Department of Energy 2009/10 Annual Report

NCOP Economic and Business Development

08 November 2010
Chairperson: Mr F Adams (ANC; Western Cape)
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Meeting Summary

The Department of Energy presented the Annual Report of the former Department of Minerals and Energy for the 2009/10 financial year, focusing on the Strategic Planning Process, Key/ Strategic Objectives, the Energy Programmes within the former Department, the 2009/10 Programme Performance Review, the Auditor-General’s Report, and the Annual Financial Report

 

The Department highlighted the difficulties caused by the division of the former Department.  One of the drawbacks of the split was that activities and projects identified during the Departmental strategic planning session in 2008 had to be delayed or abandoned to prepare for the split. The Department had faced financial constraints as well as lack of human capital to deal with backlogs, aging infrastructure, electrification backlogs and bulk infrastructure. The global economic downturn was another challenge. The activities of the Department were organised in seven programmes - Administration, Promotion of Mine Health Safety, Mineral Regulation, Mineral Promotion, Hydrocarbons and Energy Planning, Electricity Nuclear and Clean Energy and finally Associated Services. With the split of the Department in October 2009 the two energy line functions were delineated from the Mineral Resource functions and thus the Department now focused only on the performance of the two line function programmes namely, Hydrocarbons and Energy Planning as well as Electricity, Nuclear and Clean Energy. Under hydrocarbons the Department developed policy and regulation to manage petroleum, coal and natural gas sectors and promotes the sustainable use of energy resources through integrated energy planning. Figures were given for licence applications in terms of the Petroleum Products Amendment Act, site inspections by the Compliance and Monitoring Unit, and import and export permits for petrol and diesel fuel supplied to neighbouring countries. The Safe Illuminating Paraffin pilot project had seen 1000 Illuminating Paraffin safe stoves distributed. The project resulted in the prevention of fires; however the cost of stoves remained a challenge. The energy digest, the energy price report, and the energy balance for 2006 were completed. As a funding mechanism for the New Multipurpose Product Pipeline a security supply levy of 7.5 cents per litre was determined by the Minister of Finance.  A revised white paper on renewable energy will be finalised before 2010 financial year. The Medium Term Expenditure Framework allocations for the Integrated National Electrification Programme for 2009/10 stood at R2.6 billion of which R2.5 billion was distributed. Municipal allocation totalled R932 million, Eskom 1.4 billion, Eskom special schools R149 million and the non-grid allocation was R84 million of which R1.2million was transferred. Expenditure for all nine provinces totalled R914 million. The overall under spending for the Integrated National Electrification Programme was within the threshold tolerance of 5% and was mainly attributable to the misalignment of national and local government budgeting cycles. Unfortunately a qualified audit opinion was received on the basis that completeness of receivables for Departmental revenue (R25m) could not be verified. The root cause was lack of a comprehensive debtors system and skills gaps. Matters of emphasis included irregular expenditure, restatement of previous year’s financial figures, material underspending of budget, and potential unauthorised expenditure due to accruals exceeding saving. Four cases of financial misconduct were reported during the year. A significant effort was directed at reorganisation and implementation of the new structures. Minor deviations to the initial business plan were experienced.

Members were especially concerned by the Department’s qualified audit opinion, issues surrounding the safe stove distribution project and the import and export of petroleum in South Africa. Members also sought elaboration on the financial misconduct and irregular expenditure.

The Department offered to reply in writing to the questions which remained due to time constraints.

Meeting report

Mr Dakalo Netshivhazwaulu, Acting Chief Financial Officer (CFO), Department of Energy (DoE) highlighted the division of the Department of Minerals and Energy (DME) and the challenges that faced the Department because of it. One of the drawbacks of the split was that activities and projects which were identified during the Departmental strategic planning session in 2008 had to be delayed or abandoned.

Mr Netshivhazwaulu said that the DoE was now facing challenges with the implementation of the 2009/10 strategic plan which was largely because of the separation from Minerals. The Department faced financial constraints as well as lack of human capital to deal with backlogs, aging infrastructure, electrification backlogs and bulk infrastructure. The global economic downturn was another challenge putting pressure on the implementation of the strategic plan.

