DPE PRESENTATION TO PORTFOLIO COMMITTEE ON SOE PERFOMANCE AGAINST AGREED KPI

1
DPE PRESENTATION TO PORTFOLIO COMMITTEE ON SOE
PERFOMANCE AGAINST AGREED KPIS FOR 2006/07
SEPTEMBER 2007
2
Flow of Presentation

• Evolution (Phases 1 2)
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07

3
Evolution

• Phase 1
• Initially voluminous and difficult to interpret
• Resultant lengthy conclusion process
• KPIs primarily balance sheet focused due to SOE
  financial difficulties
• Lack of performance and output target focus
• Limited review

4
Evolution

• Phase 2
• Slim compact format adopted with emphasis on
  performance and output targets
• Obligation to mirror mandate and strategic intent
  statement
• KPIs to cascade down to SOE subsidiaries
• Compact reviewed annually limited tweaking of
  strategic objectives with amendments focused on
  KPIs
• Compact a live document

5
Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07

6
Process

• Annual agreement between Executive Authority
  (Minister) and Accounting Authority (SOE Board)
• Key Performance Measures Indicators determined
  from Corporate Plan
• Shareholder Compact negotiated
• Quarterly Performance Reporting and Monitoring
  against agreed indicators
• Annual Performance Reporting and Monitoring
  against agreed indicators
• Annual Review and renegotiation

7
Process
Policy
Proposed KPIs
Annual report on Performance
Negotiated KPIs
Reporting on Performance
8
Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07

9
Components - Clauses

• Interpretation
• Functions of shareholder compact
• Mandate
• Strategic objectives
• Key performance indicators and evaluation
• Period of compact
• Appendice
• Key performance indicators

Generic
Review annually
10
Components - Generic KPIs

• Capital Efficiency
• Financial Efficiency
• Operating Efficiency and Effectiveness
• Gearing Ratios
• Developmental objectives
• ASGI-SA
• Skills development
• Broad Based Black Economic Empowerment
• Strategic Supplier Development
• SOE Strategy / Maturity Specific
• Investment (Capacity Delivery)
• Infrastructure Investment
• Sales
• Revenue Increases

11
SOE Compacts 2006/2007

• Signed SC
• Transnet
• Eskom
• Denel
• Safcol (Process KPIs)
• Not signed
• SAA (then not within DPE portfolio)
• Alexkor (Land claim process)

12
SOE Compacts 2007/2008

• (Phase 3)
• Compacts extended in width (All SOE) and depth
  (Extended Performance Indicators and Targets).
• Ability to measure quarterly performance greatly
  increased

Compacts 2006/2007 Compacts 2007/2008 Compacts 2008/2009
Eskom Eskom Eskom
Transnet Transnet Transnet
Denel Denel Denel
Safcol Safcol Safcol
Alexkor Alexkor
PBMR PIM PBMR
SAA SAA
Infraco
13
Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07
• (Safcol)

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Safcol
Mandate Core business is the conduct of
forestry, timber harvesting, timber processing
and related activities, both domestically and
internationally.
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Safcol

• At the time the Shareholder Compact and KPIs for
  SAFCOL were being developed, an in-depth review
  of the future of the company was in progress.
  The review was instructed by the Minister in
  April 2006.
• As a result, at the time of KPI development, no
  decision had been taken on the future role and
  strategy for the company and thus it was not
  clear at that time which KPIs would be needed in
  future Compacts. For this reason, an Interim
  Shareholder Compact was agreed, which contained
  Interim KPIs, and which it was expected would
  be significantly revised after the decision on
  the future role of the company. These Interim
  KPIs were intended to
• ensure that performance data was prepared and
  reported, using an appropriate and consistent
  definition
• obtain base-line data for certain KPIs which were
  likely to be needed in the following year
• establish performance targets for certain
  fundamental measures, such as the presence or
  absence of good forest management

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Safcol

• In order for the KPIs and performance data to be
  meaningful, they must be defined very precisely
  and that definition must be applied consistently
  over time. Failure to do this will render the
  KPIs at least less helpful, potentially
  meaningless and potentially open to manipulation.
• Note that, as a result of the decision confirmed
  by Cabinet in March 2007 that KLF should be
  transferred to the private sector and that SAFCOL
  should be wound-up, the new Compact for 2007-08
  includes KPIs relating to those transactions.
  Such KPIs were deliberately not included in the
  2006-07 Compact.

