Fourth Quarter Performance Report: briefing by Department of Energy: Third Term Committee Programme


19 June 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Department of Energy briefed the Committee on their performance for the fourth quarter of the 2011/12 financial year. The presentation gave an overview of how much of the budget was spent by the end of the fourth quarter and where it was spent. At the end of the fourth quarter, the Department spent 99.6% of its adjusted budget. The budget was divided between five programmes: administration, energy policy and planning, energy regulation, the national electrification programme, nuclear energy and regulation.

The Committee made it clear that it did not appreciate the fact that the Department only sent the presentation earlier that morning, which did not give the Committee time to peruse the document properly. Members wanted to know why spending for energy policy and planning differed so much in the third and fourth quarter, why the Department was unable to make their lease payments, why Eskom seemed to be solely in charge of energy efficiency in the country, and if the Department could provide the Committee with more details about the Approach to Distribution Asset Management (ADAM) project. They asked if the ADAM project would look into developing a master plan that would assist municipalities to deal with backlogs and assist with institutional problems, specifically around distribution.

Members understood that R1.2 billion was going to be transferred from the Department to Eskom for solar water heating; however, they wanted to know what part of the budget was going to be used for energy efficiency, and whether there was an actual budget for energy efficiency. The Committee asked why the amount of R11.8 was allocated to ADAM when the project was going to cost the country billions. They were concerned that the Department’s energy efficiency programme seemed to be fragmented, which was particularly disconcerting because the Department was supposed to be championing the sector.  The Department was asked to write all their grievances down regarding the money that was supposed to be transferred to Eskom and to forward it to the Committee. The Committee would look at the parameters of what the transfer entailed as well as the administration costs, and they would deal with the necessary institutions such as the National treasury. 

The Committee asked for more information on the virement process used by the DoE – in the future, reports should explain the virement process and why funds were shifted between programmes.

Meeting report

Consideration of the Draft Committee Programme for the Third Term
The Chairperson noted that the Committee was supposed to adopt the Draft Third Term Committee Programme; however, there were not enough Members present to form a quorum. He decided that the Committee would take a short break so that two more Members could be asked to come to the meeting. The Committee needed seven Members in total to form a quorum.

After the break (two Members were called to sit in)…

The Chairperson informed the Committee that the bulk of activities for the next term would revolve around legislation. The Committee thought that the Electricity Regulations Amendment Bill would have found its way to Parliament already, but according to the National Economic Development and Labour Council (Nedlac), the Bill had not yet found its way into their system. Members were eager to have an update on the Bill. This would take up the bulk of the Committee’s programme.

The first two weeks of the next term would be allocated as Committee weeks. This was the last week of July and the first few days of August. Parliament would be holding a workshop on the legislative process, which the Committee would follow with public hearings on the electricity distribution industry. The Committee needed to broaden input on the matter. A joint workshop would also be held with the Committee’s equivalent committee in the Pan African Parliament to look at a number of areas such as energy efficiency, integrated planning, rural and small-scale empowerment systems, and policies and legislation. This would be followed by a joint workshop with the United Nations Development Programme (UNDP) on energy and climate change.

There were two other issues that the Committee needed to look at. One was energy pricing, in particular, electricity pricing. This was linked with the Major Industrial Plant Database (MIPD) as a concept. Getting an understanding of the MIPD would be in preparation of the forthcoming MIPD III. The President was very firm in his State of the Nation Address when he said Eskom had to look into making electricity process favourable for the poor and indigent. The Committee also wanted a briefing from the Department of Energy (DoE) on the national fuel stocks policy.

The Chairperson hoped that the DoE and its team of officials from the National Treasury, Eskom and the Department of Public Enterprises (DPE) would be able to report back on the “further due diligence and scenario building exercise”. He wanted an update from the entities regarding all the challenges they had.

Public hearings on energy efficiency had been scheduled to take place in August. This was why he wanted to schedule a few visits to places in Cape Town focused on energy initiatives. After the hearings, Members would have to turn their attention to the Energy Regulation Amendment Bill in September.

September was the month of the People’s Assembly. The Chairperson suggested the Committee round up the third term with oversight on the new nuclear build programme. He suggested an oversight visit to the South African Nuclear Energy Corporation (Necsa). This should be linked with a visit to Eskom. It would be helpful to get a sense of the preparedness of government agencies to implement the new nuclear build programme.

