Department of Energy Annual Report 2011/12

Meeting report

Introduction by the Chairperson
The Chairperson welcomed the delegation from the Department of Energy. The meeting was a continuation of the follow-up on the MTEF performance period, with the focus on the annual report for the 2011/12 financial year. The Chairperson said it was important that at least one of the Ministers should have been present for this important meeting, but the committee understood that the Ministers were busy with issues of high priority.

Presentation by the Department of Energy (DoE)
The team from the Department of Energy (DOE) was led by the Director General, Ms Nelisiwe Magubane. The presentation included the DOE’s planning for the 2011/12 financial year, its contribution to government outcomes, programme performance with regard to administration, hydrocarbons and energy planning, electricity and clean energy and nuclear. The DOE’s management had come together in November 2010 for its annual strategic planning. This had resulted in the production of seven strategic objectives which were aligned to the government’s 12 outcomes. The strategic plan and annual performance plan had been based on several assumptions, which included the availability of financial and human resources. The DOE was committed to the provision of an enabling platform for other sectors to speed up economic growth and transformation, to create decent jobs and sustainable livelihoods. During the year under review, the DOE had operated within an environment where the credibility of South Africa’s energy policy direction had been enhanced by the independent power producer (IPP) procurement process. On the geopolitical front, the DOE had had to contend with, and develop a response plan to, the sanctions by the US and European Union on the Islamic Republic of Iran. Ms Magubane outlined to the Committee the DOE’s response to the various government outcomes.

Corporate Services
The Deputy Director General (DDG): Corporate Services, Mr George Mnguni, presented the key focus areas for 2011/12, performance against targets and predetermined objectives, challenges and the way forward.  The key focus areas included human resources (HR) and auxiliary support services, legal support services, communication and knowledge management.

Mr Mnguni outlined the key achievements, and partial and non-achievements for corporate services. The DOE had finalized its HR plan and implementation had commenced. The turnaround time for the filling of vacancies had improved to a three-month average. All the performance agreements and work plans had been finalised before 30 May 2011 as required, and appropriate disciplinary sanctions had been imposed for non-compliance. The DOE had trained 443 employees in administrative and functional areas. The security risk management plan was in place and implementation was ongoing. All legal requests had been finalised and a target of 50% exceeded, with 66% of requests received having been dealt with within the prescribed timeframe. The draft communications strategy had been implemented, although capacity constraints had impacted negatively on the finalisation of the strategy. The marketing, advertising and branding plan had been developed and implemented. The draft knowledge management strategy had been developed, but approval had been delayed due to planned relocation and a lack of space.

The recruitment of persons with disabilities had been a challenge and the implementation of the structures at macro-organisational level had posed problems related to reporting and lines of authority. Another challenge had been the establishment of a knowledge management centre, as well as the development and implementation of a strategic plan.

Annual Financial Statements and Report of the Auditor-General
The annual financial statements were presented by the Chief Financial Officer of the DOE, Ms Yvonne Chetty. The 2011/12 financial year was the second year that the DOE had been operating as an independent department and there had not been any significant increase in the budget.  From the total budget allocation of R6.2 billion, 95% had gone to transfers and only 5% had been allocated for the department’s operational needs, which amounted to R305 million. The DOE had spent 99.6% of its allocated budget. The committee was presented with the statement of financial performance and the major spending areas, which included transfers and subsidies, compensation of employees, goods and services, payments for capital assets and payment for financial assets. The budget overview was also outlined with regard to the five programmes within the DOE.

Ms Chetty said that a roll-over request had been submitted to the National Treasury for the unspent budget amount of R26.65 million. Funds earmarked for capital assets could not be spent due to the delay of the DOE relocation. There had been unauthorised expenditure of R14.86 million and irregular expenditure had been R39.485 million. The DOE had received an unqualified audit opinion without any emphasis of matter, and had completed an action plan to address all outstanding AGSA findings. All the state-owned enterprises (SOEs) reporting to the DOE had also received unqualified audit opinions.

