Central Energy Fund & Subsidiaries briefings on 2012 Annual Reports


18 October 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Central Energy Fund presented a detailed report on the Annual Report of the Group for 2011/12. It had achieved a profit of around R1.929 billion, largely as a result of increases on the national interest charged on rehabilitation costs, emanating from a study done to review PetroSA assets. Total assets for the group increased from R33 billion to R35.2 billion. Although the CEF Group received an unqualified audit opinion for the year there were matters of emphasis, and some of those for subsidiaries were repeated concerns. CEF had to make changes to the financial statements after they were released for audit. Material impairments amounted to R68 million, some of which related to the subsidiaries. There were uncertainties around the pending court case involving PetroSA, and expenditure stock procurement management flaws were seen across the group. Some performance targets were not achieved, and there were continuing concerns at failure to fill vacancies. CEF had for some time been debating a consolidation and repositioning and new possible opportunities were identified in manufacturing and energy equipment. There was a focus on improving communications with the Department of Energy (DoE) and Department of Mineral Resources (DMR). Although the AG reported that six of the thirteen objectives were not achieved, this failed to take into account the substantive achievement of about 82% overall. Performance management systems were not robust enough but were being improved in all entities. Particular reports were given of Maseru, Darling and MethCap projects and others were outlined. The Board and Risk Committee presented a full report. Members questioned the wisdom of having a Board member act as Acting Chief Executive Officer, as this posed governance risks. They asked about future financing, given the strong reliance of CEF on PetroSA. Particular challenges with the projects, and how these were addressed, were debated. One Member felt that CEF was trying to do too much that was not strictly in its mandate, and asked where its future focus would lie. Concerns were expressed around African Exploration, and the Chairperson stressed that the AG’s findings had to be sternly and vigorously addressed by the CEF Board.

Five subsidiaries of the Central Energy Fund (CEF) presented their 2012 Annual Reports, some of which included details also of performance up to September 2012. The Strategic Fuel Fund (SFF) rounded the year with a net profit of R390.2 million, despite the fact that it represented a 10% decrease on the previous year, due to market volatilities that affected storage rental income. Some areas of strategic expansion and maximisation of storage capacities were identified. SFF was finally recognised as a State Agent, exempt from income tax and VAT. Some instances of irregular expenditure were identified, although there was value obtained. Responsible Managers would be held accountable. It also reported on the corrective action around inconsistencies in procurement. Strategic stocks, in line with government policy, were held at
10.3 million barrels, but the only available storage facilities were in the Western Cape, so there was a need to look inland, and at Durban and Gauteng. The procedures to boost BEE participation were outlined, as well as changes that would be required to maximise the Milnerton facility.

African Exploration Mining and Finance Corporation (AE) was focused on prioritising the supply of thermal coal to Eskom, to secure energy supplies, and to create jobs for local residents. It had mined 1.7 tonnes of coal, and sold 1.5 million tones. The off-take agreement for Kusile Power Station was being finalised. It had received a clean audit. Its challenges, apart from delays in processing of mining rights and industrial action, was that by the end of the financial year it was effectively insolvent, having incurred a R49 million loss. This was being discussed with National Treasury. However, net profits in excess of expectations had been made in August and September 2012. Several new projects, for which some prospecting rights had already been obtained, were outlined.

Petroleum Agency of South Africa had received an unqualified audit report with no matters of emphasis, and its income had improved while operating expenditure was below the previous year, due to stern efforts to reduce costs. The previous year’s provision of R13 million for Continental Shelf Project was now resolved and reversed. There was high acreage under licence or permit, and PASA had participated in exhibits and presentations, and on the Shale Gas Task Team. The increased focus on resource evaluation, technical understanding of basin evolution and unconventional sources forced building of new capacity. The United Nations decision on the extended Continental Shelf claim was still awaited. New applications were put on hold to allow for structured licensing processes and the decision on fracking. PASA’s activities in selling data and promotion of science were detailed. It was noted that PASA, in order to answer concerns that it might be a player and referee in the same space, had separated from SOEKOR

In answer to why the Oil Pollution Control (OPC) had not submitted a separate report, the CEF explained that OFC had ceased to be an independent unit and had reverted to operating and reporting through SFF. IGas gave a very brief report outlining its establishment in 2000, and the fact that it was repaying a loan from CEF, focusing on its seven same objectives, and making progress on all fronts.

South African Supplier Development Agency, described the Agency (SASDA) as a non-profit entity. Its only assets were furniture and computer equipment. It had a loan of R40 million from the holding company and an accumulated loss, as a result of which no taxes were being paid. The Minister had directed CEF to fund SASDA until such time that the Department of Energy determined a long term strategy to fund the organisation. The position lent itself to going concerns for the management of SASDA and the Board, in relation to the existing liabilities. Hopefully, ongoing discussions between the SASDA Board, CEF Board and the Department would resolve the situation as soon as possible. Delays in its accreditation meant it could work for only two months in the year, which reduced its revenue. It supplier development initiatives were outlined. Issues raised by the Auditor-General had been addressed.

Members said, in relation to SFF, that South Africa had to focus on its energy mix and growth of markets, asked whether storage capacity was sufficient, for bitumen as well as crude, questioned the ideal mix for storage and asked about pricing, checks to safeguard South Africa when it entered other markets, and minimization of loss. They asked about gas finds and how South Africa would be protected in this regard. AE was asked if it faced any possible conflicts of interest, and questions were also asked on the loan, and payment of bonuses. Members wanted explanations on the irregular expenditure and actions taken. Allegations of leakage at one storage depot were questioned, and CEF was asked what risk mitigation strategies were employed and with which departments the entities worked. A written report on all CEF appointments as requested. The Chairperson said that whilst there was a good indication that the sector was being turned around and restructured, the Department of Energy should attend the next strategic plan presentations, and concerns had to be addressed. It was hoped that PetroSA would assume IGas’ role effectively, and supplier development was an important tool, as well as future plans for SASDA.

Meeting report

Central Energy Fund (CEF) Annual Report 2011/12
CEF Financial outcomes 2011
Mr Webster Fanadzo, Acting Chief Finance Officer, Central Energy Fund, noted that the Central Energy Fund (CEF) Group had made a profit of R1.929 billion in the 2011/12 financial year, a substantial increase from the previous financial year. The increase in profit included an increase in revenues. The investment income for the period was lower, at R1.71 billion compared to R1.72 billion in the previous year. He noted that the main reason for the increase was the result of the result on the national interest charged on rehabilitation costs, emanating from a study done to review PetroSA assets. The total assets for the group increased from R33 billion to R35.2 billion.

