Department of Energy on its Annual Report for 2012/13

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed the team from DoE and said the Committee was looking forward to seeing the extent to which DoE had implemented recommendations from the Committee.

Presentation: Department of Energy (DoE) Annual Report 2012/13
Ms Thandeka Zungu, Deputy Director-General: Governance, DoE thanked the Chairperson for the invitation. Apologies were relayed from the Director-General, Ms Nelisiwe Magubane, and the following Deputy Directors General: Mr Ompi Aphane and Mr Tseliso Maqubela, who were unable to attend the meeting. The Minister as well as the Deputy Minister were also unable to attend the meeting.

The Chairperson noted that the Committee had not received an apology from the Deputy Minister. Ms Zungu said last minute changes were made to apologies and it was an error from the DoE’s side if the apology from the Deputy Minister did not reach the Committee. The Chairperson commented the meeting was a very important one and it was unfortunate that some of the most relevant people were unable to attend.

The Chairperson referred to the document circulated by the Committee’s research team on the DoE and said some of the comments made were very shocking and were therefore unacceptable. The term “not acceptable” which was mentioned repeatedly throughout the document was completely disowned by the Committee. The researchers had no liberty to make such statements and the Committee would be taking the matter up with the head of research in Parliament.

Ms Zungu outlined the structure of the presentation. She explained that the global energy agenda has been dominated by: energy security, energy access, and the deployment of sustainable (renewable) energy. The DoE’s focus within the global energy agenda had been on energy security through the diversification of energy mix, access to diversified energy markets, deployment of sustainable energy through the renewable energy program and energy access through engagements in local (continent) and international platforms. The global petroleum environment has been characterised by the fluctuation in crude oil prices. The discontinuation of the supply of crude oil from Iran meant that South African oil companies had to find alternative sources of supply.

On nuclear, she said after the devastating earthquake and tsunami on 11 March at Fukushima Daaichi Nuclear Power Station, the nuclear industry in South Africa had been inundated with scrutiny from anti-nuclear lobbyists, especially environmentalist groups. This therefore created a need to intensify public awareness initiatives to present a balanced view in order to demystify nuclear energy and ensure public acceptance. As part of the global/IAEA Safety Action Plan to address the lessons learned from the Fukushima earthquake, South Africa responded by developing its National Safety Action Plan in line with the IAEA Safety Plan.

On electricity and electrification, she said the DoE had experienced fewer challenges in the supply of electricity during the financial year. Integrated National Electrification Programme (INEP) achieved 22 835 (11.2%) above target connections. The programme however still faced some challenges:
▪ Lack of accountability by municipalities was a worrying factor
▪ The increased cost of base metals that were used to manufacture the hardware components
▪ More households had to be electrified in deep rural areas where the cost was much higher to implement
▪ Lack of infrastructure
▪ Lack of skills and resources in municipal technical departments. to plan
▪ Different technical standards between Eskom and Municipalities

Post EDI Holdings, the Approach to Distribution Asset Management (ADAM) funding model to accelerate the rehabilitation of the electricity distribution infrastructure was developed and R320 million of seed funding was made available from EDI Holdings.

On clean energy and Solar Water Heaters, she said the objective of the solar water heating programme was to provide access to those social areas that need government support. Some of the challenges experienced with the installations were:
▪ The quality of roof structures in the identified areas
▪ Water quantity and quality that are causing clogging of water pipes
▪ Utilizing of cheap imported systems that have a high failure rate
▪ Poor workmanship.

Ms Zungu said the draft Service Delivery Improvement Plan had been completed. DoE’s service delivery improvement priorities were:
▪ Electrifying the country
▪ Provision and installation of solar water heaters
▪ Improvement of the petroleum licensing process
▪ Improvement of the nuclear licensing process.

On INEP’s performance, she said as at the end of the fourth quarter, 175 473 connections were reported and the final total for the year was 202 835 new connections. The 180 000 target which the DoE had set for itself was exceeded, mostly as a result of good co-operation from Eskom and some municipalities.

