Economic Development Department & Department of Energy Strategic Plans and budgets 2010/11

NCOP Economic and Business Development

12 April 2010
Chairperson: Mr F Adams (Western Cape, ANC)
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Meeting Summary

The Minister of Economic Development noted that the new Economic Development Department (EDD) was the first new department for 11 years. It aimed to reset skewed trade relationships, achieve synergy between the different spheres of government, especially in the sharing of economic research, and focus on efficiency of spending. The EDD would phase in the setting up of the new structures, but had targets. It had a budget of R418 million. Members asked how the Department would deal with the Growth, Employment and Redistribution (GEAR) policy, and the Accelerated and Shared Growth Initiative for South Africa (AsgiSA) in creating growth, and its position in relation to the Reserve Bank’s extended mandate of economic growth and job creation. They also questioned the role of Development Finance Institutions, and the minimum qualifications of the key personnel in the new Department. They stressed that the EDD’s role and parameters needed to be tightly defined and monitored, and questioned whether policies of other departments would be aligned to the EDD, commenting that sometimes practical realities were not being addressed, including Green issues. In particular, Members questioned how the EDD would approach alternative spatial economic development, particularly in the more remote provinces. They felt that there should be more engagement on Chinese involvement and questioned whether strengthening competition and promoting sharing were not mutually exclusive. The nature of “decent work” and progress was discussed. Members asked if the three-year timeframe was achievable and if there was the necessary capacity, as also what the EDD planned for “dying” towns.

The Department of Energy outlined the pressures faced by the energy sector and noted that the main objectives of this Department (DoE) were to ensure energy security, achieve universal access and effective and efficient service delivery, regulate the energy sector, ensure optimal utilisation of energy resources and enhance the DoE culture, systems and people and promote corporate governance. The Department would take a three year phased approach. The focus of the different programmes was outlined. An update on the split process between the DoE and the former Department of Mineral Resources (DMR) was outlined. Departmental structures for both departments had been approved by both executing authorities and allocation of funding for critical, newly created positions had been obtained. The overall budget allocation was compared to what had been requested, and the Department stressed that the R1.5 billion funding allocation that appeared to be an increase would simply go to Transnet’s pipeline project, thus resulting in an effective budget reduction. An interim structure was necessary to allow the Department to function, given the funding problems. Members asked about the progress towards the Solar Water Heater goals, and whether there was a partner for development of Concentrated Solar Power (CSP). Concern was expressed as to why nuclear governance needed an overhaul. Members also questioned the progress on the split into the two new departments. Further questions related to the processing of nuclear fuel, with potential for enrichment by weaponising fuel, whether wave technology was examined, and the upscaling of Coal to Liquid technology. Members also questioned the rationale of the split in funding between the departments, and the biofuel strategy. They were concerned whether the DoE could reach the Millennium Development Goals (MDGs) on electrification, and whether there was likely to be a new empowerment dispensation. Further questions to both institutions were to be put in writing.


Meeting report

Economic Development Department (EDD) presentation
Hon Ebrahim Patel, Minister of Economic Development, expressed his appreciation at attending this Committee meeting. He noted that the central idea permeating the new Economic Development Department (EDD) was that of placing people at the centre of policy in order to respond to their needs, stressing that therefore contact with the provinces and the NCOP was important. The Minister gave a brief outline of the EDD. This department was the first fully new department in 11 years. One of the aims of the department was to reset skewed trade relationships. The need for synergy between the different spheres of government, especially in the sharing of economic research, was stressed. A study was done that compared provincial spending per capita. This showed that the lowest spender was the Western Cape and the highest spender was Kwazulu-Natal. The question, however, was not how much was spent, but the impact of the spending. As such, the EDD would focus on efficiency of spending. As the department was new it would take a phased approach to setting up the necessary structures, but targets were in place. The total budget for the department was R418 million. Spending per programme was outlined (see attached presentation).

The Minister then presented the Strategic Plan, in line with the document (see attached presentation for all details).

Discussion
Mr B Mnguni (Free State, ANC) asked how the Department saw itself restructuring the Growth, Employment and Redistribution (GEAR) policy and taking on the problem of the Accelerated and Shared Growth Initiative for South Africa (AsgiSA) in creating growth. The issue of how the Department saw itself relating to the Reserve Bank’s extended mandate of economic growth and job creation was also questioned.

