Overall mandate

Provide a single procurement entity that ensures effective and efficient procurement for Eskom (including Primary Energy), through supplier management and development, contract negotiations, as well as inventory management, warehousing and logistics.

Highlights

Challenges

Completion of the preparatory work on the formation of the consolidated procurement and supply chain function More than 51% local content (expenditure) in the whole capacity expansion programme since inception Level 2 contributor level on B-BBEE Renegotiated power transformer contracts will deliver a potential saving of R1.5 billion over the next four years. Three-year contracts for the supply and installation of dissolved gas analysers resulted in a 17% reduction in the overall cost of the units Reduced the cost base of insulated aerial bundle conductor by 28% (R215 million) over five years Reduced the average cost base of earth wire by 36% (R90 million) over five years. Medupi All major packages have been placed Value of contracts placed to date: R51 billion Contracted local content from inception of contract: R33 billion. Kusile 43 of the 53 packages have been placed Value of contracts placed to date: R47 billion Contracted local content since inception of contract: R29 billion. Ingula Finishing last package transaction Value of contracts placed to date: R10 billion Contracted local content since inception of contract: R4 billion. Power delivery projects Contracts have been successfully completed to maintain momentum Value of contracts placed to date: R7.8 billion Contracted local content since inception of contract: R6.4 billion.

Medupi Alignment of procurement activities of two packages to the World Bank procurement rules. Kusile Funding challenges delayed the placement of various packages during the year The misalignment in milestone and completion dates caused by the delay in placement of contracts has to be managed. Ingula Some contract strategies had to be revised to cater for dynamic market conditions, especially related to localisation. Power line projects Limited availability and capability of local line construction suppliers Land and rights issues affecting the awarding of contracts, as well as the receiving of uncontested environmental management plans Alignment of procurement activities on the three Medupi line construction packages to the World Bank procurement requirements. Return to service Delayed the placement of various packages during the year. Renewables Alignment of procurement activities to the World Bank procurement rules to which all funders agreed to Procurement requirements are dependent on a memorandum of understanding between various funding institutions, which is causing time delays.

Future priorities

Finalise the staffing and organisational structures of Group Commercial Deliver the Group Commercial strategy Conclude the various packages for the capacity expansion programme Deliver sustainable savings across all commodities.

 

Overview

Group Commercial was established in 2010 to consolidate the divisional procurement and supply chain departments into a single procurement entity. Group Commercial is founded on a strong commercial risk and governance premise with a sound business enablement foundation. Group Commercial is comprised of procurement and supply chain activities covering the new build projects as well as strategic and tactical sourcing of other key commodities, together with the sourcing and delivery of primary energy. The consolidation of procurement and supply chain activities will ensure effective and efficient procurement for the organisation, through supplier management and development, contract negotiations, as well as inventory management, warehousing and logistics. Operational cost efficiencies as well as sustainable cost reduction across the organisation are some of the benefits that will result from a consolidated commercial value chain.

With the current focus on Eskom’s capacity expansion programme, as well as the ongoing challenges of sourcing adequate coal supplies, smart procurement is more important than ever. In line with the Back2Basics programme, standardised, simplified and optimised procurement policies, processes and systems need to be consolidated into one common standard for the entire organisation.

Group Commercial must ensure that both local and international suppliers receive a clear and consistent message about how to do business with Eskom as a state-owned company.

With standardised procurement procedures, Eskom will have the capacity to take its buying approach to the next level, becoming leaner and more efficient, eliminating unnecessary processes while ensuring a single source of visibility.

Eskom’s total procurement budget for the financial year under review was approximately R90 billion, of which 27% went towards meeting coal requirements. Eskom is committed to staying within the cost structure laid out by the National Energy Regulator of South Africa, and consolidation of procurement and supply chain is vital to ensuring this. The division will be focusing on two critical success areas while intensifying strategic sourcing principles to drive a rigorous cost savings programme over the next three years and beyond, as well as negotiating contracts that take advantage of bulk purchases and economies of scale.

A more streamlined and efficient procurement policy requires that the supplier database is cleaned up and consolidated. Suppliers’ broad-based black economic empowerment spend and company profile are taken into account, to determine the degree to which they are contributing to the South African economy in line with government’s new growth path. Eskom examines to what extent a supplier sources or manufactures equipment in South Africa, and to what extent do they use and train local labour. Eskom remains focused on the development of local suppliers.

Sourcing components and material for a project such as Medupi station is a
massively intricate operation.

Material issues

Eskom continues to support the electricity supply and value chain of the economy by driving affirmative procurement and industrialisation through the capacity expansion programme. The annual target is 50% local content in capacity expansion contracts, as set out in the shareholder compact. From 1 April 2010 to 31 March 2011 the local content committed spend in capacity expansion projects was R9.62 billion which is 79.69%RA of the total value of contracts awarded in the period under review. Industrialisation, skills development and job creation Eskom has a pro-active approach, particularly in the capacity expansion and strategic sourcing areas, towards achieving government’s local development objectives. Eskom also actively implements government programmes such as the competitive supplier development programme (CSDP) and the new growth path (NGP) in terms of job creation and supporting small business. Since the inception of the CSDP in June 2008, the total actual investment spend in plant by suppliers was R608 million (2010: R465 million) against a committed value, over the life of the respective contracts, of R1.18 billion (2010: R1.17 billion). Improvements to the supplier development and localisation function have better aligned Eskom to deliver on government policy requirements. Local supplier development is one of the key performance areas. Training Since inception of the respective contracts a total of 6 970 (2010: 6 130) individuals have been targeted for skills development. Of these 2 514 (2010: 2 145) people are currently undergoing training. To date, 4 961 (2010: 3 054) people have completed their training at various training sites across the country, and during the fourth quarter, 157 individuals had completed their training. Job creation Since the inception of capacity expansion contracts to end of March 2011, some 21 477 jobs were created as a direct result of the build projects. The skilled labour employed was 40%, semi-skilled was 25% and non-skilled was 35%. A total of 11 519 people (54% of the total jobs created in new build projects) were employed from the local districts where the projects are taking place, ie Waterberg around Lephalale (5 996), Inkangala around Delmas (3 812) and Uthukela around Ladysmith (1 711). The capacity expansion projects impact on the following local communities: Lephalale in the Waterberg District in Limpopo province (Medupi power station) Delmas and Ogies in Mpumalanga province (Kusile power station) Ladysmith in KwaZulu-Natal province (Ingula pumped storage scheme). The local infrastructure being developed includes catering, laundry, transport, building companies, housing maintenance, hotels, entertainment, training facilities, security, schools/education, shops, medical care, banks and financial services, etc.