Mr E Smalle (DA) noted that the Committee was going to meet in Gauteng for the energy pricing and policy model, and suggested that the National Energy Regulator of South Africa (Nersa) should also be present at the meeting. It would be good to have them on board in case there were questions that needed to be answered.

The Chairperson noted that this was not a problem; Nersa could be there. He stated that when it came to the Electricity Distribution Industry (EDI), electricity pricing policy, energy policy, national fuel stocks policy, the report on the audit of refineries and public hearings on energy efficiencies – the Committee had to be guided by the DoE. With all of these events, the Committee expected reports from the DoE. Towards the end of last year, the Committee had asked the DoE to brief them on the new energy efficiency strategy. He did not know how along the DoE was with this strategy.

Mr J Selau (ANC) noted that there were particular issues in the energy sector that were catching the public eye. One of the issues was the movement of crude oil internationally – the Iran issue and the impact of it. It was also mentioned that was going to be the last year of electricity struggles in terms of spending. One of the biggest projects that the DoE had embarked upon was going to open next year. It would be good for the Committee if Members were seen to be visiting some of these projects, especially Medupi before it opened next year.

The Chairperson suggested that the Committee link the matter of crude oil and Iran to the meeting to be held on 2 August 2012. Regarding Medupi, the DPE had already gone there. It would have been lovely if it had told the Committee that it was going there, as it could have been a joint visit. He did not think it would be good to have two visits to Medupi.  

The Chairperson called for Members to move for the adoption. He noted that Mr K Moloto (ANC) moved for the adoption and Mr Smalle seconded the adoption with amendments.

Department Briefing on their Financial Performance for the Fourth Quarter
Ms Yvonne Chetty, Chief Financial Officer (DoE), informed the Committee that 99.6% of the total 2011/12 budget allocation of R6 billion was expended in the fourth quarter. An additional allocation of R111 million was added to the budget and consisted of a roll over of R88.2 million from the 2010/11 financial year, R21.2 million for unforseen and unavoidable expenditure, and an additional R1.6 million for personnel remuneration.
Although the DoE ended the financial year with a balance of R26.8 million that was unspent, the entire amount had already been committed by the DoE as at 31 March 2012. The DoE submitted a roll over request to the National Treasury for approval to have the balance available in the 2012/13 financial year to offset the 2011/12 expenditure.

The DoE requested a roll over of R26.8 million – R6 million for payment on capital assets, R8 million for goods and services, and R12.8 million for transfer payments of which EDI Holdings (EDI-H) received R11.8 million.

In terms of EDI-H funding, the DoE had submitted requests seeking approval from the National Treasury to reclassify funding from transfer payments to goods and services. These requests as well as a deviation from the 8% limitation rule request, which was the main reason for the request being unsuccessful, were all turned down by the National Treasury. The current submission requested a reclassification based on the fact that these funds will be directed towards the Approach to Distribution Asset Management (ADAM) project, which was the main project of the EDI-H.

The major cost drivers for goods and services as at 31 March 2012 were travel and subsistence, business and advisory services, lease payments, operating payments and payments for venues and facilities.

Financial Performance as at 31 March 2012

Programme 1: Administration
The adjusted budget for this programme amounted to R204 million, of which 96% was spent at the end of the fourth quarter. This consisted of compensation of employees, goods and services, financial transactions assets and liabilities, transfers and subsidies, and payments for capital assets which consisted of funding for Information and Communication Technology (ICT) costs within the DoE's relocation project.

Programme 2: Energy Policy and Planning
The adjusted budget for the programme amounted to R1.5 billion of which 99.99% was spent at the end of the fourth quarter. The bulk of the budget went to compensation of employees. Savings in goods and services off set the deficit in compensation of employees, which was largely due to staff appointed above the approved establishment e.g. interns.

Programme 3: Energy Regulation
The adjusted budget for the programme amounted to R541 million of which 97.7% was spent at the end of the fourth quarter. Funding earmarked for transfer to the EDI-H could not be transferred as there was sufficient funding within the EDI-H bank account to cater for any outstanding winding down matters. The DoE requested approval from the NT to utilise this amount for operational expenditures aimed at the ADAM project.

Programme 4: National Electrification
The adjusted budget for the programme amounted to R3.2 billion of which 99.97% was spent at end of the fourth quarter. A balance of R1 million remained – the DoE has requested National Treasury, through the roll over process, to make this amount available to offset expenditure in the Payments for Capital Assets category.

Programme 5 Nuclear Energy and Regulation
The programme received an adjusted budget of R643 million in 2011/12, of which 99.2% was spent at the end of the fourth quarter.