Mr Mnguni said that Development Finance Institutions (DFIs) were ‘sore thumbs’ in most committees, as most operated on a commercial basis, competing with banks and only financing 5% of those who needed funding. He asked whether the Department had a copy of the report on this that had been commissioned by the Department of Finance, and what the EDD would do to try and change this.

Mr Mnguni asked about the minimum qualifications for the key posts in the Department, as previous practices of cadre deployment had resulted in incompetent people being placed in key positions.

The Minister replied that he would not be doing full justice to the issues raised in the time available and that his answer would merely be a preliminary attempt to touch on the issues, and he hoped that there would be further opportunities to discuss the issues raised more fully in future engagements.

The Minister commented that GEAR was a stabilisation programme; it was now the consensus that South Africa needed a growth plan. The EDD was now trying to develop such a plan, and the critical challenge was to increase the number of people getting absorbed into the economy. During the recession one million jobs were lost. Before this, South Africa had had one of the highest unemployment rates in the world, which set the EDD back even further. The task now was to actively increase the labour absorption rate.

AsgiSA did have some good points and it had identified a skills shortage. For this reason, the EDD had put an emphasis on specific skills. It would now be the task of the Department of Higher Education and Training to shift people to the needed skills base. The EDD intended to build on AsgiSA and take it forward.

The Reserve Bank’s mandate included balanced economic growth. The EDD’s and the Reserve Bank’s intentions were aligned, as there was a core of consensus that high inflation was bad. The Governor of the Reserve Bank had welcomed information on the impact of policy, as the Reserve Bank made decisions based on this data. The EDD’s job was not interest rate policy, but it would provide the Reserve Bank with hard economic data on the effects, so that the latter could make better decisions.

The Minister agreed that there was a challenge with regard to DFIs not achieving their maximum targets, but that on the other hand some of them were constrained by the funding model. The Industrial Development Corporation (IDC) had not received funding from its shareholder, the government, for some time, so it followed that the IDC followed a cautious policy, relying on dividends. The Brazilian counterpart of the IDC had been examined and it was found that the key to its success was that it provided access to funding at less than the commercial interest rate. However there needed to be a balance between aggressive funding and the cognisance that public money should not be offered for non-sustainable ventures.

The Minister agreed that EDD obviously wanted to attract capable staff, and a number of people with Masters degrees and PhDs had applied for posts. For its senior management, EDD expected a higher than average level of education, but also stressed management skills, so people with an eye for practical implementation were also being sought. The EDD had taken the issue of qualifications and skills to heart. He added that a developmental state needed high levels of technical skills.

Mr K Sinclair (Northern Cape, COPE) stated that the EDD was necessary, but that its role and parameters needed to be rightly defined and monitored. He asked what would happen if, for example, the Department of Agriculture had policy that was not aligned with the EDD’s policy. He added that the problem was that the theory was correct, but that practical realities were not always addressed. The Minister had indicated that there was a potential growth area in the Green economy, which was a wonderful idea, but at the same time he noted that government was still going ahead with developing more coal power stations. He questioned what the EDD was going to do in a situation like this.

Mr Sinclair noted that as long as skewed development patterns occurred with regard to provinces, the economy was not going to be grown where it was needed. He asked how the EDD was going to approach alternative spatial economic development. In the Northern Cape it was decided that the MEC of Finance would also cover Economic Development and Tourism, and guidelines about the breakdown of functions were necessary. The need for decent job opportunities was highlighted, as in the Northern Cape the available jobs seemed very feeble.

Mr Sinclair noted that the Department’s international engagements referred to China significantly. During the constituency period, business people had expressed their will to grow the economy, but there were Chinese, Bangladeshis and Somalis coming in to the area who did not employ locals.

The Minister stated that if there was a policy clash between the EDD and any other department this would indicate a dysfunctional Cabinet, as the Cabinet developed policy. With regards to the Green Economy, there were two parts to it. The first was the energy part, while the second related to eco-tourism, repair of the environment and the manufacturing of eco-friendly products. With regards to energy generation and the construction of more coal power stations by Eskom, the issue was the baseload. Wind and solar power could not be relied upon to provide the bulk of power, so coal and nuclear were being pursued up until the point that wind and solar energy matured. The construction of Medupi and Kusile also presented the opportunity to create a viable power station construction industry that could perhaps develop projects in the rest of the region.

The Minister acknowledged that there was inequitable focusing on some provinces in terms of growth, but countered that in the case of the Western Cape and Gauteng, they were vital to the other provinces. When an engine of growth appeared, it was prudent to harness it to integrate into other provinces’ growth. Demand in one province could be fed with produce from another.

