Risks relating to material items

The Eskom board, through the audit and risk committee, manages Eskom’s risk and resilience in order to provide greater security for its employees, customers and other stakeholders. Two risk profiles are considered in Eskom, namely enterprise risk and business risk profiles.

An enterprise risk profile gives Exco and the board a robust and holistic top-down view of key risks facing the organisation. This makes it possible to manage those risks strategically and to increase the likelihood that Eskom’s objectives will be achieved. Enterprise risk is defined as one or a combination of the following:

Risks emanating from external factors and/or enterprise events that are strategic challenges which may affect Eskom’s ability to achieve its objectives e.g. climate change
Risks associated with Eskom’s ability to develop and execute strategy, achieve strategic objectives, and build and protect value
Business risks that occur across multiple divisions that, when integrated and aggregated, are material and impact Eskom’s objectives
The aggregated risks may not be recognised as material in any one division but are occurring across multiple Eskom divisions and when integrated, become significant
A single business risk, may be material enough to impact on the Eskom’s objectives as a whole and as such maybe reported as a corporate risk

The business risk profile gives Exco and the board a robust and holistic bottom-up view of key risks facing the divisions, and a view of the level of effectiveness in the management of those risks.

Risks inherent to Eskom’s operations are considered as:

Risks that will have a significant consequence should they materialise, but that may not be consistently listed on the risk register because of the perceived adequacy of the controls or due to their perceived low likelihood
Risks which by their nature fall into the realm of business continuity management – i.e. related to the continuity of critical products and services in the event of a disruption to processes providing these (the focus here is not on the cause of the disruption but on the time-critical impact on the process if buildings, equipment, system, technologies, human resources, or suppliers, are affected)
Risks that fall into the category of disaster risks – i.e. with potentially significant impact on the country if Eskom products and services are disrupted (if business continuity is not adequate), and if Eskom does not have the capability to respond

In line with Eskom’s integrated risk management methodology, inherent risks are continuously reviewed with a particular focus on the effectiveness of controls.

Eskom is required to comply with the relevant provisions in the Disaster Management Act No 57 of 2002 (and the associated National Disaster Management Framework) and Eskom is currently focusing on improving the processes around this requirement.

The following table details the key focus areas and associated risks and provides a link to the material items identified in the stakeholder materiality matrix (refer to page 56). It also refers to the section in this report where the items are discussed in more detail. Labour issues have been identified as a new item on this table since the integrated report for the year ended 31 March 2013.

In reviewing the table below, the reader should be aware that the identification of risks is based on an approach that attempts to identify what could go wrong to disrupt the achievement of current objectives, and whether there is adequate mitigation in place to address such an eventuality. It does not intend to set out as a matter of fact any particular concern or deficiency. It should be seen as a process to consider different scenarios and the contingency plans in place should such a scenario materialise.

Stakeholder materiality matrix linked to key focus areas and associated risks

Key focus areas and associated risks
Key performance indicators
Strategic response and controls
Focus on safety

Related material items: 14, 38, 44

There is an ongoing concern that the inherently significant health and safety risks associated with an electricity business might materialise

Number of fatalities
Eskom’s “zero harm” initiative focuses on the following elements:

Contractor safety
Supervisory capacity
Training and facilities
Human behaviour
Eskom’s life-saving rules
Integrated crime-prevention plan
Motor vehicle interventions to improve vehicle safety
Contractor coal trucks are not allowed to be on the roads between 18:00 on Fridays and 06:00 on Sundays
Improve operations

Related material items: 1, 4, 8, 13, 36, 39, 42, 43

If a significant incident relating to Eskom’s assets and technologies occur, it might result in impairment of operations, prosecutions, financial loss and reputational damage. Theft of electricity and equipment resulting in financial loss are also potential risks, including the impact thereof on technical performance. The risk of loss of supply to customers due to network unavailability and/or equipment failure as a result of ageing plant may lead to an interruption(s) of supply to customers

System minutes lost (for events <1)
Number of major incident
Generation sustainability strategy
Distribution sustainability strategy focusing on prioritised interventions towards refurbishments, reliability improvements and maintenance
Transmission network strengthening projects
Leadership interventions
Operation Khanyisa
Technologies to help reduce tower component theft
Business continuity, including the appropriate insurance portfolio
Asset management
Process control manuals

