PetroSA Annual Report 2011/12; Evaluation on Management Performance of Department of Energy: briefing by Department of Performance Monitoring and Evaluation

Energy

16 October 2012
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Meeting Summary

PetroSA
For 2011/12, the company had again achieved an unqualified audit opinion, while group profits had risen 54% year-on-year, to R1.3bn.  Progress had been made on Project Ikhwezi, formally approved by the PetroSA Board in March 2011, setting it up to play an instrumental role in sustaining the life of the gas-to-liquids (GTL) refinery in Mossel Bay. First gas was scheduled to flow from the F-O field in May 2013, and it was estimated that production would continue for six years. Further development of other gas prospects near the F-O field could potentially help to sustain the life of the Mossel Bay refinery until 2020.

Project Mthombo was another key PetroSA initiative to build a world-class crude refinery in the Coega Industrial Development Zone in the Eastern Cape. Once built, it would be the biggest crude refinery in Africa and provide national security of supply for South Africa's future fuel requirements.

PetroSA had bought Sabre Oil and Gas Holdings Ltd in Ghana, which gave it access to the Jubilee field and provided a strategic entry into the gas-rich Gulf of Guinea.
The deal was consistent with PetroSA’s strategy of being a significant oil and gas player, and came on the heels of memoranda of understanding recently concluded with various international oil companies, including China’s state-owned Sinopec Group, Italian giant ENI, Mozambique’s PetroMoc and the Korea National Oil Corporation.

Re
venue had increased by 37% to R14.444bn, and the cost of sales had dropped to R8.855bn from R11.941bn. This meant gross profit had increased by 17% to R2 503bn. The rise in revenue was due in part to a 2% increase in sales volumes.  The rand’s weakness had both helped and hindered the company‚ increasing both the value of sales and costs. However‚ operating expenditure had declined from R1 904bn in the 2010/11 financial year to R1 675bn, due to the freezing of posts and other cost-saving measures.

Investment income had dipped to R840m from a previous R860m, due to lower interest rates, despite higher cash reserves. A contract cancellation fee of R19m had caused fruitless and wasteful expenditure to rise to R35.8375m, compared with R21.619m in the 2010/11 year. The main feature of the balance sheet was that it was debt free, providing a base to grow the business.

Material impairments included loans to PetroSA Egypt (SOC) Ltd, for R197m (2011: R945m) and PetroSA Equatorial Guinea (SOC) Ltd, for R1 412m.

One of the biggest challenges facing the company was declining fuel stock and thus PetroSA was embarking on a feasibility study to look at alternative fuel sources like liquefied natural gas (LNG). There was a focus on sustaining the GTL Refinery in Mossel Bay and creating new opportunities for growth. The company had been successful with deep-water exploration and support was need for new key projects like Mthombo, as the country faced a real risk of a fuel supply shortage in the medium to short term. The vision 2020 growth strategy was designed to advance job creation, enterprise development and other key initiatives.

Members expressed concern over material impairments from subsidiaries in Egypt and Equatorial Guinea which had generated substantial losses and stated unequivocally that greater risk mitigation strategies were needed. More involvement and exploration in the southern African region was also sought, rather than further afield investments in Venezuela or North Africa. Questions were also raised on bursaries for students to create a sustainable workforce for PetroSA, which would allow it to pursue future projects.

Department of Performance Monitoring and Evaluation (DPME)
In June 2011 Cabinet had given a mandate for DPME to implement management performance assessments for all national and provincial departments on an annual basis. Following a series of workshops and consultations, DPME had officially launched MPAT in October 2011. Provincial governments through the Offices of the Premier had further facilitated their own launches and self-assessments in their provincial departments.

The “Management Performance Framework” used in MPAT was based on reviews of similar management performance assessment methodologies used by India, Brazil, Kenya, Canada, and New Zealand. Lessons from international experience indicated that such methodologies could make a significant contribution to improving the performance of government, particularly if the leadership of the departments being assessed took ownership of the assessment process and the findings; if the results were made public,  thus encouraging competition between departments; if the management of departments implemented and monitored improvement plans; and if transversal policy departments implemented support programmes.

An important step in the MPAT process was for senior managers of a department to conduct a self-assessment against a range of management standards. A total of 30 national departments and 73 provincial departments from eight provinces had participated in the self-assessment process for the financial year 2011/2012. Lessons from international experience indicated that self-assessment had limitations – for example, departments not assessing themselves realistically. The MPAT process therefore involved an additional step of independent, external moderation.

MPAT was designed to assess compliance and the quality of management practices in four Key Performance Areas (KPAs), namely, Strategic Management; Governance and Accountability; Human Resource and Systems Management; and Financial Management. The four KPAs were further broken down into 17 Management Performance Areas.  Performance was measured against 31 standards across the management performance areas.

