The Department of Energy briefed Members on its performance and expenditure reports for the 3rdand 4thQuarter of 2010/11 and the 1stQuarter of 2011/12, together with the budget composition per programme. The Department emphasised that it had been established on an incorrect baseline which was creating shortfalls in the budget. These shortfalls affected its structuring and electrification programmes. The Department was trying to correct this baseline by the reprioritisation of funds to high priority projects. The Department highlighted the need for restructuring of the budget to enable flexibility in budgeting and resource allocation to allow for the shifting of resources to under-resourced but significant projects. The financial statements were tabled and explained in detail, with a breakdown of spending and variances across various categories, and the explanations for this.
The Department in the 3rdquarter reported a total of R4.1 billion (72.3%) of the total budget expended for the financial year. A reported R220.1 million variance of the R4.3 billion allocated by National Revenue Fund was a result of delays in transfer payments of which the transfer to Transnet was the main contributor.
The 4thquarter 2010/11 experienced an increase in spending which was mainly due to the Department closing all commitments and opening up new orders in preparation for the new year end process and rolled over funds by National Treasury. The Department disbursed a total of R5.5 billion (97.5%) of the total 2010/11 financial year’s budget. A 36% increase was recorded under the Transfer Payment Category with R1.5 billion being transferred to Transnet as per schedule. By end of the quarter the Department had transferred R5.3 billion (97.7%) of the total 2010/11 transfer budget. Under the goods and services category spending increased from R61.2 million to R91 million of which the remaining R14.5 million was committed and motivated for roll-over in the next quarter. The Department mentioned that it had managed to keep its operational costs low. The failure by the Department to relocate to new offices accounted for the under spending of R1.9 million recorded under the capital assets category. The Department highlighted that the delay in relocation was a cost saving strategy as it could still be obligated to pay rentals until the end of the lease. The Department also gave a summary of the roll-over overview of the 4thquarter.
For the 1stquarter of 2011/12 the Department disbursed a total of R 763.6 million (52%) of its available to date allocation of R1.5 billion. R679.9 million was transferred under the transfer payment category to municipalities and the Department's entities. Under goods and services a total of R18.9 million was overspent of which the major contribution consisted of membership fees to bodies such as the International Atomic Energy Agency. Of the R0.7 million allocated for capital expenditure, R1.9 million was utilised in the procurement of assets like computer equipment resulting in an over spend of R1.2 million which could be corrected in the following quarter as it was a timing issue. The purchasing of computers was to enable the Department to effectively issue licences.
Members expressed concern at the Department's under spending in the in the Renewable Energy Finance and Subsidy Office project. Members advised that the Department align its budgeting period with those of the municipalities. The Committee also expressed disappointment over the Department’s under spending which indicated lack of work done. Members also sought clarification on the disbandment process of the Electricity Distribution Industry Holdings. Members also highlighted that the Department's offices were not up to standard. Members asked if the Department was satisfied with the reason given for the escalation in costs of the Transnet line and what these reasons were.
Apologises given on behalf of Mr J Selau (ANC) and Mr P Dexter (COPE).
Chairperson’s opening remarks
Chairperson asked if the “shaky” resource base on which the Department been established after its split with the Department of Mineral Resources (DMR) had resulted in budget shortfalls. He noted that the report had been circulated prior to the meeting.
Department of Energy on 3rd and 4th Quarter 2010 and 1st Quarter 2011 Performance
Yvonne Chetty, Chief Financial Officer, Department of Energy (DoE) emphasised that the style of reporting of the report was per Committee and National Treasury specifications. She concurred with the Chairperson that the DoE had started on an incorrect baseline. The DoE had after the split been allocated 30% of the resources in terms of the budget and human resources while the Department of Mineral Resources (DMR) received 70%.The full impact of the DoE efforts to build up a correct baseline could be highlighted in the financial and operational results to be presented in the annual performance at the end of the year. Some of the shortfalls experienced were in the electrification programmes and the structure of the Department. DoE had already been structured around two separate interim structures that were both inadequately funded. Shortfalls were also experienced in ad hoc projects that emerged. To remedy these shortfalls the DoE had tried to re-prioritise funds to high priority projects.
Ms Chetty then moved on to explain the 3rdquarter financial performance 2010/11 The DoE in the 3rdquarter reported a total of R4.1 billion (72.3%) of the total budget expended for the financial year. A reported R220.1 million variance of the R4.3 billion allocated by the National Revenue Fund was as a result of delays in transfer payments of which the transfer to Transnet was the main contributor. Under goods and services a total of R5.6 million had been spent (58.1%), of which the main contributors were membership fees.