Being customer-centric

Related material items: 19, 27, 28, 40, 44

There is a concern that Eskom’s reputation may be negatively affected by poor service delivery and insufficient understanding of what is important to customers

Customer service index
Eskom KeyCare index
A centre of excellence has been established with structured operating units to improve operations and to manage reputational risk
Customer service improvement plan
Build strong skills

Related material items: 6, 33, 34, 42, 44

There is a concern that there may be inadequate skills in certain areas of the business to support Eskom’s technologyintensive operations

Training expenditure as a percentage of gross employee benefits
Total number of learners in the following streams:

Youth programme
Skills development initiatives (training, skills transfer, engagement with educational institutions)
Back2Basics initiative to standardise operations
Localisation of skills through the capacity expansion programme
Eskom provides training through the Academy of Learning and learner programmes
Eskom’s learner programmes, focused on technical learners
Security of supply

Related material items: 2, 3, 4, 5, 6, 8, 9, 12, 13, 39, 42, 43, 44, 45

If there is slow progress on Eskom’s maintenance programme, it may delay improvements in plant performance. Coupled with partial load losses due to poor coal quality, this might result in prolonged energy constraints, loss of confidence in Eskom and an increased risk of load shedding, which would have severe implications for the country and Eskom. Potential shortage of liquid fuels may impact security of supply. Refer to “delivering capacity expansion” focus area below

Integrated demand management and energy efficiency
Maintenance backlog reduction based on Eskom’s technical governance committee approval
Protection systems and operating standards
Black-start readiness
Disaster risk planning through national disaster management structures
Security of supply recovery project/ system emergency preparedness and emergency response command centre
Capacity expansion and IPP programmes
NERSA approved NRS 048-9 load curtailing protocols
Power Alert, Power Bulletin and quarterly state of the system media releases
Stakeholder engagement
Crisis communication centre established
Refer to “improve operations” focus area in this table on page 58
Delivering capacity expansion

Related material items: 6, 42, 44

If there are further delays in delivery, and/ or if the cost of the capacity expansion projects escalates, it could lead to a loss of stakeholder confidence, which would affect future build projects. Possible late delivery would also place pressure on the power system and the Generation sustainability strategy

Generation capacity, transmission lines and transmission capacity installed
Generation expansion capacity milestones (Medupi, Kusile and Ingula)
An integrated mega project risk management framework has been implemented to align the objectives of all relevant stakeholders, identify and integrate risks and issues across projects, and implement more effective treatment plans
Appropriate insurance portfolio
Board build programme review committee

Related material items: 6, 38, 44

Possible labour unrest among contractors, service providers and suppliers could further delay major projects, cause significant disruptions in electricity supply, decrease productivity and pose a risk to the safety of Eskom employees, contractors and members of the public

No specific key performance indicators
Strike prevention mechanisms
Engagement with government intelligence agencies and environmental scanning
Monitoring the labour environment
Develop, review and implement strategy on employee engagement
75, 8588
Security drive to protect employees, contractors and infrastructure
See the treatment and controls under the “focus on safety” focus area in this table on page 58
Reduce environmental footprint in existing fleet

Related material items: 2, 7, 8, 9, 10, 11, 23, 36, 37, 42

Should Eskom fail to embed climate change and sustainable development in its operations, its access to natural resources and licence to operate may be jeopardised to the point that it will be unable to reliably supply electricity. Eskom’s emissions performance could also deteriorate, possibly resulting in costly legal contraventions, increased public health risks due to growing emissions, reputational damage and jeopardised security of supply should generating plant have to be wholly or partially shut down

Specific water usage
Relative particulate emissions
Environmental legal contraventions in terms of the operational health dashboard
Emission treatment plans are in place. However, they cannot always be executed due to the outages required to do upgrades being postponed
Ongoing reviews to ensure that water-use licences and permit requirements are met
Kusile and Medupi power stations will be fitted with flue gas desulphurisation technology, which will reduce sulphur oxides, nitrogen oxides and particulate emissions
Renewable-energy projects are underway
Eskom supports introducing renewable energy IPPs to the electricity industry
Internal and external energy efficiency programmes
Eskom’s climate change strategy
Implementing coal haulage and the road-to-rail migration plan