Compliance and Operations
The Chief Operating Officer, Ms Thandeka Zungu, outlined a summary of performance against predetermined objectives. The key focus areas for promoting corporate governance included strategy and risk management, monitoring and evaluation, SOE oversight, compliance and the coordination of internal liaison in the field of energy.  The DOE had established a risk management unit which included an anti-fraud and corruption function.     The absence of a risk management tool had presented a challenge. The monitoring and evaluation unit had developed the DOE’s foundational guidelines, but only 43% of the targets had been achieved. The DOE was involved in international coordination, and the challenge it faced in this regard was the need for the approval of an international relations strategy for the DOE, and the approval of audit agreements signed by the department.

Hydrocarbons and Energy Planning
Mr Tseliso Maqubela, DDG: Hydrocarbons and Energy Planning, said integrated energy planning had been undertaken to promote the sustainable use of energy resources by developing appropriate policies and regulations that promoted the sustainable use of petroleum, coal gas and renewable energy sources.
The DOE was involved in the operation of the NMMP and the facilitation of the linefill, which improved infrastructure for security of supply.  Petroleum products’ licensing awareness campaigns had been conducted in all provinces and there had been intervention on new job industry sites to facilitate accelerated job creation. There was an increase in the turnaround time for the processing of all applications that met the acceptance criteria. The DOE had spearheaded the government’s response to the sanctions imposed on Iran by the US and the European Union. In outlining some work in progress, Mr Maqubela said that the DOE had not yet completed its 20-year plan or the fuel pricing framework review. The challenges which the DOE was facing in terms of hydrocarbons and energy planning included the reluctance to submit data, HR issues, unplanned refinery outages, quality management system issues and inertia.

Nuclear
Mr Zizamele Mbambo, DDG: Nuclear, said the Cabinet had approved the establishment of the National Nuclear Energy Executive Coordination Committee (NNEECC).  In April 2011, South Africa had participated in the review meeting of the Convention on Nuclear Safety (CNS), which had culminated in the June 2011 Ministerial CNS.  South Africa had undertaken the necessary stress tests on its nuclear installations. The recommendations resulting from this exercise were to be implemented to ensure safety was maintained. The amendments of the founding legislation, as well as the development of new legislation for long-term funding provisions for radioactive waste management, were being undertaken within the nuclear energy policy.  The DOE was continuing with consultations on the installation of appropriate radiation detection equipment at identified ports of entry. Following the approval of the business case for the National Radioactive Waste Disposal Institute, physical establishment of the entity had remained a challenge due to the lack of funding. Processes to fund the operation of the Institute were in progress.  Challenges faced by the DOE in the nuclear field included the lack of human capacity and financial resources.

Clean Energy and Electricity Pricing Policy
Mr Ompi Aphane, DDG: Clean Energy and Policy, outlined the preferred bidders’ salient terms in regard to solar photovoltaic, wind, small hydro, concentrated solar power and the distribution per province.
The energy efficiency targets which had not been achieved included the energy efficiency target monitoring system, the savings verification mechanism and the energy efficiency campaign strategy. The energy efficiency action plan was outlined to the committee. The Electricity Distribution Industry (EDI) target which had not been achieved was the Approach to Distribution Asset Management (ADAM) implementation and funding plan for metros. The backlog with regard to ADAM was R35 billion, which would be eliminated over ten years. 

Mr Aphane reported on the Integrated National Electrification Programme (INEP). The funding model of the INEP outlined the use of the grid and non-grid electrification. The role of municipalities, Eskom and concessionaires was also highlighted. The INEP contributed to outcomes 4, 6, 7, 8 and 9 of the Government’s Outcomes-Based Planning Approach. The committee was presented with statistics on electrification progress, achieved connections from 2001 to June 2012, and percentages of households without electricity. A total of 3.4 million households did not have electricity. Of these households, 1.2 million were in informal settlements, while 2.2 million were in formal settlements, and of those households without electricity, 75% were in Eskom supply areas and 25% in municipal supply areas.

