Audit outcomes of Department of Energy and entities for 2012/13

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed Members and representatives of the office of the Auditor-General of South Africa (AGSA) and Department of Performance Monitoring and Evaluation (DPME). He noted that Parliament was getting into the third leg of the Budget Review process, and that the five stages combined would be considered when the Committee compiled its report, which was to be presented to Cabinet. He stressed the importance of the various entities indicating in clear terms their levels of responsiveness to the recommendations of the Committee.

Department of Energy Audit outcomes: Auditor-General of South Africa SA (AGSA) briefing
Mr Carl Wessels, Senior Manager, Auditor-General of South Africa, explained that AGSA had a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, existed to strengthen South Africa’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence. The purpose of the briefing document was therefore to provide an overview of the audit outcomes and other findings in respect of the DoE and its entities for the 2012/13 financial year.

He summarised that, during the 2012/13 financial year, the DoE received funding totalling R6.7 billion for the following programmes:
• Administration R236 583 million
• Energy Policy and Planning R1.5 billion
• Energy Regulation R1.1 billion
• National electrification programme R3.1 billion
• Nuclear energy and regulation R646 883 million

As at 31 March 2013, the DoE disbursed transfer payments to the value of R6.28 billion, which represented 99.6% of the total budget allocation for the year, to public entities, municipalities and implementing agencies. Some of the major transfer payments were to the following entities:

-The South African National Energy Development Institute (SANEDI) : R56 million
-Energy and Efficiency and Demand Side Management (EEDSM) Eskom: R820 million
-EEDSM Municipalities: R200 million
-Nuclear Energy Corporation of South Africa (NECSA): R567 579 million
-Integrated National Electrification Programme (INEP) Eskom: R1.8 billion
-INEP Municipalities R1.1 billion

Mr Wessels said most of the DoE’s entities had received an unqualified audit opinion. The Equalisation Fund received a disclaimer, an adverse audit opinion, because its financial statements were not prepared in accordance with the requirements of Generally Recognised Accounting Practices, as applied in South Africa, and therefore the income and expenses were underestimated.

He highlighted some of the matters of concern cited in the audit report. Referring to paragraph 7 of the Directors’ report and note 46 to the financial statements, the Central Energy Fund (CEF) audit disclosed fruitless and wasteful, as well as irregular expenditure incurred.

SANEDI sustained material losses in the amount of R6.8 million as a result of impairments in the accounts receivables.

AGSA was increasingly concerned that Electricity Distribution Industry (EDI) Holdings’ financial statements were not being prepared properly, according to Note 1. There was also a claim against the entity by EOH Public Sector Consortium (EOH) for the recovery of damages allegedly suffered as a result of the termination of a consultancy agreement when the company ceased to conduct business as a going concern, at 31 March 2011. The claim amount was R936 502 million.

Mr Wessels explained that there were two investigations conducted by the DoE during the financial year, relating to employees allegedly having interests and /or performing remunerative work without approval. This was commonly referred to as ‘moonlighting’. National Energy Regulator South Africa (NERSA) also had two investigations conducted during the financial year, one related to possible irregularities in the supply chain management system, and one related to Employee costs.

In conclusion, AGSA concluded that the quality of the quarterly financial reporting needed to be improved through proper reviews of financial information by government structures, through internal audit.

Discussion
The Chairperson thanked AGSA for the presentation. He noted that whilst AGSA was speaking highly of the DoE’s own good levels of compliance, the same could not be said for the DoE’s entities. More supervision was needed. He asked about whether it seemed possible for the DoE to reach its 2014 target for universal access to energy

The Chairperson took note of the concern raised about the repetitions on non-compliance that ran over from previous years into the period under review. Most of the areas of non-compliance by DoE’s entities had not shown much improvement.

The Chairperson commented that the Equalisation Fund was very significant in determining the price of fuel, as it heavily influenced some of the major players in the petroleum sector. It was therefore a concern that AGSA had given the entity a qualified audit opinion and he asked for more clarity on what had happened.