The 4thquarter 2010/11 experienced an increase in spending which was mainly due to the Department closing all commitments and opening up new orders in preparation for the new year end process and rolled over funds by National Treasury. The DoE disbursed a total of R5.5 billion (97.5%) of the total 2010/11 financial year’s budget. A 36% increase was recorded under the transfer payment category with R1.5 billion being transferred to Transnet as per schedule. By end of the quarter the DoE had transferred R5.3 billion (97.7%) of the total 2010/11 transfer budget.
Under the goods and services category spending increased from R61.2 million to R91 million (86.3%) of which the remaining R14.5 million was committed and motivated for roll-over in the next quarter. The major contributors were listed as travel and subsistence (R30.3 million), lease payments (R22.2 million), consultation and advisory services (R6.6 million), venues and facilities (R4.3 million) and operational costs (R3.4 million).The DoE mentioned that it had managed to keep its operational costs low.
The failure by the DoE to relocate to their new offices accounted for the under spending of R1.9 million recorded under the capital assets category.
Ms Chetty also gave a summary of the roll-over overview of the 4thquarter. She noted that the unspent funds under the Compensation of Employees could not be rolled. In Goods and Services in addition to the unspent R14.5 million the DoE requested an additional R21.7 million from National Treasury of which a total of R10.7 was declined as the amount related to the National Electricity Response Team Project Management Office (NERT PMO). Under the Transfers of Payment the Department requested a total of R78.5 million of which R 77.2 million was granted. The remaining R1.3 million was not approved as it was under the non-grid programme.
For the 1stquarter of 2011/12 the Department disbursed a total of R 763.6 million (52%) of its available allocation of R1.5 billion. R679.9 million was transferred under the transfer payment category to municipalities and the Department entities - the Integrated National Electrification Programme (INEP), Electricity Demand Site Management (EDSM) Eskom, the South African National Energy Development Institute (SANEDI), Working for Energy, the Renewable Energy Finance and Subsidy Office (REFSO) and Transnet Pipeline.
Under goods and services a total of R18.9 million was over spent with the major contribution being membership fees to organisations such as the International Atomic Energy Agency (IAEA) and office accommodation. The Department was allocated R0.7 million for Capital Expenditure of which R1.9 was utilised in the procurement of assets like computer equipment resulting in an over spend of R1.2 million which could be corrected in the following quarter as it was a timing issue.
Mr S Radebe (ANC) asked if the reduction in the administration budget for the third quarter had a negative impact on the compensation of employers and job opportunities.
Mr Radebe asked if the Department had secured office space. He also wanted to know why the DoE had not used some of the funding allocated to furnish its offices which were currently unfurnished.
Chairman reiterated the point made by Mr Radebe stating that the
Ms Chetty replied that the DoE was currently sharing offices with the DMR but noted that the Department of Public Works (DPW) had recently allocated alternative offices into which it would move in February 2012. The purchasing of new furniture was delayed as the DoE was currently making use of furniture procured from Electricity Distribution Industry (EDI) Holdings.
Mr Tseliso Maqubela, Deputy Director-General: Hydrocarbon, Department of Energy, reiterated that the use of accommodation leased by the DMR was done for cost saving measures. The rationale was that if the DoE moved before the end of their lease, it could still be obligated to pay rentals. Similarly, the purchasing of new furniture was seen as unnecessary since the DoE had not relocated. The DoE had upgraded its computer infrastructure and systems to ensure effective issuing of licences.
Mr Maqubela, however, agreed with the point that the current offices were not up to standard but reminded Members that this had been brought about by inadequate resources.
Mr K Moloto (ANC) asked if the delays in payment to municipalities were partly due to the fact that they did not have contract capacities to control the funds.
Mr Ompi Aphane, Acting Deputy Director-General, Department of Energy, explained that delays in transfers to municipalities were a result of Government’s use of a cash accounting system instead of anaccrualsystem. This meant that by 31 March every year all funds that had not been utilised had to be applied for a roll-over. He further explained that National Treasury had issued a directive under the Division of Revenue Act to the effect that no municipal transfers could be done before 1 July each year. This meant that the municipal year was compressed into only nine months and so the unutilised funds had to be reapplied for in order to be rolled-over.
In addition, the INEP non-grid transfers to private concessionaires posed the greatest challenge as the DoE could not take up the risk, and had to pay on an invoice basis. Mr Aphane noted that R57million had been applied and approved, although it did not reflect in the presentation. An additional challenge faced by DoE was uncertainty of having to guarantee payment within 30 days but after the 31 March having to wait for the Treasury to grant the roll-over. He noted that the trend was that in the 3rdand 4thquarter there was a massive uptake in the revenue by municipalities.
