The measurement of productivity improvement provides a better understanding of business performance by analysing the change in net income between two accounting periods in terms of the impact of productivity, inflation (price recovery) and growth.

Productivity improvement occurs through the more efficient and effective use of all operating and capital resources, which include coal, employees, other expenses and assets.

Price recovery refers to the relationship between the price increases passed on to customers and the inflationary impact on the cost of resources to Eskom. Growth represents the change in net profit when resource quantities and prices change at the same rate as electricity sales quantities and prices.

¹ Fair value gains/losses on financial instruments, asset impairments, insurance proceeds, depreciation restatement in compliance with IFRS and other adjustments are specifically excluded because they do not impact productivity.

Productivity and price recovery

The company recorded a productivity loss of 9% or R4 060 million. This was due to the difference between the substantial increase in resource costs compared to a more moderate sales growth. The actual weighted sales growth was 3,2%, while the actual resource quantities over the same period increased by 13,3%. Sales quantity growth would have been higher were it not for the recent aggressive demand-side management focus and load shedding.

The price under-recovery was 1,8% or R731 million and resulted from the difference between a weighted tariff increase of 7,8% (the Nersa tariff increase for 2008 was 5,9%) and the 9,8% inflation which Eskom was subjected to in terms of the price of resources. The weighted sales price increase is higher than the Nersa-approved increase mainly due to the impacts of commodity-linked pricing deals with certain key customers that fall outside the Nersa price determination parameters. These commodity-linked price deals have made a favourable contribution to the price recovery, though insufficient to make a total price over-recovery.

The contribution to productivity performance from the major resource categories is set out below and is split between capacity utilisation and efficiency.

	March 2008		March 2007
	Rm	%	Rm	%
Total productivity (loss)/gain	(4 060)	(9,0)	667	1,9
Primary energy (including electricity purchases)	(2 781)	(14,7)	(162)	(1,2)
Manpower	(284)	(3,1	(273)	(2,9)
Other operating expenses	(309)	(3,3)	906	14,2
Capital	(686)	(8,5)	196	3,2
Total productivity	(4 060)	(9,0)	667	1,9
Capacity utilisation	715	1,6	1 029	2,9
Efficiency	(4 775)	(10,5)	(362)	(1,0)

Primary energy reflects a productivity decline of R2 781 million or 14,7%. This resulted from an increased usage of gas turbine power stations (diesel) and increases in both the quantities and price of coal burnt. The price under-recovery for primary energy was R1 573 million.

Operational manpower costs increased by 6,6% in 2007/8 while recorded sales quantities increased by 3,2%, resulting in a productivity decline of R284 million or 3,1%. This reflects the impact of additional staffing to cater for expanding operational needs.

Other operating costs reflect a productivity loss of R309 million or 3,3%. This is attributable to increased maintenance and demand-side management costs.

Capital (depreciation, interest and finance charges) reflects a productivity loss of R686 million or 8,5%, largely attributable to increased borrowing costs.

The unfavourable efficiency of R4 775 million reflects the shortterm impact of the accelerated capacity expansion drive, demandside management, increased utilisation of expensive diesel-fired power stations and lower grade coal, and the impact of load shedding against the tide of resource increases.

Long-term Eskom competitive position

This year’s productivity loss has reversed the 10-year positive trend, to record a cumulative productivity loss of R1 056 million. This reversal reflects the effect of supply issues and unsustainable price under-recovery from less-than-optimal price increases of electricity.

Click here for a graph of Eskom’s competitiveness over 10 years.