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Safcol

• Specific mandate for 2007/2008
• - Complete the transfer to the private sector of
  Komatiland Forests (Pty) Ltd in accordance with
  the Transaction Guidelines
• - Maintain sustainable management and value of
  forests and other assets until transfer is
  completed
• - Reform the system used for sale of sawlogs
• - Assist the Shareholder Representative with
  the sale of IFLOMA
• - Prepare for an orderly winding up.

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Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07
• (Denel)

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Denel

• Mandate
• Denels mandate is to supply strategic defence
  capabilities to the SANDF (and the SAAF) and to
  act as a catalyst for advanced manufacturing in
  the broader economy.
• Strategic Objectives
• Strategic Role
• Capital and financial efficiency
• Investment
• Consolidation
• Capability Improvements and Operational
  Efficiency
• Developmental Objectives
• Key Performance Indicators
• See next slide

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Denel
KEY PERFORMANCE INDICATORS TARGET ACTUAL
Financial Indicators Financial Indicators Financial Indicators
Capital/financial efficiency EBIT Margin RONA (before tax) -13.7 -55 -12.2 -63.1
Investment (Capacity delivery) CAPEX / Revenue Product Development 12.4 3 3.6 2.5
Measurable Indicators Measurable Indicators Measurable Indicators
Disposal of non-core businesses and assets 5 remaining disposals realising R394.2m in income 3 non-core businesses were disposed of realising income of R247m. Total accumulative income to date R413m. New processes for SPP and Cosource transactions underway. Sale of land at ORTIA to ACSA at an advanced stage and will realise income of R606m.
Sales Order coverage ratio of 69 49.4 as at 31 March 2007. Increased to 75 as at 30 April 2007
Sales R1 869m in exports -27.8 growth R1 720m in exports - 10.8 growth
Cost reductions Revenue per Head Revenue/Headcount (R m) R0.5m R0.4m
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Denel
KEY PERFORMANCE INDICATORS TARGET ACTUAL
Improvement of governance and risk management policies and systems Compliance with the Protocol on Corporate Governance and the PFMA Substantial improvement in policies and systems. However, some areas still require improvement. Denel needs to avoid future reportable irregularities
Compliance with legislation Compliance with the PFMA, BBBEE Act, Employment Equity Act and the LRA Substantial improvement in compliance with legislative frameworks. New equity appointments. Some areas still require improvement.
Best Endeavour Indicators Best Endeavour Indicators Best Endeavour Indicators
Progress towards consolidation of the business and the establishment of manufacturing clusters Substantive progress made Progress to be reported only Philippi and Somchem plants were merged. The Corporate Office was relocated to the Irene Campus. Where the cost of consolidation was found to be prohibitive, it was decided not to pursue this.
Other cost reduction initiatives Initiatives undertaken and the results thereof OPEX ratio decreased from 42 to 38. Cost of sales as a percentage of sales decreased from 105 to 77.
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Denel
KEY PERFORMANCE INDICATORS TARGET ACTUAL
Partnerships with foreign and local companies Progress on partnership negotiations Partnerships were concluded with Saab in Aerostructures and Carl Zeiss in Optronics. PFMA application for merger with ATE in UAVs received in 2007/08. Negotiations with a third strategic partner at an advanced stage.
Other measures taken to improve capabilities Management interventions Initiatives to improve programme management and supply chain practices undertaken eg. internal auditors concluded a review on contract management.
Closure of non-viable businesses Substantive progress made See above
Sales 1. Percentage of revenue from sales (including SANDF sales) 2. Significant new contracts signed with clients abroad 1. Domestic sales as percentage of total sales was 48. Major local contracts include Oryx, Acrobat, Hoefyster and A-Darter. 2. Export contracts included Umkhonto (Finland), A-Darter (Brazil) and contracts with the UAE
Contract management and delivery alignment of scope, specifications and costs Substantive progress made in reducing slippages on contracts Information on the reduction of backlogs where possible (e.g. DSA) Internal audit and international equity partners (where relevant) reviewed processes and controls. Upgrading of applicable programme management and ERP software completed. Backlogs on the Top Shells contracts reduced at DSA. Substantial improvement required in contracting and contract management.
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Denel