The CEF Group received an unqualified opinion for the year but there were matters of emphasis. CEF had to make changes to the financial statements after they were released for audit. Changes were made to some indicators and other areas, but all the necessary corrections had been made. There were material impairments amounting to R68 million, some of which related to the subsidiaries.

He also noted significant uncertainties relating to PetroSA pending court case. There were certain expenditure stock procurement management flaws across the group. This resulted from entities not following normal procurement procedures. CEF was reviewing its processes around procurement, following the finding by the AG. Remedial action would be taken where required.

Some performance agreement objectives resulted in non-achievement of planned targets. This had happened because some of the entities did not follow budgets, and therefore did not meet objectives. Mr Fanadzo said there was a need to differentiate between strategic and operational objectives. An external consultant had been employed to advise the group on certain issues.

Another of the AG’s finding related to human resource management, and the fact that certain key positions were not filled. Some positions would be filled shortly, and a cross-group skills audit had been undertaken to address the skills challenge, with attention being given to these matters also at the Board.

Other concerns related to Brass Nigeria and the issue of African Exploration moving across to the Department of Mineral Resources (DMR), but these were also receiving attention at the appropriate levels.

CEF performance
Mr Chris Cooper, Strategy Manager, CEF, said the structure of CEF had been debated in the past, and the CEF was focusing on consolidating the entity. He took the Committee through slides showing the new structure of CEF and its affiliate entities (see attached presentation). There had been a proposal to try to reposition CEF, following the challenge of where it needed to be located within the renewable energy projects. Part of the restructuring was complete and part was still ongoing.

Two possible new areas of opportunity for CEF, one in manufacturing and one in energy equipment, had been investigated. An internal report was drawn, but it had not been taken to the Board by due date. The same occurred with the investigative report into energy opportunities for the rural poor.

Mr Cooper then outlined selected focus areas. He said communication with the Department of Energy (DoE) had to be improved, and now both entities were in communication on a regular basis. CEF was providing assistance and skills in a number of areas where DoE operated. The human capital component had not been completed, being quite complex, but there were ongoing efforts. Other objectives related to CEF managing its cash, associated companies and subsidiaries, and reviewing its developmental projects, which were mostly achieved in full.

The Auditor-General (AG) had reached a finding that CEF did not achieve six out of its 13 objectives. Whilst that may seem startling, Mr Cooper pointed out that this was because of the manner of reporting, and that in fact CEF was very close to achieving targets, and if a proper weighting was given to the achievements, CEF had achieved about 82% on performance overall. Following some unhappiness with the weighting of activities, CEF had engaged Ernst and Young to provide guidance. CEF had realised that it had confused strategic and operational objectives, and the plans. This was the major contributor to the audit findings on performance. This was now being addressed, performance plans had been submitted for the year, and there should be significant improvements.

The AG had found that performance management systems (PMS) at the group were not robust enough. The PMS used at the highest level was acceptable, but did not have detail in relation to subsidiary entities. In the future, the PMS would be refined, and cascaded down through the entities.

The existing portfolios that CEF was looking to enhance were the Phillips factory in Maseru, which manufactured bulbs, the Darling Wind Farm and MethCap Waste-To-Energy. Mr Cooper noted that MethCap was tied to PetroSA's production levels, so that once it had more gas and increased production, the project should show better results. CEF was trying to recoup value on the other two projects, as they were not performing at all.

Projects that were in the pipeline included the Solar Water Heaters, Solar Park Feasibility, ENER G Landfill (gas to electricity) and the TinFin Solar Technologoy (TFST). CEF had been brought in to the Solar Water Heater projects when there were significant challenges with Eskom's capacity to supply. However, it had a different focus, looking at the high-pressure solar water heater, which performed better than the low-pressure system, and this was an area where considerable electricity savings could be seen. The challenge was to find an efficient financing model. CEF's Project Appraisal and Monitoring Committee was looking at how to proceed with the project.

The Solar Park Feasibility study had faced challenges regarding access to the land, but DoE was addressing those. The concept of the Solar Park was broader than just one single site. The ENER G Landfill was rejected for administrative reasons, but these were now being addressed. CEF awaited input from DoE.

Mr Cooper said the CEF generally achieved targets, but was in a close-down mode, due to the Clean Development Mechanism (CDM) structures having changed. The projects on CCF light bulbs had been collapsed and terminated. CEF completed two projects under the CDM, and was now legally registered. CDM specialists were successfully trained and were now in the market.

Board audit and risk committee Report
Mr Reggie Boqo, Chairperson, Board Audit and Risk Committee, CEF, said that he wanted to give the Committee a feel of the mandate of the Board Audit and Risk Committee (BARC) and how it went about its business. The Board Audit and Risk Committee was made up of three members, two of whom were independent. Management could attend meetings, by invitation. The internal audit representatives, the Board Chairperson and the AG also attended the meetings. The AG's office had unlimited access to the Committee. The Committee Charter, reviewed annually, directed the BARC. It sat four times a year.

The key responsibility of the BARC was to ensure that the internal controls were in place, adequate and effective. This Committee would look at the whole combined assurance model, where risk was dealt with at different levels. Management implemented internal controls as the first line of defence. BARC then monitored effectiveness of its controls throughout the year. Internal and external audits would feed into a report that was scrutinised by BARC. Any remedial action that was necessary was then taken.

Mr Boqo noted that there were three main findings by the AG that were being addressed by the Committee. The BARC had to ensure that the final figures in the financial statements were correct. This was achieved by making some adjustments, and although this was done, it had not been done within the necessary deadlines. The second matter raised by the AG related to an interpretation of whether some aspects of the income could be offset. This was dealt through by interaction between the AG and management. The third aspects related to the fact that certain controls were not adequate, and this had now been addressed by corrective measures.

Mr Boqo made the point that all audits were sample-based, as confirmed in the Audit Report, so it was not a question of looking at every single entry. The main point was to ensure that the errors and deficiencies were corrected and that there was no recurrence. The challenges were followed up, on a daily basis, by the Internal Audit Unit, and were reported upon, on a quarterly basis to the BARC. He confirmed that the findings by the AG were a fair representation.