Mr Smalle voiced concern that Members had only received the presentation for the first time that morning. This meant that Members did not have sufficient time to prepare for the meeting with the DoE.
Mr Smalle then referred to the DoE’s cost drivers on slide 9 of the presentation, which were different from what was contained in the “little red book” that spoke about estimates of the national expenditure. The adjusted appropriation for travel and subsistence was R31.4 million, which was revised to R29.2 million. However, according to the presentation it was R40.1 million. Similarly, consultation fees were R29.1 million which was revised to R27 million, and was now R35.6 million. Lease payments were R8.8 million, then R8.1 million and now R25.8 million. Why were there so many discrepancies? At some point he wanted a breakdown of the R40.1 million for travel and subsistence. This could be given in writing. The DoE spoke about the roll over of finances and requesting the EDI funding. There was a further request under the ADAM project. He needed to understand this. He wondered if the funds for the roll-over were for the same thing that the DoE applied for under the EDI. He understood that the DoE was looking for a “back door” to assist the EDI. He asked if this was correct. When he looked at the DoE’s energy policy and planning programme, and spending for the third and fourth quarter, he noted that spending was close to the 100% mark. However, spending in the third quarter was quite low. He asked why percentages were at 50% and then they were almost at 100% in the fourth quarter.

Ms Chetty explained that the estimates in the “red book” were the national estimates. Once the red book was printed, there were still virement processes within the DoE. This meant money could be shifted between programmes and expenses. Money could still be shifted if it was within the rules of the DoE. However, once 8% of the value in a specific programme was reached, the DoE was prevented from going any further. So, there were rules in place that allowed the DoE to transfer funds between line items. Section 43 of the Public Finance Management Act (PFMA) stated that the DoE may utilise savings in the amount appropriated to them under the main division under the DoE’s vote to defer expenditure. The request to transfer money between line items went through a submission to request the virement; however, the National Treasury can turn this down.

Mr Smalle responded that the DoE spoke of an 8% shift, but if one looked at the figures – for example, the lease payments, which shifted from R8 million to R25 million. This was a big jump, more than 8%.

Ms Chetty explained the problem around the lease payments. She said that the DoE had a budget that did not meet their lease obligations. The DoE went to the National Treasury and explained that they had money in programme 3 to the value of approximately R57 million that they wanted to have reclassified. The National Treasury reclassified the amount of R42 million. Some of this money had been used for lease payments. The original amount given by the National Treasury did not even cover the lease obligations that the DoE had. Therefore, the DoE had to look for an alternate payment strategy, one of which wad to use money from programme 3 that had to be reclassified to pay for operational expenses such as the lease payments. Similarly, the DoE used reclassified money to supplement some of the other budget items.

The Chairperson asked why the DoE could not make its lease payments.

Ms Chetty replied that it was as a result of the split of the Department of Minerals and Energy (DME) into the DoE and the Department of Mineral Resources (DMR). The DoE only received part of the required amount for the rental payments, which was a basic expense that had to be covered by the budget. Unfortunately, it was not.

The Chairperson noted that when a department rented a building there was usually a lease payment plan spanning over a few months or years.

Mr Moloto stated that it would be helpful if the DoE put together a document showing what the virements were and the reasons for them. 

Ms Thandeka Zungu, Chief Operations Officer (DoE), clarified that the DME split in May 2009. By this time the DoE already had an allocation for the 2009/10 financial year. When the DoE started at the beginning of the 2009/10 financial year, the building it was housed in belonged to the DME. After the split, the amount that the DoE received did not cover the lease payments. The DoE had to ask the National Treasury for the money. The agreement was that the NT had to reclassify money that was in the DoE’s budget already. Up to now, the DoE had not had a line item that was budgeted in terms of the entity’s baseline to address its accommodation.

Ms Chetty addressed some of the other questions posed by Mr Smalle. It was correct that there was a delay in the third quarter spending; however, spending has been brought up to date in the fourth quarter. She explained that there was a further delay in the implementation of the energy modelling system and subsequently, money has been spent in this area.

In terms of transfers, they took place according to the Division of Revenue Act (DORA) where the schedule is Gazetted and communicate through the DoE and the Integrated National Electrification Programme (INEP) department, controlled by Dr Wolsey Barnard, Chief Director for INEP. Funds are dispersed according to this schedule when deliverables “happen” and there were Memorandums of Understandings (MoUs) in place as well.