Mr Aphane said challenges included the slow delivery by municipalities and Eskom in some areas. There was a lack of capacity within municipalities and internal procurement processes took too long. There was a slow roll-out of non-grid connections due to negative political perceptions and practical shortcomings, and current non-grid systems were not addressing basic electricity needs such as cooking and heating. The recent regulations promulgated had increased non-grid installation costs dramatically. More and more connections were being done in rural areas and connection costs had increased sharply, thus there was a need for subsidy levels to increase accordingly.  The annual budgetary process forced projects to be planned and designed on an annual basis and not on a multi-year and project completion basis. Another challenge was the difference in the national and local government financial years. A sharp increase in hardware cost had been noticed, and local manufacturers could not compete with low-cost imported equipment.

Presentation by the Department of Energy’s Audit Committee
The Chairperson of the DOE Audit Committee, Prof. Yaswant Gordhan, said the Audit Committee was responsible for exercising oversight responsibly over internal audit, external audit, risk management, reporting, compliance and internal control. The Audit Committee, which was established in September 2010, consisted of three members and had adopted formal terms of reference.

The DOE had established a process for the management and monitoring of the risk management process. This initiative had been enhanced by the appointment of a Chief Risk Officer. The Audit Committee had reviewed the strategic risk register and had recommended improvements to some of the processes. The maturity of the enterprise risk management process had been found to be at an evolutionary stage and required further commitment and improvement.

The Audit Committee had been provided with quarterly internal audit reports in terms of its approved annual and three-year rolling Internal Audit Plan. From the various reports of the internal audit and the Auditor-General, it had been noted that there were some deficiencies in the internal control systems. The DOE management had undertaken to address the deficiencies and to improve the internal control environment.

The Audit Committee had not been entirely satisfied with the content and the quality of the quarterly management reports, particularly the timely submission of reports and review thereof, and had suggested certain improvements in the process of reporting. An unqualified audit report had been received from the AG on the Audit of Predetermined Objectives.

The Audit Committee had reviewed and discussed the AG’s final management report with the accounting officer and the DOE management. An undertaking had been given to address all the reported items. The 31 March 2012 audited annual financial statements were to be included in the 31 March 2012 annual report. In discussions about the unqualified audit opinion, the Audit Committee had taken note of the other reported items included in the AG’s report, which the accounting officer and management had committed to addressing in the ensuing financial year.

The internal audit quarterly reports had been reviewed to ensure that internal audit activities had been conducted in terms of the approved annual and three-year rolling plan. As in the previous years, the Audit Committee had registered its concerns with the accounting officer and management regarding the adequacy of resources within the internal audit function.  An evaluation of the internal audit function, in accordance with Institute of Internal Auditors (IIA) standards, was necessary.

In a meeting with the Minister of Energy, the Audit Committee had raised the need for a skills audit for the whole department by an independent service provider and the need to balance the internal and external audit. The Audit Committee had also raised the need for the establishment of an ethics and social committee. The Minister had been informed of the need for an increase in the Audit Committee members and risk management capacity, in order to enhance risk management and the oversight responsibility.

Discussion
Mr L Greyling (ID) said that his feeling about the DOE was that it had spent the last two or three years trying to establish itself as an independent entity. On the financial side, the DOE was doing well. The committee needed the DOE to be at the forefront of energy planning and policy. For the last three years, the DOE had been playing a catch-up role instead of a leading role. This problem was largely as a result of the lack of capacity. What could the committee do to help the DOE in its growth and the building of institutional capacity? It was clear that the DOE was not performing as well as it ought to. Planning was dragging and holding back the progress of the whole sector. What was the situation with the energy efficiency strategy? What was the position of the DOE with regard to a household electricity strategy?

Ms Magubane replied that the DOE appreciated the offer to assist by the Portfolio Committee. It was true that the DOE was not at the forefront of energy policy planning and it was still trying to catch up. However, the DOE had been formed under the circumstances of a lack of confidence in its capacity to manage the sector, and the DOE had had to start work extra hard to convince National Treasury about the funds that were needed. The DOE had since been engaging with the National Treasury and had come a long way in convincing it on the importance of the sector. Some of the DOE programmes were part of the Presidential Infrastructure Coordinating Commission (PICC) which were going to be prioritised in terms of funding, so there was hope for great improvements. The DOE had outlined its programmes and objectives for the year to the National Treasury, and the improved spending by the DOE was a good sign.