MPAT compliance ratings levels were the following: Level 1 meant non-compliance with legal/regulatory requirements; Level 2 was partial compliance with requirements; Level 3 was full compliance, but could mean malicious compliance.  A Level 4 department, on the other hand, was fully compliant and operating “smartly” in terms of its management practices. In such cases, good practice case studies would be developed and disseminated through learning networks. Level 3, complying fully with the legal prescripts, was essentially a minimum requirement for departments and all departments should aspire to operate at Level 4 – being fully compliant and working smartly.

For DoE, the only area on level 4 (slides 10 and 11) was accountability, and there was clearly room for improvement on ethics, delegations, and the internal auditing process. HR planning, and staff retention were below compliance and two areas of concern had been identified in Service Delivery Improvement and IT Management, where DoE had assessed itself at level 1. When it came to senior management, there was room for improvement at level 3, and the challenge for the head of the department was in management of performance.

DPME was in the process of implementing the second round of MPAT and as a part of this process, the DoE planned to conduct its next self-assessment during October 2012.  DPME was available to present the findings of the 2012/13 assessment from February 2013. The MPAT assessments would be repeated annually, and from 2013/14 the MPAT results would be taken into account in the performance assessment of individual HoDs.

Members wished to know how results would be affected by corruption, as well as how punitive measures could be enforced in the coming round of assessments for departments which remained non-compliant with MPAT standards.

Meeting report

Briefing by PetroSA
Ms Nosizwe Nocawe Nokwe-Macamo, Group CEO, PetroSA, said the company had been founded in 2002 following the merger of Soekor E&P and Mossgas Pty Ltd, after the discovery of offshore gas. It currently employed 1 861 staff and had pioneered the world’s first gas-to-liquid (GTL) refinery with acreage in Ghana, Namibia and Equatorial Guinea. PetroSA had a net asset value of R18bn, as at March 31 2012.

As the national oil company (NOC), PetroSA was mandated to operate commercially and support South Africa’s fuel supply security. For 2011/12, the company had again achieved an unqualified audit opinion while group profits had risen 54% year on year, to R1.3bn. Formally approved by the PetroSA Board in March 2011, progress had been made on Project Ikhwezi, setting it up to play an instrumental role in sustaining the life of the gas-to-liquids (GTL) refinery in Mossel Bay. This involved tapping into gas reserves in PetroSA’s F-O field located 40km off the south coast of South Africa. First gas was scheduled to flow from the F-O field in May 2013 and it was estimated that production would continue for six years. Further development of other gas prospects near the F-O field could potentially help to sustain the life of the Mossel Bay refinery until 2020 while providing jobs at the single largest employer in the Southern Cape.

Safety Health Environment Quality (SHEQ)
PetroSA’s safety record was within an acceptable range, but more focus on leading indicators (e.g. near misses) was needed. On the environment, 15 incidents had occurred but since then appropriate remedial action had been taken to avert recurrences, and increased awareness and education should help this process.

Growth
Together with Sinopec,PetroSA had signed a joint study agreement and was currently reviewing the business case for Project Mthombo in view of new clean fuel requirements and demand/supply projections. Project Mthombo was a PetroSA initiative to build a world-class crude refinery in the Coega Industrial Development Zone in the Eastern Cape. Once built, it would be the biggest crude refinery in Africa and provide national security of supply for South Africa's future fuel requirements. In addition, it would bring investment and job opportunities to an area facing significant socio-economic challenges. 

PetroSA had bought Sabre Oil and Gas Holdings Ltd in Ghana, which gave it access to the Jubilee field and provided a strategic entry into the gas-rich Gulf of Guinea.
The deal was consistent with PetroSA’s strategy to be a significant oil and gas player, and came on the heels of memoranda of understanding recently concluded with various international oil companies, including China’s state-owned Sinopec Group, Italian giant ENI, Mozambique’s PetroMoc and the Korea National Oil Corporation. The Sabre Oil and Gas Holdings Ltd acquisition increased PetroSA’s reserves and gave the company, which has so far been heavily dependent on income from its Gas-to-Liquids Refinery in Mossel Bay, immediate access to a new source of revenue.

Progress was being made on the recruitment of women into the company, but it remained difficult to recruit people with disabilities, although bursaries for disabled students were offered.  South Africa’s first academic facility offering research on improving the quality of diesel, the R36 m PetroSA Synthetic Fuels Innovation Centre (PFSIC) had been officially opened by the Minister of Energy, Ms Dipuo Peters on May 15 at the University of Western Cape (UWC). 

