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INTEGRATED RESULTS PRESENTATION
KING III APPLICATION
 
   



Leadership's key focus areas

The board and executive management have been instrumental in guiding Eskom with regard to the key priorities and risks in the business – they have been appropriately involved in the material issues affecting the business.

Some of the key items that were tabled at board and executive management level during 2013/14 are listed below and all these items are addressed in this integrated report:

Strategy, including the corporate plan for 2014/15 to 2017/18
General performance and risks, including safety, board and sub-committee evaluations, key business risks, and shareholder reporting
Generation sustainability, including maintenance issues
Security of supply, including IPPs, energy efficiency, electricity and equipment theft, and stakeholder engagement
Progress on the capacity expansion programme
Financial sustainability, including the business productivity programme, municipal debt, budgets, Eskom’s borrowing programme and statutory reporting
Security of coal and water supply, including coal haulage
Eskom’s environmental footprint, including emissions and environmental licences
Transformation, including employment equity, job creation, the electrification programme and B-BBEE

Ensure security of supply and Eskom’s financial sustainability

Balancing security of supply and Eskom’s financial sustainability were two of the most material items the board had to deal with this year. Some of the key decisions the board has taken during the year in this regard are listed below:

The going-concern status of the company will not be compromised while Eskom continues to ensure security of supply
The funding for the use of open-cycle gas turbines (OCGTs) in 2013/14 was increased from R3.6 billion to R11.3 billion to ensure security of supply, but this funding needs to be found elsewhere within the approved budgets, until it is recovered as a part of the regulatory mechanism
Appropriate levels of planned maintenance based on what is necessary to ensure long-term plant health will be executed while at the same time taking into account the current system constraints, compliance, safety and statutory requirements, and the financial constraints
Eskom will explore alternative funding options, including government support
Eskom will pursue all the regulatory options, including the liquidation of the RCA balance and, if necessary, a potential re-opening of the MYPD 3 revenue determination will be considered
The capital portfolio will be managed within the available funds and should additional funding not be secured for additional capital requirements, the current capital portfolio will be reviewed to reprioritise projects to ensure environmental and regulatory compliance
The board build programme review committee was established in April 2013 to enhance governance and monitoring and provide an additional oversight role for the capacity expansion programme
The residential customer revenue-management strategy, which includes the Soweto revenue management strategy to address debtor payment levels, received PFMA approval from the DPE and will be implemented in the new financial year
Various cost saving initiatives relating to the business productivity programme have been approved by the board investment and finance committee
The board has taken active steps to address the sustainability challenges in an integrated manner, including the establishment of a special board/Exco task team

Cost savings through the business productivity programme

Eskom implemented the business productivity programme (BPP) which focuses on the reduction of the cost base, increased productivity and revisions of the Eskom business model and strategy in order to close the revenue shortfall that was created by the MYPD 3 determination. Cash savings of between R50 billion and R60 billion are targeted over the period of MYPD 3.

To date, 86 savings opportunities (value packages) totalling R72.9 billion have been identified and approved and covers the following functional areas:

Primary energy
Employee costs
Repairs and maintenance
External spend
Finance
Revenue management

Cost-saving projects focus on:

Improving the efficiency and effectiveness of the capacity expansion programme
Reducing external expenditure through, amongst others, efficient procurement practices, negotiating for better prices, revising technical standards and reviewing the necessity of some activities
Reducing revenue losses, improving debt management and finding additional revenue sources
Optimising maintenance costs and processes
Reducing direct and indirect employee benefit costs
Optimising funding options and the balance sheet
Optimising and reducing the cost of primary energy

Risk reviews are performed prior to the implementation of value packages. A number of controls are in place to manage the risk of non-realisation of BPP targets. These mostly relate to the current governance processes such as business planning, budgeting and periodic financial monitoring. However, more specific measures will be implemented as part of the BPP programme. This will provide a much more granular view, monitoring value packages from inception through savings realisation, following a “stage gate” methodology. This is a proven, standard methodology applied in cost-saving exercises. A comprehensive project management approach and methodology is in the process of being implemented.

Internal controls including security and combined assurance

Internal controls

The board, through the audit and risk committee, ensures that internal controls are effective and adequately reported on for auditing and regulatory purposes. In line with King III, Eskom applies a combined assurance model to ensure coordinated assurance activities. This model gives the audit and risk committee an overview of significant risks, as well as the effectiveness of critical controls to mitigate these risks. The principles for the combined assurance model are embedded in the combined assurance framework. Eskom’s internal audit function is managed by the Assurance and Forensics department which reports directly to the audit and risk committee.

Eskom has for the past few years been running the “Back2Basics” programme to standardise, simplify and optimise its internal processes and improve the overall control environment. This is managed by a cross-functional committee called the CARAT committee. Process control manuals, each containing a “risk and controls” matrix, have been prepared for all key processes. These manuals cover both financial and operational processes, including the processes to be followed to determine the key performance indicators for technical matters and operations. The process control manuals are updated regularly.