With regard to the issue of energy efficiency, the DOE was of the view that there was a need for prioritisation. The Household Energy Strategy was top of the DOE’s list because it was important to have this strategy and not to use electricity for thermal needs. The electricity prices were going up and there was thus a need to cut down on household consumption.

Mr J Smalle (DA) asked what the relationship between the entities and the DOE was, and how this synergy was monitored. Why was there a situation in which the DOE had to struggle to get information from other institutions within the energy sector? With regard to the internal audit, what was the quality of the work which was being done -- was the quality compromised or was the work done in haste in order to meet deadlines? What was the cost of using consultants to assist the audit committee, compared to the actual capacity of the audit committee? Was the DOE being proactive or reactive with regard to circumstances which might arise in the course of the operation of the department? Were the DOE’s bilateral trade agreements in place? Were the internal audit system and the audit committee playing their role with regard to supply chain management? Did the planning of the knowledge management centre include some of the challenges which the entities faced, or was it just about the department alone? In the EDI holdings report, what was the link between the R11.8 million and the R400 million?

Ms Magubane replied that in its relationship with the entities, the DOE participated in the strategic planning sessions of the entities to ensure that the view and position of government was always included in the corporate plans of the entities. However, that aspect had to be structured, and there was a need for the oversight capacity of the DOE to be strengthened.  Regarding the transfer of money, the DOE had been trying to convince the National Treasury that it was not only about transferring the money, but also the need for accounting in respect of performance. With regard to obtaining information, the DOE had regulations that mandated people in the sector to provide information. The challenge had been in the way the information had been processed and packaged. There had also been a reluctance to release information to the DOE, because these institutions had been worried about the sensitivity of the information. They had needed assurance that the information was never going to get into the hands of their competitors. In terms of being proactive on issues such as skills usage, the Department of Mineral Resources and Energy was preoccupied with mining, so the energy component was not well developed. Energy skills were limited and the shortages in 2008 were proof of the challenges which the sector was facing, but which had not yet been given adequate consideration. The liquid fuels and electricity sector were under a lot of stress and this was one of the reasons why the DOE was still catching up with regard to energy policy planning. In terms of the bilateral agreements which South Africa had with its neighbours, the DOE had agreed with the Southern African Development Community (SADC) that there was a need for interconnectivity, both for liquid fuels and electricity. There were agreements in place with SADC countries in this regard.
 
On the issue of EDI, when the report referred to R11.8 million, it had been referring to money that was going to be for the operational budget, and the R400 million was for the actual project. On the selection of key municipalities, the DOE had set specific selection criteria which had been approved by the PICC Secretariat. The municipalities had to demonstrate their willingness to do maintenance. The DOE was going to start experimenting with non-grid technology in these municipalities, funded through the R400 million.

Ms Zungu said that comparing consultants against the use of  DOE capacity, it was important to look at the use of consultants not only from a financial dimension. Consultants were temporary and were used for quick solutions. They were expensive so they were used for a particular purpose and thereafter the contract was over. Consultant had the skills, qualification and experience which the DOE might not have. They were a short term solution. On the issue of assumptions in the strategic plan and annual performance plan (APP), the DOE had been looking at what it knew and what it did not know at the time of planning. The process of planning had to consider the aspects of unforeseen circumstances and issues which were not yet known at the beginning of the year. The issue of risk management with the entities was critical, and the DOE had a challenge in that the planning cycles of the DOE and its entities were different. The entities used to plan before the DOE and this had created a challenge of alignment. There were now efforts to streamline the planning and the timelines. This would result in the identification of  strategic risks which affected the energy sector as a whole.

Mr Mnguni said that since the knowledge management centre was new, the DOE had decided that it had to be internally focused.

