Department of Energy, National Energy Regulator South Africa, Electricity Distribution Industries Holdings 2009/10 Annual Reports


13 October 2010
Chairperson: Ms E Mathebe (ANC)
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Meeting Summary

Electricity Distribution Industry Holdings (EDI) presented its Annual Report 2009/10. It was noted that EDI was to restructure the electricity distribution industry and invest in financially viable independent Regional Electricity Distributors (REDs) in South Africa, which would ensure a more effective distribution industry that could provide affordable and accessible electricity. There were six wall-to-wall RED areas. EDI had complied with corporate governance principles in the last year, although it was in the process of updating itself to comply fully with the King III report, and also complied with shareholder and National Treasury requirements. An unqualified audit opinion had been issued. The restructuring was influenced by complex developments at organisational, social, political and economic levels. The RED readiness preparation programme continued, with 33 municipalities being ring fenced. The EDI Industry Scorecard had been finalised and was presented. Three critical collective agreements had been agreed after protracted negotiations in the Transitional Labour Relations Structure over the past two years. Although employment equity targets were not fully reached, particularly in relation to disability, this was due to a moratorium on staff appointments. In respect of the financial statements, EDI reported a net deficit amounting to R13.1 million. In addition it was noted that EDI was the defendant in a civil suit instituted by a service provider, but was confident of its chances of success in the case. Irregular expenditure had been incurred through failure to follow the proper procurement processes in consultants’ contracts, and in respect of irregular payments made on behalf of the Department of Energy in contravention of a National Treasury practice note. Cash flow was higher than in the previous year. EDI was expecting a reduction in the Medium Term Expenditure Framework allocations. EDI was awaiting approval from the Minister for the Strategic Implementation Plan.

Members asked why government departments seemed to be struggling to fill disability quotas in particular, and stressed that all workplaces should be disabled-friendly and energy-efficient. Members asked what was being done to ensure that legislative needs were coordinated with attempts to restructure at municipal level, and noted EDI’s response that the legislative process was out of its hands. Later, EDI noted that it was necessary for restructuring and consolidation to be speeded up, saying that EDI would lose what little it had if the current position continued. Members asked whether a lifespan was named for EDI, asked for more details on the legal claim, the reasons for the irregular expenditure, and why so much was paid to consultants, asking if those skills could not be found in-house. Members noted that there was a need to facilitate the REDs and that the Committee hoped that the slow progress would be hastened.

Meeting report

Electricity Distribution Industry Holdings (EDI) Annual Report 2009/10
Mr Duma Nkosi, Chairperson, Electricity Distribution Industry Holdings, tabled his Chairman’s report for the 2009/10 financial year, saying that he would like to speak to the mandate, corporate governance and restructuring environment.

The main objective of Electricity Distribution Industry Holdings (EDI) was to restructure the electricity distribution industry and invest into financially viable independent Regional Electricity Distributors (REDs) in South Africa, in accordance with National Government policy. This would ensure a more effective electricity distribution industry that was capable of providing affordable and accessible electricity to consumers. There were currently six wall-to-wall RED areas.

He noted that the initiatives in regard to corporate governance were set out fully in the Annual Report, with the exception that it had not been mentioned that assessments were made in line with the Institute of Directors requirements, and copies of the reports were forwarded to the relevant Ministers. EDI was currently engaged with adjusting from the requirements that had been updated in the King III Corporate Governance report. During 2009/10, EDI had complied with corporate governance, and shareholder statutory requirements, as well as National Treasury requirements, in all its dealings.

He noted that the annual financial statements were the responsibility of the accounting authority. The Auditor-General had issued an unqualified audit opinion.

He noted that the restructuring environment was influenced by complex developments at organisational, social, political and economic levels. The Board continued to provide strategic leadership and guidance over the resources entrusted to them by the shareholder.

Ms Phindile Nzimande, Chief Executive Officer, EDI Holdings, presented a report on performance against business strategy, the staff establishment report and detailed the Corporate and Social Investment initiatives.  

Ms Nzimande announced that the RED readiness preparation programme continued unabated. A total of 150 out of 187 electricity distribution municipalities had signed the Accession to Co-operative Agreement. EDI had already  ring-fenced 33 out of the 56 municipalities that had commenced with the exercise in preparation for the ultimate transfer of their electricity distribution assets to the REDs during this period.

The EDI industry scorecard in relation to oversight had been finalised. National outcomes, industry outcomes and restructuring outcomes were the main parameters of this scorecard (see attached presentation for more detail).

Negotiations in the Transitional Labour Relations Structure (TLRS) resulted in a significant milestone being reached, after more than two years of intense deliberations. The Employee Transfer Agreement, the Placement and Migration Agreement and the Regional TLRS Agreement, all of which were critical collective agreements, were finally adopted by all participants.

Employment equity targets were not achieved this year at EDI, mainly due to a moratorium on the hiring of staff. Of the staff, there were 87% black and 56% female employees. Although the target for disabled employees was at 10%, none had been appointed.

Mr Jabo Mesash, Chief Financial Officer, EDI Holdings, gave a report on the financial performance. He noted that the total income received for the year, from government funding, interest and other income, amounted to R195.7 million. Of this, an amount of R72.2 million was received from the Department of Energy (DoE) to cover corporate operational expenditure, whilst the balance of R98 million was released from the conditional grant.

An amount of R394.6 million was received during this financial year as part payment of the R1.2 billion Multi Year Pricing Determination (MYPD) restructuring funding. At the end of March 2010, the total amount received in respect of the MYPD transfer payments amounted to R7 335.5 million. Utilised government grants and funding amounted to R496.2 million by the end of the financial year.