Of all commercial business sales, 71% went to Black Economic Empowerment (BEE) customers, while 67% of total discretionary procurement expenditure went to BEE suppliers.

According to the US Energy Information Administration, South Africa had the fifth largest shale gas resources in the world.  Econometrix estimated 10% of this supply could add as much as R200bn annually to South Africa’s GDP and create 700 000 jobs over 25 years. However it was noted that a balance was needed between developing shale gas and environmental concerns in the Karoo.

Features of 2011/12 Annual Report
Although a 15% target for the EE recruitment of women had been set, 37% of all appointments had been female. A BEE sales target of 214m litres had been surpassed, with 232m litres sold – a 9% increase over the previous year.

Key performance milestones in general were positive. Crude production was only 50% of the target amount due to challenges at the production facility which had since been resolved.  84%,or 6.5 m barrels, of the indigenous refinery production target for GTL had been achieved.  This had been caused by dwindling fuel stock into the plant.  Last year, the F-O offshore gas field performance reported a low profit, but this year there was a healthier financial performance.  A revenue increase of 2% due to sales volumes was affected by a weakening rand –  PetroSA sales were dollar denominated, leading to higher revenue.

Mr Nkosemntu Gladman Nika, Chief Financial Officer (CFO), continued by saying that revenue had increased by 37% to R14.444bn, but the cost of sales had dropped to R8.855bn from R11.941bn. This meant gross profit had increased by 17% to R2 503bn. The rise in revenue was due in part to a 2% increase in sales volumes. This was slightly offset by the cost of sales increase, due to increased products purchased. The rand’s weakness had both helped and hindered the company‚ increasing both the value of sales and costs. However‚ operating expenditure had declined from R1 904bn in the 2010-11 financial year to R1 675bn due to the freezing of posts and other cost-saving measures.

Investment income dipped to R840m from a previous R860m due to lower interest rates, despite higher cash reserves. A contract cancellation fee of R19m caused fruitless and wasteful expenditure to rise to R35.8375m in the 2011/12 financial year, compared with R21.619m in the 2010/11 year. The main feature of the balance sheet was that it was debt free, providing a base to grow the business.

PetroSA was issued with an unqualified audit opinion, although there had been significant uncertainties which included the sale of Brass Exploration Unlimited and PetroSA Nigeria (SOC) Ltd. These disposals were still subject to litigation in the Nigerian legal system. A joint venture (JV) with a Nigerian partner as a state-owned entity (SOE) was subject to Purblic Finance Model (PFM) regulations.   However this JV partner was a family business and there was simply too much risk, so the decision had been taken to sell. There had been a profitable return for the amount invested, yet after selling and signing indemnities PetroSA had been taken to court by the JV partner. According to the AG however, all risks were covered.

Material impairments included loans to PetroSA Egypt (SOC) Ltd for R197m (2011 R945m) and PetroSA Equatorial Guinea (SOC) Ltd for R1 412m.  PetroSA had undertaken exploration in Equatorial Guinea and last year had been given an extension for one year, with the condition that it find a JV partner by the end of the year. While it was finalising this year’s financial statements, no partner had yet been found, so it had been prudent to write off the investment. Earlier this week, Petrosa had managed to find a potential JV partner which satisfied the requirements of the agreement, so the investment had been partially written back or would be written back in full.

There had been no material findings for predetermined objectives.  38% of total targets had not been achieved and annual financial statements that had been submitted for auditing were not prepared in all material aspects in accordance with the prescribed reporting framework. This had led to material misstatements of non-current and current assets identified by auditors. However, this had since been corrected.

In regard to the National Environment Management Act, timely corrective action had not been implemented to prevent contamination at operating facilities.

The procurement process had not complied with the requirement under the Public Finance Management Act (PFMA) for a supply chain management system. Certain goods and services, with a value above R15 000 for quotations and R1m for tenders, were procured without inviting competitive bids.

Fruitless and wasteful expenses in the previous year had amounted to R21.6m, while R12.9m of this had been recovered. This year R35.8m had been reported and 16.3m had been recovered through the return of interest payments.  A contract cancelled by the board had led to legal fees derived from a transaction which had not followed the necessary procurement processes and as auditors and finance management were evaluating the benefits from those fees, they found it difficult to place value, hence the fees were classified as fruitless and wasteful.

The PetroSA board had brought in an acting chief executive officer (CEO) for a period of eight months to oversee the running of the organisation until a permanent Group CEO could be appointed, hence the increase in irregular and fruitless and wasteful expenditure. However, normality had returned and the Committee should not get the impression that the company’s internal controls had collapsed.