The Minister said that the issue of MECs having multiple portfolios was an issue left to the individual province. The EDD would seek to bring together all economic development information.

Mr A Lees (Kwazulu-Natal, DA) stated that there needed to be more engagement on Chinese imperialism. There was a contradiction between the Minister’s statement about strengthening competition in the private field, and the references to planning, co-operation and sharing, which were anti-competitive. He asked for a definition of decent work, pointing out that even something like cutting grass was ‘decent work’, despite the need to progress. In the Northern Cape there was the potential for wind energy, but no infrastructure for feeding it into the grid, and as such he asked how best to ensure that Green infrastructure goals were met when they were not on the agenda. The issue of Dimbaza and development pursued along apartheid lines was raised.

The Minister replied that competition and co-operation were not mutually exclusive and that industrialised countries had a combination of the two. The issue was to achieve a balance, and he cited the instance of a fabric-producing region of Italy, where factories assisted each other when they had problems, despite being competitors, in order to ensure that the regional trade strength was kept up.

With regard to Chinese imperialism there was also a need to avoid xenophobia, or viewing other nations as enemies. However there was also a need to restructure the global market, which was a tough goal. China would be a huge part of the future; during the last year and a half China had been focusing on expanding its domestic base , South Africa needed to get a piece of that market. The question was whether South Africa was going to push raw materials or manufactured goods. Stronger diplomacy was needed to make headway, and trade missions needed to be aggressively focused on South African growth now.

The Minister noted that Mr Lees mentioned the need to progress when he had posed the question about the nature of ‘decent work’. The need to progress meant that work should become more financially and personally fulfilling. However, there was not a discrete moment at which this would be fulfilled, but rather a continuum that allowed for people to further themselves and not simply be part of a one-tier Expanded Public Works Programme, where a person would be relegated for ever to be a street sweeper.

When Dimbaza was formed it had received a range of incentives, like Atlantis, but when the business incentives disappeared, huge levels of unemployment arose. The reality was that when Dimbaza collapsed, a significant capacity of the Eastern Cape did so as well. The EDD could not go back to the old model, but it could not sit back and do nothing. The challenge was to see what other economic activity it could leverage, given the existing infrastructure.

Mr D Gamede (Kwazulu-Natal, ANC) noted that the EDD had given itself a three-year timeframe, and asked whether it had the necessary capacity to do what it needed to do this year. He asked whether the EDD envisaged nodal partners and whether the Department had any specific plans dealing with the revival of other ‘dying’ towns, like Dimbaza.

The Minister replied that the EDD wanted to have sector plans for distressed sectors. The EDD had visited Atlantis and sat down with the community and business people and asked them for input on a plan to revive the area. Assurance was given that the EDD would try its best to stick to its targets.

The Chairperson asked for any further questions by members to be submitted in writing to the Department as time had run out. He thanked the Minister for coming and engaging with the Committee so thoroughly.

Department of Energy (DoE) Strategic Plan and budget presentation
Ms Thandeka Zungu, Deputy Director-General, Corporate Services, Department of Energy, stated that the Strategic Plan was informed by government priorities, the State of the Nation Address, the National Budget Speech, the Budget Vote Speech, the 2010 cabinet Lekgotla’s Resolution and Sector Specific Challenges. Pressures faced by the energy sector were outlined. These consisted of energy security, international co-operation, the upward pressure on the cost of energy , demand management, skills and capacity, poor economic regulation and diversity of supply. The Department of Energy’s (DoE or the Department) strategic objectives were to ensure energy security, achieve universal access and effective and efficient service delivery, regulate the energy sector, ensure optimal utilisation of energy resources and enhance the DoE culture, systems and people and promote corporate governance. The organisational environment was discussed, with a focus on the impact of the lesser budget and the Department’s approach to taking a three year phased approach.

Programme 1, Support Services, was stated as focusing on the establishment of the new department and developing capacity. Programme 4, dealing with State Owned Enterprises (SOEs) reporting to the Ministry of Energy, included Research and Development , Regulatory SOEs and Electricity Distribution Industry (EDI) Holdings. 2010/11 transfers to SOEs amounted to R3.463 billion.

Mr G Mnguni, Chief Director: Management Services, DoE, provided an update on the split process between the DoE and the Department of Mineral Resources (DMR), as outlined in the presentation (see attached document for full details). Departmental structures for both departments had been approved by both executing authorities and allocation of funding for critical, newly created positions had been obtained. Recommendations for placement have been approved by both departments’ Director-Generals.

