Auditor-General on Department of Energy 2011/12 Annual Report & CPUT Energy Institute review

Meeting report

The Chairperson noted he had spent the previous afternoon being briefed by the Auditor-General.

Auditor-General of South Africa (AGSA) briefing
Mr Kevish Lachman, AGSA Business Executive, introduced the delegation. He thanked all entities which co-operated with and guided the work of the Auditor-General. There had to be a huge focus on the quality of financial statements. These statements were the basis for reaching financial decisions. The poor quality of some statements would make these decisions not credible. Internal audit had a role to play. Another aspect was fruitless and wasteful expenditure. The focus had to be to drive these figures down to zero. Sustainability was critical.

Mr Carl Wessels, AGSA Senior Manager, said that a colour code was used to indicate the level of satisfaction with the financial statements. A green status indicated a satisfactory condition. A yellow status indicated that there had been some findings of non-compliance. A red status indicated that a special focus was needed. All entities had obtained a yellow status (unqualified with findings on Predetermined Objectives and compliance).

Mr Wessels looked at where each entity had not been satisfactory. There had been no improvement in supply chain management (SCM) for the Department of Energy which had a red status. There had been three findings on SCM: Some employees of the Department of Energy (DoE) had performed other remunerative tasks outside the Department without permission. Quotations had been awarded to bidders without a declaration on whether the bidders were employed by the state. Quotations had been awarded to bidders whose tax affairs were not certified as being in order by the South African Revenue Service.

Mr Wessels said that the Central Energy Fund (CEF) had two adverse findings: The procurement processes had not complied with the requirements of a fair SCM system. Goods and services had not been procured through a fair process. In the case of PetroSA, the procurement processes had not complied with a fair SCM system. There had been no findings in respect of the Nuclear Energy Corporation of South Africa (NECSA), the National Energy Regulator of South Africa (NERSA), the South African National Energy Research and Development Institute (SANEDI), EDI Holdings and the National Nuclear Regulator (NNR).

Mr Wessels said that the pre-determined objectives environment was being better understood. The usefulness of the performance information had not been assessed. In the case of DoE, 43% of planned targets had not been achieved. In the CEF, 46% of targets had not been achieved although the cumulative weight of these targets was only 35%. At PetroSA, 38% of targets had not been achieved. In the case of SANEDI, 54% of the reported measures were not accurate compared to source information. The accounting authority had not ensured that the entity had maintained a transparent and effective system of internal control, nor that the corporate plan was clearly defined with measurable targets. In terms of NNR, 57% of targets were not time bound due to a lack of key controls. Source information for 27% of the actual reported performance was not completely recorded, and material misstatements in the Annual Report had been identified during the audit and corrected. In the cases of NERSA, NECSA and EDI Holdings, no findings had been made.

Mr Wessels said no findings had been made about human resources and information technology controls.

Mr Wessels said that the crux of the matter was the material errors and omissions in the annual financial statements (AFS). Less should be more. Household issues should not be included in strategic plans. In the cases of DoE, NERSA, CEF, PetroSA, SANEDI, EDI Holdings and NNR, there had been errors in the original statements. In most cases these had been corrected during the audit process and thus unqualified reports could be given. There had been no findings regarding the statements of NECSA.

Mr Lachman said that material errors and omissions in the AFS were reducing the credibility of information. The quality of information was important. A lot of work was needed in this area. There had to be a continual focus on this. Processes needed to be in place to ensure integrity. It came down to simple discipline in the day-to-day activities of staff. Daily activities should be planned, and critical tasks identified. Leaders of entities should entrench this culture. A level of passion was needed. People needed to take pride in their work.

Mr Wessels moved on to the transfer of funds. In the case of DoE, there had been some cases of non-compliance with the Division of Revenue Act (DORA). One case was the transfer of funds for the Integrated National Electrification Programme (INEP). Memorandums of agreement had not been signed with all parties. Other mechanisms had been suggested to DoE.