Ms Nokwe-Macamo resumed her presentation, covering BEE status management and control, and noted that employment equity was below the set target and had only achieved a level of only 8.48 out of 15. Skills development was also lower than the target, although the centre of excellence (COE) was used by institutions in the country and would be enhanced by COE bursaries and leadership development programmes, so this was not considered a problem. Preferential procurement was nearly on target, with  a 19.27 out of 20 achievement level. There was, however, a need to improve enterprise development.

One of the biggest challenges facing the company was declining fuel stock, so PetroSA was embarking on a feasibility study to look at alternative fuel sources like Liquefied Natural Gas (LNG). There was a focus on sustaining the gas-to-liquids (GTL) refinery in Mossel Bay and creating new opportunities for growth. The company had been successful with deep-water exploration, and support was needed for new key projects like Mthombo, as the country faced a real risk of a fuel supply shortage in the medium to short term. The vision 2020 growth strategy was designed to advance job creation, enterprise development and other key initiatives. If support was given to these initiatives, PetroSA felt confident they would be able to achieve their key objectives in the sector.

Discussion
Mr K Moloto (ANC), on the issue of the AG’s findings, said it would be prudent to get a comprehensive report from the board on why it had taken certain decisions.  Page 68 of the AG’s report detailed the fact that the Minister had mandated an investigation into amounts above R5m and the board had also mandated an investigation into the irregular procurement practices of PetroSa. There was a need to schedule another session with the Committee to ask for a report responding to why there was a cancelled contract, and why it had come to R19m. What was the rationale here, and how did it apply to legal and consultation fees?

Concern was raised over PetroSA’s internal controls, but this seemed to have been resolved according to the CFO.  On the issue of impairments related to operations in Guinea and Egypt, there was a desire to be assured by the board that the SOE had been crafted by the board and assisted by the executive. Part of this process needed to be a risk management approach, as the pursuit of foreign partners was not free of risks. There was a need to be aware of risks with a clearly defined risk mitigation strategy in place. Exploration was part of the investment strategy, but what was PetroSA’srisk management strategy? PetroSA had no large cash base like BHP Billiton or other massive conglomerates, but because this was a significant amount of money, what guided PetroSA’s investment philosophy?

On Project Ikhwezi, how sure was PetroSA that this project would be sustainable through 2020? Was the possibility of success high? In terms of downstream activities which included storage facilities and petrol stations, how was this supported by the board’s investment philosophy? On Project Mthombo, certain agreements had been signed and the Minister had given support, but could PetroSA enlighten the Committee on what further work was ongoing in this area to ensure the project was realised.

Mr J Smalle (DA) noted that of 13 subsidiaries, only three had positive numbers this year. Where was the business sense in writing off money in Egypt and Guinea?  He agreed with Mr Moloto on the cancellation and legal fees which had not been there in previous years – it was astonishing that PetroSA could make those types of management decisions. Where was their thinking on this?  Hopefully the report would show the rationale behind these decisions.

R197m that could not be found in the financial statements of the AG’s report on p67, dealing with material impairments on PetroSA Egypt, was raised. An explanation was sought for bringing in an administrator for eight months, as well as on performance bonuses that had rapidly jumped from R90m to R355m with only a 2% profit margin.

PetroSA had made two trips to Venezuela and it was asked what had come out of this. What was the thinking on moving into downstream areas, but not having a refinery online yet?  Would it lie dormant or be sublet while not in use? What would the capacity of the refinery be? Would it produce a type of crude oil that was usable and would it be heavy or light crude, or a mixture?

Ms B Ferguson (COPE) said that in terms of the company’s transformation, the research centre was an amazing accomplishment.   She asked if PetroSA was getting new employees out of it.  71% of commercial sales had gone to BEE customers, but this R2.86bn equated to only 25% of PetroSA’s total spend. What was the plan going forward to increase this number?

Concern was expressed over material impairments, and if risks were similar to those in the Nigerian partnership deal which had failed, what was the mitigation strategy in place to deal with future or emerging risks? Were there any standout reasons over the failure of enterprise development by PetroSA? How was this going to be improved?

Mr L Greyling (ID) said that writing off loans to Egypt and Guinea meant that R2.5bn had effectively been wasted. What were the controls over subsidiaries and how did they report to PetroSA?  How did one ensure money was being spent and reporting cycles met at subsidiaries?

On the big picture scenario, what informed PetroSA’s investment decisions? Why had PetroSA gone into Egypt and Guinea? The desire to become a large oil company was understandable, but the focus should be on a local supply of fuel for South Africa from the southern African region, like Mozambique. There was no investment focus in the southern African region.  What was PetroSA doing to make use of recent gas discoveries to benefit South Africa and ensure a gas supply from the region? What was PetroSA doing in southern Africa as opposed to the rest of the continent, and even Venezuela?

