Department of Energy Budget & Strategic Plan 2010/11-2012/13

Meeting report

Department of Energy (DOE) strategic plan and budget 2010 - 2011
Mr Dakaolo Netshivhazwaulu, Chief Financial Officer, Department of Energy, reminded the Committee that in May 2009, the President had announced the split of the then Department of Minerals and Energy (DME) into two separate departments – the Department of Energy (DOE) and the Department of Mineral Resources (DMR). A new Minister of Energy was appointed with immediate effect and an agreement was reached that although a new Department would be created, the formal administrative and operational division would take place on 1 April 2010, whilst the DMR’s financial administration and the Director-General from the previous year would continue to operate until the end of 2009/10. The support service allocation split ratio was 70 (DMR): 30% (DOE), on the basis of the line function personnel attached to each department.

The Strategic Plan was devised in August 2009 and presented to the Department of Public Services and Administration (DPSA) during November, to assist with the planning for the future, in terms of the resources allocated.

At the time of the Medium Term Expenditure Committee (MTEC) proposal, National Treasury (NT) had ruled out any possibility of new funding. Goods and services and salaries made up only 3% to 4% of the total budget and the rest was transferred to earmarked donor-funded projects which could not be moved. Reprioritisation allowed for R150 million to be re-allocated to support services, mainly from the Integrated National Electrification Programme (INEP). The R65 million that DOE had earmarked before the split was not transferred to DOE, but instead went to DMR. DOE immediately consulted with the accounting officers from the two departments, who agreed that the R65 million would be transferred back to DOE. DOE was currently waiting for the final response from NT on how the transfer would be approved.

All programmes received reduced allocation of funding, except the Hydrocarbon and Energy Planning programmes (HEP) and a small amount in Associated Services. However most of the HEP allocation went to the Transnet pipeline infrastructure development. The R150 million for the INEP was not reflected on the MTEC proposal presentation, as it was incorporated as Associated Services.

The total medium term expenditure framework (MTEF) allocation to DOE was R5.535 billion. Major projects funded were the INEP (R2.8 billion), Demand Side Management (DSM) (R329 million), Renewable Energy (R36 million), EMS (R20 million), and Transnet Pipeline (R1.5 billion).

The budget was expected to grow to R5.7 billion in 2011/12 and return to R5.5 billion in 2012/13.

There was a reduction in the Electricity Distribution Industry (EDI) / DSM funding in 2012/13, by which time the process would be funded by levies.

Revised estimates for the Medium Term Expenditure Framework (MTEF) 2009/10 current payments stood at only R200 million. The majority lay on the unmovable transfers and subsidies (R3.5 billion). Capital assets, which comprised mostly IT structure and a small amount for transportation cost for the DOE, was R2.6 billion.

Mr Netshivhazwaulu set out the potential challenges. Firstly he named new DOE capacity funding, saying that this had always previously been funded from savings. Another challenge was the discontinuation of the DSM funding in 2013/14, to be replaced by tariffs. There were concerns about the structures not being fully funded, but potential resources could come from the DMR’s R65 million and entities. The universal access cost projections were more than double the allocated budget. DOE had requested money to achieve the target for universal access. Interventions to increase efficiency, increase savings and use of limited resources were a focus area of DOE.

Last year 30% of procurement processes was spent on target groups (disadvantaged individuals, women and others). This target was expected to increase to around 40% by 2012/13. Recruitment, in line with equity targets, would be a priority for driving the transformation policy. DOE would continue to communicate with stakeholders regarding stimulating interest in DOE’s work through schools and communities. Service level agreements (SLAs) and performance around SLAs was also monitored.

In conclusion, a phased-in approach in implementing the new structure was critical in maintaining spending in line with the available budget over the MTEF period. Consistency in implementation of planned activities was vital for stabilising the financial capacity of the DOE. Available funding would be sufficient to set up and sustain the operations of the DOE for the foreseeable future, but only if the R65 million transfer from DMR was successful.