Mr Wessels continued that there had been other areas of non-compliance. The Annual Report had not included information on the extent of monitoring performed by the Department of the compliance by municipalities with DORA. The accounting officer of the DoE had not taken effective steps to prevent irregular expenditure. In the CEF there had been a similar problem. PetroSA had not complied with some measures of the National Environmental Management Act. There had also been insufficient steps to prevent fruitless, wasteful and irregular expenditure. At NECSA, there had been insufficient measures to combat irregular expenditure. The same applied at NNR, and a further problem was that bank reconciliation for the call account had not taken place on a weekly basis as required by Treasury. There were no findings regarding NERSA, SANEDI and EDI Holdings.

Mr Wessels said that there was uncertainty over the future of NECSA and SANEDI, which affected their financial health.

Mr Lachman said that the majority of errors were due to human failures. These could all be corrected. The DoE and its entities could clean up their financial controls easily. There had been no qualifications. The faults noted could all be corrected, and the entities were all on the verge of fully unqualified audits.

Mr Wessels said that that the DoE had recorded no unauthorised expenditure, which was a huge improvement. There had also been some reduction in the amount of fruitless and wasteful expenditure amongst the various entities, and a significant all-round reduction in the amount of irregular expenditure.

Discussion
Mr L Greyling (ID) was encouraged to see the progress on the financial front. He was concerned to see how many targets had not been met. The Committee had its focus on the DoE. He asked if there was a lack of capacity due to an insufficient budget. The DoE was now a stand-alone Department after having been part of the former Department of Mineral Resources and Energy.

Mr Wessels replied that the DoE would say that it did not have the capacity to meet targets. There was a massive roll-out to municipalities. The level of involvement should be pre-determined, and extra resources should be brought in. If it was simply to be an information gathering process, then the information had to be credible. Capacity was a major challenge.

Mr Lachman was aware that energy was becoming a huge challenge globally, both in terms of costs and supply. The South African government was trying to source more energy generating initiatives on the rest of the continent. Fossil reserves could not be sustained. There would continue to be a huge focus on alternative energy sources. Demand was high. Government had identified twelve outcomes. The AG would support these initiatives. The extent to which they could provide support would be up to the DoE. Skills were needed, and came at a high cost. It was a challenge to a growing economy.

Mr Wessels likened the split in the former department to a divorce. The DoE was still trying to establish its separate identity.

Mr J Smalle (DA) asked about management processes which could be corrected. He asked if the percentage indicated simply reflected a willingness to implement procedures. He mused on the role which the DoE should play in monitoring targets. It should not be simply a question of dumping funds. He asked if the tender process was being conducted correctly. This could impact on the credibility of an entity. He asked how the audit considered the value for money achieved.

Mr Wessels said that the oversight role was critical. Strategic plans had to be set up. Corporate guidance was needed. Some entities, such as Eskom, reported to more than one portfolio. Memorandums of agreement were needed between the respective departments. AG had discussed the focus of oversight with DoE. There was not rigid guidance in this regard. A document on oversight of the public entities was being compiled.

Ms N Mathibela (ANC) wanted to know about the CEF and PetroSA, where large amounts of fruitless and wasteful expenditure had been reported, and what measures would be taken.

The Chairperson saw that reference had been made to material errors in all entities except NECSA. He asked if internal audit should have picked up these errors. Quarterly reports had been submitted, and their accuracy should now be under scrutiny. Senior management had the primary role of ensuring quality of information, but internal audit had an important secondary role.

Mr Smalle said that the figures for unauthorised and irregular expenditure were very precise. He asked if the actual amounts in terms of SCM errors could be provided at some stage. He would like a percentage of bids that were not compliant with regulations.

Mr Wessels said that AG had been involved with entities and had stressed the importance of internal audit and independent review. There was an increased level of management involvement and review of procurement programmes. This was bearing fruit with a reduction in the instances of such malpractices. Internal audit should review all stages of the tender process, and should also evaluate financial statements. This should happen throughout the year.

Mr Wessels added that an awareness of expenditure control was needed. There was a myriad of different documents on SCM where in the past there had been one very large book. Processes should be standardised and documented. There was a separate business unit at the AG to investigate the cost effective spending undertaken by departments. The work of this unit would become more prominent in the near future.

