Legislative Compliance of Contractors and Sub-Contractors in terms of Advancing Government's Economic Imperatives: Briefing by Eskom

Meeting report

Mr Dan Marokane, Group Executive, Technology and Commercial, anchored Eskom’s presentation to the Committee.  Procurement had been one key area of focus identified at the August 2011 Eskom Board Breakaway, where it had been highlighted that Eskom must impact on society differently and take proactive steps to put procurement measures in place to ensure maximum benefits to previously disadvantaged persons. In a bid to achieve this, Eskom had implemented a focused delivery strategy of creating long-term revenue for black businesses, thereby enabling long-term operational sustainability and moving beyond government’s minimum requirement as far as transformation was required.

Within this context, Eskom had requested to be excused from the Preferential Procurement Policy Frame Work Act (PPPFA) as an organisation, as it believed it inhibited rather than enhanced its work.  Eskom had thus developed its own approach to Supplier Development and Localisation (SD&L), centred on the key concepts of skills development, supplier development and localisation and industrialisation.  Eskom’s current approach was reflected in its Supplier Development and Localisation Plan (2011-2013).

The key deliverables under the SD & L plan were:
1.         Local Content Spend in New Build - at the end of June 2012, the accumulative local content actual spend was R35.4 billion, which was 47% of the total local content committed. 
2.         Job Creation in New Build - at the end of June 2012, there were 30 893 individuals working on the various new build project sites. Of the total jobs created in new build projects, 48% were employed from the local districts where the projects were situated. The key question for consideration remained how job holders would be absorbed upon expiration of the projects into other sectors of the economy.
3.         Investment in Skills Development by Suppliers - suppliers had contractual obligations for skills transfer monitored by Eskom.   Focused areas of training included boilermakers, coded welders, riggers, fitters, technicians, laboratory technicians and quantity surveyors.
4.         Investment in Plant by Suppliers - between June 2008 and June 2012, total investment spent in plant by suppliers was R718 million, representing 60% of the committed value of R1.2 billion over the life span of the respective contracts up to 2017.

There had been policy shifts in procurement within Eskom which refocused the approach towards evaluating tenders.  Seventy percent focused on price and technical aspects, while 30% focused on SD&L (10% B-BBEE ownership, 20% local content, skills development and job creation). This new approach discouraged the simple importation of products into the country without corresponding value being added, entrepreneurs seeking maximum returns by refusal to invest in skills development and the non-employment of locals in the value chain.  Alternative mechanisms were also employed by Eskom including price matching, set asides, awarding of additional preference points for defined categories of suppliers, and so on.

Clear targets had been set for the five-year period from 2012 to 2016 in the area of skills development, job creation, youth development and procurement (see document).  Overall comparative performance showed that by the end of years 2011 and 2012, Eskom had performed close to target on Broad-Based Black Economic Empowerment (B-BBEE) total measurable procurement spend. However, as regard Black Women Owned (BWO) companies, Black Owned (BO) companies, and qualifying small enterprises, Eskom had underperformed in its total measurable procurement spend (see document for details).  In the current year, first quarter performances had been evaluated and indications were that the overall total measurable procurement spend had increased by 32%, while B-BBEE and BWO had grown by more than 80%.

The presentation discussed in detail Eskom’s contractors in view of local suppliers’ development across a variety of different industries, including how Eskom had enabled the capacity growth of power line supplier Babcock Ntuthuko (Babcock), as well as the localization by Hitachi Power Africa and the capacity of steel producers at the Southern African Institute for Steel Construction.

With its suppliers, Eskom had ensured strict compliance management and monitoring to SD&L obligations both during and after the contractual stage.  SD&L targets were negotiated and set out in the contracts, with clearly defined penalties where targets were not met.  Eskom monitoring and compliance teams randomly visited project sites to ensure compliance and bi-annual audits were conducted by independent assurance audit firms on all contracts that had SD&L objectives.

Discussion
Using the food crisis strike as an example, the Chairperson questioned whether inspection and monitoring teams from Eskom had picked up on the dissatisfaction among workers employed by contractors on its project sites.

Mr Marokane responded that the manner in which Eskom was structured to deal with supply, development and localisation was to set up an integrated procurement procedure to create a basis for creating a common culture across the organisation.  Monitoring and compliance duties were constantly carried out by Eskom’s procurement teams. Project managers were empowered as the first line of defence to ensure contractors and subcontractors fulfilled all contractual obligations. On the food crisis issue Eskom, through its project managers, had driven the verification of facts process. Eskom still had room for improvement -- swifter response to issues by capacitating its project managers and teams; identifying and targeting specific areas of procurement such as Black Women Owned (BWO) and Black Youth Owned (BYO) businesses, including directing more high valued tenders to these groups. Furthermore, managers were held accountable for the performance at each of the project sites.

The Chairperson asked for specific details on the number workers trained as described under the specified training areas for Eskom, as reflected in its presentation.

Mr Marokane responded that the information requested would be forwarded to the Committee.