• Improvements in the 2007/08 Proposed Shareholder
  Compact
• The Strategic objectives have been consolidated
  and streamlined for the 2007/08 Compact
• Strategic and economic role in South Africa
• Financial and operational efficiency
• Consolidation and equity partnerships
• Developmental objectives
• The financial KPIs have been expanded to enable
  improved monitoring of Denels performance
  (particular attention has been paid to monitoring
  Denels debt position as it is entering the
  market to raise its remaining funding
  requirements)
• Profitability ratios
• Management effectiveness
• Liquidity ratios
• Cash Cycle Days
• Order Coverage
• Investment
• Debt and Gearing

24
Denel

• Improvements in the 2007/08 Proposed Shareholder
  Compact (contd.)
• Business performance indicators include
• Measurable indicators Export sales, cost
  reductions, exit of non-viable and non-core
  businesses, improvements in governance and risk
  management policies and systems and compliance
  with legislation.
• Best endeavour indicators Consolidation of the
  business and the establishment of manufacturing
  clusters, equity partnerships and local
  collaborative partnerships, alignment of product
  lines to strategy, the management of major
  programmes, contract management and contracting
  improvements and reductions in the overall
  liability under the A400M programme.

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Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07
• (Eskom)

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Transnet

• Mandate
• Key role assist in lowering the cost of doing
  business in S.A and enabling economic growth
  through providing appropriate infrastructure and
  ensuring system reliability in a cost effective,
  efficient manner within acceptable benchmark
  standards

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Performance Area Key Performance Indicator Measure Target 2006/7 Actual 31 March 2007
Capital / Financial Efficiency Economic Operating Profit Budget (Rm) 7 173 8 431
Infrastructure Investments (Capacity delivery) Managed by Capital Expansion Division Generation Capital expenditure Budget (Rm) 6 058 7 034
Infrastructure Investments (Capacity delivery) Managed by Capital Expansion Division Transmission Capital expenditure Target (Rm) 1 000 1 166
Infrastructure Investments (Capacity delivery) Managed by Capital Expansion Division Generation capacity installed commissioned Target (MW) 1 041 1 065
Infrastructure Investments (Capacity delivery) Managed by Capital Expansion Division Transmission lines installed Target (Km) 410 430
Infrastructure Investments (Capacity delivery) Managed by Capital Expansion Division Transmission MVA installed Target (MVA) 500 1 000
Infrastructure Investments (Capacity delivery) Managed by Capital Expansion Division Distribution Capital expenditure Budget (Rm) 2 888 3 430
Operating Efficiency Effectiveness Major Incidents Plan 1 Deg 1 1 Deg 1 1 Deg 2
Operating Efficiency Effectiveness System Minutes Lost ( 1 min) Plan (SML) 3.9 3.67
Operating Efficiency Effectiveness Unplanned Capability Loss Factor (UCLF) Plan () 4.5 4.4
Operating Efficiency Effectiveness System Average Interruption Duration Index (SAIDI) Plan 52.8 49.7
Operating Efficiency Effectiveness Rand/Megawatt Hour (R/MWh) (before embedded derivative) Budget 167.26 162.5
Skills Development Eskom Trainees / Bursars Target 4 000 4 236
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• Economic Operating Profit (EOP)
• Measures the economic operating profit created by
  the business after paying for the use of capital
  (including working capital) to the providers
  thereof. Minimum return required from the
  business should result in EOP being zero. This
  minimum required return (opportunity cost)
  includes a charge for the capital employed to
  produce the outputs. EOP is derived from the
  following calculation
• Operating Profit XXX
• Add Depreciation XXX
• EBITDA XXX
• Less Economic Tax (XXX)
• EBITDA After Tax XXX
• Less Total Capital Charge on Assets (XXX)
• Economic Profit XXXX
• Add EBITDA After Tax XXX
• Less Capital Charge for Working Capital (XXX)
• Economic Operating Profit (EOP) XXXX

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• Generation Capital Expenditure
• This is the capital expenditure that will be
  spent by Capital Expansion Department (CED) on
  behalf of Generation Division on new generation
  capacity projects and other generation projects
  in accordance with the enabling agreement between
  CED and line divisions.
• Transmission Capital Expenditure
• This is the capital expenditure that will be
  spent by Capital Expansion Department (CED) on
  behalf of Transmission Division including the
  design and construction of new transmission
  networks and major extensions and strengthening
  of the existing grid major transmission projects
  in accordance with the existing enabling
  agreement.
• Distribution Capital Expenditure
• This is capital expenditure spent on
  distribution infrastructure managed within the
  Distribution Division. This captures capital
  expenditure on new customer connection,
  refurbishment, strengthening and continuous
  business improvement (electrification is
  excluded)