Mr Tseliso Maqubela, Deputy Director-General: Hydrocarbons, DoE, discussed Hydrocarbons and energy planning. Under Programme 2, an Integrated Energy Planning Strategy was in the pipeline and a review of fuel specifications and standards was under way.

Mr Muzi Mkhize, Chief Director: Hydrocarbons, DoE, added that Liquid Petroleum Gas (LPG) price regulations had been done and a biofuel pricing framework was being developed. A review of the charter annexed to The Petroleum Products Amendment Act of 2003 (PPAA) and the promulgation of the Regulations for the mandatory provision of data with regards to The National Energy Act of 2008 (NEA) was under way. General challenges included budgetary, support system and personnel constraints.

Mr Ompi Aphane, Acting Deputy Director-General: Electricity, Nuclear and Clean Energy, DoE, stated that with regards to Programme 3, on Electricity, Nuclear and Clean Energy, a radioactive waste disposal institute was being registered in line with the Public Finance Management Act (PFMA). The Nuclear Energy Act would allow for the development of regulations to introduce Design Basis Threat (DBT), and furthermore the Pelindaba Treaty would come into effect in July and create an African Commission on Nuclear Energy, with Africa becoming a nuclear weapons free zone. With regard to Clean Energy, the focus was on energy efficiency, and after the Eskom crisis in 2008, this was needed more than ever. Incentives had been implemented. Renewable energy targets were under threat, but the roll out of Solar Water Heaters (SWH) was ensuring that these targets would be met.

The Chief Director: Integrated National Electrification Programme (INEP), DoE, stated that his directorate’s task was to manage the electrification planning process, the funding allocation process, the implementation process and to ensure that INEP was in line with the Energy White Paper and other policy documents. The total electrification backlog was broken down per province and totalled R3,3 million. The funding requirement to meet universal access goals by 2014 were set out at R29 billion.

Mr Dakaolo Netshivhazwalu, Acting Chief Financial Officer, Department of Energy, compared the overall budget allocation to what had been requested, and the subsequent programme allocation as per the document.  He stressed that the R1.5 billion funding allocation that appeared to be an increase would simply go to Transnet’s pipeline project, thus resulting in an effective budget reduction. The majority of the budget (97%) would go to transfers, resulting in only 3% being left for operations. Therefore the interim structure was necessary to allow the Department to function, given the funding problems.

Discussion
Mr Lees asked what progress towards the 1 million unit SWH goal had been made and whether the DoE had found a strategic partner to develop Concentrated Solar Power (CSP). It was disturbing how long it would take for the Department to become fully functional. He asked why the Cradock biofuel project was a State Owned Enterprise (SOE) and how the rebate on SWH savings was going to be measured. The statement about nuclear governance needing an overhaul was worrying as it implied that current structures were not safe. He asked how the Department expected to use wattle trees and other invasive species cleared, through the Working for Energy (WFE) programme, to generate power. The percentage that the R1.5 billion mooted for the Transnet pipeline made up was requested.

Ms Zungu replied that the actual announcement of the split came in May 2009 and that it had been necessary to wait for the national timeframe process to take its course, which added a further two months. The Department took 10 months to be established and the only problem at the time was that there was not a separate budget. The problematic issue was that Support Services was supporting two departments. The DoE had to respond to effectively using half of the budget that it needed and was trying to do its best when faced with the limited resources.

Mr Maqubela added that Transnet had wanted to build a 16 inch multi-product pipeline and that government requested that this be increased to 24 inches for capacity safety. As such R4.5 billion was allocated by the Minister of Finance to cover the cost difference.

Mr Mkhize added that the Cradock project was focused on commercially pursuing sugar beets as a source of bio-ethanol, the project had been pursued as a commercial venture and the department was in consultation with them.

Mr Aphane responded that the reference to nuclear governance was not in terms of safety but had to do with the co-ordination of Eskom, Koeberg, the National Energy Regulator of South Africa (NERSA) and the Pebble Bed Modular Reactor (PBMR). On 18 April the President would launch the SWH programme in Gauteng. NERSA would provide the funding and the rebate would be based on a fixed assumption that the every SWH would displace 300 kilo-watt hours per month. Due to the conditions of the World Bank loan to Eskom, which contained a clause demanding the confirmation of mitigation measures, Eskom was tasked with CSP and as such there would be no strategic partner.