Mr K Moloto (ANC) sought clarity on whether Ms Mabuza was still the Acting Chief Executive Officer of the CEF.

Mr Cooper replied that she was, but her doctor had advised her not to travel.

Mr Moloto said that this raised some governance issues. She had been appointed as a non-executive director. Whilst he accepted the decision of the Board to appoint her as the Acting Chief Executive Officer, until a permanent replacement was found, the Board should be aware of the fact that when she returned to her non-executive position as a Director, a junior official might scrutinise some of her work, and she may take exception to this.

Mr Rias Jawoodeen, Director, CEF, agreed that this was a potential risk but said that the Board had faced a crisis. Other Board members would ensure objectivity and good governance. Interviews had been conducted, and the situation would be corrected as soon as possible.

Mr Moloto commented that CEF would struggle to survive if PetroSA were to stop financing the entity. The CEF derived a lot of cash from interest earned on money that was made available by PetroSA. He said CEF needed to think through what might happen if PetroSA was moved into another department, as that would create financial instability for the CEF.

Mr Jawoodeen agreed that PetroSA was CEF's largest financing entity. However the kind of demands that Government put on CEF to ensure security of supply meant CEF had to have a well-positioned balance sheet. The necessary infrastructural developments were capital intensive. He agreed, however, that CEF would have to give further thought to the position.

Mr Jawoodeen explained that there were challenges on the security supply side. Products could be brought in, but there was limited space to store. Tanks were being cleared out every 18 hours, in some of the depots, and this was the basis of PetroSA purchases. He said this question was not clearly addressed on the previous day. In essence, it was necessary to look at how synergies could be achieved between bringing the necessary capital whilst reducing the burden on the fiscus. It was important that the Board must be clear on what it was bringing to the table, before asking for Government assistance.

There were other competing financial priorities, in other sectors. PetroSA was indeed the largest funding subsidiary, and would remain so, because of the kind of projects in which it was involved. The second largest subsidiary was the Strategic Fuel Fund (SFF), which concentrated on security of supply. A move away from PetroSA would have to be carefully thought through, taking into account the realities around security of supply, and where the fuel company might be best placed.

Mr Moloto pointed that there was a project undertaken in Cradock, on bio-fuels, that was not reported in the Annual Report. He asked for further clarity on that, particularly in the context of what was reported in the media.

Mr Moloto also wanted more clarity on the challenges with the Maseru project, and asked what CEF intended to do to ensure mass rollout of the project, and also to ensure reduced prices to the benefactors.

Mr J Smalle (DA) wanted to know the plans to accelerate the bio-fuels initiatives and the values that the country looked to bring into the energy mix.

Mr Jawoodeen replied that there were challenges both with the Cradock project as well as other bio-fuel projects. The main issue was that the projects must be shown to be economically viable before a lot of money was invested into them. If better value were to be found in a food pool, then there was no necessity to pursue the fuel pool. The other problem with bio-fuels was that the plants might not be grown where the end product was needed, and the challenges around transporting the products to their eventual destination for a fuel mix must also be taken into account. In South Africa, the fuel mix could only be up to around 5% as anything more than that would cause problems for the motor industry. South Africa’s market was far too small to deal with two car pools; one for export and one for domestic usage, and it was not a self-contained market, as was the case in Brazil, United States, Russia or China. Those markets did not care what kind of policies implemented, because they could absorb the pressure and still survive.

Another problem around bio-fuels was water cleanage. Much more planning was needed on the concepts before any pronouncements could be made as to how the projects would move forward. Bio-fuels made economic sense, particularly given the current pricing of crude oils. However, there were a number of other issues that needed to be overcome.

Mr Moloto said the recurrent areas of non-compliance with South African Revenue Service (SARS) and paying on time needed to be looked into, to avoid repeat findings by the AG.

Mr Smalle wanted to know what informed CEF's policy to give out inter-departmental loans.

Mr Smalle enquired if CEF looked at future bills when it passed the amounts to subsidiaries. He had asked this because CEF had apparently been willing to write -off over R2.5 billion of bad investments done through PetroSA.

Mr Smalle said it was clear that revenue increases were mainly due to crude oil prices and wondered if South Africa was trading, or hedging.

Mr Jawoodeen replied that when the crude oil prices went up, they helped CEF, because it meant the product base score went up, and the cash flow improved. However, other factors also came into play, including the rand/dollar exchange rate. If the rand strengthened, less dollars were brought in.

Mr Smalle sought clarity on whether the Brass Exploration sale had been done. He said he understood that litigation was pending, but the Committee needed to understand how that had been dealt with.

Mr Jawoodeen replied that the reason that exploration outside of the country was sought was because SA's import cost for crude oil was far too high. The only way to balance that was to have barrels on the books. Exploration often involved very high costs. He noted that there was a legal process ongoing on the Brass Exploration matters, and numbers for that were contained in the Annual Report.

Mr L Greyling (ID) commented that it was unfortunate that the CEF found itself in the same position as last year. He appreciated that it was difficult for CEF to do all of its work and it was involved in many things that it should not be doing. Unfortunately the repositioning plan – one of the main targets – was not achieved, and that stifled the debate around the areas in which CEF needed to improve on. He asked when that plan would be ready for a proper debate in Parliament.

Mr Jawoodeen replied that the bio-fuels mix into the energy plan depended on two things. Firstly, one of the projects had to be brought off the ground and made to work successfully.  Secondly there should not be attachment of corollary projects to some of the projects that the CEF was looking at. The energy mix could not be more than 5%.

Mr Greyling said the Presidential Review on the State Owned Enterprises (SOEs) should give guidance as to the markets where CEF should be focusing. He asked if CEF had any preliminary thoughts as to where it should focus, when it came to repositioning, and from what areas it should be exiting. He reiterated that CEF was too stretched and this could not continue as it was not getting value for money. Clearly it needed to start looking at how to streamline all of these activities.

Mr Jawoodeen replied that was planning around the future, and the new structure reflected that. The starting point had been for the internal re-organisation to work on hydrocarbon and renewables, because the country needed them both. The Board was looking at what could be brought to the table, before resorting to government assistance in future. CEF needed economies of scale, which was currently lacking. If there were to be multiple biomass projects, the CEF could start to resolve challenges.