Presentation: 2012/13 Annual Financial Statements, DoE
Ms Yvonne Chetty, DoE Chief Financial Officer, said 2012/13 was the third year that the Department of Energy had been operating as an independent department. The DOE’s budget allocation had increased by 8.6% from R6.20 billion in 2011/12 to R6.73 billion in 2012/13.

Of the 2012/13 total budget allocation of R6.73 billion, 93.6% was allocated to transfers as follows:
▪ Integrated National Electrification Programme – R3 billion;
▪ Transnet’s New Multi-Product Pipeline – R1.5 billion;
▪ Nuclear Energy Corporation of South Africa (NECSA) – R568 million;
▪ Energy Efficiency Demand Side Management – R1,02 billion

Only 6.4% (or R429 million) of the total budget was allocated for the Department’s operational needs. The DoE spent a total of 98.9% of its budget. A rollover request was submitted to National Treasury for the unspent budget amount of R69.34 million, subsequently R28.07 million was approved. She explained that the unauthorized expenditure of R14.86 million was due to an Infrastructure Grant transfer payments paid to the Mthonjaneni Municipality in May 2010. The transfer was appropriated in the 2009/10 financial year; the payment to the municipality was processed in March 2010, but transferred only in May 2010 due to the system's rejection of the banking details. The matter was currently under discussion with National Treasury. The department received an unqualified audit opinion, without any emphasis of matter. Most of the audit findings were addressed by 31 July 2013.

Presentation: Audit and Risk Committee
Mr Yaswant Gordhan, Chairman of Audit Committee gave a brief background to the role of the Audit and Risk Committee, as well as its responsibilities. He reported on:
Internal Audit
Risk Management
Internal Controls
Management Reports
Pre-Determined Objectives
Annual Financial Statements.

The Audit and Risk Committee was established in 2010, and was contracted for a three-year period. The Committee consisted of independent members, discharged with all responsibilities in accordance with the Audit and Risk Committee Charter. The Audit and Risk Committee was a non-executive committee in an advisory capacity to the Accounting Officer. The primary objective of the Audit and Risk Committee was to advise the accounting officer and senior management of the DoE in fulfilling their responsibilities for financial and operating reporting processes, the system of internal controls, governance, risk management, audit process and monitoring compliance with applicable laws, regulations, relevant prescripts and directives.

The Audit Committee must, among other things review the following:
- The effectiveness of internal control systems
- The risk areas of the DoE’s operations
- The adequacy, reliability and accuracy of the financial information provided
- Compliance with legal and regulatory provisions.

•Internal Audit
The Internal Audit function was a co-sourced function, reviewed and approved by the annual risk based internal audit on a three-year rolling plan. Internal Audit quarterly reports were also reviewed, to monitor the progress of the DoE against the annual plan. The Audit Committee concluded that the DoE’s management had indeed taken steps to improve the internal audit capacity in the ensuing financial year.

• Risk Management
Quarterly Risk Management Committee meetings were held to ensure the management and monitoring of risk management. Through internal audits, the Audit and Risk Committee reviewed the DoE’s risk management process and made recommendations. A service provider was contracted to assist the DoE on certain risk management processes.

•Internal Controls
The DoE had a system of internal controls to provide cost-effective assurance that the DoE’s goals would be economically, effectively and efficiently achieved. The Audit and Risk Committee found that there were no material deficiencies in the DoE’s system of internal controls. On average, management implemented 92% of the recommendations raised by the Auditor-General.

•Management Reports
The DoE presented quarterly management reports to the Audit and Risk Committee and the Committee was satisfied with the content and quality of the reports. However there was still room for improvement.

•Pre-determined objectives
These objectives were reviewed and discussed with the Accounting Officer and the Auditor-General; to audit the annual performance information concluded in the Annual Report. The Audit and Risk Committee agreed with the Auditor-General’s conclusions; however the DoE still needed to improve on performance information reporting.