Mr C Gololo (ANC) commended the success stories reflected in Eskom’s presentation. He questioned how many other companies besides Babcock had been empowered by Eskom.

Mr Marokane responded that a number of other black-owned companies had developed similarly to Babcock.  Eskom had focused on giving these companies the opportunity to exist, rather than creating companies.  A minimum percentage of work demands were designated to particular groupings and with Eskom’s five-year plan, it was hoped these companies would be empowered to compete with other market players.

Mr Gololo further asked if Babcock was a creation of Eskom

Mr Marokane responded that Babcock was a company that had already existed.   Eskom had only allowed it to create particular capabilities within Eskom’s line of service and work on the basis of what the company already had.  Eskom’s long-term goal was to encourage long-term investment from the private sector through five-year plans, rather than the obtainable three-year plan, to ensure development of capabilities in the private sector.
           
Mr Gololo noted that the presentation had not captured specific information on Eskom’s intervention in empowering disabled persons. He asked what Eskom was doing to address this.

Mr Marokane responded that there had not been sufficient emphasis on empowering persons with disabilities.  Eskom had identified target groups, opened up its database and invited these target groups to bid for procurement contracts.  First quarter results indicated that these efforts had yielded desirable results.  Eskom was in discussion with the National Youth Development Agency (NYDA) and other organisations actively involved with people living with disabilities.

Dr G Koornhof (ANC) noted that during the Committee’s oversight visits to three of Eskom’s power stations, it had observed that the challenges faced by the communities, local government authorities, small businesses and workers at the power stations all varied.  Eskom’s responses and attitude to these challenges also differed.  He asked whether Eskom had systems in place to exchange experiences and harmonise its responses across board.

Mr Marokane responded that Eskom had shifted from a fragmented business approach to a wholly integrated approach. The initiatives set up under SD& L had been rolled out across the board.

Dr Koornhof observed that Eskom’s report in its presentation on underperformance in empowering black women-owned (BWO) companies and black-owned small enterprises was a reflection of what the Committee had observed on its oversight visit.  He questioned the extent to which Eskom went in ensuring these groups of persons were represented in its empowerment drive.
Mr M Sonto (ANC) asked to what Eskom attributed its underperformance in empowering BWO businesses, and what it was doing to correct this.

Mr Marokane stated that Eskom had improved in its drive to involve these groups of persons in its business. The problem lay in the time frame between when Eskom placed advertisements and when these groups were sufficiently organised to bid.  It was hoped that the new five-year procurement strategy devised by Eskom would eliminate surprise elements and encourage better participation. It was hoped that the upfront sharing of knowledge through road shows, updated date data bases and other interventions, would also address these issues.

Dr Koornhof stated that in all three power stations the Committee had visited, it had been observed that there was a flagrant abuse of labour legislation by Eskom’s contractors and sub-contractors.  He asked what measures Eskom had put in place to ensure adherence to labour legislation by its contractors and sub-contractors.

Ms G Borman (ANC) also stated that during the Committee’s oversight visit it had received complaints of delayed payment of worker’s wages by contractors. She asked whether Eskom’s contracts with its contractors ensured contractor’s compliance with labour laws.

Mr Marokane responded that Eskom had a contractual relationship with all its contractors and understood its responsibility towards ensuring proper compliance with legislation governing labour legislation. He conceded that Eskom needed to improve on its timeline in dealing with labour issues that arose at its sites and in engagement with CEO’s of its contracting companies.  Eskom had acted on complaints which it had received to ensure labour relations were improved.  Eskom’s Enterprise Development entity was geared towards empowering sub-contractors so they understood the contracts they had signed, the execution of their contracts and any changes that might arise in the duration of the contractual term. There was a need to ensure more of its sub-contractors attended these training sessions.

Ms Borman asked for concrete examples of non-performance penalties that Eskom had imposed.

Mr Marokane replied that Eskom’s penalties included retention of percentage payments, forfeiting portions of payment, revoking favourable payment terms, and termination of contracts.

Ms Borman asked what exactly the feeding situation problem with workers working on Eskom sites was, and what had been done to investigate and rectify the issue.

Mr Marokane responded he was not privy to all the facts regarding the situation but assured the Committee that the responsible Eskom staff monitored the quality and nutritional value of the food served to its workers.

Ms Borman noted that according to the presentation, not all persons trained were absorbed by Eskom.  She asked whether there was any follow up for trained persons not absorbed, to ensure they were using the skills for which they had been trained.

Mr Marokane responded that some of the trainees not absorbed by Eskom stood a better chance with the help of the private sector.

Mr Sonto noted that the presentation had reflected that 30 000 persons had been recruited to work on Eskom’s new project sites and about 14 000 were employed from the local districts where the project sites were situated.  From which communities were other workers recruited, what type of skills did the workers bring which were not already available at the sites, and what percentage of these workers formed skilled and semi-skilled workers?

Mr A Mokoena (ANC) commented that Eskom’s presentation seemed to focus only on its successful mega-projects.  Eskom had actually left a lot to be desired in its performance, as it was a monopoly and therefore had the opportunity to do even better.  He suggested that Eskom should adopt the model of an audited database of skills development to promote sustainability and to prevent effort duplication.  