The activities of the DME were organised in seven programmes - Administration, Promotion of Mine Health Safety (MHS), Mineral Regulation, Mineral Promotion, Hydrocarbons and Energy Planning, Electricity Nuclear and Clean Energy and finally Associated Services. With the split of the DME in October 2009 the two energy line functions were delineated from the Mineral Resource functions and thus the DoE now focused only on the performance of the two line function programmes namely, Hydrocarbons and Energy Planning as well as Electricity, Nuclear and Clean Energy.

Under hydrocarbons the Department developed policy and regulation to manage petroleum, coal and natural gas sectors and promotes the sustainable use of energy resources through integrated energy planning.

In terms of the implementation of the Petroleum Products Amendment Act (PPAA), 15 198 license applications were received and 12 453 were processed, leaving the Department with a balance of 2 745. The Department had inspectors from the Compliance and Monitoring Unit undertake 2 309 site inspections for the year; however the Department felt that this should be increased.


Mr Netshivhazwaulu said that 1 200 Import and export permits were issued during the reporting period. South Africa exported petrol and diesel to neighbouring countries, thus the export permits.

The Safe Illuminating Paraffin (IP) pilot project had seen 1 000 IP safe stoves distributed by the Department to households in Gauteng (350), Western Cape (350), Kwazulu-Natal (150) and Eastern Cape (150). The project resulted in the prevention of fires; however the cost of stoves remained a challenge.

Regarding energy data, Mr Netshivhazwaulu said that the energy digest was finalised in December 2009, the energy price report was compiled and finalise and the energy balance for 2006 was finalised and published on the Department’s website.

As a funding mechanism for the New Multipurpose Product Pipeline (NMPP) a security supply levy of 7.5 cents per litre was determined by the Minister of Finance to contribute toward the construction of the NMPP.

In respect of Energy, Nuclear and Clean Energy, there were a number of key policy developments which included a review of the 2003 renewable energy white paper, development of the country’s first integrated resource plan and the development of a nuclear energy implementation strategy. A revised white paper on renewable energy will be finalised before 2010 financial year.

The Medium Term Expenditure Framework (MTEF) allocations for the Integrated National Electrification Programme (INEP) for 2009/10 stood at R2.6 billion of which R2.5 billion were distributed. Municipal allocation totalled R932 million, Eskom 1.4 billion, Eskom special schools R149 million and the non-grid allocation was R84 million of which R1.2 million was transferred. Expenditure for all nine provinces totalled R914milllion.

Mr Netshivhazwaulu said that the overall under spending for INEP was within the threshold tolerance of 5% and was mainly attributable to the misalignment of national and local government budgeting cycles. Municipal tender processes only commenced after July, once the budgets have been passed. Procurement processes in the municipalities took a long time and municipalities faced technical challenges.

Mr Netshivhazwaulu in his statement of financial performance said that the staff cost increased in relation to the increase in staff numbers; the goods and services cost was relatively low compared to 2008/9 owing to cost containment measures implemented during the year under review. The related costs included travelling, venues and facilities as well as advertising and catering. Tangible assets increased significantly while intangible assets decreased as only security related software were acquired during 2009/10.

Mr Netshivhazwaulu said unfortunately a qualified audit opinion was issued. The basis for the qualified opinion was that completeness of receivables for departmental revenue (R25 million) could not be verified, which was related to disclosure note 26 (Annual Report, page 189). Disclosure notes were necessary as part of the preparation for migration into accrual basis of accounting.

According to the audit report the irregular expenditure which was incurred related to services rendered without prior approval by the relevant authority. The material under spending of the budget which was at 2.9% was below the materiality threshold set by the National Treasury. However, approval was granted by the National Treasury for the rollover of the funding to the 2010/11.

Mr Netshivhazwaulu said that four cases of financial misconduct was reported during the year of which the outcomes of the hearing was that two were found guilty, one was in progress and the other one had left the Department.

In conclusion Mr Netshivhazwaulu said that a significant amount of effort was directed at reorganisation and implementation of the structures of the new departments, minor deviations to the initial business plan were inexperienced.