•Financial statements
The DoE’s quarterly financial reports were presented by management to the Audit and Risk Committee and the internal audit performed a high-level review of the unaudited Annual Financial Statements to conduct in-depth review prior submission to National Treasury. The Committee agreed with the Auditor-General’s conclusions.

Discussion
The Chairperson thanked all delegates for the presentations but said the presentation from Mr Gordhan was too diplomatic. The 2012/13 financial year was the 3^rd year of the DoE having a stand-alone audit report. A number of interesting developments have come about as a result of the DoE’s efforts of ensuring affordable, sustainable and accessible electricity. The work of the DoE in ensuring alternative energy sources after the sanctions imposed on Iran by the United States was also highly commendable. After the Fukushima incident, Eskom, the National Nuclear Regulator (NNR) and the Portfolio Committee on Energy paid a visit to Koeberg, and there was much satisfaction with the high levels of safety at the nuclear site. The INEP allocation to municipalities was quite sizeable. However municipalities were not improving the rollout of solar water heaters. Much work still needed to be done on high pressure solar water heaters. Localisation issues also needed to be resolved before the full rollout of solar water heaters.

With regard to ADAM, the pressure was growing and rehabilitation of municipal rollouts was needed. The DoE was therefore supposed to provide leadership, especially when it came to the allocations from National Treasury. Many foreign countries admired South Africa on its efforts with Independent Power Producers (IPPs); however, locally there was a growing sense that the DoE still had a lot more work to do. What plans were in place to improve gas infrastructure and the energy element in rural areas? What collaborative efforts were in place between DoE and the Department of Rural Development and Land Reform? ITC software had shown improvement with regard to connectivity, however information sharing was still a challenge and DoE could do better to improve this area. He asked that the DoE make available copies of the New Household Electrification Strategy to the Committee. With regard to finance, the area of transfers needed more supervision. Seeing that the DoE paid when work had been completed and municipalities began working when money was received; how was this mismatch being addressed? South Africa was very influential in the international environment; what were some of the outcomes of agreements such as the Grand Inga agreement and how did such agreements influence the DoE’s capacity?

Mr K Moloto (ANC) asked that the finance department give some background on the R470 000 claim against the DoE. On the R250 million guarantees extended to NECSA by the DoE; why would NECSA need a guarantee from the DoE? On the R 1.7 billion environmental liability which had doubled to R 3.7 billion; what led to this? He asked for the DoE’s decision to write off the loan to Cahora Bassa. Why did EDI Holdings surrender R387 million to National Treasury; why wasn’t an arrangement made to retain the money instead? What was the cause of the delay of procurement of Information Technology supply by the supplier; could the DoE provide background on the matter?

Mr L Greyling (ID) argued that municipal infrastructure backlogs were a concern, regardless of the ADAM programme. In the long term what mechanisms did the DoE have in place to address these backlogs? Was a complete institutional reform necessary? Over 100 000 solar water heaters were rolled out per year, however a whole lot more emphasis needed to be put on high pressure units. The rebate system also needed to be re-looked at. What targets were there for reaching energy efficiency goals? He argued that DoE international visits indicated the DoE’s priorities; why was very little attention being paid to the gas industry and gas infrastructure?

Mr J Smalle (DA) said the outcomes of subsidy transfers to municipalities were not satisfactory; only 3 620 connections were made by municipalities. How did this low rollout affect the DoE’s performance? On the South African Nuclear Energy Corporatation, he asked for clarity on why there was a major shift from a negative to a billion in one year. The shortages in Human Resources within the DoE were a cause for concern; the DoE had dealt with 62 disciplinary misconduct cases, yet there was one dismissal. Why was the DoE so lenient; what happened to the rest of the cases?

Prof S Mayathula (ANC) asked whether the DoE’s strategic plans were linked with the DoE’s budget plans. What were some of the reasons for municipalities' poor performance?