Mr L Greyling (ID) noted that the amount for energy policy and planning for this financial year was R1.5 billion. The amount would remain the same for the next financial year; however, it would drop to R75 million in 2013/14. He assumed it was because of transfer payments and asked which transfer payment it was part of. The DoE said the R1.2 billion for energy efficiency was going to be transferred to Eskom. His problem with this was that he did not think that Eskom should be solely in charge of energy efficiency in the country. He wondered why this was the case. His understanding from the Minister of Finance was that the levy put on electricity sales was going to be ring-fenced and sent through for energy efficiency. So, Eskom would not automatically get the money; it would go to an energy efficiency agency.Was this model changing? Would the money be given back to Eskom to run energy efficiency, or was it going to stay with the DoE? He thought that the government had to build institutional capacity in the DoE or in another agency, but not in Eskom for energy efficiency. In terms of the DoE’s request to National Treasury around the transfers to EDI and how they wanted to keep it in house for ADAM – could the DoE give the Committee more details about ADAM? What is this programme about? What does ADAM strive to achieve?

Ms Chetty responded to the question concerning the R1.2 billion for energy efficiency that was going to be transferred to Eskom via transfer payments. The DoE raised this same issue with the National Treasury on 25 May 2012. Unfortunately, the DoE has not received any feedback on the matter; although the Treasury has asked for further information. The DoE also disagreed that it just had to be a conduit for the money and that the entire amount had to be transferred to Eskom.

The Chairperson flagged the matter saying that the Committee would come back to it at a later stage. He noted as well that the DoE was involved in a few large projects that were supposed to come to an end very soon. He wanted to flag this issue as well, saying that the Committee would keep an eye on the DoE to ensure that pipeline payments were coming to an end. He did not want to see the DoE approaching the National Treasury for more money later on for projects that were supposed to have come to an end. The Committee wanted to ensure that increased recurring payments came to a stop.

Mr Greyling stated that the problem that he had was that there was an approach to the distribution network, which was abandoned because there were problems with it. The Committee understood that there was a R40 billion backlog in municipalities, but there was no point in trying to rectify the problem by throwing money at them when the institutional problem was still there. He wondered if ADAM itself would look into developing a master plan that would help municipalities deal with backlogs as well as assist with institutional problems around distribution. This was the challenge that had to be addressed. If this was what ADAM was going to address then he supported the strategy. However, if this was not what ADAM was supposed to do then he would not support it.

Mr Greyling understood that DoE was saying that the R1.2 billion to be transferred to Eskom was for solar water heating, but what part of the budget was going to be used for energy efficiency? Over the years, he had seen that the National Energy Efficiency Agency had not been budgeted for, with only two people working on it. There was no dedicated office that deals with energy efficiency within the DoE. Was there an actual budget for energy efficiency? What was the budget? How would it be driven from the DoE’s side, and not Eskom’s side?

Dr Barnard explained that the analysis that Mr Greyling made about what he expected ADAM to be was exactly what the DoE was aiming at. It was not only a capital expenditure problem; it was much broader than this. There were infrastructure as well as capacity challenges – there was a lack of human resources and skills. He did not want to “jump the gun”, but he was excited to see that the the Committee included in its third term programme a discussion on EDI restructuring. He asked that the National Treasury and the DPE also be included in these discussions.

Mr Selau informed the DoE that 2013/14 was the last year of office for the current government. Experience showed that during the period when the new government took over, a small budget was set aside for them. When the new government came in, it made a new budget. Normally, when the old government left at the end of its term, it had carried out its five year mandate and could not make decisions about how the new government dealt with things. He was not very good with figures, but something told him there was “some kind of magic” happening. He noted that the MTEF allocation for 2012/13 was R6.8 billion. All the other allocations were less than this amount. He wanted clarity on the matter. He thought that it could be the due to the allocation that was supposed to be transferred to Eskom.
Dr Barnard referred to the money being transferred to Eskom for energy efficiency. He stated that the money was not for energy efficiency, it was for “an aspect of solar water heaters”. As it stood now, there were two programmes running – a rebate and a fiscus programme, managed through DoE. In the second phase the programmes would be joined as one programme, a standard offer programme. This funding was for Eskom to manage this programme on behalf of the DoE. This will happen in August.

Mr Moloto noted the R11.8 million earmarked for ADAM. ADAM was going to cost the country billions. What was the R11.8 million going to be used for if ADAM was going to cost billions?