Discussion
Mr S Motau (DA) said that it was clear that the R65 million had to be transferred back to DOE. He asked what could be done about it and what the implications would be if it was not transferred.

Mr Netshivhazwaulu replied that it should not be a difficult task to have the money returned to DOE, as the two accounting officers had agreed on this, but Treasury worked differently. DOE was likely to only get the chance to implement the return of the R65 million through the budget adjustment process. The impact should this money not be received would be catastrophic, in view of the setup costs of the new DOE.

Mr S Radebe (ANC) asked if the funding for electrification would be sufficient for structures to implement programmes and ensure electricity supply.

Mr Ompi Aphane, Deputy Director General: Electricity, Nuclear and Clean Energy, DOE, said that there was a need to increase funding because the cost of the INEP was double what had been allocated to realise universal access by the target date of 2012. In addition, the DOE needed to increase its number of “warm bodies” to perform its functions by about 100 or more people.

Mr Radebe said that transformation at the start of the new department would avoid challenges in the long term. With regard to retaining skills, he believed that comprehensive programmes for success should be set up by the DOE itself.

Mr Netshivhazwaulu said that since May 2009, DOE had started afresh and on the right footing. He was positive that the DOE was moving in the right direction. It had a comprehensive Strategy Retention Programme, dating back to the time when it was still incorporated in DME, and this would be shared with the Committee. When reviewing the programmes, policies would be realigned to talk to the DOE business.

Mr D Ross (DA) was seriously concerned that after the DSM was replaced by tariffs at the end of the funding cycle, DOE would increase tariffs to fund capital expenditure, as Eskom was doing.

Mr E Lucas (IFP) asked if, instead of shareholders withdrawing their fund injections and the consumer paying for this through increased tariffs, the DOE had considered funding through a bond of, for instance, ten to fifteen years, as an alternative.

Mr Aphane said that the DSM Programme, specifically, was meant to reduce the need for increased capital expenditure. The cost of savings was less than the cost of building more power stations to increase supply. There was indeed the economical perception that tariffs were too low and needed to increase to fund Eskom’s capital programme. In the Regulator’s determination, there was an amount of R5.2 billion for demand-buying management. If this was spent successfully, the target for energy efficiency would be met and there would not be a need to build more power stations. This was why it was logical to see the demand side as a tariff issue (involving saving of electricity) rather than a tax issue, and as a means of saving electricity and building of power stations, rather than seeing competition with state funds for education and other matters. He added that 20% of people in the country did not have access to the electricity grid. A tax approach would mean that those people who did not use electricity would also be paying for it.

The Chairperson asked if the heading of page 17 was supposed to read ‘mineral’ sector.

Mr Netshivhazwaulu apologised for the mistake, and said that the Chairperson was correct.

The Chairperson asked what DOE was doing in terms of a Human Resources (HR) strategy. She asked what was done when people did not have exact technical skills, what percentage of employees might not have those exact technical skills, and what the time frame was for payment to service providers.

Mr Netshivhazwaulu said that the HR strategy and funding had been scrutinised in thorough detail, as presented the previous day.  The technical skills he had referred to were those of the support service staff. It was essentially only the support services that had moved from the DME to DOE. With the budget constraint and the split of departments, the structure had gaps, which were specific, and the task was to fill those specific technical skills required. Training within the DOE was also given to improve staff skills. The time frame for payment to service providers was 30 days. DOE had a 95% record of payment within 30 days period.

Mr George Mnguni, Chief Director: Management Services, DOE said that skills retention was a process. Because of the nature of the DOE, staff skills included engineers, economists, and other diverse skills. From the day a new staff member started at DOE, he or she would be entered into the skills retention programme, talent management and development processes, to ensure that the DOE allowed that person the opportunity to grow and have a future in the DOE.