Mr E Lucas (IFP) asked when the Darling Wind Farm would come to an end.

The Chairperson commended the work by CEF to try and restructure itself. However, he too wanted to know initial reactions to the possible restructuring.

The Chairperson said he was concerned about the African Exploration (AE), an initiative endorsed by the President. He asked if were plans as to how AE would stand on its own. The project had taken R49 million out of CEF coffers. It was discomforting that this amount of money would be made available for such a project, without qualification. He would have thought that there would be recommendations on how this project could be brought to a natural end. These were initiatives and activities that should have been concluded in the current financial year.

Mr Jawoodeen replied that AE would give a full report on the issue. The CEF's board had set up a committee to look at how the transfer of the functions could occur, and the financial implications. All these initiatives, including the IGas, had implications on the CEF's balance sheet. Thought had been given to the movement of these entities. The solution proposed for IGas would not be the same as the one proposed for AE.

He agreed that AE had to leave CEF in a strong position, with a strong balance sheet. The exact methods for this could occur over a period of time, when both parties were not under stress at the same time. This was not an easy matter, but the process had commenced, and updates would be reported to the Committee, as the process unfolded.

Mr Jawoodeen said there was another process to look at the future of the CEF, what subsidiaries it had and would have, and financial implications. He reminded the Committee that CEF dealt in hydrocarbon, and renewables and clean energy. These were critical to its role.

Mr Jawoodeen noted that AE must also ensure that it took over the daily functions of its mining operations, thereby reducing reliance on contractors. AE was a new company, and would answer on some of these issues when making a presentation, but it must be remembered that it had also started to look at other projects, on which the Committee would be kept informed. There was no shortage of projects in which AE could become involved, but the question was how to strengthen the capital resources to make the projects happen. AE needed to move away from focusing on only one mineral. There were many more mineral resources that South Africa should pursue to meet the strategic developmental goals of government. AE management could answer the rest of the questions themselves.

The Chairperson commented that he understood the points on the audit findings, but stressed that the Board Audit Committees had to be very vigorous in ensuring that the findings were remedied. His understanding of the role of the Audit Committee, and the internal audit, was that they must be proactive and pre-emptive. CEF was a complex institution, and there had to be verification and evidence of corrective measures.

The Chairperson was concerned at the number of audit findings in relation to the subsidiaries, which included that irregular and wasteful expenditure had increased. He would have preferred to hear how the BARC had dealt with that, given that it was a Risk Committee as well. He wanted to hear how the Committee had tightened risk analysis and mitigation at CEF. Last year it was stated that CEF had a high failure rate of projects, which meant that very strong risk strategies and plans were needed.

Mr Jawoodeen replied that the Board was very concerned with compliance issues. He commented that compliance with regulations was imperative. All subsidiaries had been called in to a strategic workshop around the findings of the AG. The Board was not pleased with any of the findings. The BARC was involved in the process, and was instituting processes to ensure that these findings would not recur.

He pleaded with the Committee to pay special attention on the CEF because its procurement and spending would increase dramatically. There would be a lot of infrastructural projects going on, and the CEF would need to be advised and assisted, especially when it struggled with some of the small compliance issues. Another workshop and a second strategic meeting would be held, as compliance would be an integral part of the CEF subsidiaries. This was not an aspect that could be ignored, and it was essential to ensure that subsidiaries simply implemented the regulations and guidelines.

The Chairperson asked if the BARC had engaged with Audit Committees in the subsidiaries, as it would have been ideal for CEF to have shared performance information on projects that were not administered by any of the subsidiaries.

Mr Boqo replied that there was a robust audit process. Many new developments were put in place. There was an operational structure that would ensure that CEF Board and management were in touch with what was happening at the subsidiaries. On a quarterly basis, the subsidiaries’ own audit committees’ reports were coordinated and key common issues were isolated. A single report on issues affecting the whole Group would be compiled for the Board, followed by a thorough correction process. One of the common findings was the result of CEF playing an administrative role at all the entities. If something erroneous occurred at CEF it was likely that it would appear at all entities.

Mr Smalle asked what oversight role CEF played over its subsidiaries. He requested that a special focus be given to accountability on internal loans given to entities.

Mr Smalle noted that only projects were described in the Annual Report as being in dire straits. However, other projects like the African Exploration had been operating at a loss for the past four years, and were not mentioned. He asked if CEF believed that projects would be able to start making returns on investments.

Mr Jawoodeen replied that some of the losses that people reported concerned venture capital for new projects. The Public Finance Management Act (PFMA) did not allow the CEF to look at venture capital for new businesses. CEF undertook feasibility studies, and it saved a lot of money when it was seen, at an early stage, that something did not work. The kind of technical expertise required to make the feasibility studies work could easily reach about a R100 million. However, the lack of venture capital meant that CEF appeared inefficient when it came to Parliament.

Mr Jawoodeen added that there were Boards in different subsidiaries and CEF Board could exercise a certain level of authority in terms of oversight. A large part of oversight took place when there was a requirement for a Section 54 approval to go to the Minister. This approval was already an indication of the extent of the project. However, he understood the Member to be suggesting that CEF needed to have a level of oversight akin to running a tight commercial-level ship, as many projects were intended to meet development needs. Some subcommittees had been activated and restructured at the Board, which would allow members of the CEF board to attend meetings at some subsidiaries, to get control over the details. In this industry everything worked according to detail.

The Chairperson asked for clarity on fluorescent lights, the challenges they raised, and if there were more markets and support. He said there was at one stage a plan to re-negotiate the tariff on the Darling Wind Farm with the City of Cape Town, and asked for an update.

Mr Jawoodeen replied it was still too early for the Board to see what kind of things it needed to do to enhance value, and to achieve the economic scales that would make the Maseru project work as expected. He did not dispute the vision, but the Maseru Project had to be shown as affordable, otherwise neither the developmental nor profitability mandates would be met. This project was being reviewed.

CEF Board Chairperson comments
Ms Sankie Mthembi-Mahanyele, Chairperson, CEF Board, commented that CEF and the AG had an open-door arrangement, which helped to address issues timeously. The last strategic session was the culmination of that exercise.

She explained that the write-offs and fruitless expenditure were part of addressing the structural problems in having the CEF as a holding company, although the linking mechanisms with subsidiaries were not entirely successful. This exercise had been done to try to find a way out of the situation.