Mr Wessels said that management had certain steps to follow when it became aware of irregular expenditure. The Committee should interrogate the entities on specific examples of such expenditure when they presented their respective Annual Reports. Entities should also report on SCM irregularities.

Mr Lachman said that there was a legislated process to follow in terms of procedures to investigate irregular expenditure. The AG was satisfied that these processes were being followed. A lot had been said about internal audit. Governance structures had a responsibility to manage policies and procedures internally. The internal control environment had to be strong. These policies had to be reviewed from time to time. It was a critical function. If there was a strong internal control environment, the focus could move away from fighting fires to a situation of harmony. Everything should run smoothly all year round, rather than there being a mad rush to fix problems as the time for the annual audit came closer. Problems should be exposed and addressed at an early stage.

Mr J Selau (ANC) said a lot of good work had been done. There were two levels of discussions. There was a need for training, development and building infrastructure. The Department had to be held accountable for spending its budget correctly. There was also an emphasis on the difference from learning for examinations, and learning from knowledge. In the former case, some aspects might go astray. There was a responsibility on the Department, but the AG also had a responsibility to make entities aware of what needed to be done. He asked what plans the AG had to ensure that effective infrastructures for internal audit were created within the entities.

Mr Lachman found that the analogy of learning from knowledge was very apt. The role of the AG in preparing entities for audits was critical. Their mission was to raise the awareness of the need for an independent internal audit function. Internal audit should be appointed by the entity, and should be part of the establishment of the entity. Although this was not ideal, many entities outsourced this function. They were losing out on developing their skills and knowledge. In some cases, employees worked together with external consultants. Internal audit was required by the Public Finances Management Act (PFMA), but also added value to an organisation. At any point, leadership should step back and assess if they were doing things in the correct manner. Entities should be empowered to implement transformation. The energy sector was a dynamic one. Change was rapid. A continuous transformation was needed. All the tools needed to be provided.

The Chairperson returned to the unachieved targets of the NNR. His second point was on systems. He asked what could have been amiss in that sector.

Mr Selau asked about the AG's mandate. He asked if it was only to audit spending in terms of the PFMA, or if it was also to audit if the money was spent on the purposes for which it had been allocated. At the end of the financial year (FY), money might have been spent but services had still not been delivered.

Mr Lachman replied that an entity was required to have a system to report on the achievement of predetermined objectives. These achievements should be reported. The systems used to record achievements were often lacking. Entities needed to have proper systems in place. It then became difficult to report on these objectives. The mandate of the AG was to report on financial performance. For the previous five years they had been working on improving reporting on predetermined objectives. If a figure of 57% was reported, that meant that the entity had not delivered on the balance of the objectives and should explain why this was so. Corrective measures should be put in place. This process would continue until such time as the AG could express an opinion.

The Chairperson said that a number of oversight tools had been added in the current term of Parliament. The Department of Performance Monitoring and Evaluation (DPME) would report on the performance of departments while the AG was also making presentations. The levels of assurance would be quite important exercises. The first level was from the departments themselves. The second level would be the entities. The third level would be through the Committee, AG and Standing Committee on Public Accounts (SCOPA). Within a short space of time, the DoE and its entities could all achieve clean audits. This was encouraging. While there were challenges, in some entities there had been no adverse findings. The exercise had been productive. The AG's office had a wealth of information, and Members had to develop an understanding of how to use it.

Energy Institute Cape Peninsula University of Technology (CPUT) review of DoE Annual Report
Prof Phillip Lloyd, Energy Institute: CPUT, said that, being academics, they had marked the Annual Report of the DoE. It had passed by current school standards, but had only achieved 31%. This meant that it was getting twice as much wrong as it was getting right. The visions were honourable, but the vision of universal access to electricity by 2014 was not achievable. The main problem was the deficiency in energy supplies. The go-ahead on the Integrated Resource Plan (IRP) 2010 was given in March 2011.

Prof Lloyd said that there were commitments for wind, compact solar power and solar photo-voltaic (PV) systems. This was commendable. However, in terms of nuclear energy it seemed that the DoE was going backwards. He did not see the need for a Cabinet committee to have to consider this when the DoE should have the authority to take decisions. There had been no advance on commitments to build additional coal-fired stations. Nothing was happening regarding gas turbine and imported hydro-electrical projects.