Mr E Lucas (DA) was excited about extending the life of the Mossel Bay refinery, as the community would battle to create jobs in its absence. This would allow people to survive. Although gas was being depleted offshore, what plans were there to continue with exploration? What was the long-term programme? When the rand to the dollar exchange rate changed, what effect did this have on PetroSA?

Ms N Mathibela (ANC)asked if students were offered jobs after bursary studies had been completed. What were the necessary qualifications for bursaries?

Mr S Radebe (ANC) asked if PetroSA was marketing bursaries to students. PetroSA had 61 full-time bursary students, but when this was compared to what PetroSA needed in terms of its workforce this number was simply not high enough. Specific technical skills were needed for new and upcoming projects and it was necessary to ensure staff had those skills in advance. It had been said that the relationship with Further Education and Training (FET) colleges was ineffective. Clarity was sought on p123 of the annual report, where a R1m claim was considered for a former employee, as “golden handshakes” could not happen.

Responses
Ms Nokwe-Macamo responded that the Vision 2020 strategy provided a mandate for PetroSA to become an integrated oil company with a large percentage of market share. There was a high risk in being a company that based its income on a commodity that was proven to be diminishing, so they had embarked on a growth strategy, as there was a clear need to diversify and become a bigger player. Different strategic models were employed in different parts of the country to be commercially viable. Why were certain countries invested in?  Conventional investment methodology was used in this regard, to build strong partnerships with people who had experience and knowledge, as PetroSA was not in the arena of very big oil companies. Thus initially they were attempting to build up strength and reserves which would lead to greater market participation. They had looked at countries with prolific reserves which were producing or near producing, and considered whether PetroSA could fund part of that value chain. Lessons had been learnt from past forays into foreign investment and a partnership had been developed with PetroMoc in the gas industry in Mozambique.

PetroSA’s first aim was to sustain the current GTL plant in Mossel Bay, so Project Ikhwezi was very important in this regard for the whole country. It should have been realised that it was not solely the responsibility of PetroSA, but an integrated joint approach with Eskom was needed to ameliorate the lack of sufficient energy in the country, as the problems with supply were hobbling economic growth. It was also necessary to look at alternative fuel stocks to change the nation’s energy balance.

On financial issues the board had delegated an administrator to the company rather than have a period of instability, as there was a need to have leadership throughout. Why the contract had been cancelled, was under analysis and investigation.

Venezuela was one of the countries with prolific crude reserves, and PetroSA was looking at volume and access to sufficient crude as part of its mandate for South Africa.  The Mossel Bay refinery required more processes to break down heavy crude and make it usable, so the outcome of the trips to Venezuela was an attempt to make crude more readily available.

Bonus payments were agreed upon with employees over time, with the initial R90m as the first payment based on percentages, while the R355m was the second and final payment of an obligatory scheme running in company. A different performance management agreement was now in place.

Mr Nika, speaking about the impairments in Egypt and Guinea, said exploration was undertaken by forming a subsidiary in a country once a drilling license had been granted, but all risk mitigation, administration and bookkeeping was done at the head office in South Africa. The cash balance in those offices was more like petty cash, to deal with the daily expenses of those offices. Only once they became operational were larger budgets allocated. These offices employed non-executive officers and were not big locations with large infrastructure. In the Egyptian case, the exploration had been written off the books in 2008 and in the subsidiary itself, that amount had always been reflected.  It was something they would pay back to PetroSA when there were returns.

PetroSA had lost a dismissal case against an employee, hence a one-time R1m bonus had been paid out, as decided by a court of law. There were plans to increase BEE contributions, with specific contracts set aside for BEE customers.

Mr Everton September, Vice President: New Ventures (Upstream) said that Ikhewezi had been discovered in 1990s and PetroSA’s precursors had drilled four discovery wells between 1990 and 2000. To further appraise the field, two more appraisal wells had been drilled and seismic responses correlated with other sub-surface analysis, so they had moved forward on a sub-sea pipeline development and started commencing the connection between the pipeline and the drilling platform. There was a high level of confidence that the project would be a success.

Mr Nika raised the issue of the audit findings, saying that there had been no collapse of internal controls at PetroSA. In the majority of the 27 audit findings, a solution could not be implemented within the reporting period, but relating to specific areas, an external service provider would be brought in to deploy additional financial resource tools.  For reasons of transparency, there was a need to quote the repeat findings.  It was emphasised that cash holdings should be reinvested and bring in returns of 7-8% or higher.