The CARAT committee is a sub-committee of the executive management committee and performs the following in terms of its mandate:
It ensures that processes are driven with functional accountability with respect to the principles of completeness, accuracy, relevance, accessibility and timeliness
Reviews all change requests affecting processes, systems or data
Ensures the adherence to and compliance with business processes defined in each support function process control manual
Identifies the need for business process optimisation projects
Enforces standardisation across the business
Defines and monitors KPIs to drive performance improvement across the business

The Audit and Forensic department’s risk-based plan for technical and financial reviews of internal control systems is approved by the audit and risk committee on an annual basis. Eskom keeps a database of all internal and external audit findings (financial and technical). The database is monitored on a monthly basis by management and Assurance and Forensics, and progress on resolving audit findings is reported to the audit and risk committee on a quarterly basis. Eskom also provides the Auditor-General of South Africa with a quarterly assessment on the control environment.

Combined assurance

Combined assurance assists management in identifying duplication of assurance work, any potential assurance shortfall, and improvement plans for those areas identified. It also helps focus assurance providers to better achieve consensus on the key risks the company faces and reduce the risk of failing to identify significant risks.

The combined assurance model provides three lines of defence against risk:

Line 1: Line management and managerial controls. Line management is responsible for managing risk and performance
Line 2: Functional areas like risk management, compliance (including ISO 9001 and 14001 compliance), safety, health, environment, quality and the associated frameworks, policies, reporting and oversight, support management in executing its duties and provides a layer of control over risk management
Line 3: Independent, objective internal and external assurance providers. The third line of defence is independent of management and provides independent, objective assurance

A combined assurance forum has been established to implement and embed the combined assurance framework principles. The forum consists of the three lines of defence, with the objective of:

Ensuring coordinated and relevant assurance activities focusing on key risks
Improving collaboration between different assurance providers
Improving reporting to the board and committees, including minimising repetition of reports being reviewed by different committees
Reducing assurance fatigue and minimising disruptions to the business
Providing the audit and risk committee with a better basis for exercising its oversight function

The Assurance and Forensics department is responsible for driving combined assurance within Eskom. External auditors independently audit the financial statements and selected sustainability information.

Security risk management

The board is responsible for ensuring that an integrated crime-prevention plan is in place to minimise Eskom’s exposure to crime, particularly fraud. Eskom develops strategies to protect assets, interests, information, people and processes, and gives assurance that the required measures are implemented.

Security projects for the year included purchasing new data-leakage prevention software, firewalls, laptop encryption and a security operations centre. Public Finance Management Act approval has been obtained for the transmission national security refurbishment project. This project includes various initiatives to improve and upgrade the security systems at various critical and high-risk Transmission sites, in order to mitigate risks to the integrity of assets and continuity of supply. The project is underway and will receive continued focus until completion.

Remuneration and employee relations

Eskom’s approach to remuneration and benefits is designed to attract and retain skilled, high-performing employees. To achieve this, Eskom pursues the following remuneration principles:

Business requirements determine market positioning
Provide market-related remuneration structures, benefits and conditions of service
Maintain external competitiveness to attract and retain key skills
Ensure internal equity through defensible differentials in pay and benefits
Remunerate employees in accordance with their job grade, and at least at the minimum of the applicable salary scale
Follow a lead-lag market approach. The Eskom salary/guaranteed packages will typically be leading the market just after the annual increases have been implemented and lagging the market two to three months before the next increases are due

Eskom is committed to resolving unjustifiable race- and gender-based income differentials by reinforcing its remuneration management principles. This involved ensuring that all qualifying employees are moved to the 50th percentile for their job description. An income differential exercise was implemented in November 2013 and the resulting salary adjustments were made.

Eskom’s employee engagement model aims to encourage employee participation and involve employees and executives in conversations around strategy, performance and people. Eskom has developed more productive, sustainable relationships with organised labour and continues to do so through a partnering model to guide these interactions. The company has also embarked on a process to further strengthen the relationships with the trade unions, using the services of an external facilitator.

Eskom’s remuneration structures fall into four categories as set out below.

Bargaining unit

High-voltage line construction calls for very stringent safety measures
High-voltage line construction calls for very
stringent safety measures

Bargaining-unit employees (all those below middle management) receive a basic salary plus benefits. Major benefits include membership of the pension and provident fund, a medical aid, housing allowance and an annual bonus (thirteenth cheque). Basic salaries and conditions of service are reviewed annually through a collective bargaining process. Bargaining-unit employees also participate in an annual short-term incentive scheme.

Eskom and its recognised trade unions approved the Council for Conciliation, Mediation and Arbitration (CCMA) for wage-negotiation arbitration towards the end of 2013. In January 2014, the CCMA awarded Eskom’s trade unions a 5.6% annual wage increase (6.3% total costs including benefits) for one year, backdated to 1 July 2013. This was largely in line with Eskom’s final offer.

Even though electricity has been declared an essential service, which prohibits Eskom employees from engaging in industrial action, employees at some sites embarked on various forms of unprotected industrial action during the year.