Prof Lloyd said that Rounds 1 and 2 of the Renewable Energy Independent Power Producer (REIPP) programme had been set in motion, but these would only yield an average of 500 MW. The demand increased by 800 MW annually. Progress on nuclear sources was slow. There had been no progress on the requirement of 4 320 MW of conventional power sources. Computing the figures of supply and demand left the DoE with the 31% rating.

Prof Lloyd said that energy savings could alleviate the problem, but the economy needed to grow and energy was needed. There was a direct relation between the wealth of a nation and its energy consumption. Predictions made by the International Energy Agency some 25 years previously were proving to be accurate within 10%. South Africa was somewhere in the middle of the classification of nations using an index of oil usage per capita.

Prof Lloyd said that energy shortages meant shortages in growth, jobs, wealth, nutrition and life expectancy. The long-term vision of having a 30% component of clean energy by 2025 was commendable, but the average person did not worry about the source of energy. There were still far too many cases of death by carbon monoxide poisoning due to the use of coal fires in the household. No progress was being made in this aspect. Clean energy would provide a means of cooking and heating homes without causing indoor air pollution. Energy needed to be affordable. Liquid petroleum gas (LPG) might be a source of this, but the DoE was making minimal progress.

Prof Lloyd said that clean energy would reduce the number of shack fires. Members should visit the Red Cross Children's Hospital to see the damage caused by shack fires. The DoE was also not making any progress in this area. Progress on clean fuels for cars was slow, and he could only assign a score of 30% for this aspect.

Prof Ernst Uken, Energy Institute, CPUT, concentrated on the financial aspects of the DoE Annual Report for 2011/12. The internal audit committee had raised some concerns. The accounting officer had referred to the challenges of providing free basic services, and this had been taken up by Treasury. There should be an element of job creation and poverty alleviation. International investors and the public were concerned the delays in putting these programmes into practice. IPPs would still have to wait a long time before become a part of the mixture. There was concern that these programmes were little more than window dressing. The process was getting towards its fifth year without noticeable results.

Prof Uken said that REIPP would provide 3 725 MW, attracting foreign investment. Nothing was being fed into the grid yet. The Cabinet had established an oversight committee, the National Nuclear Energy Executive Coordination Committee (NNEECC). While there would be 107 000 new grid connections, many people would still not be serviced. There had been fifteen educational public participation programmes. More than 1 000 delegates had attended an IPP conference to bid for a share of the 3 725 MW.

Prof Uken said that 95% of the DoE budget of R6.2 billion had gone to transfers. It had spent 99.6% of its remaining budget of R305 million. However, there was a high incidence of roll-over funding. In terms of its various programmes, spending had been between 95 and 100%. There had been under-spending due to timing of overseas visits, procurement of computer software and hardware, There had been no unauthorised expenditure.

Prof Uken quoted from the AG report. The overall opinion was satisfactory. Only 57% of planned targets had been achieved. An unqualified opinion was given. The financial statements had not been in accordance with section 40 of the PFMA, but this had been corrected subsequently. The Annual Report did not mention the extent of monitoring compliance. The Accounting Officer had not taken effective steps to prevent irregular expenditure. Some employees had performed remunerative work outside DoE without permission. There had been some irregularities with quotations. Memorandums of agreement had not bee signed for the INEP grant to municipalities before the start of the financial year. Internal control had been ineffective. The DoE and the Special Investigative Unit were investigating allegations about irregularities in the procurement process.

Prof Uken noted that there had been an under-spending of R8.3 million (4.1%) on the administration programme, mainly due to the procurement of goods and services). There was under-spending of R12.3 million (2.3%) in the Electricity, nuclear and clean energy programme. There were questions over French and German investments.