The new Companies Act requirements had to be met, but there also had to be consideration given to what improvements could be made. In the new structure, experts would be focusing on specific areas. Subsidiaries would be working with the CEF team, and this should help to reduce the losses.

In answer to earlier questions about the position of the Acting CEO, Ms Mthembi-Mahanyele said that she would come back to the Board on any major decisions that might impact on governance issues. She reiterated that she had been appointed to this position because of the position in which the Board found itself. The vacancies in the Group were being effectively addressed, and interviews were being conducted.

Ms Mthembi-Mahanyele said the risks had motivated the board to find a way of working that would ensure that it did not wait for board meetings before addressing issues. The hiring of the AE was work in progress. Policy considerations were addressed at the national level between DoE and DMR. At administrative level, at CEF the process of hiring had been initiated. The communication to address issues of finance and continuation with some of the projects would take place. All of these issues were being addressed also at the national level.

Central Energy Fund Subsidiaries’ briefings on 2012 Annual Reports
Strategic Fuel Fund (SFF)
Ms L Makatini, Acting Chief Executive Officer, Strategic Fuel Fund, presented the report for the Strategic Fuel Fund (SFF), a subsidiary of Central Energy Fund (CEF), She reported that the net profit for the accounting year was R390.2 million, down by 10% from earnings in the previous year. The crude oil market experienced volatility, resulting in a significant drop in storage rental income.
The Minister of Energy had authorised the acquisition of diesel for the National Multi Product Pipeline (NMPP) and 154 744 400 litres of diesel was acquired, valued at R1.049 billion. The stock was being managed by Transnet, and processes were put in place for quarterly checks on the quality and quantity of this strategic stock. The Minister eventually recognised SFF as a State agent, and it was accordingly exempted from VAT and Income Tax in terms of section 10(1)(c) of the Income Tax Act.

In this financial year, SFF showed i
rregular expenditure amounting to R48 million, accrued as a result of unapproved expenses, non-adherence to quotation requirements, payments on expired contracts, payments to service providers who lacked valid tax certificate, quotation processes that did not comply with appropriate approval, unapproved supplies and deviation from tender processes without due motivation or necessary approval to deviate. However, the bulk of the irregular expenditure was incurred on actual services, that were acquired and had value, so the question was rather that due process was not followed. Other flaws occurred as a result of miscommunication regarding what policies were applicable, or because of failure of individual managers to comply. SFF undertook to hold Managers accountable for flaws, and identify areas of policy misalignment so they could be corrected. In relation to procurement issues, SFF completed its forensic audit to identify what happened, and Managers would be held accountable. The procurement system was also tightened.

The Auditor General (AG) had made findings around inconsistencies between procurement policy and procurement procedures. An in-house legal person was given responsibility for contract management, to ensure compliance with all contractual obligations. SFF was also working to ensure that IT provided the appropriate services and to close identified gaps, including those in human resources.

The strategic stock was at 10.3 million barrels, in line with policy. The Department of Energy (DoE or the Department) was reviewing the policy and this could affect the amount and type of crude oil that would be stored. SFF would respond to changes that may be directed by the Minister. To fulfil its strategic goals, SFF identified the need to fund infrastructure development and the purchase of additional crude oil as may be required. To meet the 10.3 billion barrels of crude, an additional 1 million barrels were required in the pipeline system. The only available storage facilities were in Western Cape, at Milnerton and Saldanha, both of which were in one province. There was need to look inland at Durban and Gauteng as places for additional storage facilities.

There had been some
concerns about Black Economic Empowerment (BEE) participation in storage facilities. When storage tanks were available, SFF would, as a practice, issue Request for Proposals (RFP). This gave members of the public equal opportunities to access storage facilities. BEE entities were given adequate consideration, but it was observed that they had challenges with securing the crude, and with storage and holding costs. SFF worked with BEE companies on the issue and offered advice where possible. However, SFF’s main focus was on keeping the facilities for the time and costs that were required. As part of BEE, 30 women were trained on oil and trading and other related issues. The effort would continue and trainees would be followed up, to see how they had benefited from their training.

SFF rented out excess storage facilities and used the rent income to fund its mandate. SFF was in the process of reviewing, refurbishing and maximising the empty storage facility at Milnerton. The facility regained its status as a national key point. However, the pipe line that connected Milnerton to Saldanha was a one-way pipeline that belonged to Chevron. Crude delivered at Saldanha could only flow to Milnerton to then be forwarded to the Chevron refinery. Crude oil stored at Milnerton for purposes other than Chevron’s could not be reversed back to Saldanha or the ship. It would maximise this facility if there was capacity created to reverse crude oil, and facilitate third party usage and a proposal on this was being considered.

African Exploration Mining and Finance Corporation (SOC) Ltd (AE)
Mr Sizwe Madondo, Chief Executive Officer, African Exploration Mining and Finance Corporation (AE) presented the Annual Report, and noted that AE’s commitments were focused on prioritising the supply of thermal coal to Eskom to secure energy supply. It also created jobs for local residents, with about 80% of AE’s employees being recruited from the nearest townships. AE was also setting examples in good environmental responsibility and labour practices. It supported the State’s drive to promote skills.

AE set out its specific achievements, as at September 2012. These included 1.7 million tons of coal mined, of which 1.5 million tons was sold. 256 job opportunities were created during the year, of which 54 related directly to AE, with the rest employed by AE’s contractors. Five people benefited from bursaries, two being engineering bursaries, and there were three internships in safety, administration and geology. More bursaries would be awarded by year end.

The off-take agreement for Kusile Power Station was being finalised. AE was speaking to Eskom to secure the off-take agreement on another project. Production and sales were beyond estimated volumes and mining safety was preserved. The state owned mine was self-sustaining. AE had received a clean audit from the Auditor-General. The situation on last year’s losses had improved significantly. AE had achieved almost fully on its investments.

Challenges included delays in the processing of mining rights and industrial actions. The major challenge, from a practical point of view, was that at the end of the year, AE was insolvent and required significant funding to drive growth. It had incurred a R49 million loss. Mr Madondo reminded the Members that operations commenced in the second half of the previous year, and the off-take agreement with Eskom was concluded in December. Effectively, operations had lasted for only four months after the Eskom off-take. AE’s total liability of R306 million exceeded its total assets of R210 million. The question of AE’s insolvency was being deliberated by the leadership. There was no funding plan for the future, but the matter was being discussed with the National Treasury. However, without an appropriation, National Treasury would not fund AE. The Treasury took AE through processes for securing funding.