Mr S Radebe (ANC) how far has the DoE had gone in educating the community on nuclear escape plans? On solar water heaters; 35 000 installations had been achieved, however an independent assessment was made that the DoE would not be able to reach their target of installing 1 million solar water heaters. The DoE however had indicated that the DoE was on track with the rollout of solar water heaters. Was the Auditor-General’s assessment that the DoE would not meet the solar water heater target of 1 million incorrect? What were some of the challenges which the DoE faced in this regard?

Ms N Mathibela (ANC) asked what the exact number of solar water heater rollouts was. Which municipalities were piloted for the ADAM programme? The DoE had committed to spend over R1 billion to empower women; how far had the DoE progressed with this initiative? What happened to the DoE’s interns after their terms; did the DoE have plans to absorb them after the internship?

The Chairperson said there was still more work for the DoE to do with regard to transforming the downstream sector. Storage was also another area of concern and more investment in infrastructure was necessary. When targets were not achieved, what happened to these funds? One of the international projects which was highlighted was the Grand Inga project; could the DoE share which other activities they partook in on the African continent and how these project benefited the DoE. He reminded Members that a while back the DoE had a collaborative meeting with the Department of Labour and Public Enterprises as well as with the Department of Women, Children and People with Disabilities; a couple of commitments were made. DoE was asked to brief the Committee on the outcomes of this meeting. The bulk of the DoE’s human resource capacity was under Programme: Administration, what was the rationale for this?

Ms Zungu replied and said the concern in terms of international coordination have been taken into account. Some of the questions and comments raised by Members would be addressed in the DoE’s meeting the next day. On the Cahora Bassa loan which had been written down to R1, she replied that the loan was between South Africa and Mozambique and was one of the oldest standing loans which South Africa had, signed in the 1960s. Interest had therefore doubled in value and was causing major problems for the DoE’s balance sheet. The agreement was that because the loan could still be used by DoE as political leverage; it still needed to be kept on the books. It required re-negotiation however between the two countries. As Mozambique could not repay the loan, the agreement between DoE and the Auditor General was that the loan would be kept on the books at a R1 value.

On whether the strategic plans were aligned to the budget, she requested that Members outline the specific targets which were not met so the DoE could elaborate further on them. Most targets which were not met did not have any specific financial implications. The DoE however did not have information about the collaborative meeting between the DoE, the Department of Labour and the Department of Women, Children and People with Disabilities.

The Chairperson said the Committee had documents from the meeting and would share these with the DoE. One of the main topics of discussion was on people with disabilities and employment equity.

Mr George Mnguni, DoE Deputy Director-General: Corporate Services, said the meeting was probably around the composition of the staff complement in relation to people with disabilities. The DoE would embark on a programme to empower disabled employees within DoE so they can be placed within relevant structures within the DoE.

The Chairperson thanked Mr Mnguni for the note of clarity and said he would share the Committee’s documents which they had received from the collaborative meeting with the DoE. The Committee however was interested to know what the DoE had done to engage other departments in this matter.

Ms Zungu said various members from the DoE team would be responding to the questions relevant to them.

Mr Makgabo Tsiri, Director: International Relations, replied to the question on the DoE’s international priorities and said the DoE’s priorities were informed by the 2010 Integrated Resource Plan (IRP). The focus was primarily on renewable energy. With regard to the gas industry, the DoE was busy doing some work with the relevant counterparts throughout Africa. Cooperation agreements by DoE and International Relations however needed to be established first. The boom in shale gas in the United States was one area South Africa wanted to explore with regards to the exportation of gas.

The Chairperson agreed that government to government relations increased the chances of trade between countries. With Tanzania, he asked whether DoE already had a signed formal agreement for trading. Why was DoE so interested in Mozambique, seeing that Italian companies had already taken up a big chunk of the gas industry in the country? DoE needed to look into creating and facilitating a sustainable supply of energy. A distinction therefore needed to be made within the interests of private companies, which were primarily about making a profit, and the interests of government which were about sustainability.

Mr Tsiri asked that Mr Mkhize elaborate on the matter of gas exploration.