Dr Barnard explained that the R11.8 million allocation was not for EDI Holdings; it was for EDI activities. Members would recall the closure of EDI Holdings and the responsibilities around the EDI restructuring process, which moved to the DoE – but, without a budget. The first thing the DoE did was to split the R11.8 million into two things. The one was that it helped the DoE rectify problems if it did not have a master plan around a problem. The DoE broke down the ADAM process in steps. The first phase was to address between 10 and 14 of the most vulnerable municipalities in the country. They were so vulnerable that there were no master plans for the reasons around the problems. Over R8 million of the total amount had been allocated for this. The rest of the money was allocated to the DoE so that the entity could get its internal structures ready for the next phase, which would involve an element of project management. On the ADAM, the amount of money needed to rectify these problems was in the vicinity of R35 billion. The DoE had to ensure that it was ready to tackle these challenges, as it is a long term project. The ADAM project stood on three legs: funding, technical skills and management of that funding. It was one thing to say the project needs R35 billion, but it was another thing to issue to manage this money. ADAM, in its essence has to address those three aspects to ensure that rectification or rehabilitation is done the correct way and maintained thereafter.

The Chairperson observed that the DoE’s energy efficiency programme seemed to be fragmented. The DoE was supposed to champion energy efficiency. There was a strong need for public hearings on EDI.

Mr Maphuti Legodi, Deputy Director: Energy Efficiency (DoE), added that it was a fact that the DoE was struggling a little in terms of energy efficiency, specifically in relation to operational resources. This matter was raised with National Treasury. The trend was that money was being made available in the DoRA but there would be no allocation for operational purposes. For example, all R280 million that was made available in the 2011/12 financial year was transferred to municipalities. Money for operational expenses would help the DoE to better monitor programmes that had been running for the past few years. This was going to be a challenge for the next three years if no decision was made about how to assist the DoE to manage allocations as it was being made through the DoRA and other Appropriations Bills.

Where the DoE has had discussions about money, for example on the R1.2 billion for this financial year – about R200 million went to municipalities and R1 billion to Eskom. The DoE had highlighted, to National Treasury, some of the problems that had occurred over the past three years that had affected the performance of the energy efficiency programme, particularly around operational efficiency. During the budget announcement by the Minister of Finance, the DoE was given R1.2 billion, which came as a shock to the DoE because it had been told that the programme with Eskom would not be continuing. The decision was made that R1 billion would be transferred to Eskom. The DoE had highlighted some of the problems it had experienced over the past three years with money being transferred to Eskom on behalf of municipalities. The DoE did not see the transfer happening efficiently without adequate resources being made available to it. If the National Treasury wanted Eskom to have the money, it could transfer it directly to Eskom and not through the DoE.

The Chairperson replied that if the money was supposed to be transferred through the DoE, the entity was expected to supervise that there was efficient utilisation of those funds.

Mr Legodi agreed, saying the Chairperson raised a good point. The DoE would be expected to account for the money; however – seemingly, “someone” decided on the DoE's behalf how the money should be used. Over and above this, there was no system in place to monitor the spending. Eskom would be “implementing and reporting”, but how would the DoE monitor that what Eskom told them was exactly what had been achieved. The DoE was dependent on the information Eskom gave it. The DoE had asked the National Treasury to give it the resources needed to monitor this programme, because ultimately, it was responsible for whatever comes out of the programme. Money had not been transferred to Eskom yet, as a result of this debate.

The Chairperson asked the DoE to put all these grievances on paper and to send it to the Committee. He wanted the information as soon as possible. The Committee would take up the matter. If the DoE was sitting with R1 billion that was supposed to be transferred to Eskom, then the matter had to be tackled head on. If the DoE was expected to allocate the money, sooner rather than later, then the Committee had to look at the parameters of what this entailed and how the money was supposed to be monitored. He understood that the DoE was keen to get a little more sophisticated in monitoring the roll out of solar water heaters. It was important to install quality equipment and technology, especially if thousands of units were being rolled out and there was a risk that quality might be tampered with. This matter was a cause for concern. The Committee would find a way of taking the matter up with the relevant authorities such as the National Treasury.

The Chairperson warned the DoE not to submit its documents late, as Members needed more time to peruse some of the financial matters. The Committee also wanted more clarity on virements – they needed to understand the process. They also wanted more information on what the reasons were for the virements. He warned the DoE that the Committee was going to be very alert in terms of projects that were coming to an end and the big sums of money that were allocated to projects.

The meeting was adjourned.


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