Mr S Mayathula (ANC) said that there had been a general outcry about the lack of finances and resources. There was the need to resolve that problem.  Regarding the establishment of an ethics and social committee, was the need peculiar to the DOE or was it a recommendation which should be considered by other government departments?

Ms Magubane replied that it was true that funding was a problem and assistance in that regard was appreciated. On the issue of data collection, the DOE had regulations which requested institutions to provide relevant information.

Prof Gordhan replied that the need for the ethics and social committee could be recommended for all government departments. However, the DOE could take the lead in this regard. 

The Chairperson asked why the risk management had not prepared for worst case scenario when it was basing its strategic plan on assumptions. What was the role of the DOE in contributing to the various government outcomes? Was there a branch in the DOE which was charged with the issue of contributing to the government outcomes? Did the vacancy rate relate to the interim or permanent organogram, and what was the baseline of 15% all about? What was the training target of the DOE? What was the state of the publication services of the DOE? Had there been any consensus on the issue of the baseline of the DOE budget with the National Treasury? What was the allocation given to NERSA? What was the importance of the National Radio-Active Waste Management Institute with regard to the nuclear build programme? What were the unintended consequences of the inclining block tariffs and what could be done to solve the problem? Had there been any remedial action in that regard? What was the progress with regard to the targets for the tariff determination and had the DOE ensured that the March 2013 target was still realistic? How did the DOE select the key municipalities for the ADAM projects? How was the DOE supporting small projects? What had been done with regard to the slow roll-out of non-grid connections? In the presentation of the Audit Committee, did reference to the current year mean the year under review or the 2012/13 financial year. What was the extent to which the internal audit had done its work with regard to the issues raised by the Audit Committee?

Prof Gordhan replied that in the light of the development of the risk management process, the DOE had had strategic workshops and seminars in 2010 and 2011, where the whole DOE had been looking at the overall responsibility for risk management issues. The report by the Audit Committee was for the period up to 31 march 2012, but the current year had been used for issues which had developed subsequent to the 31 March 2012.

Ms Magubane said that on the selection of key municipalities, the DOE had specific selection criteria which were intended to encourage the right behavior from municipalities in terms of maintenance. On the issue of the role of the DOE in contributing to government outcomes, the DOE had an official assigned to make sure that the Department reported to the Department of Performance Monitoring and Evaluation (DPME) on outcomes where the DOE was involved. A web-based tool had been developed where documents could be uploaded frequently and appropriately. On the vacancy rate of 15%, the President had had a meeting with the Directors General of the various departments, where the high vacancy rates had been addressed. The DG’s made a commitment that by 2014, the rate was going to be no more than 15%.  The DOE had a vacancy rate of 9.6%.  On the issue of the baseline, the DOE had resolved that the fixing of the baseline was going to be done over a period of time and in line with the priority areas of the department. The National Radio-Active Waste Management Institute was extremely important, as one of the ways of ensuring there was confidence in the nuclear programme was to prove there was a coherent strategy on how to handle nuclear waste.

The issue of Inclining Block Tariffs could be solved only with the cooperation of all  three spheres of government.  Local government had a by-law which provided for one meter per site, and that would not help the critical situation where there could be five families on one site. Until such by-laws were removed, it was going to be difficult to achieve the goal of one meter per household. The Inclining Block Tariff issue could only be solved when each and every household was metered appropriately and received its own separate metering. On the issue of tariff determination, Eskom was going to meet its targets. Although the DOE was not responsible for ensuring that it met its targets, the DOE was confident that the target of March 2013 was going to be met. On remedial action, the DOE was of the opinion that as more and more rural areas were being electrified, it was going to be cheaper to resort to solar panels. One of the recommendations of the DOE was to increase the size of the currently supplied solar panels three or fourfold.  The average cost of electrifying a household in a rural area was about R20 000, but the solar panel cost around R4 000. The use of the solar panel was more effective when compared to the grid system. The DOE was also recommending the use of solar panels in urban areas.

Ms Chetty said that NERSA had requested for an additional R13 million for security and information technology refurbishment. 