A net profit of R64 million was made in August 2012, although the project net profit, for the six months up to September was R70 million. For the whole of the 2012/13 financial year, a net profit of R100 million or more was estimated, as against the initial projections, and this represented a huge turnaround from a negative of R48 million.

AE’s vision was to be among the top five producers of coal, limestone, lithium, uranium, and thorium and rare earth elements. It already had prospecting rights for some of these. A number of projects were being looked at. The Vlakfontein mine was already operational. Phase 1 had been completed and 1.6 million tons of coal was projected. The net income in the second quarter was R68 million, but the projected annual turnover was R270 million. Phase 2 of the project was in progress, and the plan was to double capacity to about 3 million tonnes, basically doubling AE’s net income. The T-Project employed 1 000 people and it was estimated that 3.6 million would be sold to Eskom. Production should start in 2016. Other projects included the Springbok Flats, Limpopo Coal, Witbank and Carolina Coal, and Limpopo PGMs.

Petroleum Agency SA (PASA)
Ms Olivia Mans, Chief Financial Officer, Petroleum Agency of South Africa, reported that this Agency (PASA) had received an unqualified audit report on matters of financial performance and performance management, with no matters of emphasis. Income was up by R26 million from the last financial year. Operating expenditure was below what it was in 2011. Actual operating costs were kept in line with the previous year, due to targeted efforts in PASA to maintain and reduce costs. In 2011, R13 million was provided for the Continental Shelf project, for which funding was uncertain. This uncertainty had since been clarified and the R13 million provision was reversed. PASA’s total assets and financial position had improved on the position in the previous financial year. The cash position improved significantly. Despite the challenges of PASA in finalizing the way forward, the good financial performance in this year enabled an extension of the reserves to cover operations for another financial year.

The Acting Chief Executive Officer of PASA gave the report on corporate performance. There was a very high percentage of acreage under licence or permit. Exhibits and presentations had been given at national and international forums, and PASA participated in the shale gas task team. Because much of the acreage had been taken, there was increased focus on resource evaluation and technical understanding of basin evolution.
Increased interest in unconventional oil, and gas onshore, forced the present focus on capacity building. Two years ago, offshore resources, mainly the West Coast and South Coast and a portion of the East Coast were taken, and at the moment basically all the offshore acreage was already taken, or was under application. There was huge interest in biogenic gas, and recently in shale gas. Though this was a good development, it presented challenges around gathering and analysing data, both for promotional and regulation purposes.

The extended Continental Shelf claim was submitted to the United Nations. PASA was still waiting for the Commission to assign a sub-commission to analyse its submission and determine whether South Africa would receive the extra acreage for which it had applied. When making the submission, the right was reserved to go up the ridge to claim the extra acreage. Necessary data was collated and analysis was completed. PASA was waiting for France to submit its own submission for the east part of the Shelf that belonged to France.

PASA had excelled on all its targets and most of the applications were processed within the time frames. PASA continued to monitor and enforce compliance with the industry legislation.

There were applications from Shell and Falcon Oil and Gas to convert Technical Cooperation Permits (TCPs) to Exploration Rights. A moratorium on new applications was put in place to allow for a structured licensing process rather than an open-door process. After that, Cabinet had put another layer on the moratorium, until there was a decision on fracking, and this would put the previously-submitted applications on hold. There was a lively debate on fracking and horizontal drilling, but PASA maintained its intention to be objective and focused on its mandate.

There was massive interest in PASA’s on and offshore data and R30 million was made from data sales last year. Five internships were given and PASA promoted science in schools and tertiary institutions. It administered bursaries, and participated in Habitat for Humanity.

Some concerns had been raised in the last year, about PASA being both a referee and a player in the industry. This had been the case with SOEKOR. PASA had since separated from SOEKOR, so that it would no longer be in this position.
PASA’s promotional functions of were accepted as good industry practice.

Mr Petrus Fusi, Chairperson, PASA, added that the separation of PASA from SOEKOR followed a sound Norwegian model. The issue of conflict was clarified with the adoption of that model. The current status of PASA was a best practice that should be preserved. The challenge in future would be how to manage PASA and another subsidiary of CEF in the same group. A lot of checks were put in place to ensure that there were no compromises.

Oil Pollution Control (OPC) Unit

The Chairperson asked why there was no report from the Oil Pollution Control (OPC) unit

Mr Chris Cooper, Corporate Planner, CEF, replied that OPC had ceased to be an independent unit. It now functioned within, and was reporting through SFF.

The Chairperson said that was understood, but a report was still required for the period under review, for work done by the OPC before it was subsumed under SFF.

Dr Sankie Mthembi-Mahanyele, CEF Group Chairperson, responded that when the Board had looked at the OPC operations, it became clear that OPC was conducting projects that were related to SFF activities. The staff complement at OPC did not have much work to do, outside the SFF activities, and thus the decision to separate these two structures was revisited, and the result was that OPC was brought back under SFF, with the staff simply being absorbed into the SFF structure and continuing to operate in their area of expertise.

The Chairperson said that preparation of a report would have been appropriate, more so in view of the unique function the unit played.

IGas (Pty) Ltd

Mr Chris Cooper presented the report for IGas. The fair value of the company was estimated at R1.93 billion. Cash at hand was R104 million. The company was established by a Cabinet resolution in 2000 to have a hydrocarbon gas development company for South Africa. The major financial issue was that it acquired a loan from CEF, which it was repaying. From the performance point of view, the IGas kept focus on its seven objectives and progress was made on all fronts.

South African Supplier Development Agency (SASDA)
Mr Lunga Saki, Acting Chief Executive Officer, South African Supplier Development Agency, described the Agency (SASDA) as a non-profit entity. Its only assets were furniture and computer equipment. It had a loan of R40 million from the holding company and an accumulated loss, as a result of which no taxes were being paid. The Minister had directed CEF to fund SASDA until such time that the Department of Energy determined a long term strategy to fund the organisation. The position lent itself to going concerns for the management of SASDA and the Board, in relation to the existing liabilities. Hopefully, ongoing discussions between the SASDA Board, CEF Board and the Department would resolve the situation as soon as possible.