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• Generation capacity installed commissioned
• This is the nominal number of megawatts
  installed and commissioned within the financial
  year. This does not track the number of megawatt
  sent out or the maximum capacity demand which is
  always less than the nominal amount installed.
• Transmission lines installed
• This is the number of kilometres of transmission
  lines installed within one financial year. This
  includes kilometres of line that are installed
  and commissioned and those that are not yet
  commissioned within the financial year.
• Transmission MVA installed
• This is the total transform capacity measured in
  MVA installed within one financial year.

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• Major Incidents
• A major incident is an interruption incident
  that results in the loss of 1 system minute or
  more. The measure is scored on the basis of the
  degree of severity of these events. The degree of
  severity of a major interruption is defined
  internationally as follows
• Severity Degree 1 System minutes lost 1 and
  smaller than 10 Severity Degree 2 System
  minutes lost gt10 and lt 100 Severity Degree 3
  System minutes lost 100
• This measure tracks the number of significant
  interruption incidents.
• System Minutes Lost ( 1 min)
• This measure is the sum of system minutes lost
  per incident over a 12 month moving window. Only
  system minute events less than 1 system minute
  are counted in this index. This measure
  describes the underlying performance (severity of
  the load interrupted) over a 12-month period.
  Major events are excluded from this measure.
• Unplanned Capability Loss Factor (UCLF)
• This measure indicates the effectiveness of
  plant programmes and practices in maintaining
  systems available for safe electrical generation.
  It is defined as the ratio of the unplanned
  energy losses during a given period of time, to
  the reference energy generation, expressed as a
  percentage. Unplanned energy loss is energy that
  was not produced during the period because of
  unplanned shutdowns, outage extensions, or
  unplanned load reductions due to causes under
  plant management control.

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• System Average Interruption Duration Index
  (SAIDI)
• This measure is the average interruption
  duration for all customers served during the 12
  month period.
• SAIDI Sum of customer interruption durations
  (total hrs / customer / year)
• Total number of connected customers
• Rand/Megawatt Hour (R/MWh) (before embedded
  derivatives)
• Measures the cost per unit of energy sold.
• R/MWh Interest (include fair value)
  Operating costs (includes abnormal) Primary
  Energy X 100
• External sales GWh
• Eskom Trainees / Bursars
• This indicator tracks the number of learnerships
  that have been registered with the Eskom
  learnership programme in the current financial
  year. This indicator includes both the 18.1
  (employed by Eskom) and 18.2 (unemployed)
  learners.

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Transnet
CAPITAL FINANCIAL EFFICIENCY KPIS INTRODUCED
IN 2007/08

• EIBT Margin
• Return on Average Capital Employed

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Transnet
OPERATIONAL KPIS INTRODUCED IN 2007/08

• Distribution
• System Average Interruption Frequency Index
  (SAIFI)

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Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07
• (Transnet)

36
Transnet

• Mandate
• Key role assist in lowering the cost of doing
  business in S.A and enabling economic growth
  through providing appropriate ports, rail and
  pipeline infrastructure and operations in a cost
  effective, efficient manner within acceptable
  benchmark standards

37
Transnet

• Strategic Objectives
• Capital Financial efficiency
• Operational Efficiency Effectiveness
• Infrastructure Investments
• Development Objectives

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Transnet

• 2006/07 SKPIS

TARGET ACTUAL
Capital / financial efficiency Ebitda margin () Cash interest cover (times) Gearing ratio () Cfroi () 34.8 5.3 47.9 5.8 40.7 5.4 39 5.4
Infrastructure investments of actual capital expenditure compared to budgeted expenditure of total maintenance spent compared to budget spoornet gt90 gt90 99 125
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Transnet