Mr Muzi Mkhize, Chief Director: Clean Energy, DoE explained that the DoE had a commission in Mozambique to look at gas exploration. Unfortunately it had not been successful in participating in the bidding realm. The DoE was still engaged in discussions with Mozambique about exporting gas to South Africa. PetroSA had also been in discussions with the Mozambique government in this regard. The DoE would be in a meeting with the Gas Commission in Mozambique in November 2013.

Mr Smalle said it was clear that there had been some discussion taking place about gas exploration; however the outcomes were not reflected in the DoE’s report. Such discussions were important and they needed to be strengthened.

The Chairperson said the DoE looked to the  Integrated Resource Plan (IRP) for guidance.

Mr Mkhize said the DoE would continue to increase its endeavours with regard to the gas industry. The DoE had been engaged in discussions with Mozambique together with the foreign companies leading the sector in the country.

The Chairperson said it was a concern that South Africa was beaten by foreign countries in securing gas in Mozambique, while the country was one of South Africa’s closest neighbours.

Mr Tsiri said as a country, South Africa did not have a policy which subsidised its companies to go and explore gas in other countries.

The Chairperson said Mr Tsiri should not continue with his response as he still had a lot to learn. The issue at hand was not as simple as Mr Tsiri was making it out to be.

Mr Zizamele Mbambo, Deputy Director-General: Nuclear, replied to the question on what lessons the DoE had learned from the Fukushima accident and said the DoE’s nuclear national safety plan was in line with that of the IAEA’s safety plan on nuclear. Stakeholders such as Eskom had also been consulted. The area of nuclear safety was one which was being monitored closely by the National Nuclear Regulator. The communities around nuclear sites were engaged in various public safety information forums; the public was informed about all that was happening at the sites and what the safety measures were in case of an emergency.

Mr Radebe said some of the members of the community around Koeberg said there was no engagement with them or any education around nuclear safety and an exit strategy should an accident occur. These loopholes needed to be addressed because if there were still people who were saying they had not received any information. This meant that the DoE had not done enough work.

The Chairperson said stakeholder engagement was one of the issues highlighted by the DoE on nuclear. However it seemed as if little had been done in reaching and educating people at local community level.

Mr Maphelo Mvunelwa, Eskom Senior Advisor: Parliamentary Affairs, informed Members that there was a standing committee which met twice a month to tease out issues of nuclear safety and evacuation. All areas of concern were under intense discussion.

The Chairperson asked that Mr Mvunelwa share with the Committee the details of who the participants were in that committee.

Mr Mvunelwa said a list of all the stakeholders would be provided in writing.

The Chairperson asked whether residents were directly represented in these meetings.

Mr Mbambo thanked Eskom for providing the Committee with the assurance that local communities were indeed consulted on issues pertaining to nuclear safety and the relevant evacuation processes.

Mr Wolsey Barnard, DoE Deputy Director-General: Energy Programmes and Projects, replied to the question on INEP electrification and municipalities improving their rollout, and said the DoE was dealing with municipal entities which were not functioning well in terms of service delivery. Electrification was therefore turning out to be a huge challenge. Networks were also in a bad state, and these challenges put huge challenges on the DoE’s planning and rollouts. However irrespective of these challenges; the DoE was doing impressive work. Municipalities also had big shortages of highly skilled and technical people and the procurement process within municipalities was a very long one. The municipal financial cycle was also very different from the national one. The DoE however managed to achieve 50 000 connections in the last financial year. The new Household Electrification Strategy would be shared with the Committee; the strategy was approved by Cabinet in July 2013. Eskom would be getting more funding for delivery purposes. The system within municipalities was clearly not working, however this was a political challenge and it was therefore difficult to deal with.