Discussion
Ms Nelisiwe Magubane, Director-General, DoE, explained to Members that the document presented was prepared while the Department was part of the former DME. The annual report for the new DoE was due next year. Some issues were joint responsibilities of both Departments; however the issue of the qualified audit report was something that the DoE was taking responsibility for and would ensure that it did not recur. Thus the DoE might not be able to respond to questions adequately. Ms Magubane pointed out that the state diamond trader was the responsibility of the Department of Mineral Resources (DMR) but the only reason it was presented in its report was because the report was prepared while the DoE was still part of the DME.

Mr Tseliso Maqubela, Deputy Director-General: Hydrocarbons, DoE, said that there were three things he wanted to bring to the attention of the Committee. The first was the security of crude oil supply for the country which in the Department’s view needed acceleration. There was a lot of economic diplomacy and a lot of shuttling back and forth between the country and various capitals where crude oil was found. In the medium to long term, if the Department did not accelerate the security of crude oil it would end up with no allocations it could call its own. China would take it all.

Mr Mqubela further stated the issue of attracting investment into downstream infrastructure because big multinationals such as Shell or British Petroleum (BP) were fast losing interest that sector globally and were selling all their downstream assets. Thus this was a challenge for the Department.

Mr Mqubela said as far as licensing was concerned the Department was making sure that it was an orderly process.

Mr A Lees (DA, KwaZulu-Natal) pointed out that there was no mention of transmission infrastructure and asked if the Department was of the view that it was an aging infrastructure which had challenges attached.

Mr Ompi Aphane, Acting Deputy Director General, DoE, said the Department did regard the transmission infrastructure as a problem. One of its programmes under INEP was what it called bulk infrastructure which included what it called the sub transmission line. But the Department drew a demarcation line between social infrastructure and what Eskom did, which was not part of its normal programme rollout. Thus the electrification programme did deal with sub transmission infrastructure and it did do that as part of the INEP programme.

Mr Lees said that he would like to know to which countries petrol and diesel exports were made and by whom. He asked whether PetroSA was involved in those exports and if the Department was paid for all the exports.

Mr Mqubela responded that the countries that were exported to were Botswana, Swaziland, Lesotho among others. PetroSA exported diesel to USA and Kenya. PetroSA was not a major player in the export market because of its size. Most of its production went to the Western Cape and some of it to the Eastern Cape and was mainly taken by the big oil makers.

Mr Lees sought clarity into what the import permit procedure was. He was unclear whether a new permit had to be applied for every time a shipment came in or whether permits were open ended.

Mr Mqubela said that getting an export or import permit was a 24 hour turnaround process. Companies could only import or export when it had a license, thus it were in the database. The Department had a system whereby it made a recommendation which had to be ratified by the Department of Trade and Industry (DTI). The Department did not want to be bureaucratic but wanted to ensure that it did not export when there were shortages in the country. The permit was valid for six months. The Department was currently importing 2.8million litres of petrol and diesel. The question then was to what extent it continued exporting. For now the system was working well and there was sufficient capacity to import and export. It also helped South Africa based companies to be able to supply those markets because for them and ensured that it remained viable. However if it stopped exporting, it would lose business to India or other countries.

Mr Lees asked whether the fuel in the IP Safe Stoves, which the Department planned to distribute, was widely available and how it compared with the cost of illuminating paraffin.

Mr Mqubela answered that it was the stove that was safe not the illuminating paraffin itself. The stoves had safe features and were unfortunately imported. The Department felt that there was a need for them to intervene because paraffin was used by many people and its use had had some very bad consequences. The paraffin stoves will continue until everyone had access to electricity. The Department was now investigating the use of liquefied petroleum gas which is the next level of development to modern forms of energy.

Mr Lees asked whether the money for the NMPP of 7.5 cents per litre, which Treasury agreed to, was ring-fenced and if it had started flowing to Transnet. If it had not yet, when would it. He also asked whether the pipeline was on schedule and its completion date. He noted that the Environmental Impact Assessment (EIA) was just starting on the sixth pump station and wondered when the Department would start on the other pump stations.