The Chairperson said that the overall performance as reflected by the reports and presentation was good. The DOE was a young department but it was making its presence felt at both national and international levels. It was, however, important to note that there was a need to intensify employee assistance programmes. The fact that the DOE was still catching up was understandable. Their remedial actions and the strategic plan would deal with the issue of catching up. The issues of assumptions and risk management had to be dealt with cautiously. The committee was hoping that standards and controls were going to be improved. The DOE was supposed to emphasize its role in training and motivation of its employees. It was important for Committee Members to start looking at  legislation with regard to the energy sector. The continental drive of the DOE had to be intensified, particularly at the radioactive waste level. The entire continent was looking  to South Africa to lead the way in that regard.

First Quarter Performance Report for 2012/13
Ms Magubane said that with the permission of the Chairperson, the presentation was going to focus on the aspects and issues which had not been achieved during the first quarter.

The Chairperson agreed to the proposal and requested management to focus on the aspects not yet achieved. The Chairperson said it was important to start considering including in the AG’s report the remedial actions and measures proposed by the departments themselves concerning what could be done to best resolve the problems identified.

Corporate Services
Mr Mnguni told the committee that with regard to HR management, the matching and placement of employees in the new structure had not been achieved. The target to commence the implementation of the framework for the classification and management of staff by 30 June 2012 had also not been achieved. The development of a call center had not been achieved, nor had the quarterly target to develop and distribute quarterly external newsletters. The target of developing and managing the Resource Centre and the development and maintenance of a database of organisational resources and materials, had not been achieved.

Financial Services
With regard to the accurate and timeous payments provided to all creditors, the target of reducing audit findings by 20% had not been achieved. The compilation and submission of financial reports to the National Treasury had not been achieved. On the ICT infrastructure and systems, the deployment of capture license modules had not been achieved. The configuration of network equipment, the installation of network equipment and the installation and configuration of test equipment had not been achieved.

Compliance and Operations
Ms Zungu told the committee that the target to enable the sitting of the first Risk Management Committee  meeting had not been achieved. The target to conduct fraud risk assessments and the review and update of the Departmental Planning Framework had also not been achieved. The quarterly target to complete, approve and roll-out the State-Owned Enterprise (SOE) oversight framework had not been achieved.

Energy Planning and Policy
In terms of energy modeling, the target for the development of data package file and the collection of data for IEP had not been achieved. The monitoring and reporting on the implementation of the agreement for construction of the rest of NMPP system and the energy safety awareness campaigns as quarterly targets, had not been achieved. With regard to petroleum policy, identifying task team members and project leaders for monitoring the progress in line with the Fuel Specifications Roadmap, had not been achieved.
On clean energy, the DOE was still to implement and review the Standard Offer Policy and Plans. The DOE had not yet expanded the scope of the Standard Offer Policy to include other energy efficiency measures. The DOE’s target to hold a workshop with the industrial stakeholders was still to be achieved. 

Petroleum Regulation
Mr Maqubela told the committee that the DOE had not yet done a system of corrective action for non-compliance with the Liquid Fuels Charter and technical, legal, and commercial licensing conditions.

Discussion
Mr Smalle asked for an update on the current backlog with regard to legal services. What was the situation of the DOE call centre in relation to the reception of calls coming from the Presidential hotline? Why did the DOE set a target of only 20% for the reduction of audit findings?

Ms Chetty replied that the audit finding target was low, but the Department was striving to respond to all of the AG’s recommendations, and the department usually achieved more than the target of 20%. With the current skills gap, there was a need to set a realistic target, but with development and training, the target was going to be adjusted.

The Chairperson asked for the implications of not installing and configuring the test equipment.

Mr Maqubela replied that the implications were that the DOE basically relied on the oil companies for the quality of fuel which was sold. The DOE did not have an independent verification mechanism. It was an uncomfortable situation, as consumers were at the mercy of oil companies.

Ms B Ferguson (COPE) said that the presentations from the DOE were proof that there was a lot of work going on and the DOE was on the right path.

The meeting was adjourned.