Ms N Mathibela (ANC) said that in the rural areas there were houses where people were building back rooms, which meant that more than one “house” needed to be electrified. She noted that each municipality seemed to have its own methods. She asked if DOE communicated with them and advised them in that regard.

The Chairperson asked why the number of households which were off the grid differed by a few percent, depending on the source of information.

Mr Aphane said that the DOE used methodology that related to the number of households on the ground. Where a settlement may have 2 or 3 houses, the DOE had to decide on whether there were three families or one. That was what caused the difference between official statistics and those of the DOE (78% versus 80% respectively). There was a programme called the Free Basic Alternative Energy which addressed the needs of the 20% households that were not connected to the grid. They were offered alternative energy carriers such as ethanol, depending on what their municipality offered.

The Chairperson asked when free basic electricity would come into effect.

Mr Aphane said that free basic electricity had been adopted as a policy and was already in effect. It had been delayed for about a year because the municipalities had the prerogative as to how they targeted households, and what technologies they used. They were funded by unconditional government grants and decided how they wanted to use the subsidies. There were constitutional issues under the DOE mandate with this regard.

Mr Lucas said that the municipality issue was a thorny one, as there was no uniformity in terms of collecting revenue. This caused problems, especially in the rural areas where there was no service in homes or facilities. He agreed that saving electricity was helpful to everyone, but stressed that education was required to inform the public on the benefits of energy saving. He added that the government facilities themselves could make huge savings. He believed that they were actually the biggest transgressors. 

The Chairperson asked how far DOE was in dealing with free basic electricity issues.

Mr Aphane said that holistically DOE was dealing with the problem. Part of the EDI Restructuring Process would eliminate the disparities. The outcome of the EDI Restructuring Process and Constitutional Amendment Bill would address issues in the medium term. In the short term, DOE had entered into agreements with the respective municipalities, as part of the electrification programme, to include those who wanted to roll out free basic alternative energy, as part of the Expansion Programme.

Mr Lucas asked how the expense of the pipeline was shared between the Department of Transport and DOE.

Mr Muzi Mkhize, Director: Hydrocarbon and Energy Planning programme, DOE, said that the pipeline was being developed by Transnet, which was a shareholder of the Department of Public Enterprises. Since the pipeline was solely used for the transportation of liquid fuel the DOE had to be involved from a supply perspective. The two departments agreed to increase the 16 inch pipe to a 24 inch pipe. DOE also interfaced with the Department of Transport (DOT) as trucks were used as an alternative source of fuel transport, and as they had an impact on the road surface. On 7 May 2009, the former Minister of Finance agreed to a fuel levy for the distribution of fuel products, but was concerned about how Transnet would compensate the proceeds of the levy. After a long process with Departments of Public Enterprises, Transport and Energy, the present Minister of Finance announced, on 17 February 2010, that there would be a fuel levy. At the same time, the DOE was allocated R1.5 billion.

Mr Motau commented that although there was pressure with budget cuts, the renewable energy allocation of R36 million should be used, as it would make a difference.

Ms L Moss (ANC) asked what the difference in structure was between the DME and DOE. She said that this would help the Committee to understand the shortcomings of HR and deal with technical and scarce skills shortages, so that the DOE could achieve its objectives.

Mr Netshivhazwaulu said that DME had investigated how it would be possible to fairly split the skills of the two new departments. The old DME structure and the new DOE structure and funding plans were available and would be submitted to the Committee.

The Chairperson asked how and where the R20 million in relation to EMS would be used.

Mr Jeff Subramoney, Director: Energy Planning and Development, DOE, said that DOE was taking a two-phased approach to the Modelling System. The first process involved DOE acquiring proprietary software to develop the Integral Energy Plan. In future, it would establish a Sustainable System of Operations where DOE would move from saving data on a proprietary software system, to one where the Modelling system was developed in-house through engagement with stakeholders and consultants. In the medium to long term, the Modelling tool was appropriate for South Africa. As far as possible, DOE would use a hybrid system of models to develop its system and would also use tools from other departments to reduce the need for expenditure on consultants.

