2001, remains the most appropriate option for the EDI Based on legal analysis, lessons learnt and experience to date:

REDs should be established as public entities The EDI Restructuring should take place on a mandatory basis, supported by the necessary enabling legislation

A decision by Government on the EDI model and way forward is imminent 1 May 2020 13

RED Creation Journey Ahead

Current negotiation and EDI reform governance arrangements will be leveraged in aligning the current RED creation activities with the final Cabinet Decision The work done and lessons to date in terms of the RED creation will amongst others be used to inform the RED creation journey ahead Stakeholder engagement will be intensified to enhance engagement on the way forward and to address potential uncertainties The Multi Stakeholder Forum (MSF) will be revived to facilitate inter alia the resolving of the outstanding policy matters 1 May 2020 14

Conclusion

The EDI restructuring journey to date had many obstacles and considering this, good progress has been made to date Government has allowed for a very transparent and participative process in terms of the restructuring and EDI Holdings has utilised these opportunities in the National interest Based on the level of readiness, understanding of the EDI and stakeholder relationship, EDI Holdings is committed to deliver the EDI model in line with the final Cabinet Decision in this regard 1 May 2020 15

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