The Chairperson commented that there appeared to be poor performance in relation to the financial performance and management, and this also resonated throughout the Department of Performance Monitoring and Evaluation presentations. He asked for comment from AGSA on this point.

Ms B Ferguson (ANC) asked whether employees were permitted to undertake other paid jobs, and she thought that the AGSA was indicating that the only problem with the current employees who were moonlighting was that this work was being done without permission.

Mr L Greyling (ID) wanted to know how moonlighting impacted on  the work of the DoE, and what kind of jobs these employees were undertaking.

The Chairperson said that the AGSA presentation indicated that ‘moonlighting’ was a serious concern, particularly when the DoE was already struggling to fill vacancies for significant skills shortages. He reiterated that moonlighting involved DoE employees holding other remunerative jobs, without the DoE’s consent.

Mr K Moloto (ANC) said the Chief Executive Officers (CEOs) of the DoE’s entities should be held accountable for non-compliance in the area of supply chain management. He asked that AGSA elaborate on whether members of the executive management could actually be appointed to be members of the Audit Committee. There was no risk management committee so as a result the risk register was not updated frequently. He wondered if board members were fully aware of the challenges faced with the register, and how they were tackling these.

Mr L Greyling (ID) thanked AGSA for the report. He commented that Members would need to direct many questions to the entities, but there seemed to be a lot of problems with the entities not meeting targets, and he asked if AGSA could indicate why, and whether this was related to skills shortages.

Mr Greyling asked why, for SANEDI, indicators were not well defined and who was responsible for setting these indicators. He questioned if there any role which the Committee could play when it came to setting targets and re-defining indicators.

Ms Ferguson agreed with her colleagues that non-compliance for supply chain management for the various DoE entities were too high.

Ms N Mathibela (ANC) asked about the composition of the boards for the different entities. She argued that if reporting was done on a quarterly basis, the work of both the entities and the DoE would be much lighter at year-end.

The Chairperson said risk management was a particular concern in the energy sector. He asked that AGSA give its views on the effectiveness of quarterly reporting, seeing that the rationale behind it was to build an early warning system. Improvements on reporting were needed, in order to ensure that there would be improved performance for the coming financial years. AGSA was invited to make a general comment on the matter. He reminded members that the Committee did not receive reports from DoE entities, but only from the DoE itself.

Mr Wessels replied to the question on risk management, and said it would be combined with the assurance model. Risk was always present, and could not be avoided, so all the different entities needed to be aware of all risks, in order to better manage them. In relation to the targets, he pointed out that if the targets were flawed then the reporting would also be flawed. Targets were pre-determined by management but they needed to be communicated well to every single employee. Quarterly reporting was therefore an internal tool used to ensure compliance. The Committee needed to remain well informed of all challenges the DoE faced with planning and targeting.

The Chairperson said the DoE had changed its organogram in the middle of the financial year, and this should have been communicated to the Committee. Members were surprised to see the changes.

Mr Wessels then moved on to respond on SANEDI. Here, he repeated that indicators were approved by management and they needed to be in line with the SMART principles. AGSA had a responsibility to ensure that these principles were relevant to the overall objectives of the DoE.

In response to discussions on moonlighting, Mr Wessels said that it was primarily undertaken by lower level employees. The policy was quite clear; other remunerative work could be undertaken, but only if permission was granted by the executive.

Mr Wessels noted, in relation to the audit committee, that the majority of the members needed to be external members, as they needed to be independent.

The principles for quarterly reporting were set by National Treasury (Treasury). He agreed that quarterly reporting was a tool for processing early warning systems. The current financial year did indeed have repetitions of concerns that had also arisen in the previous financial year, and the supply chain environment was a major cause for concern.

The Chairperson said ordinary reporting had a strong character of introducing early warning systems. He wondered if AGSA could foresee it contributing positively to results on performance.