SASDA had achieved R2.7 million out of an estimated revenue target of R15 million. A unit was established to earn revenue by doing verifications, but accreditation of that unit took 18 months. It had had only two months left in the financial year to actually do the work, which explained why the targets were not achieved. However, the savings on operating costs amounted to R10 million, which was attributable to the delays in the project.

SASDA had five objectives: namely, to undertake supplier development initiatives, establish SASDA as a supplier developer of choice, develop existing and new suppliers with participating State Owned Enterprises (SOEs), develop existing and new suppliers with participating oil companies, and operate a sustainable verification unit. The outputs on the first objective were met and training programmes would be commencing in the new financial year. IN relation to the establishment of SASDA as a supplier developer, there had been discussions with PetroSA that SASDA should take over the supply development initiatives of PetroSA, leaving the latter to concentrate on its core functions, but this had not yet been concluded. SOEs had given commitments that they would develop 15 companies but that had also not happened. SASDA was at pains to persuade SOEs to keep to their commitments. Oil companies pledged 50 companies, with an approved budget and plan. They had delivered on 44 companies that were now under SASDA’s supply development. The verification unit was approved by South African National Accreditation of Standards (SANAS) and it had two months to operate.

There were two findings by the AG on the financial reporting of SASDA, relating to the completeness of revenue and invoices. They were corrected by June 2012. Incomplete employee files and the suppliers’ list that was not updated were corrected before the financial statements were signed. Issues about differences regarding payment schedules and completeness of intangibles, in terms of representations to the International Faculty of Finance, were resolved by August 2012. The Company Secretary was resolving the problem of deviations from the requirement of the new Companies Act that Audit Committee members be Board members. There was a group-wide issue about performance against objectives. The Corporate Planner indicated that those issues would be reviewed to ensure compliance with AG’s findings.

Mr J Smalle (DA) said attention had to be focused on where South Africa was headed with its energy mix, and how it intended to grow markets in South Africa, SADC and East Africa. He noted that PetroSA was trying to take up 25% stakes in South Africa, and there was a need to extend into regional markets, and asked SFF if there were enough storage capacities to venture into those markets, not just for crude oil but also for bitumen. He also asked if the price for storage facilities in Saldanha and Milnerton was being regulated or whether it could it be exploited. Given that the petroleum industry had a dynamic pricing system in place, he wondered how storage pricing came into play.

Mr Smalle asked, in relation to PASA, how its resource evaluation was conducted, and how this would be done when PetroSA would, for instance, go into Guinea or Egypt. He questioned whether the resource evaluation benchmark was too high. He also enquired how losses were being cut, and if there were checks and balances in place to safeguard against wrong investments, to venture into more profitable ventures or to minimise losses.

Mr Smalle referred to the gas finds along the coast and the discussions regarding possible shareholdings and prospective negotiations, and asked if there were negotiations to ensure that South African companies were involved in potential shareholdings. While it was true that PetroSA owned some of the shareholding, it was necessary to ensure that total blocks were not signed off to foreign companies, giving them more leverage to determine market prices. He also wondered if there was some sort of hold for South Africa in consequence of losing investors to other data sources.

Mr Smalle questioned whether AE was not faced with a conflict of interest, in view of its status as a state entity that received a prospecting license from Department of Mineral Resources, whilst also negotiating deals with Eskom. He asked how transparent these deals were, and whether the playing field would be leveled in respect of any third party who wanted to compete. If not, the Committee might need to look at regulating the issue. He cautioned that government should not be only looking after government while failing to look after businesses.

The Chairperson said the question was relevant, and there was indeed a need to look at the reality. However, he was not entirely happy with the insinuation that there might be conflict of interest, as he supposed that the Department of Mineral Resources would be guided by set procedures and regulations when it looked at applications, and would be examining the processes critically. If there was anything inappropriate he had no doubt that the mining community would have expressed its concerns.

Mr Smalle referred to AE’s loan from the CEF, that was subordinated in order to pay other credits. He wanted to know what had informed the decision, and for how long it applied. He also questioned why, in circumstances where a company had failed to break even for three years, and had even had to borrow money, performance bonuses were nonetheless paid.

Mr L Greyling (ID) wanted explanations for irregular expenditure, and the actions that were taken against those involved.

Mr Greyling referred to allegations around leakage at one of the fuel depots where crude oil was stored, and asked if indeed crude oil was still stored there, if there were any known instances of it leaking into the groundwater systems and, if so, what had been done.

Mr Greyling wanted to know why the remuneration and management fees were shown as having almost doubled in the past year.

Mr Greyling also wanted to know if the strategic fuel plan mandate extended to bitumen. He pointed out that severe shortages of bitumen were hampering infrastructural programmes in Cape Town, and advised that consideration should be given to creating storage capacities to import bitumen, if South Africa’s refineries were not producing enough.

Mr Greyling commented that in regard to IGas, there were no developments in relation to the infrastructural investments were needed to capitalise on the massive gas pipeline in Southern Africa. A report presented to the Committee on the previous day showed that there was research into this, but there was no clarity on what Agency had responsibility for this. He asked if any comprehensive studies were undertaken to look into the kind of infrastructural investments that would be required to take the pipelines on board. He emphasised the need to begin debating the issues and investment potential as a matter of urgency.

Mr Greyling asked if all proper procedures were followed when hiring the new Chief Executive Officer and other management positions at SFF.
The Chairperson asked for a brief written report on all CEF appointments.

Mr Smalle noted that the two different types of crude oil were being stored in the strategic fuel stock, in equal amounts, even though South African refineries were better suited to one type than the other. He wondered why the capacity of the refineries was not reflecting what was stored, and asked for the acceptable strategic level for South Africa, and how this level would be managed.

Ms Makatini replied to the questions directed at SFF. In regard to questions on bitumen, she said that although SFF’s mandate was to store crude oil, it also explored storage of what it regarded as strategic crude. SFF now stored white products as strategic crude, because it paid R1.4 billion for the diesel line. By implication, SFF was, for the first time, moving away from just storing crude oil. It was also considering how the Milnerton Tank Farm could be converted to multi-usage for other products. These were pro-active measures that SFF believed it should take. The issue of bitumen and its technical feasibilities, including the changes that would have to be made to the Milnerton Tank Farm, were well understood by the SFF Board, whose findings were presented to CEF.