Mr Darrin Arendse, Vice President: Human Capital, speaking on the retention strategy said the research centre currently had five employees, and they would become a part of the company’s learning platform. A memorandum of understandinghad been signed with a local institute to give students living with disabilities an opportunity to find employment at PetroSA. The general intake of new employees was linked to business requirements, and although the score card for BEE used different measurements, these were being aligned with PetroSA’s EEE codes to build capacity within the company. As far as full- time students were concerned, PetroSA did not want students finishing without meaningful jobs, so their intention was to employ all graduates. Any graduates who had not found work with the company went on to work in other parts of the oil and gas sector in South Africa. There was also a strong social development intention within the company and PetroSA was planning on duplicating its centre of excellence model with regard to Project Mthombo.  There would also be an greater attempt to tie up with more FET colleges in this respect.

The CEO said the Sinopec agreement would establish all configurations on Project Mthomboand this would allow PetroSA to deal with market demand now and going forward, rather than being in net import mode by 2015, which would become the case if progressive measures were not taken soon.

The uptake in the Jubilee field had increased the current reserve profile by roughly 40%, and as years went by, its full potential would be realised. However, it was not going to be the only source of crude oil for South Africa as PetroSA was looking at other avenues to improve the reserve base. Constant changes in the crude price was also affected by the rand/dollar exchange price. Operating at lower than optimum capacity had had a negative effect on margins, but next year was going to be a watershed year because of multiple investments and would make PetroSA a more sustainable business. Downstream and upstream partnerships would be expanded, and there would be a high level of activity moving forward.

The Chairperson said PetroSA had claimed that it would be an integrated entity by 2020. This was a bold step, as was rolling out Sabre in Ghana and the specialised field research centre at UWC. These were all indications that PetroSA was keen to take even bolder steps, but there seemed to be a lack of responsiveness on matters which had been raised year after year –  like environmental issues. The Committee would monitor areas that had a risk of compromising PetroSA’s position. On applied development, it was hoped the company would share with the Committee a turn-around plan at some point. Finally, a report combining all outstanding issues was requested, as PetroSA desired to become a world-class organisation.

Briefing by Department of Performance Monitoring and Evaluation (DPME)
Dr Sean Phillips, DG, DPME, said that since DPME had begun operating as a department in 2010 there had been a focus on the strategic priorities of government, 12 service delivery agreements and economic infrastructure. As a department, they were responsible for monitoring the results of strategic outcomes and whether departments were achieving their set targets, using new information to improve plans and encouraging better achievement of targets over time. This would be applied to all departments across national, provincial and local government. The 12 service delivery outcomes required collective involvement for those outcomes that involved concurrent functions, like health and basic education. The implementation of delivery agreements was managed by the Council of Basic Education Ministers and spheres of government involved in concurrent functions.  Specific monitoring of the Department of Energy (DoE) as a department looked at the 12 priority outcomes and DPME had decided to focus on the quality of management practices, in conjunction with the Offices of the Premier. The third dimension that the President had asked DPME to focus on was the experience of citizens when they received service delivery, and thus monitoring was based on front-line service delivery. A national evaluation policy framework had been put in place and soon DPME would submit a three-year plan.

The presentation was on the quality of management practises in the DoE. In order to produce outcomes there was a clear need to have an effective administration and a 10-year and 15-year review had identified weaknesses in implementation as a key challenge. When presenting on the implementation capacity of DoE, generic management practices were used to convert inputs into outputs and deliver on implementation.

Mr Ismail Akhakuaya, Deputy Director General (DDG), DPME, noted that in October 2010, Cabinet had approved a proposal from the DPME to work with transversal administrative departments and the Offices of the Premier, to develop and pilot the implementation of a management performance assessment tool. The Management Performance Assessment Tool (MPAT) had been developed in collaboration with the Department of Public Service and Administration (DPSA) and the National Treasury, with additional inputs from the Office of the Auditor General and the Office of the Public Service Commission.

In June 2011, Cabinet had given a mandate for DPME to implement management performance assessments for all national and provincial departments on an annual basis. Following a series of workshops and consultations, DPME had officially launched MPAT in October 2011. Provincial governments through the Offices of the Premier had further facilitated their own launches and self-assessments in their provincial departments.

The “Management Performance Framework” used in MPAT was based on reviews of similar management performance assessment methodologies used by India, Brazil, Kenya, Canada, and New Zealand. Lessons from international experience indicated that such methodologies could make a significant contribution to improving the performance of government, particularly if the leadership of the departments being assessed took ownership of the assessment process and the findings, if the results were made public, thus encouraging competition between departments, if the management of departments implemented and monitored improvement plans, and if transversal policy departments implemented support programmes.