Mr Mqubela said that the NMPP money was ring-fenced. There was an allocation of R1.5 billion per annum given to Transnet in quarterly payments. However there were conditions attached to those payments. Transnet must investigate the possibility of “corporatising” the Transnet pipeline to ensure that all the activities on the pipeline were going well. Mr Mqubela said that the Department was concerned about the delays in the construction of the pipeline. The EIA had not been resolved in good time and in the Department’s view a delay was a major concern. It was unlikely that the pipeline would be completed by the end of 2011 as expected but this would not have an impact on the budget.

Mr Lees pointed out that information sessions (slide 19) had been conducted but the Department did not state with whom those information sessions were conducted. He wondered what real value there was in those kinds of information sessions.


Mr Mqubela said that the Department was always looking for new ways to structure information sessions and it also targeted schools but to save costs the Department linked up with the fire services.  When the fire services went into the communities, the Department would join them as part of a combined effort to try and prevent fire.

In terms of INEP allocations, Mr Lees said there was an under spending and asked how the Department monitored the actual spending of that money by the entities to which the transfers had taken place. He was concerned that large amounts of money might be sitting in bank accounts that had not been spent, which would explain why service delivery had not taken place.

Mr Aphane replied that there were a number of mechanisms were in place to ensure outputs on the ground. The Department had regional offices with regional managers, and technical auditing teams who did sample audits of municipal projects. Those regional managers were required to visit a project and ensure that it came off the ground. The meters had a number and the Department was therefore able to trace that number when it was connected to the grid and were able to see whether electricity had been distributed.

Mr Lees noted that the Department stated that R8.6 million was used for refurbishment in Gauteng (slide 27). He asked the Department to please clarify whether it used that money for refurbishment or for the backlog. If the money was indeed used for refurbishment he was curious as to how the Department managed to get that approved in the first place.

Mr Lees asked what will be the annual additional cost of two departments, in terms of office space, electricity bills, payments for ministers and deputy ministers.


Mr Netshivhazwaulu replied that he did not know the actual cost and would only be able to categorise it and give an amount per category.

Mr Lees was concerned that the Department was going to improve the financial skills at regional offices while by the Department’s own admission there was a very low volume of transactions. It would be far more efficient to centralise the debtors system in the national office rather than decentralise it.

Mr Dakalo Netshivhazwaulu said that it was not an intensive work of finance. It was very simply set up at regional level but there were some basic rules on which staff would be trained. However the master debtors system was centralised at headquarters.  


Mr Lees further asked what the cost was to the fiscus of the misconduct mentioned in the presentation and if any of that money been recovered from the people involved.

Mr Netshivhazwaulu answered that two of the four cases of misconduct did not have financial implications for the Department but had to do with the influence the staff member concerned had within the employ of the state. The other two staff members had falsified claims, but recoveries had been made. There was an issue of someone who went on unauthorised leave but the cost of those leave days was recovered as well. 

Mr A Nyambi (ANC, Mpumalanga) asked the Department to simplify note 26, page 189, in the financial statements. He said that the Department was able to take Members through the Auditor General (AG) report and able to respond to most things raised by the AG, but the Department was at the same time selective about detailing the deficiencies. There was close to R123 million under spent in Programme 7 but no details surrounding that under expenditure was given.

Mr Netshivhazwaulu said that with regards to note 26 about receivables of departmental revenue. The amount of R25 million was the interest and dividends and rent on land. He explained that when someone had a license to go prospecting there was a minimum royalty that the person must pay. There could also be another clause saying that the person needed to pay the minimum royalties in addition to the amount of production done. The production part could not be confirmed by the time of booking, but the minimum part could be confirmed and as a result that amount would always be an estimate and this was explained on page 189 of the annual report. What the Auditor-General was trying to say was that it was important to have a fully fledged financial system and the Department agreed that it would be the only solution to administer this process. But it was stated by National Treasury that no Department was to purchase a financial system without the consent of the Treasury.

Mr Netshivhazwaulu said that the R123 million was a combination of the under expenditure of INEP and the non-grid system.