Related material items: 14, 42, 44

Failing to successfully implement the road-to-rail migration strategy would cost Eskom lost opportunities in terms of cost (road repairs and logistics costs would not be lowered) and reputation. Safety benefits would also not materialise

Amount of coal haulage transferred from road to rail
The road-to-rail migration strategy is being implemented in partnership with Transnet Freight Rail
IPP-contracted energy

Related material items: 5, 16, 44

If IPPs are only able to intermittently deliver electricity, Eskom’s demand-andsupply planning may be affected, so affecting security of supply

Installed IPP capacity
GWh purchased from IPPs
Eskom continues to sign power purchase agreements with IPPs
Eskom is implementing a contract management strategy for IPPs
Independent System Market Operator

Related material item: 15

The creation of the Independent System Market Operator may affect Eskom and its stakeholders should it be implemented within a constrained capacity environment

No specific key performance indicators
Eskom contributed to the preparation of a due diligence report that was tabled with the Department of Energy
Eskom has suggested a phased approach
Maximise socio-economic contribution and procurement equity

Related material items: 17, 19, 20, 21, 22, 27, 42, 44

Failing to meet targets for corporate social investment, universal electrification and local procurement – especially procurement from businesses that are owned by black people, black women or black youth – would mean that Eskom has effectively not fulfilled its mandate to contribute to the government’s developmental plans

Percentage of local content in all new build contracts
Percentage of expenditure attributable to B-BBEE companies, blackwomen- owned and black youthowned companies
Corporate social investments
Electrification connections
Eskom promotes jobs and localcontent procurement in all new commercial contracts
Eskom’s procurement policies advance B-BBEE and blackwomen- owned and black youthowned businesses
Eskom provides training through the Academy of Learning and learner programmes
The universal electrification programme is ongoing
Corporate social investment activities are ongoing
Eskom’s socio-economic development strategy
Employment equity

Related material items: 18, 42

Failing to meet equity targets for disability, race and gender in middle and upper managerial and professional positions would affect Eskom’s reputation and labour relations, and could jeopardise the developmental aspect of its mandate

Employment equity indicators
Eskom has implemented an employment equity plan supported by a long-term, target-setting strategy to drive the transformation agenda
Ensure Eskom’s financial sustainability

Related material items: 4, 13, 16, 23, 24, 25, 26, 29, 30, 31, 32, 35, 41, 42, 45

The revenue shortfall between Eskom’s MYPD 3 application and NERSA’s tariff determinations may compromise business operations and delivery on the current corporate mandate. Should poor decisions be made regarding liquidity and portfolio management, it will lead to insufficient funds to meet financial obligations

Further sovereign rating downgrades, combined with uncertainty around Eskom’s financial sustainability or ability to meet loan obligations on time as perceived by the rating agencies, may result in a lower credit rating for Eskom. This would negatively affect its funding and hedging options, and increase borrowing costs

Financial and
liquidity ratios
Eskom continues to monitor its funding and liquidity position
The MYPD 3 response, which includes the business productivity programme, forms the core of the treatment plan. Executive management committee “sponsors” have been assigned to the programme’s seven streams to drive value creation and ensure that cash is delivered to the business, and the board closely monitors the progress
There is ongoing engagement with NERSA regarding the regulatory rules and RCA
A joint board/Exco task team has been established to find a solution to Eskom’s financial sustainability in the long term
Refer to note 4 in the 2014 annual financial statements for more information regarding Eskom’s financial risk management (www.eskom.co.za/IR2014/01.html).

The heat map that follows indicates the relative likelihood and impact of selected risks noted in the materiality matrix. For a risk to be classified as a priority one risk, both the likelihood and impact should be high. Roman numerals are used to facilitate the linkage to the material items table above.

Heat map of risks linked to material items

Heat map of risks linked to material items Employment equity

Rotek and Roshcon logistics services transports about 18 000 tons of abnormal loads for Eskom per year, such as this vale for the Ingula pumped-storage scheme
Rotek and Roshcon logistics services transports about 18 000 tons of abnormal loads for Eskom per year, such as this vale for the Ingula pumped-storage scheme