He said on supervision on electricity transfers; each municipality needed to sign a contract with an attached business plan. DoE was therefore doing its best with regard to planning, but in some cases, implementation at ground level was a challenge. DoE was however working closely with stakeholders such as Eskom to improve and increase connection rates. The reason municipalities only utilised 40% of their budget allocations was because of the mismatch between the municipal and national financial years. On Non-Grid he agreed that the DoE’s achieved targets were quite low. On the ADAM programme, it was a pilot which was established to assist municipalities which had major infrastructure backlogs. The R230 million investment in ADAM would have returned well over R600 million for the DoE and the respective municipalities. However the ADAM programme would not be allocating any funding for network upgrades within municipalities. The two Metros under the ADAM programme were Nelson Mandela Bay and Mangaung; DoE would be doing a full presentation to the Committee, providing the full list of all the pilot municipalities within the programme together with a detailed account of all the progress made so far. On the amount of money DoE spent on women-owned entities within the energy sector, the team did not have the information at hand; however the information would be forwarded to the Committee. The DoE had also managed to create over 14 000 jobs and of these about 4 000 were for the youth.

Ms Mokgadi Modise, DoE Chief Director: Clean Energy, replied that as of the end of August the DoE had rolled out 379 649 solar water heating units, with an additional 5 000 currently being considered for some areas in the KwaZulu Natal area. In 2011/12, the DoE reported that they would be able to meet their planned targets for solar water heater rollouts. However according to the Auditor General report; this would not be the case. In 2011 government signed the Green Economic accord with the private sector, in some of the commitments made; there was heavy emphasis on localisation. Some work had been done on solar water heaters, led by the Department of Trade and Industry and production and manufacturing locally was a key focus. The Minister of Finance signed the instruction note in July and a tender was issued. The manufacturers were expected to meet a 70% threshold; however the tender could not proceed because there was no qualifying bidder. Other challenges pertaining to the water quality analysis, the DoE had to get a blue water report from the Department of Water Affairs so that when the selection of areas was done, the DoE was aware of the areas with poor water supply. The units therefore needed to be verified prior the rollout. In 2011/12 the DoE received R 4.7 billion, however early in 2012/13 there was a rescheduling of funds and this resulted in the DoE having to push back on some of its targets.

Ms Chetty responded to the question on the contingent liability and said these were all claims against the DoE. On the R20 million guarantees from NECSA, she explained that NECSA could not make any guarantees from its own balance sheet. As a 100% shareholder, the DoE could provide a guarantee. She explained that the reason for the increase in environmental liability was that the last increase was in 2007 and the costing methodologies had changed since then. In the procurement of IT equipment, the procurement was done through State Information Technology Agency (SITA) and the process was not an easy one. The supplier had indicated that they would deliver in March 2013, but this was not the case because the equipment was not in stock within South Africa. The strategic plans were aligned with the budget plans, however not all the targets were budget related.

Mr Mnguni replied to the question on interns, saying most interns were placed under the DoE’s Projects and Programmes division. The majority of these interns were placed at municipal level in order to address the capacity challenges most municipalities were faced with. Those interns already within the DoE were given first preference for jobs. The currently approved organisational structure made provision for 818 posts; 556 of these were funded and 262 were not funded. The DoE’s Organisational Development Committee prioritised posts and funding was allocated to prioritised posts. On Programme 1: Administration, he explained that the DoE was in the process of increasing funding for line function posts.

The Chairperson agreed that the DoE and the Committee needed to work intensively for the next few weeks in order to meet the requirements for the budgetary review process. The Committee was busy putting together its Budget Review and Recommendations Report. All other questions from Members would be forwarded to the DoE in writing. He raised the Sasol Project Maputo, and said that DoE did not seem to have made any comment on the project; were the concerns of Sasol being adequately met? On the infrastructure grid, he said the DoE needed to clarify whose responsibility this area was between Eskom, municipalities and the DoE. The smart metering project was another area which the Committee would have been interested to hear more about. The reporting structure of DoE and National Treasury seemed to be an issue and it needed to be addressed as a matter of urgency. He reminded Members that the Department of Performance Monitoring and Evaluation had not painted a very good picture of the management practices within the DoE. The way the DoE handled disciplinary cases was an area of concern. The Committee was interested to know the level to which the DoE had implemented the Committee’s recommendations.

The meeting was adjourned.