Ms Makatini responded to questions around prices by saying that the storage price was regulated by the market, which would determine whether to store, or sell crude oil. She reiterated that when a tank was available, SFF would advertise a Request for Proposals (RFP) and negotiate the best price for storage. The “best price” would vary, depending on market factors.
Ms Makatini believed that the question on irregular expenditure was addressed in the presentation.

Ms Makatini responded to Mr Greyling’s question on the allegations about one facility by saying that SFF was once responsible for the entity, but it was handled by OPC. The management at the facility was specifically concerned with avoiding leakages that could go into the groundwater system. No accidents resulting in leakages had occurred. Regular checks were done, and the mining close by was being monitored to ensure there was no contamination from there. There had been a presence on site for eight months, to develop a report on how best to monitor the situation, and mitigate potential risk. The water was regularly pumped and the oil levels were checked. There was some oil in the water, but a company was currently on site to take out the oil. Furthermore, the Board asked SFF to find a holistic solution that would do away with this environmental liability.

The Chairperson asked if there were regulatory authorities at the Department of Environmental Affairs or Department of Water Affairs who had oversight over the environmental issues.

Ms Makatini replied that SFF was working closely with both the Department of Water Affairs and Department of Mineral Resources. The two allowed SFF to regulate the space within which the disturbances occurred. The Department of Environmental Affairs also oversaw the reports that SFF produced, but ultimately the responsibility lay with SFF.

Mr Smalle requested a report that gave an analysis of the risk, how much oil was in the water, the levels it could reach and how would be cleaned up.

Ms Makatini replied that it was not possible to tell how much oil was left in the water, but the water levels could be checked for contamination and subsequently drained. However, the report would reveal the trend in changing water levels.

Mr Webster Fanadzo, Acting Chief Financial Officer, CEF, responded to the question on why the auditor’s fees had doubled, explaining that this was due to an increase in the scope of the audit. He explained also that crude oil for the pipeline was purchased during the reporting period, and there were extended discussions with the auditors over the ownership of the stock at year end. Many procurement issues raised regarding SFF also prolonged the discussions with the auditors.

Mr R Jawoodeen, Director, CEF, also responded to the question on the type of crude held in the storage facilities. He said South African refineries were designed to run optimally on Middle Eastern crude, specifically uranium. However, no refinery in the world ran on one grade at any one time. There would always be a mix that went into the refinery. Bonny Light alone would not produce lubricants unless it is combined with Basrah crude. This was the reason both crudes were used in South African refineries. Whether South Africa should stock bigger storage volumes of crude - and what those new volumes should be – were questions that were being considered. The biggest driver of that decision would be the octane levels those crudes produced. Ultimately, government would still determine how much crude would be stored. In relation to the extracts, Mr Jawoodeen said that some crude could be processed if it was not in a carbonated form.

The Acting Chief Executive Officer of  PASA replied to questions regarding resource evaluation. Because of its mandate, PASA’s resource evaluation, regulation and promotional activities were limited to South Africa. As a regulator, it would be a conflict of interest should it assist PetroSA.  There were laws and regulations that guided the involvement of entities in exploration, and these reserved 10% for state participation – which went to PetroSA - and a further 10% for BEE companies. PASA’s licenses were executed with that in mind. He agreed that there was a backlog. 10 000 square kilometers of 3D had to be analysed by one staff member, and there was much strain on PASA’s human resources. However, the resource evaluation was for promotional activities, and was for the State.

Mr Fanadzo spoke to the issue of the soft loan, engagement with CEF and subordination. There was a loan agreement between AE and CEF, and this was reviewed on annual process. Discussions were under way on the issue.
The Chairperson asked whether there would be other loans to from CEF to AE.

Mr Jawoodeen replied that the project management committee and Board decided that projects that did not do well for one year must be brought back to the Board for re-evaluation. This was to instil accountability. Also, the loan agreements were well documented. A shareholders’ compact and a corporate plan were also in place. These offered a variety of steps of governance, to ensure checks and balances.

Mr Jawoodeen also responded to the questions regarding investment in comprehensive gas infrastructure, saying that IGas was part of a pipeline project that moved gas from Mozambique into South Africa. IGas’s shareholding in the pipeline company (SASOL) was 25%.  A project was under way for the expansion of the line. PetroSA was involved in other natural gas projects. However, the possibility of a regional approach to natural gas was being considered.

Ms Makatini added that that concern led the Minister of Energy to consolidate and streamline all efforts. IGas would be consolidated into PetroSA. Henceforth, gas would be addressed under PetroSA.

Ms N Mathibela (ANC) asked whether the 30 women trained were from the same group, project or company, or whether they were from different companies. She also wanted to know where the Habitat for Humanity projects took place.

The General Manager for Operations, CEF, replied that the women came from different small companies. The training was offered because of a concern that the companies brought up at an oil and gas conference last year, that they lacked capacity. Two of the participants came from PetroSA and another two were from the Department of Energy. The Chairperson of CEF was one of the trainees and the rest came from small companies operating in the oil space.

The Acting Chief Executive Officer of PASA also replied that Habitat for Humanity was run by a non-profit organisation, who had asked companies to release their employees for a week, to participate in building a house. PASA had been participating for three years.

The Chairperson said the reason for the meeting today was to provide the Committee with information that it needed for oversight and for helping to moving the sector forward. The presentations had indicated that there were attempts to restructure and turn around the sector. The Committee would look forward to CEF presentation of strategic plans in March 2013, when Members would expect to see an approved plan, a new vision and a new mandate that has the endorsement of the Department of Energy as well. For this reason, he would expect the DoE also to attend with CEF. He saw great potential to move out of the doldrums.

On the other hand, the Members had raised a number of concerns on which changes were needed. The issue of bitumen was important, and there were issues around fluctuations in oil prices and supply. IGas showed tremendous potential, going from 5% marketability to 20%. It was hoped that PetroSA would assume IGas’ role effectively. SASDA’s report was rather terse, and the Committee hoped to see a fuller and weightier report in future. He commented that supplier development was a very important tool but it still had to be developed. For instance, the focus now was on liquid fuels but the question was whether SASDA would be able to grow capacities for gas. There must be a better call for SASDA to exist. Players in the sector were complaining of suffocation, and that was why questions were asked about SFF’s storage practice. SASDA should be robust about ensuring supplier development. There must also be a turnaround for BEE.

The meeting was adjourned.


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