Date: 23/11/2010
Source: The Department of Public Enterprises
Title: SA: Gigaba: Keynote Address by the Minister of Public Enterprises, at the Reliability and Maintenance Week Conference, Johannesburg

Programme Director
Ladies and Gentlemen, Good Morning

The Minister conveys his sincere apologies for not being here today. He wanted to be here however due to a pressing commitment he had to be elsewhere.

The Minister also wishes to thank you for inviting him to this important conference that will address the challenges facing plant and asset management and provide the necessary solutions required to foster industrial growth.

The timing of the conference could not be better as Government is investing more than R800 billion on an infrastructure programme, to accelerate the country's economic growth. Government's massive infrastructure programme will include the construction of transport system, energy generation, water, ports and logistics amongst others.

To foster the country's economic growth, reliable supply of electricity is essential. The country is moving with speed with the construction of energy generation infrastructure, where Eskom is playing a critical role to ensure security of future electricity supply in the country is maintained. However, much can't be said about the supporting infrastructure for electricity generation, which include roads, bulk water, and rail logistics infrastructure.

As you may be aware, Government has developed a comprehensive delivery agreement that focuses on the corrective measures or interventions, in order to maximize the impact of infrastructure investment to economic growth. The aim is to increase competition, strengthen regulation and accelerate the revitalization of the ageing infrastructure.
Government has identified four key categories of constraints to infrastructure development. These include:
➢ Insufficient and inadequate infrastructure
➢ lack of maintenance and refurbishment
➢ operational inefficiencies
➢ uncompetitive environment and regulatory constraints

Government intends to resolve all these constraints and enforce especially maintenance as part of management performance contracts. Such infrastructure are the cornerstone of ensuring that electricity generated from power stations eventually reach the intended recipients such as municipalities, industries and the ordinary person for their household use.

Infrastructure Maintenance

Maintenance is a fundamental part in the execution of an integrated enterprise asset management philosophy. It is the execution of well-planned activities to keep plant and equipment in a reliable state of performance. It is essential for any asset centric organisation to have a well defined asset management strategy, underpinned by a clearly defined maintenance philosophy and execution strategy. There are different types of maintenance practices. These include, amongst others,
• Reactive Maintenance,
• Preventative Maintenance,
• Predictive Maintenance and
• Reliability-centred Maintenance

All three spheres of Government, as well as SOE, face the challenge of operating and maintaining infrastructure. While the importance of the provision of infrastructure to support socio-economic growth has been well recognised within Government, the potential of infrastructure maintenance as a powerful management tool for economic growth and service delivery needs to come more to the forefront.

Infrastructure maintenance must be regarded as a strategic tool to:
• promote improved service delivery,
• create jobs,
• unlock funding to extend infrastructure to historically disadvantaged communities.
• And optimise resources thereby supporting the nation's economy, improve plant performance and reliability thereby contributing to customer satisfaction, enhance business sustainability and create shareholder value.
• Maintenance of existing infrastructure should therefore not be seen as of secondary importance to the apparently more attractive prospect of new infrastructure.
Overview of Distribution Industry

In South Africa, the responsibility for distribution of electricity is shared between Eskom and approximately 187 municipalities. The latter contributing 40% of the total electricity sales from 60% of the customer base.

Whereas attention was given to the challenges facing the electricity generation industry after the rolling blackouts of 2008, lesser attention was given to the state of the distribution assets and their ability to guarantee reliable service into the future. The distribution industry is in a dilapidated state, posing a very real threat to the security and reliability of electricity supply to the end-user. To date, the delay in the restructuring of the distribution industry has resulted in an ever-increasing maintenance backlog that must be addressed promptly.

The key causes of the challenges facing the distribution industry include failure to implement effective maintenance, upgrading and refurbishment programmes; high demand growth, underinvestment in infrastructure and higher infrastructure/equipment loading.

Municipalities

Municipal distributors are facing widespread challenges due to historical under-investment and as a result, their distribution businesses continue to suffer financial problems. Most are facing rising consumer debt. Revenue collection from the consumer base is of paramount importance to the financial capability of the distribution industry. In addition, distributors need to meet their financial commitments for electricity purchases and refurbishment in order to be financially sustainable. Approximately one third of the 187 municipal distributors are currently experiencing severe financial problems and have therefore not been able to consistently and sufficiently provide reliable electricity to the end-user.

According to the research conducted by the National Energy Regulator of South Africa (NERSA) in 2007, about one third of distribution utilities had sufficient competent staff and only fifteen percent of the distribution networks were found to be in an acceptable state. From the local government budget and expenditure figures over the period from 2003 to 2010, the capital expenditure on electricity as a percentage of total municipal capital expenditure has been decreasing. Furthermore, the available capital budget is insufficient to facilitate growth and address the backlog simultaneously.
I would like to urge business, industries and domestic users to exercise their responsibility and pay for their electricity timeously as the failure to do so, places a huge financial strain on the municipality's ability to provide communities with reliable electricity supply.