Mr Nyambi asked the Department to explain its definition irregular expenditure which seemed more like over simplification. The Department stated that over R4million was incurred in irregular expenditure but the Department was not specific about what “over” meant and what the precise amount was.


Mr Netshivhazwaulu said that no one could incur an expense without the approval of the Director-General. R3.6 million was spent on construction of the new building. When the announcement of a split was made, the Department had to ensure the availability of two offices for the Ministers in the building and therefore had to redo the original building plan.

Mr Nyambi queried the Department’s statement (slide 28) that the main reason for under spending was the misalignment of national and local government budgeting cycles.


Mr Nyambi made reference the timeliness of performance information (Annual Report, page 151). He asked for comment from the Department.

Mr Nyambi cautioned the Department regarding accruals.

 

Mr Netshivhazwaulu explained the accounting process in the Department. A transaction was only recognized once a rand or cent was paid. In terms of the accruals basis of accounting, one recognised a rand or cent when one committed and one had an agreement with the other party. What the Department was trying to operate on was something in the middle called the modified cash basis of accounting, which meant that one would recognised what one had paid for; whatever one had committed to but not paid had to be disclosed. It would not appear on the financial statements but it would be added as a note. Thus Treasury would recognise it as a commitment and not take it away as unspent money.

Mr D Gamede (ANC, Kwazulu-Natal) said that the Department could explain the Auditor-General’s report until “the cattle came home” but the truth was that the Department had a qualified audit opinion. This did not make him happy.

Mr Netshivhazwaulu said that he agreed with Mr Gamede about the qualified audit report. It was an embarrassment.

Mr Gamede said that the Committee pointed out to the Department’s Chief Operating Officer the previous year the Committee’s concern on the issue of stoves. Those things were not sustainable. He said that he had gone to seven municipalities where the stoves had been ditched and could not be found. Members wanted electrification. He was dismayed to see the issue of stoves appear in this presentation.

Mr Aphane replied that in the financial year under review, the rehabilitation of infrastructure was not part of the electrification programme. One of the obvious challenges the Department faced was the fact that whilst it were busy coordinating as many new households to the grid as possible it still had three million additional houses that did not have access to electricity. The challenge was whether to fix the infrastructure already in place or connect those households which had never had access to the grid. Part of the solution would be to have a joint plan with the Department of Human Settlements (DHS) to integrate the electrification programme.


Mr Gamede was puzzled because the CFO had started the presentation with the Department’s challenges. Members were only too well aware of them. Another angle was needed.  

Mr Gamede said that the Department had given a breakdown of the INEP per province. However, the Department had not stated what was allocated and spent by each municipality. That would have assisted Members when they went to their constituents’ offices.

Mr Gamede agreed with Mr Nyambi about the under spending. He asked why other provinces and other municipalities did well and others not. Thus the Department’s reason for under expenditure, as pointed out by Mr Nyambi, did not stand the test of reason.

Mr Gamede asked for an explanation for the over expenditure on travelling.

Mr Gamede said that he was not sure whether there was an increase or decrease in staffing. He asked for clarity. He referred again to the qualified audit opinion and asked if the Department would give a bonus to someone who caused the Department to receive a qualified opinion. What would be the justification of a bonus, taking the qualified opinion into account?

Mr Netshivhazwaulu explained that the bonuses for Senior Management Services (SMS) were paid after the audit report and the bonuses for staff of levels 1 to 12 were paid before the audit report. The performance bonuses paid were for the previous financial year.

The Department added that bonuses paid to senior management services were for the 2008/09 financial year and that no bonuses had been paid to the Department or the DMR for the 2009/10 financial year

The Department added  that there was a staff increase of two Ministers and two Directors-General. The Department had been struggling with capacity shortages regarding licensing processes but hoped it would now be able to catch up. The Department was still seriously understaffed because some positions were unfunded and therefore it was losing staff.

Mrs E van Lingen (DA, Eastern Cape) pointed out that the Department had said that the strategic planning was started in November 2008; however, the split only came shortly after the election in 2009.  She asked for clarity as to whether the Department had been planning before the election without Members knowing about it.