Mr Marokane stated that Eskom had embarked on a drive to re-establish its training centres. The training centre in Midrand had been relaunched as a fully-fledged faculty (Eskom Academy of Learning). The Eskom Leadership Development Centre had also been established and was fully functional. Trainees had been absorbed in areas of vacancy or where staff changes were necessary. He conceded that there was a need for a database to reflect skills development. 

Mr Mokoena questioned why these facts had not been highlighted in Eskom’s presentation.

Mr Marokane responded that the Chief Executive Officer (CEO) of Eskom had recently emphasised the need for an improved effort on training, and many of its training centres had been relaunched in the current year. There was a need to improve on the visibility of these training centres.

Mr Gololo questioned what criteria Eskom considered for the admission of persons to its training institutions.

Mr Marokane responded that the recruitment drive was carried out countrywide and Eskom leveraged on established bodies such as the NYDA to ensure a balance across all regions of the country.

The Chairperson asked whether Eskom’s regional offices were involved in the process and whether they had succeeded in reaching out to all communities.

Mr Marokane replied that Eskom’s regional offices were involved, but the challenge was that its regional offices were located in major towns, hence the need to use institutions such as the NYDA with a wider reach to grassroots communities.  Eskom also advertised in newspapers.

Mr Mokoena asked whether Eskom had put in an extra effort by giving guarantees to targeted groups of companies to assist them in securing funding.

Mr Marokane responded that access to finance was indeed an impediment to many BO and SME companies.  Eskom had identified this challenge and had proactively provided undertakings from Eskom to help in negotiating facilities with financiers.

Mr Mokoena suggested that Eskom should consider setting up a call centre for procurement purposes to encourage access to persons in rural areas and direct feedback from the grassroots communities. The call centre should be fully-fledged and have proper information flow-back channels, and not just a dismissive call centre.

Ms C September (ANC) questioned whether, after the signing of contracts with its contractors and subcontractors, Eskom considered itself absolved of all responsibilities, particularly in relation to labour disputes.

Mr Marokane responded that Eskom’s accountability did not stop upon signing of its contracts. Eskom constantly received complaints, investigated and held its contractors responsible where it could prove they were liable. He conceded that Eskom could improve on its speed of response and it also needed to focus on empowering its subcontractors.

Ms September asked whether Eskom performed differently from the Department of Public Works in respect of the procurement of skilled labour.

Mr Marokane responded that from a skills development point of view, Eskom dealt with its functions on a contract by contract basis and for each contract, negotiations on skills development and transfer was ensured. This included part of the contractual obligations monitored by Eskom.

Ms September asked if Eskom could forward further details on its contracts to the Committee.

Mr Marokane responded in the affirmative.

Mr E Marais (DA) asked what Eskom’s average time frame was in paying its contractors after it had been invoiced.

Mr Marokane replied that Eskom had varying contractual terms regarding the turnaround time on the payment of invoices.  Eskom used the 14-day payment system as a tool, particularly in assisting BO or BWO companies, and had embarked on a drive to encourage the 14-day payment system across board.  It still had challenges in fully embracing the system, so over 60% of its payments were still done within 30 days. This remained an area of challenge for Eskom.

Mr Mokoena asked when this drive to a 14-day payment system had commenced

Mr Marokena responded that the 14-day system of payment had been in operation for a while, but compliance had only recently gained momentum within the SD&L context.  Eskom realized it needed to raise the bar to more favourable payment terms to make them sustainable and also improve its system of doing business.  Some control measures still needed to be put in place and it still faced challenges, such as suppliers changing banking details or the names of directors.

Mr Marais remarked that where workers were paid late by contractors, it impacted negatively on Eskom as a corporate institution.  He asked what influence Eskom had to rectify situations like this.

Mr Marokena responded that Eskom did not have the capability to control the payment by sub-contractors. It would however adhere to better monitoring procedures for its contractors.

Mr Marais asked what the interconnection between Eskom and Hitachi Power was.

Mr Marokane responded that Eskom had a number of suppliers and Hitachi Power was one of its suppliers.

Mr Marais probed further and asked what political connections existed between Eskom and Hitachi Power.

Mr Marokane responded that Eskom had no political connection with any of its suppliers.  In its award of bids and contracts it focused on proper governance and procurement processes in arriving at the selection of its suppliers.

As a rejoinder, Mr Tom Mutshidza, Acting Chief Director Department of Public Enterprises, briefly addressed Members on the issues at stake and the Department’s stand. The Performance Management Agreements signed by the executives of Eskom had far-reaching implications, including expected targets which drove the commitment from the leadership on deliverables.

Adoption of Minutes and Oversight Reports

Members suggested that the Minutes and Oversight Reports of the Committee be adopted at a later date after thorough consideration and reaching proper consensus in the Committee.  The Chairperson agreed with Members and postponed the adoption for a later date after proper consideration.

The meeting was adjourned.