Mr E Lucas (IFP) asked if the there was a way to synchronise the DoE financial year with that of municipalities.
Mr Aphane replied that the issue was too enormous for the Department to handle alone. He stated that the Financial and Fiscal Commission (FFC) had at one point deliberated on the issue. He added that the greatest criticism was that the budget was highly classified and not flexible in terms of reallocations of funds to projects that were more demanding. It is primarily earmarked and appropriated for specific functions for which the money has been set aside. In the evident of policy framework shifts the budget was not flexible enough to facilitate funding of new programmes.
Members asked for reasons for the under spending in the Renewable Energy Finance and Subsidy Office (REFSO) project.
Mr Aphane replied that under spending in the REFSO project was due to the fact that its functions had been taken over by the Renewable Energy Programme that was undergoing a bidding process. Therefore the DoE viewed it as inappropriate to allocate resources to the programme. Meanwhile the DoE had applied for the reclassification of funds.
Members asked what the Working for Energy initiative encompassed.
Aphane replied that the Working for Energy initiatives included Waste for Energy that involved the harvesting of municipal waste for the creation of jobs. The DoE was considering the consolidation of Working for Energy and REFSO into the same portfolio as they had overlaps that could allow for more effective budgeting.
Mr D Ross (DA) asked about the disbandment process of Electricity Distribution Industry Holdings (EDIH).
Ms Thandeka Zungu Chief Operations Officer, Department of Energy replied that R11 million had been for winding up process which could include the payment of employees and administration costs of de-registration. She however noted that EDIH had been advised to use its savings in the meantime and could have the money transferred after the funds had been exhausted.
Mr S Motau (DA) wanted to know what happened to EDIH assets and their offices.
Ms Zungu replied that all assets had been transferred to the Department.
Mr K Moloto (ANC) asked if the Department was satisfied with reasons given for the escalation of cost prices in the Transnet line and what the reasons were.
Mr Maqubela replied that Transnet differed from the programmes affected by the Ministry of Public Enterprises. The DoE initially suspended operations based on investigations that the board of Transnet had begun which were supposed to end in November 2010. These were later taken over by the Ministry of Public Enterprises. The general underlining reasons for these oversights were that programmes were rushed and had been pushed for time which meant that certain things were underestimated. The escalated costs were also as a result of delays in consultation with land owners which in most cases resulted in the relocation of equipment as consultations were on going. Nonetheless the DoE had resolved to maintain the final portion from Government, to be fixed at the agreed 4.5billion.
Mr Moloto asked for an explanation concerning over budgeting by the DoE in consultation fees.
Mr Maqubela replied that the issues of consultants’ costs talked to the number and the calibre of people within the Department. The services contracted were for assistance on modelling of the front part of the Integrated Plan, a system for accounting regularly for the entire value chain of the liquid fuels to reward investment, and the Bio Fuel Pricing Framework. The positive aspect was that some of these services, for example, the Bio Fuel Pricing Framework, were a once-off requirement.
The Chairperson commented that under spending showed work had not been done.
Mr Maqubela reminded the Members that the cost to the economy of an under resourced Energy Department were huge and hidden and doing more for less had negative outcomes as it could not be sustained.
Mr Motau reiterated the point made and highlighted that the DoE had to argue its case of shortfalls, especially in terms of shortage in human resources, more strongly to the National Treasury.
Mr Moloto asked if, under the REFSO project, the hydro dam was on course.
Mr Aphane replied that the roll-over had been approved and the positive outcomes was that the Department of Water Affairs (DWA) had committed that, if the project was a success, 20 other dams with hydro potential could be developed in the future.
Mr Moloto said that the DoE should discuss project shortfalls with National Treasury and find solutions.
Ms Cherry replied that the DoE had engaged with and invited Treasury to the Department on many occasions. This was intended to have a one-on-one interaction to highlight the challenges that it was facing after the split with the DMR. She highlighted how in last week’s presentation by Treasury some of the concerns raised by DoE had been highlighted.
Mr Moloto commented that the Chairperson needed to seek advice after the Department had followed all the necessary processes from the appropriate committees how it could be assisted on restructuring of the budget.
The Chairperson highlighted that he could take the concerns up with the Standing Committees on Appropriations and Finance. However, he emphasised that there could be no quick fix to the budget, but these discussions could create a platform for future budget discussions.
The Chairperson commented on the need not to lump financial reports into one presentation.
The Chairperson noted that the Committee was still to interact with the Auditor-General and the FFC in order to get a full picture of the finances from a different angle.
Members were reminded of the upcoming African Ministers on Energy Conference on 15 and 16 September 2011 of which six Members could attend.
The meeting was adjourned.
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