In the course of the WFE programme, some geographical mapping had been done of large tracts of land where the existence of alien species of plants could be used for energy generation, the project was feasible and techniques such as gasification would be investigated.

Mr Gamede said that, with due respect, the EDD was a completely new department, which started out with no staff. The Minister had not even had an office when he began his job. It was already up and running.

The Chairperson interjected that the Department had said that it was running.

Mr Gamede replied that the presentation said that the Department would only be running by June and that he was merely responding to this information.

Ms Zungu replied that she had meant that by June the Department would like to have advertised all the critical posts and that it was currently running.

Mr Mnguni asked whether South Africa would not possibly face the same issues facing Iran around processing nuclear fuel for peaceful means, with the potential for enrichment being used to weaponise fuel. He asked whether wave technology had been examined, or if it was too expensive, as well as whether the up-scaling of Coal to Liquid (CTL) technology could be done.

Mr Mkhize replied that wave generation technology was a developing technology which had been looked at as a future option.

Mr Maqubela replied that that Sasol had proposed to build a 80,000 barrel per day CTL facility in Limpopo and that it had indicated the wish for government support and chosen the IDC as an investment partner.  A team was working with the DoE. It was noted that coal saved the South African economy, but came at an environmental price, which in the case of CTL was exacerbated by the high volumes of water needed. Due to this, CTL would not be able to replace crude oil refining and that the ideal would be to achieve a 70:30 ratio. He added that South Africa had also been slow off the mark in harnessing African oil resources compared to China and the United States. Globally, R26 trillion needed to spent on oil infrastructure, thus if South Africa made up one percent of the global oil usage figure then its bill would be one percent of R26 trillion.

Mr A Nyambi (Mpumalanga, ANC) stated that the Strategic plan was a direct response to what was raised in the fourth State of the Nation Address, and that in light of the DoE’s apparent funding problems it was dubious whether the interim structure was going to be able to actually implement the targets of the Strategic Plan.

Mr Sinclair asked what the rationale between the 70:30 break between the DMR and the DoE was. Currently farmers were producing maize at a R1 000 loss per ton, and biofuel investment in this sector had not happened because government had so far failed to come to the table. There was a need to enhance the biofuel strategy.  With regard to the mixture of energy production between renewable and non-renewable sources, the government was saying one thing and doing another, by building more coal power stations.

Mr Netshivhazwalu replied that the rationale between the 70/30 split was that energy functions in the previous department were smaller and that the split talked to the amount of people in each line function.

Mr Maqubela added that when the biofuels strategy was approved it was at a time when food and fuel prices were increasing, and while higher fuel prices were good for biofuel
competitiveness, the higher food prices influenced the implementation of the strategy. There was a decision by Cabinet to exclude maize from the biofuel initiative, due to it being a staple food, but perhaps there was now a need to re-evaluate the situation.

Mr Mkhize stated that the Department was looking at clean coal techniques when building the new coal power stations, and that since coal was all South Africa had, the country would have to use it. During 2006 there had been promulgation of biofuels specifications and regulations  and bio-diesel was included in this. The issue was now the economics of getting the industry off the ground. A further issue was the challenge posed by bio-ethanol’s affinity to water.

Mr Gamede said that it was assumed that when the DoE moved to its new structure there would simply be a shift of the necessary personnel with their current salary allocations, and that the only extra expense should be the new Minister and Deputy Minister. As such he could not understand the funding problems. He asked for further information on this.

Mr Gamede also asked whether the DoE would reach the Millennium Development Goals (MDGs) on electrification. He asked where they DoE got its figures on electrification from.

Mr Gamede asked whether the new empowerment dispensation referred to in the document meant that Broad Based Black Economic Empowerment was again going to have a name-change.

Mr Mkhize replied that he did not mean that there would be a new empowerment dispensation, but that the DoE would have to focus on sector specific challenges and thus need a ‘new’ dispensation to do so.

The Chief Director: INEP, replied that the DoE had got its figures from Statistics South Africa. He commented that, in regard to the MDGs, it would be very hard to ensure universal access by 2014, especially in light of the number of informal dwellings.

Mr Lees said that there appeared to be very little local involvement in the construction of a new peaking station in Ladysmith.

The Chairperson said that due to the time constraints, further questions from Members would have to be forwarded in writing and that, since the Members clearly seemed to want more engagement, the DoE would be called back at a later stage.

The meeting was adjourned.

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