The Chairperson asked how the new structure would be phased in.

Mr Netshivhazwaulu said that with the split process and funds available, DOE would not be able to fully fund the structure in the present financial year. However, in the following years, DOE would phase in allocations of funds for the present structure.

The Chairperson asked which programmes were suffering.

Mr Netshivhazwaulu said support systems were prioritised, and a proposal for an adjustment budget would be submitted to fund the line functions.

The Chairperson said that it was not clear what the problem was. He asked what DOE would do if, for instance, the R65 million was not received until October.

Ms Tandeka Zungu, Deputy Director General: Corporate Services, DOE, said that DOE was indeed operating with its critical structure, and that the additional funding would allow for adding on to that critical structure. However, the structure was not enough. Should the R65 million come through, DOE would have enough support services for its structure. The funding and human resources were two critical factors and the phased-in approach was about support services and policies which were conducive to the success of DOE.

The Chairperson said that Members of the Committee could not be asked to endorse something that was still not certain, and be told how it was going in six months time. Members were concerned about the public purse. DOE must be able to convince the Committee of what was required and give an understanding of what would be done. This Committee could not simply agree to Vote 28 of the Budget without a sense of what policies would work under the new DOE’s mandate. DOE should not answer on what was not implementable, and should be frank about what could be achieved, where it would need consultants, how the SOEs could assist and on other matters.

Mr Mnguni said that the current structure of DOE, as approved by the Minister, was still awaiting approval from the Public Services Administrator (PSA). There were four operational branches for implementation of projects: namely, Quality Development, Energy Operational Services, Nuclear Energy and Integrated Energy Planning. These were line function components. These branches were supported by Corporate Services, the Chief Financial Officer and the new branch under the Chief Operating Officer, to manage the strategy, risk and monitoring. The old structure had two branches: Electricity and Nuclear Energy and Hydrocarbons and Energy Planning. Because of the financial constraints, DOE was not in a position to implement the recently approved new branches. Hence it was compelled to continue rendering services in the same way as they were structured when removed from DME. If, despite all efforts, DOE did not receive the R65 million, the support services would be compelled to do more than they were supposed to do in the new structure, and would be over-worked. DOE had established, through consultation with the staff, that they were prepared to do the extra work.

The Chairperson said that the structure was now clearer and asked for an organogram, the turn around time for transformation, the numbers of officials who would be required and why they were required.

Mr Mnguni said that DOE would provide the Committee with the necessary information.

The Chairperson asked what would happen if the PSA did not agree to the DOE structure.

Mr Mnguni said that what had been submitted to the PSA was exactly the same as he had just presented to the Committee. It made provision for six Deputy Directors General, and one Chief Operations Officer. The DOE had consulted with PSA officials and they were broadly in agreement.

In as far as line functions were concerned DOE could not move from the two branches because there was not enough funding to implement the new structure, which made provision for four more Deputy Director Generals.

The Chairperson asked for confirmation that there were two Deputy Director Generals presently, and that four more were required. She asked the DOE to furnish the Committee with information on how many Chief Directors were required.

Mr Ross suggested that the DOE give the Committee a briefing on the organogram as soon as possible.

Mr L Greyling (ID) agreed that it would be useful to have a follow up meeting with the DOE as soon as possible, when the DOE could give the Committee the necessary organogram and motivation for funds, so that in terms of the Money Bills Amendment Procedure and Related Matters Act, the Committee could advocate for more funding for the critical work of the DOE, particularly on the Modelling side.

The Chairperson said that the Budget Vote was scheduled for the 20 April 2010 and suggested that Team Energy, the Director General and Chief Financial Officer should meet on 23 March 2010 to address the issues that were raised in the meeting.

The meeting was adjourned.