Mr Mesash said that operational expenditure for the financial period amounted to R208.8 million. The net result at the end of the financial year reflected a net surplus (deficit) amounting to R13.1 million. He noted that EDI Holdings was the defendant in a legal dispute instituted by a service provider, for approximately R4.8 million, but was confident that it had a good chance of winning this case.

He noted that irregular expenditure to the amount of R5.1 million was incurred because the proper procurement processes were not followed with regard to consultants’ contracts. Another irregular expenditure occurred due to a payment of R4.2 million made to third parties, on behalf of the DoE, in contravention to the National Treasury Practice Note 4 of 2006/2007.

He said that the annual financial cash flow statement for 2010 showed a total of R529,2 million, which was a much higher cash and cash flow equivalent than the R245,3 million recorded for 2008/09.

Ms Nzimande summarised that one of the objectives of EDI had been to get the Chief Financial Officer appointed in the 2010 financial year. The go-ahead from the Minister for the Strategic Implementation Plan (SIP) was still awaiting Cabinet approval.

EDI had received notification that the reduction in the Medium Term Expenditure Framework (MTEF) budget allocation over the next two years was going to be significant, dropping down to R23 million by 2012/13.

Finally, she noted that South African Revenue Services (SARS) had issued a non binding opinion in terms of which it had ruled that the monies collected by Eskom for EDI Holdings (around R342 million) should be taxed in the hands of Eskom as part of its revenue.

Ms N Mathibela (ANC) said that she was disappointed to note that no employees were disabled, and hoped that EDI would work hard on this area, as many disabled people were highly educated but were struggling to obtain employment.

The Chairperson said that it was not only EDI, but most government entities, who failed to meet the 2% target for disabled employees. She asked why there appeared to be so much difficulty in meeting these targets.

A delegate from the Department of Energy answered that it seemed that many disabled people were scared to apply for positions advertised in the newspapers. The Department had asked that Members of Parliament who knew of disabled people seeking employment should note their details and forward them to the Department, who could then approach these people directly.

The Chairperson added that all workplaces should be disability friendly and energy efficient.

Mr D Ross (DA) noted that the restructuring was taking place at a municipal level, and some of the regulatory framework for the legislation needed to come later. There was a lot of progress on the ground in terms of the establishment of the REDs, but legislation still had to follow, and he asked whether there was sufficient coordination in this regard.

Ms Nzimande explained that EDI included a Key Performance Indicator of legislation, but said that EDI itself could not develop this legislation, as it was up to the legislator. EDI was only able to focus on what was within its direct control.

The Chairperson asked what EDI’s lifespan was.

Ms Nzimande answered that the founding documents of EDI Holdings did not specify what its lifespan was likely to be. The entity would therefore exist either until its mandate had been fully fulfilled, or until the Minister decided that the entity had run its course. The National Treasury had budgeted for it for five years, which is why only a five year allocation was included in the MTEF.

Mr S Motau (DA) referred to Slide 31, which highlighted the legal claim, and asked for more details on it.

Ms Nzimande explained that the legal claim was lodged by a law firm that had been placed on a panel of service providers, and who had requested that another entity be on the panel. The agreement was that EDI would give work as and when it arose. However, when EDI started using the other entity, thus giving that law firm less work, it claimed that it should have been offered the chance to generate R4 million in revenue, and had sued for that.

Mr Motau highlighted the irregular expenditure on the extension of consultants’ contracts, and sought some clarity on this.

Ms Nzimande said that the process of renewal of the contract was delayed. By the time it had reached the Board for approval of the amount involved, the time frames had lapsed, although the service provider continued providing the service. The Auditor-General felt that the terms were not strictly adhered to, and had thus referred to this as irregular expenditure.

Mr Mesash expanded that this related to the rolling blackout in 2008. He noted that there had been a National Strategic Response Task Team, and that this was mandated to the Department, who had then entered into a contract with EDI to host the programme management unit. EDI then procured a service provider. The agreement was that the Department would pay EDI Holdings, and EDI would then pay the service provider. There was an initial transfer of R10 million. Costs were incurred by the service provider, who continued to provide services, but there was a delay in reimbursement of the funding from the Department to EDI. EDI had made the interim payment, expecting to be reimbursed by National Treasury. Strictly speaking, this was in violation of National Treasury requirements.

Ms L Moss (ANC) noted that payment to consultants accounted for a fairly substantial amount of the  EDI budget and asked whether the capacity within the EDI was so low that it was unable to do the work internally.

Ms Nzimande said that EDI was specifically designed to have a small staff complement for a limited period of time, so that focus would be placed on restructuring the industry without imposing inefficiencies by a large staff complement. She conceded that there were some skills that were not to be found internally.

Mr Lucas, (IFP) asked when the EDI was going to deliver and what the Committee could do to help.

Mr Nkosi said that if Parliament slowed the process, then it would be necessary to ratify certain actions taken to implement matters. He likened the process of restructuring and consolidation to sitting “on a dam” without making any progress. If the current position were to be retained over the next five years, then EDI would lose what little it had. Matters were quite urgent, and he asked that the legislative process must not be the only matter on which EDI could rely.

Ms Nzimande added that if nothing was done, the infrastructure would continue to deteriorate.

Ms Neliswa Magubane, Director General, Department of Energy, noted that the 17th Constitutional Amendment was being considered by the Portfolio Committee on Justice, and that the Minister had asked the Deputy President to assist in ensuring that the Department moved forward with this matter. In further response to a Member’s question, she noted that the request to move forward related both the Constitutional Amendment and other legislation.

The Chairperson said that there was a need to facilitate the REDs and that the Committee was not happy with the slow process, and hoped it could see some results soon.

The meeting was adjourned.

Note: The morning session will be available shortly

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