An important step in the MPAT process was for senior managers of a department to conduct a self-assessment against a range of management standards. A total of 30 national departments and 73 provincial departments from eight provinces had participated in the self-assessment process for the financial year 2011/2012.  Lessons from international experience indicated that self-assessment had limitations – for example, departments not assessing themselves realistically. The MPAT process therefore involved an additional step of independent, external moderation.

MPAT was designed to assess compliance and the quality of management practices in four Key Performance Areas (KPAs), namely, Strategic Management; Governance and Accountability; Human Resource and Systems Management; and Financial Management. The four KPAs were further broken down into 17 Management Performance Areas.  Performance was measured against 31 standards across the management performance areas.  What differentiated MPAT from other monitoring processes was that it provided a consolidated view of a department’s performance across several critical performance areas, making it easier to prioritise areas that were in need of significant improvement. The value of MPAT for transversal policy departments such as DPSA and National Treasury was that it could assist them in identifying areas where departments needed assistance or where frameworks and guidelines could be improved.

Self-assessment
An important step in the MPAT process was for the senior management of a department to conduct a self-assessment against a range of management standards. MPAT did not duplicate existing monitoring and oversight by other departments, and in fact drew on secondary data from these entities to review the self-assessments of departments. A total of 30 national departments and 73 provincial departments from eight provinces had participated in the self-assessment process for the financial year 2011/2012. (Thus 103 out of a total of 158 (65%) national and provincial departments had carried out self-assessments.)

Independent moderation of self-assessment results
DPME also subjected the self-assessments to independent peer moderation by selected practitioners and policy experts from national and provincial departments. However, the moderation process had been limited due to the availability of evidence to substantiate self-assessment scores from all departments. This was largely due to weaknesses with the design of the evidence submission moderation process. DPME had not provided sufficiently clear guidelines of what evidence would be required to substantiate self-assessment scores, and the process did not allow for follow-ups with departments to provide missing evidence.

MPAT compliance ratings levels had been the following: Level 1 meant non-compliance with legal/regulatory requirements; Level 2 was partial compliance with requirements; Level 3 was full compliance, but could mean malicious compliance. A Level 4 department, on the other hand, was fully compliant and operating “smartly” in terms of its management practices. In such cases, good practice case studies would be developed and disseminated through learning networks. Level 3, complying fully with the legal prescripts, was essentially a minimum requirement for departments and all departments should aspire to operate at Level 4 – being fully compliant and working smartly. It was only when the critical mass of departments were operating at Level 4 that one would achieve the goal of an efficient, effective and development-orientated public service.

For DoE, the only area on level 4 (slides 10 and 11) was accountability, and there was clearly room for improvement on ethics, delegations, and the internal auditing process.  Human resource (HR) planning, and staff retention were below compliance, and two areas of concern had been identified in Service Delivery Improvement and IT Management, where DoE had assessed itself at level 1.  When it came to Senior Management, there was room for improvement at level 3, and the challenge for the head of the department was in management of performance. This and other disciplinary cases needed to be worked on. IT governance was a challenge across all national departments and was something that correlated the with AG’s finding. The supply chain management sector also had issues with acquisition management, in particular that DPME hoped to see improvements during the next round of assessments. The Department rated itself as working smartly (level 4) in the following areas: annual reporting, functioning of the audit committee, implementation of level 1-12 PMDS and the functionality of the departmental bargaining chamber.

Future MPAT Assessments
DPME was in the process of implementing the second round of MPAT and as a part of this process, the DoE planned to conduct its next self-assessment during October 2012.  DPME was available to present the findings of the 2012/13 assessment from February 2013.  The MPAT assessments would be repeated annually and from 2013/14, the MPAT results would be taken into account in the performance assessment of individual heads of departments (HoDs).

Improving Management Performance
In most management areas, some departments had been able to reach level 4, which meant that is was possible for all departments to reach this level of compliance.  DPME had also developed good practice case studies of level 4 performance in various areas, which would be distributed to departments. Workshops would also be held to encourage departments to learn from each other. DPME was working with DPSA and National Treasury to offer support, targeting specific departments to improve management practices.

Limitations on this process were related to MPAT focussing on processes which converted inputs into outputs. It did not focus on assessing whether the right outputs were being produced to achieve desired outcomes and impacts. There was a risk that departments may be producing the wrong outputs and therefore it was important to consider the achievement of outcomes and impacts. DPME was doing this through monitoring of the 12 priority outcomes and related delivery agreements.

The value added by this process was that the MPAT provided a single holistic picture of the state of a department, rather than just focussing on financial management, for example. Generally audits focussed on compliance only, whereas MPAT focussed on getting managers to work more smartly. Getting all departments to level 4 would improve levels and quality of service delivery. For example, getting departments to procure more smartly would result in better service delivery by suppliers and contractors. This would lead to huge savings through reducing corruption and increasing value for money.