Mr Wessels replied that the focus of the AGSA was not on assessing whether performance was improved, but rather to ensure that the pre-determined objectives set by the DoE were in line with the SMART principles, and that any other changes were communicated in time. Achieving targets was still a major concern.

Mr S Radebe (ANC) said that section 35(a) of the Public Finance Management Act (PFMA) required that the DoE should submit all documents to support proof of all purchases. From AGSA‘s report, it seemed that the DoE did not comply with this regulation. Section 85 of the PFMA stated that if the accounting officer did not comply with the regulations, that person would be prosecuted. He therefore asked how the DoE had dealt with such misconduct.

Mr Wessels replied that there were three areas which stood out for entities with regard to non-compliance. For DoE, these were a lack of consequences, an existing culture of misbehaviour, and slow response to findings by the DoE management.

The Chairperson said that there was a need to make more ongoing reference to the National Nuclear Regulator (NNR).

The Chairperson asked about the extent to which the framework was used to monitor transfers. He wondered how responsive the DoE was to recommendations made by the internal audit unit. Internal audits were more frequent, and closer to the DoE, than external auditors and internal audit should be picking up areas of concerns within the DoE, and was therefore better able to respond to early warning signals.

Mr Wessels replied that measurement of performance against pre-determined objectives was one area where entities had been encouraged to use their internal audit units, particularly where the unit had shown significant improvement over the years. In the case of DoE, management responded well to recommendations from internal audit, however timing was sometimes a concern. Internal audit units should therefore be approached before a final draft plan from the entity was handed out to stakeholders.

The Chairperson thanked AGSA for the presentation.

Department of Performance Monitoring and Evaluation (DPME), briefing on DoE progress on the outcomes
The Chairperson welcomed the team from the DPME, which had highly effective management tools.

Mr Mahesh Fakir, Outcome Facilitator: Infrastructure, DPME, introduced the team from DPME. He explained that the mandate of DMPE was established in 2010 by the President and Cabinet. The DPME was intended, amongst others, to:  

• facilitate the development of plans /delivery agreements for cross-cutting priorities or outcomes of government, and monitor and evaluate the implementation of these plans/delivery agreements
• monitor the performance of individual national and provincial government departments and municipalities
• promote good monitoring and evaluation practices in government
• provide support to delivery institutions to address blockages in delivery.

The overall progress of the DoE against the 2013/14 outcomes was shown. The following targets were met as planned, and were completed on schedule:
- The Long-term energy mix diversification to address the security of energy supply and requirements for renewable energy
- The restructuring of the Electricity Distribution Industry (EDI)

The following targets had progressed with activity but they were not on schedule:
- Regulatory and institutional structures were created for the introduction of viable Independent Power Producers (IPP) and to start the process  for the participation of IPPs in 2010
- A funding model for the Electricity Generation/build programme was developed to ensure security of supply
- Cost reflective tariffs were set, while cushioning the poor from increasing electricity costs
- Deploying renewable energy and promoting efficient energy use

The following targets were not met:
- Developing a funding and implementation plan and reducing the electricity distribution infrastructure maintenance backlogs of R27.4 billion, to R15 billion by 2014
- The 92% universal access target for household electrification by 2014
- Coal Haulage Logistics
- Increasing access to basic electricity

Mr Fakir took the Committee through some of the outputs and indicators in greater detail. A sub-output under the planning targets was to ensure reliable generation, distribution and transmission of energy, there was a target to “Create regulatory and institutional structures for the introduction of viable Independent Power Producers (IPPs) and start process for the participation of IPPs in 2010”. He noted that the Independent Systems Market Operator (ISMO) Bill, which was adopted by the Portfolio Committee on Energy in March 2013, had still not been approved. However, Independent Power Producer (IPP)- New generation capacity regulations under the Electricity Regulation Act have been promulgated. DPME believed that the DoE had shown significant progress in developing legislation, as well as in facilitating the participation of IPPs in the energy sector. Sustainability was likely to be achieved by the end of the term, but it was recognised that this would not be in full. 