Eskom

The Eskom Distribution business is also experiencing challenges regarding appropriate levels of maintenance, refurbishment and strengthening of key infrastructure. Eskom acknowledged this in its Multi-Year Price Determination (MYPD2) application in 2009.

Utilities of this day and age are faced with the uphill task of improving operational efficiencies in an ageing infrastructure whilst ensuring that they deliver uninterrupted electricity to the end-user. In the South African context, as Eskom expands the generation and transmission capacity, it is highly crucial that the existing electricity infrastructure also be upgraded and strengthened.

Progress of the Eskom distribution network performance improvement initiatives have resulted in Eskom focusing on planned maintenance work during this financial year. The unacceptably high levels of theft of equipment and electricity are affecting plant performance and increasing cost. It costs Eskom approximately R1.2 billion a year and, coupled with the cost to municipalities, it is estimated that the country lost R4.4 billion in the last financial year due to equipment and electricity theft.

These losses to the country's economy cannot continue to be left unabated. We urge all South Africans to continue to support the recently launched Operation Khanyisa, which encourages all citizens to use electricity legally. Government is fully committed to lend its support to this initiative by Eskom in partnership with Business Unity of South Africa, Business Against Crime, Primedia Crime Line, Proudly South African and the South African Local Government Association.

Government Efforts

Government is also aware of other factors that contribute to the deterioration of the distribution infrastructure, namely:

➢ Institutional issues:
➢ Management and allocation of finances
➢ Limitations in regulation:
➢ Shortage of skills and staff:
➢ Demand growth:
➢ Ageing assets:
➢ Urban densification:

Government is working on the solution to the challenges facing the electricity distribution industry. In 2006, Cabinet approved the plan to create six regional electricity distributors (REDs). These REDs will be established as public entities and will be accountable to the Department of Energy.

An Inter-Ministerial Committee on Energy (IMC) was set up by Cabinet in 2009 to consider, amongst others, matters related to the establishment of REDs. Therefore a working group comprising various Government departments was established with the chief purpose of fast tracking a final decision on whether it is feasible for REDs establishment by the end of the year, failing which the REDs concept will be reviewed.

Interim solution to address distribution backlog

While a decision on the restructuring of the distribution industry is being finalised, it is vital that interim measures be put in place to address the inefficiencies and backlogs plaguing the industry.

The (EDI) Holdings developed a comprehensive Approach to Distribution Asset Management (ADAM) turnaround programme, in support of the National Electricity Response Plan to the electricity emergency in 2008. In 2008, EDI Holdings identified that about R27.4billion is required to roll out ADAM, which represents roughly 9.6% of the then replacement value of the distribution network. At an estimated growth rate of about R2.5 billion per year, R32.4 billion will be required to address the backlog in the distribution network by the end of 2010.

Conclusion

Reliability begins with management. Because components, equipment, systems and people are imperfect and therefore bound to fail; management of these facets is essential to ensure system reliability. Therefore, the role of plant, operations and asset managers is without a doubt, very vital in preserving, upgrading and ensuring continuous reliability of services. Managers must prioritise the formulation, improvement and application of reliability standards in all operational processes.

The electricity distribution network needs to be supported with an information management network that will play a fundamental role in the delivery of electricity to the end-user. For that reason, all relevant stakeholders are called to work collectively towards this goal.

For South Africa to take the country's economic growth to a higher trajectory, massive investment in maintenance is absolutely critical such that we are able to provide reliable services in the generation, transmission and distribution sectors of the electricity industry. Furthermore, there is a pressing need for enhanced monitoring, mechanisation and information management in order to improve the reliability of power supply. Management must prioritise these facets to ensure that the end-user receives service of the highest quality.

Ladies and gentlemen, one of the focus areas that is fundamental to regional and national development is the provision of reliable transmission network to evacuate power to support development. However, we all know that most of our transmission network was created at a time when the country had excess capacity. Now we need to ask ourselves the question as to what type of network will ensure reliability? The transmission lines should be able to meet the Transmission Grid Codes reliability criteria. This means that at all times a primary contingency will not result in a loss of transmission network, thereby resulting in power not being able to be evacuated through the transmission corridor.

The viability of the distribution industry will be dependent on the infrastructure backlog being funded and eliminated swiftly in the medium term. Government acknowledges that the process of addressing the backlog effectively is inherently complex and as such requires careful management from public and private stakeholders. Furthermore, it is essential that an electricity distribution asset management plan be developed and rolled out through a well structured mechanism. In this light, we are committed to strengthening our regulatory environment to ensure full compliance to licence conditions.

Ladies and Gentlemen

State-Owned Enterprises play a critical role in the different economic sectors of the country and in support of Government's developmental agenda. Government is committed to support the SOE and other industries such as the electricity distribution sector to ensure security of supply of electricity to South Africans.

The Minister wishes you a fruitful conference.

I thank you