Managerial level

Managerial-level employees are remunerated on a cost-to-company/package basis. The package includes pensionable earnings, compulsory benefits and a residual cash component. Managerial employees also participate in an annual short-term incentive scheme, consisting of rewards for achieving objectives set by the chief executive and approved by a board committee.

Short-term incentive scheme for bargaining unit and managerial level

Eskom has a short-term incentive scheme in place that aims to align individual performance with organisational strategic objectives by setting targets for key performance indicators that contribute to these objectives.

The key performance indicators are linked to Eskom’s strategic objectives and cascade down from the organisational level to the individual level. Employees are contracted to achieve targets for selected key performance indicators and are rewarded for meeting or exceeding these targets. All permanent employees take part in the scheme. The value of the bonus itself depends on the organisation’s overall performance.

The performance areas of Eskom are weighted: safety (15%), technical and customer service (45%), energy demand and cash savings (20%) and achievement of new build milestones (20%).

The executive management committee can reduce the incentive payable to the bargaining unit and managerial level when the minimum requirements of the scheme are not adhered to, for example fatalities, by a maximum of 30%.

Non-executive directors

Non-executive directors’ fees are paid as a fixed monthly fee, decided in accordance with the shareholder’s approval. Non-executive directors are reimbursed for company-related expenses.

Executive remuneration

The chief executive, finance director and group executives have permanent employment contracts based on Eskom’s standard conditions of service.

Executive remuneration is based on the organisation’s performance, as assessed through performance on key indicators, and the individual’s contribution to that performance. It consists of a basic salary augmented by short- and long-term incentives. The balance between fixed and variable remuneration (short- and long-term incentives) is reviewed annually.

International and local benchmarks are considered in determining remuneration. The remuneration strategy is aligned with shareholder guidelines.

The board approves the remuneration of the finance director and group executives. The chief executive’s remuneration is approved by the shareholder. Factors taken into account include the executive’s level of skill and experience, his/her contribution to organisational performance, and the group’s business results.

The remuneration of executive management committee (Exco) members consists of the following:

A total guaranteed amount, consisting of a fixed cash portion and compulsory benefits. This is reviewed annually
Short-term incentives, consisting of rewards for achieving objectives set by the chief executive and approved by a board committee (refer to the key performance indicators on page 80)
Long-term incentives, consisting of rewards for achieving objectives set by the shareholder (refer page 80)

In terms of their performance contracts, only 20% of executives’ performance rating is based on individual performance; the remaining 80% is based on Eskom’s collective performance. Cognisance must be taken of the responsibilities and risks that directors and executives carry, given their broad accountability.

Incentives for executives

Eskom has a formal remuneration plan that links management remuneration to the performance of the organisation and individual contribution.

Incentives for executives

All key performance areas and key performance indicators in the shareholder’s compact are included in the Exco compacts. The compact is in essence a performance agreement.

Compacts of Exco members are focused on the implementation of the corporate plan and are as such linked to the Eskom strategic objectives
The people and governance committee reviews the key performance areas and key performance indicators of the Exco members’ compacts annually to ensure alignment with the shareholder’s compact and the corporate plan
Individual performance is reviewed annually and is based on a performance contract (compact) between the group executive and chief executive
Compacts for all other executives are aligned with the Exco compacts
Targets include both company and division specific priorities (key performance areas and key performance indicators) which link directly to the shareholder compact and corporate plan

Exco compacts rely on three elements to determine bonuses for executives:

Gatekeepers need to be reached to qualify for bonus: If gatekeepers are not reached, then there will be no bonus at all
Qualifiers determine the performance score of between 60% and 120%, depending on achievement
Modifiers reduce performance score if not reached and can decrease the performance score by up to 25%, depending on how many modifiers are not reached

Long-term incentives

A number of performance shares (award performance shares) were awarded to the Exco members on 1 April 2010, 2011, 2012 and 2013. The board has set performance conditions in line with the Eskom shareholder’s compact over a three-year performance period. Performance covers financial and non-financial targets. Awards only vest if, and to the extent that, these targets are met. The vesting percentage can be reduced by the people and governance committee if gatekeepers are not met.

Long-term incentive vesting percentages – 2014: 53.48%, 2013: 48.23%.

The vesting rates take into account the penalty of 0% for 2014 and 15% for 2013 on the vested amount.

Short-term incentives

Short-term incentives, consisting of rewards for achieving set objectives over a 12-month period, are division/company specific.

The table below contains the executive compact areas for the year ended 31 March 2014.

The consolidated key performance indicator table (which includes the key performance indicators in the shareholder’s compact) shows the link (colour coded as indicated below) between the key indicators in appendix A (refer to pages 170 to 175) and the executive compact key performance areas.

Executive compact key performance areas
  1.   Operate safely
  2.   Keep the lights on
  3.   Deliver on the capacity expansion programme
  4.   Protect the environment
  5.   Socio-economic contribution and build skills
  6.   Transformation
  7.   Improve performance
  8.   Chief executive discretion

The weight allocated to each person for each of the compact areas will depend on the responsibilities of that specific individual.