The second sub-output was to “Develop a funding and implementation plan and reduce the electricity distribution infrastructure maintenance backlog of R27.4 billion (bn) to R15 bn by 2014”. The DoE’s progress, as at 1 October 2013/14, was that Cabinet had approved the Approach to Distribution Asset Management (ADAM). All metros had been mapped in respect of the status of their electricity distribution infrastructure and allocations had been made for seven municipalities and two metros. DPME noted, however, that actual rehabilitation of distribution infrastructure had not been reported. Municipalities were also using some electricity revenues for maintenance, while Nersa had made allocations from tariffs for maintenance.

With regard to achieving a 92% household electrification by 2014, the DoE had set a target to electrify 180 000 household and 500 schools. 10 000 solar electricity home systems were also installed, and 200 000 households were electrified through non-fiscal funding. The DoE connected 33 193 households to the Grid and 2 341 household to Non-Grid in the first quarter. 86.05% of households had access to electricity. DPME noted, however, that the 2014 target of 92% of households having access to electricity would not be met.

Good progress was made on developing a funding model for electricity generation, for securing much of the Integrated Resource Plans (IRP) for 2010, but much work still needed to be done on the nuclear build programme.

DoE had targets in relation to migrating Eskom coal from road to rail use, and its progress to date was that Eskom had completed Camden and Tutuka containerised coal terminals. The Majuba heavy-haul line project was now under way. Eskom planned to transport 12.2 million tonnes by rail in 2012/13 once the Tutuka rail facility was operating. DPME concluded that the target would not be met.

DPME noted that in regard to increasing the target for access to basic electricity, no details were provided by Department of Cooperative Governance and Traditional Affairs (COGTA) in its reports on bulk lines and substations. The target was therefore unlikely to be achieved.

Mr Fakir also tabled reports for the Committee on the three-year comparison, covering the periods 2010/11 up to 2012/13, together with financial data for the fourth quarter (see attached presentation).

Discussion
The Chairperson asked what the criteria were for linking a department to the DPME’s outcomes, and also wanted to know what role the DoE was supposed to be playing. He commented, in relation to the outcomes, that the DoE was actually supposed to ensure sustainable levels of energy, not of electricity. He therefore wanted to know what measures were being taken to maximise the use of non-electricity carriers, such as fossil fuels, and what were the outcomes for job creation in these areas.

The Chairperson asked why the restructuring of the electricity distribution industry was being conflated with setting up the EDI Holdings structure. He asked what had replaced EDI Holdings.

The Chairperson asked for more comment on the extent to which the DPME’s assessments penetrated within the DoE. He also asked how independent were these assessments, and how reliable was the information given to the DPME by the different entities. He thought more information was needed on the Special Infrastructure Programmes (SIPs).

Mr Greyling said the DoE’s sub-outcomes also needed to be looked at. The work of Parliament also needed to be assessed, especially pertaining to legislation, such as the recent ISMO Bill. It seemed that this Bill may not be passed by this Parliament, since it had been referred back to the Portfolio Committee on Energy. The ERA and National Energy Regulator Act (NERA) Acts had also suffered significant delays.

Mr Greyling added that there also seemed to be an issue with developing a funding model for electricity generation which spoke directly to the Integrated Resource Plan (IRP). He wondered why were two different figures cited for demand side management. A concern was also raised about the target for renewable energy and capacity was a serious concern. No power plant of renewables could deliver 100% output, and as a result, the DoE had fallen behind in reaching the 2014 target for universal access.

Mr Greyling further noted that the IRP should have been revised in March 2013, but this had not yet taken place and the DoE had therefore not lived up to this target. He wondered what the consequences of this would be.

Mr Greyling said, in relation to the funding model, that generating funds from the international community should be a target for the DoE. He wondered what had happened to the South African Renewables Initiative (SARI).