The process of getting top management as a whole to assess itself against a holistic set of good practice management standards and to agree on required improvements was the main value added by the MPAT assessment process. Management practices were generally poor because top management did not pay sufficient attention to improving them.

Discussion
Ms N Mathibela (ANC) began with a question on corruption. If the head of a department was corrupt, who was responsible for bringing that person to account? She noted that at times departments did not act in a collaborative way, and praised the work of DPME in this regard.

Mr E Lucas (DA) said that within a department there should be someone in charge of issuing correct information. Was there in fact a body within the department fulfilling this role?

Mr S Radebe (ANC) asked, in terms of scaling levels, whether were there still any departments that did not have correct evaluation practices in place? Were newer departments failing to put in place compliance documents? Clarification was sought over the expectations from departments in terms of service delivery charters.

The issue of departmental HR plans was raised, as they were expected to work collaboratively with the overall national plan. Why did departments not have these plans in place, when it was a national requirement? What were DPME’s plans to assist departments with systems management and IT?

Responses
Dr Phillips responded that when the management assessment tool had been developed, one of the lessons learned from international examples was that there was a need to keep the number of indicators to a minimum. The MPAT currently measured 31 standards, but too many standards would mean the system would not work well. Part of the development process in consultation with departments and the presidency in producing this tool, was to consider which factors were key indicators of performance. Although other areas like communications could have been included, they had not been, as it as it would have become too complex.

While there was an expectation that all departments would be compliant with national requirements, the reality was that quite a number of departments did not have national regulations in place. Therefore MPAT results would hopefully be used by top management to move on them.

Public service regulation standards related to the quality of service delivery as delivered to the public and even departments without much public delivery still needed standards in place to deal with client interaction. The number of departments that were non-compliant would be reduced over time, as the point of having service delivery standards was to ensure a high level of delivery derived from taking measures to improve standards and effect real, on-the-ground delivery. Level 4 required a department to show evidence that it was actually measuring, monitoring and taking action to remedy weaknesses. This meant using compliance to improve performance and service delivery, and was the eventual aim for all departments across the country.

Top management needed to realise that as long as administrative issues were not in a good state, they were in fact strategic. One of the key causes of low service delivery standards across government was a lack of prioritising administration.  An example of this was the distribution of textbooks coming out of problems with supply chain management.  A renewed focus on strategic issues like administration would have a big impact on improving the performance of government and overall service delivery.

Mr Akhakuaya said that what had happened with the 120 departments that had done self-assessments was that the process had allowed DPME to get a good sense of their baselines. The initial findings would not be used to hammer departments if they had weaknesses.  Issues of concern would emerge on the second round of MPAT assessments, and if there was regression, action would be taken. The initial MPAT had presented a good picture of the current situation which showed a majority of departments were struggling. Greater collaboration would be needed with DPSA and National Treasury in this regard. The concern was that many departments were at levels 1 and 2 and DPME was working to fix up HR and financial and supply chain management in particular.

Mr Radebe said the first round of assessments was over, but what were the punitive measures that could be imposed on a department to ensure compliance and improvement from the second round?

Dr Phillips said the self-assessment results for 2011/12 tested the moderation processes of departments, and was part of the learning process for DPME. The present moderation process had not been robust enough to use the moderated results, so for the second round beginning this October it would still be a self-assessment, but would also include moderated results which would be released publicly. This would allow the proper moderating of new assessments. Punitive measures were included in the existing system for managing performance of individuals in government, such as disciplinary action where it was a requirement of supervisors to take action against a poorly performing subordinate down the line, to including the minister taking action against HODs if they failed themselves to take action where necessary.  As a result, there was a need to improve the function of individual performance management systems so that it effectively dealt with cases of gross malfeasance.

The full narrative report was available on the DPME website, with detailed report cards for each department. Separate moderation criteria, as well as an evidence requirement, were a part of the onus on the departments to provide the assessment data. Evidence could be provided by means of the minutes of a forum or some communication to show proof of action in a given area. Level 4 went beyond compliance, and there was thus a desire by DPME to see innovation above the norm.

A representative from DoE said self-assessment criteria were made a part of the monthly meeting agenda. At the last presentation, all DDGs and DGs had been present and all areas that were at 1 and 2 were now sitting at 3.  DoE was a very young department and information still needed to be put in a specific format with a draft charter and an action plan. When DoE created their strategic plan, they had not yet had a format in place.  The transition had been difficult since splitting from the Department of Minerals and Energy, although DoE continued to implement policies in the approval process, and these had largely been finalised. The only major challenge remaining was on the issue of Integrated Delivery Service Protocols.

The meeting was adjourned.


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