Prof Uken then reviewed Chapter 4 of the Annual Report. All Departments had to develop a service delivery improvement (SDI) Plan. A plan had been drafted for security risk management. This had been hampered by budget constraints. A sustainable energy handbook had been distributed together with other publications. In terms of SCM, there were 1 162 service providers. Cashiers were open from 07h30 to 16h00, a lesson in service delivery to the banks. There was optimal utilisation of integrated technology bandwidth. A Parliamentary question tracking system was in pilot phase. The petroleum controller had issued 1 200 new licences, mostly in less than sixty days.

Prof Uken said that in terms of INEP, 141 390 homes had been connected to the grid against a target of 150 000. The size of the sample used to study housing projects was less than 10%, but should have been 30%. The 1 000 MW target for IPPs was not achieved. He thought that the whole procedure should be speeded up. This was a growing concern. A German investor had withdrawn its offer due to slow progress.

Prof Uken presented a table of the different DoE programmes. A cost cutting exercise had been carried out. Over 45% of compensation of employees went to those in the administration programme and less than 10% to the INEP.

Prof Uken looked at the number of vacancies. There were 55 vacancies, but 87 additional posts had been filled, the majority in the Administration programme.

Prof Uken said that that there was a target of supplying 1 million solar geysers. The majority of these would be low-pressure geysers for households who had not had hot running water before. These geysers would be an additional load on the electricity grid. He was in favour of handouts for the poor, and with these geysers the costs would be almost exclusively carried by the municipalities. This was a different philosophy to the subsidised systems at the higher end.

Prof Uken said that the employment statistics looked good. Training was good. He had a problem with performance rewards. Performance awards had been given to 209 out of 560 employees. In terms of leave, 74% of employees used a total of 2 205 days sick leave. This amounted to an estimated loss of R2.7 million. He asked if there were rewards for combating absenteeism. Only ten employees had been paid for not taking leave.

Prof Uken was satisfied with HIV/AIDS programmes, labour relations and skills development programmes. Injuries on duty had been minimal and payments to consultants had been R18.3 million. Donor funds had been used on three new projects.

Discussion
The Chairperson informed the professors that the Committee was in the process of compiling its Budget Review and Recommendations Report (BRRR).

Mr Greyling said that the view that the average citizen was not concerned how electricity was generated was probably correct. However, it had to be a concern for government. The lack of public concern was hampering efforts to introduce renewable energy sources. He shared the concern over the lack of progress on the IRP. Companies were being paid to scale back on production in order to save energy. The debate on nuclear energy was progressing far too slowly. Once tenders were awarded, it might prove to be prohibitively expensive. He asked what alternative plan could be made. There was not enough provision made for gas in the region.

Mr Greyling had had experience of solar home systems in the Eastern Cape. If Eskom declared an intent to electrify an area within a five year period, then solar home projects did not take place.  People were thus left without electricity. Solar farms could be established as an interim measure. He agreed on the comments on solar water heating. There had to be real reductions. Many of the low pressure systems were not manufactured in South Africa, while high end suppliers were going out of business.

Mr Smalle noted that the IRP would be reviewed every second year. Given the type of investment required, he asked the opinions of the professors. With 10 to 20% of the population not having access to electricity in the short term, solar water heating should be considered for these households.

Mr Selau had reached a point as a young man of wondering why he was attending school. Mistakes were met with various forms of punishment, including corporal punishment. As an adult, he realised the rationale behind the teaching methods of the time. The report made by the professors reminded him of those days. The IRP was a long-term plan, but would be responsive to new developments. The RDP was scheduled to last until 2013. The plan put forward by the professors tallied with the IRP. Marks had been given at the start of the process, and might discourage the DoE. The treatment being given to the DoE might be a bit too harsh. Most issues raised were true. There was a reason to worry. Most South Africans lived in poor conditions. Electricity could improve these conditions. He felt that this document could have been presented after the DoE had presented its Annual Report.

Ms Mathibela said that the presentation had assisted Members. It amplified some points made by the AG. The failures were often at municipal level. Their performance was not being monitored. In her constituency, she saw where departments were failing. Some people were helping with health issues, but had not been paid since January. No-one was looking after their interests. Budgeted funds were being returned to the relative department unspent while this was happening.