The Chairperson asked about the independence of the DPME’s assessments.

Mr Radebe asked about the causes for the delays in the school electrification process. These targets needed to form part of the DoE’s key targets and the DoE needed to outline its plans for reaching these targets. He argued that although the solar water heater rollout went very well, it was still unlikely that the DoE would meet its targets in this regard.

The Chairperson asked why facts and figures for energy efficiency were not indicated in the presentation. A comparison between the overall target and the sectoral targets would have been useful. He wanted also to know how close was the DoE in improving regulations and setting cost effective tariffs for electricity, and what the targets and figures were for increased access to basic electricity, on a national scale, and how much of this could be attributed to bulk infrastructure. He commented that input from COGTA on the role and performance of municipalities would have provided a clearer picture, especially on bulk infrastructure. He also asked if bulk infrastructure was part of the ADAM programme. The Chairperson asked what challenges DPME had experienced with regard to the indigent policy.

The Chairperson also asked what informed the targets for infrastructure roll-out, and whether the DoE was improving on its procurement practices.

Mr Fakir pointed out that he may not be able to answer all questions, and some of them would be better responded to by DoE itself.

In relation to outcomes, he noted that the DoE had to agree with Eskom on matters of policy, for instance in matters such as the transporting of coal using rail. In relation to infrastructure, the focus was on basic electricity rollout, as problems in this area emerged during the 2007/8 financial year. I

In answer to questions about EDI restructuring, Mr Fakir said a lot of municipalities, and Eskom to a certain extent, had held back on maintenance expenditure until a solution was proposed. However,  the fact that municipalities were not spending on maintenance resulted in ongoing deterioration in the infrastructure. The revenue collected by municipalities, together with the Nersa allocation, was therefore going to be allocated to the upgrading and repairing of infrastructure.

On the question on the extent to which DPME penetrated the DoE, Mr Fakir replied that the DPME relied mostly on the DoE’s monitoring and evaluation for information and data. Some of the DPME’s data was collected through public surveys and the national census. The DPME also conducted independent research with stakeholders such as Eskom.

Mr Fakir said, in relation to the SIPs, that the Presidential Infrastructure Coordinating Commission (PICC) was formed after the original delivery agreement. The content on the SIPs was therefore included afterwards, and the SIPs were not part of the delivery agreement. The PICC operated differently from the Cluster system, but these would be amalgamated. He said DPME was not at liberty to present a delivery agreement to Parliament. DPME was only mandated to monitor the direction of the DoE, and to assess whether it was moving towards the set pre-determined outcomes.

Mr Fakir said that the funding model of the IRP should be looked at by DPME, but the DoE should get the model up and running. The main priority for both departments had been on Eskom’s build programme, but more attention would be paid to the funding model in the future. The full rollout of solar water heaters was proving to be challenging, especially with regard to accelerating the local content in production and manufacturing. Accelerating that rollout before addressing the local content would not be a good idea. Low pressure units were not necessarily on the DPME agenda.

According to the 2011 census, 84.7% of household had electricity. Currently, an estimated 86% of households had access to electricity, but this number would be lower if only formal connections were counted. He agreed that the country needed to move towards renewable energy, but this was dependent on the proper management of the base-load. Unlike in European countries, storage of renewable energy was still a serious challenge.

The Department of Trade and Industry (dti) was looking into the South African Renewables Initiative (SARI) but the DPME had not had much contact with the structure. The IRP would be revised and work was already under way on this.

Mr Fakir agreed that inequality in education and infrastructure was still a major challenge to the efficient electrification of schools. The DoE needed to have a good working plan to address this, together with the electrification of clinics.

The DPME was taking note of regulatory tariffs and these would be addressed through the regulatory mechanism. Some of the challenges in this area were related to the prepaid metering. Block tariffs could not be implemented on pre-paid metering. He noted that COGTA had not been reporting to DPME in a while. He agreed that Bulk infrastructure was necessary to reaching the 92% universal access target for 2014.