• OPERATING EFFICIENCY EFFECTIVENESS

Tariff () Target Tariff () Actual Volume activity () Target Volume activity () Actual Total () Target Total () Actual
Total core 3.3 4.0 11.5 4.0 15.2 8
Spoornet 3.1 5 10.9 (2.5) 14.3 3.7
NPA 2.9 1.3 3.7 15.5 6.7 12.0
SAPO 3.9 6.4 8.8 8.6 13.0 14.0
Petronet 2.0 2.5 6.8 8-14 8.9 15.0
Transwerk 4.3 28.6 34.1 90.0
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Transnet

• 2006/07 KPIS

KPI ACHIEVED
CAPITAL / FINANCIAL EFFICIENCY
INFRASTRUCTURE INVESTMENTS
REVENUE INCREASE TARIFF AND VOLUMES (GROUP DIVISIONAL LEVEL) x

• Transnet achieved the capital/financial
  efficiency and infrastructure investment targets
• X Revenue objective not achieved due to
  Spoornets underperformance. Division experienced
  capacity, constraints, derailments and
  customer-related problems

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Transnet

• 2007/08 SKPIs
• Capital/financial efficiency
• - Ebitda margin ()
• - Cash interest cover (times)
• - Gearing ratio ()
• - Cfroi ()
• Infrastructure investments (capacity delivery)
• - of actual capital expenditure compared to
  budgeted expenditure
• - of total maintenance spent compared to
  budget Spoornet
• Revenue targets tariff () increase and volume
  () increase at group and divisional level
• Our focus now shifts from primarily financial to
  a mix of financial and operational targets
• Note KPIs remain the same as for 2006/07
  2006/07 targets form the base, new targets to be
  agreed where required

42
Transnet
OPERATIONAL KPIS INTRODUCED IN 2007/08

• Transnet freight rail
• Traffic volume in tonnes
• Staff productivity (net ton kilometres / number
  of staff)
• Net ton average / average of locomotives
• Net ton average / average of wagons
• Net operating cost / net ton kilometer
• Wagon turnaround (days)
• On-time arrival () at yard nearest the customer
  sidings

43
OPERATIONAL KPIS INTRODUCED IN 2007/08
Transnet

• NPA
• Annual volumes of cargo and growth per cargo type
• Cargo throughput per metre of quay
• Berth occupancy ()
• Ship waiting time

44
Transnet
OPERATIONAL KPIS INTRODUCED IN 2007/08

• SAPO
• Volume of cargo p.a
• Crane productivity
• Ship productivity (working time only)
• Ship productivity (total time at berth)
• Yard productivity
• Labour productivity

45
Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07
• (SAA)

46

• Mandate
• African airline with global reach
• Serve wide range of routes focus on limited
  number of profitable routes into major continents
• Increase African routes
• Only serve heavily trade routes in South Africa

47
Due to the unbundling of SAA from Transnet, a
Shareholders Compact between DPE and SAA was not
concluded for 2006/07. KPIs for the current
financial year are cited in the following table
. The focus for the department is to monitor
performance against the Turnaround Plan devised
with the assistance of the Seabury Consulting
Group and to this end a team comprising official
from National Treasury and DPE has been setup.
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Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07
• (PBMR)

49

• Mandate
• Successful commercialisation of pebble bed
  technology for world energy market
• Preferred global provider of standardised nuclear
  energy systems, fuel and life cycle support
• Performance oversight via PIM
• Project phase development of demonstration
  plant
• Shareholder compact to be concluded 2008/2009

50
Flow of Presentation

• Evolution
• Process
• Components
• SOE Performance Against Agreed KPIs for 2006/07
• (Infraco)

51
Infraco
Mandate

• To expand the availability and affordability of
  access to electronic communications, including to
  underdeveloped and underserviced areas, in
  accordance with the Electronic Communications Act
  and commensurate with international best practice
  and pricing, through the provision of
• (a) electronic communications network
  services an
• (b) electronic communications services.

52
Infraco
SKPIs

• Currently subsidiary of Eskom Enterprises
• Department has the agreement of Eskom Enterprises
  to monitor performance of Infraco on the
  following KPIs
• - EBITDA Margin ()
• - Cash Interest Cover (Times)
• - Gearing Ratio ()
• - ROA ()
• - ROE ()

53
Conclusion

• 2007/2008 compact process greatly improved
• Negotiation of compacts with majority of SOE
• Increased depth and width of compact content
  proving invaluable performance tool
• Ongoing identification and negotiation of KPIs
  following shareholder strategic objectives and
  market changes
• Majority of KPIs achieved by SOE for 2006/2007