Prof Lloyd agreed that the report might be harsh. Government existed to serve the people, not itself. The IRP was in a dormant state. There was no mention of IRP 2012 in the Annual Report. The DoE was slowly putting an energy plan together. Changes in the environment had to be considered, such as gas imports from Mozambique and Angola. Shale gas might come from the Karoo. Better use of gas could be implemented at short notice. Natural gas had more hydrogen than coal, and therefore produced fewer emissions. More attention should be paid to the use of gas.

Prof Lloyd agreed that the IRP should be updated every second year. He had tried to be constructive in his review and not unnecessarily critical. Providing power to the unelectrified was a challenge. There was massive urbanisation. There was no idea on what the rural population would be in fifty years time. It was true that 20% were still unserved, and were cynical towards free basic electricity. Some resources could be diverted to addressing the problems of shack fires and carbon monoxide poisoning.

Prof Uken said that there had been a shift with solar water heaters. Originally, Eskom had financed the high end solar water heaters. There had been an insistence on local products, but prices had sky-rocketed. In the past it had taken about two and a half years to recoup the outlay on the equipment from electricity savings, but this was now about ten years. This might exceed the life cycle of the machinery itself. The majority of geysers were going to those who had never had hot water before, so there would be no saving. Eskom had withdrawn from the programme. He had been informed by Eskom that people were no longer buying the high pressure geysers due to the cost. The targets for energy saving would not be reached. Solar water geysers were good and were environmentally friendly. South Africans had not bought into this concept yet. Renewable energy was expensive.

Prof Uken observed that it was important to have good monitoring systems in place, and how results should be evaluated.

Mr Selau agreed on the difference between electrification and energy usage. On cleaner energy, coupled with rural electrification, prompted a discussion with DoE. There was a lot of good intention, but the meeting of targets looked blurred. There was more to solar power than water heating. This source could also be used for lighting and other applications. There was a scarcity of water in the country, but neighbouring countries had made successful investments in hydro-electricity projects. He asked how advanced such projects were. There were predictions for nuclear energy in the IRP. There was work in progress on the provision of Mozambican gas. He asked how much impact renewable energy would make to mitigate against greenhouse gas emissions. This matter should be discussed with the professors and the DoE present.

The Chairperson said that the current focus should be on the 2011/12 Annual Report. The budgeting cycle had five stages. Outside thinking might be valuable at one of the stages. It would soon be time to handle the issue of the multi-term budget policy strategy. This was a tool to enable longer term planning. One of the strengths of the report made by Prof Lloyd was the way he looked at the report on 2011/12 and extracted long term implications. The extent to which DoE had met its targets for that year could be seen as an indication of future successes. Some tools were needed to grow the economy. It was the first time that he had seen the correlation between national wealth and energy use.

The Chairperson asked if there had been any attempts to engage the DoE on cleaner energy. There were criticisms of the Department having made slow, little or no efforts in aspects such as domestic use of coal.

Prof Lloyd replied that energy was needed to grow the economy. The lack of energy had a reverse consequence. Many projects were being stalled due to a lack of energy, and many job opportunities were lost as a consequence. The energy supply had to be increased as quickly as possible. When the disaster had struck in 2008, the flow of energy had been interrupted. Eskom had done a superb job to prevent further outages, but the supply was not increasing and therefore the economy was not growing. In certain areas the DoE was not working on a long-term vision. There had been a lot of work done on domestic coal, but it had not been carried through. One of the international developments in Europe and the Americas was smokeless coal, which removed the hazards of carbon monoxide.

The Chairperson had had some matters drawn to his attention. He noted the impact of the amount of sick leave. He was interested by the figures on performance bonuses. The DoE was an evolving organisation. There should be no budget constraints on security risk management.

Prof Uken appreciated the opportunity to interact with Members, and would take the perspectives forward. If solar geysers were given to people, they were not being given electricity. They were basically buckets mounted on the roof to absorb heat. People had the perception that renewable energy was not real energy. There had been tremendous strides in solar energy. It would be very expensive to work on a house-by-house basis, and mini-grids were needed. A community of thirty houses could be serviced by a PV source.

The Chairperson concluded that the Department should consider more public participation to analyse what the community wanted.

The meeting was adjourned.