The Chairperson thanked the DPME for the presentation. However he argued that increased spending did not equal restructuring, and he wondered how the DPME could ensure that the rest of the Cabinet understood what was meant by “restructuring”. The localisation issue was indeed a political one, seeing that job creation was a national mandate.

Management Performance Assessment Tool (MPAT): 2012 Final Scores: DPME briefing
Ms Tumi Mketi, DMPE, explained that the Management Performance Assessment Tool (MPAT) was established to improve management practices, as a key to improving service delivery and management within departments.

Mr Henk Serfontein, Director: MPAT, DPME, commented that weak administration was a recurring theme across all priorities, and was contributing heavily to poor service delivery. A culture of continuous improvement and good practice needed to be established, by linking institutional performance to the individual assessments of Heads of Departments.

He explained that the assessment on the MPAT was done against 31 management standards, in 17 management areas. These management areas were developed collaboratively by DPSA, National Treasury and the Offices of the Premier. Standards were therefore based on legislation and regulations. The MPAT 2012/13 implementation process consisted of self-assessment and moderation. With the self-assessment, the DPME and Premiers’ Offices provided hands on support to departments to upload evidence. On the moderation process he explained that policy and implementing experts from national and provincial departments were used as moderators during the November 2012. Feedback was provided to the departments on 21 January 2013. Final scores were communicated to the departments between 23 and 25 April 2013.

Mr Serfontein explained the MPAT Ratings, which were from level 1 to level 4. The DoE’s performance was assessed according to two performance areas: Monitoring and Evaluation and Accountability.

Monitoring and Evaluation
Mr Serfontein said that there was a standard definition used, namely the department’s ability to do monitoring and evaluation, produce useful and reliable information, and use performance information in performance and strategic management. He explained that the DoE did not have a Monitoring and Evaluation or Performance Management Information Policy or Framework. This indicated a non-compliance with legal and regulatory requirements.

Accountability|
In this area the standard definition was that the department had a properly constituted Audit Committee (or shared Audit Committee) that functioned in terms of Treasury requirements. The Audit Committee had an Audit Charter with clearly defined objectives and key performance indicators.

Mr Serfontein provided the DoE’s final scores. He said that there had been strengths observed in the performance areas of:
• Strategic Plans
• Monitoring and Evaluation
• Human Resource Development Planning
• Management of Diversity

Weaknesses had, however, been observed in the DoE, in the following:
• Service Delivery Improvement Mechanisms
• Assessment of Accountability Mechanisms (Audit Committee)
• Management of Disciplinary Cases

In conclusion, Mr Serfontein said that the MPAT process provided a single holistic picture of the state and of a department. Departments needed to procure smartly so that this would result in better service delivery by suppliers and contractors. They also needed to focus on saving the departments from corruption and increasing value for money. Management practices in departments were generally weak, because top management had not paid sufficient attention to improving them. Annual MPAT assessments by the Presidency and the Offices of the Premier were therefore sending a clear message that improving administration was a government priority.

Discussion
The Chairperson thanked Mr Serfontein for the presentation, which had been very informative.

The Chairperson asked how DoE was managing disciplinary matters without having a negative impact on the morale of the staff.

Ms Mketi replied that the DoE would be in a better position to respond to most of the questions. Discipline, however, had an impact on the morale of the staff as well as on the performance of individuals within a structure. Service delivery improvement mechanisms were informed by the standard set by the DoE and the DPME only monitored the implementation of the plan. Poor planning from the DoE would therefore reflect in the DoE’s performance. In relation to the internal audit, the DoE was not doing too well, but compared to the performance of the rest of the sector, DoE’s Human Resource Management was doing significantly better than other departments.

Mr Serfontein expanded on this by saying that the internal audit did not set up an enabling environment and capacity for the DoE to deliver on what was expected of it.

The meeting was adjourned.