Mrs Van Lingen said that the 2 309 site inspections were markedly few if the PPAA was taken into consideration.

Mr Mqubela replied that the Department was trying to reduce the number of site inspections, but increase the quality and visibility of inspections. Inspectors would go to a site once every two years, because a site in a major location was not going to display fuel prices that would mislead the public. However, sites in far off areas took advantage of the distances between sites and the regional headquarters of the Department; thus the Department would visit those sites unannounced.

Mrs Van Lingen asked in which areas the stoves were issued in the Eastern Cape.

Mr Mqubela said that they were distributed at Mbizana municipality in the Eastern Cape.

Mrs Van Lingen asked whether that information on the energy balance for 2006 was still relevant today. Alternatively, had there been a typing mistake?  

Mr Mqubela replied that the Department had difficulty in obtaining information from the users of energy. The Department now had a full staff compliment in the unit and will now be able to catch up with publishing those energy balances.

Mrs Van Lingen asked for a complete list of municipal allocations and a list of schools. She was aware that the Department did not have that information with it and asked it to send the information to her.

Mr Aphane replied that the Department did have a disaggregation of municipal allocations and apologised for not putting it in the presentation.

 

Mrs Van Lingen touched on the delay in municipal projects when the Department’s financial year started in April and the municipalities’ financial year ended on 30 June. Funding for provincials only became available in August/September. What would be the Department’s recommendation be to start the projects once the money was available on 01 April and how would the Department overcome the three month problem.

Mr Aphane replied that municipalities had a cash flow problem and thus the Department waited until the budget was confirmed from 01 April. Thereafter it would go through its own budget process and nothing much happened until 1July or August in terms of approving the municipal allocation. The municipalities would then go through the procurement process in relation to that allocation. The National Treasury had issued a directive to the Department not to fund municipalities before July of the financial year. The Department had been reporting on the basis of its own cycle where at the end of March of each financial year, the municipality would still be dealing with that financial year’s problem and therefore the figures reflected an under spending on the Municipality’s part.

Mrs Van Lingen said that there was illegal occupation of houses and no certainty about when it would be resolved. She asked what action had been taken.

Mrs Van Lingen said that in Mantsopa there were no projects that could be readily implemented and asked why the Department mentioned Mantsopa in its budget.

Mr Aphane replied that, in order to ensure that the Department integrated its approach, the Department needed to keep tabs on housing projects that municipalities planned to undertake. It was part of an integration approach with the Department of Human Settlements (DHS). The Department made allocations on the strength of municipal representation. Thus if a municipality indicated that it was to build houses in a particular area, the question of funding required that the municipal manager must sign off the verification thereof. However, there were problems and, unfortunately, Mantsopa was one of those areas where housing did not materialise.

Mrs Van Lingen said that there was reference to the board of entities which the Department had to pay and she said that she found it strange that the Department had to pay for the entities’ boards.

Mrs Van Lingen was convinced that the State Diamond Trader, which the Department had bailed out, had appeared in the budget of the Department of Mineral Resources (DMR) as well. She sought an explanation.

Mrs Van Lingen asked how many regional offices the Department had and in what circumstances its finances were. She wanted to know whether that was the cause of the qualified audit opinion.

Mrs Van Lingen mentioned only four cases of financial misconduct were mentioned (slide 52). It was unclear what type of misconduct it was.


Mr Gamede said that he accepted the response regarding late bonuses and said that he hoped there would be no other late bonuses in this financial year. He was eager to see the 2010/11 annual report.

Mr Nyambi said that he was too looking forward to the 2010/11 annual report.

Mr K Sinclair (COPE, Northern Cape) asked why the CFO was still acting.

Ms Nelisiwe Magubane replied that the CFO was at the level of a deputy director-general. There was another candidate who had received Cabinet approval for the CFO position and had accepted the offer.

Mr Sinclair suggested that Ministers should attend Committee meetings to address the many policy issues which needed their attention.

Ms Magubane said that she accepted Mr Gamede and Mr Nyambi’s comments.

The Chairperson ruled that the Department should reply to any unanswered questions in writing.

The meeting wa
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