Central Energy Fund (CEF) and subsidiaries on its Annual Report for 20102/13

Meeting report

Chairperson’s Welcome and Apologies
The Chairperson welcomed the Members of the Committee as well as the CEF Group and all its subsidiaries, including African Exploration Mining and Finance Cooperation (AE), The Petroleum Agency of South Africa (PASA), The Strategic Fuel Fund (SDD), the South African Supplier Development Agency (SASDA) as well as PetroSA that was to present later in the day. He said that they would be listening to how CEF had tried to turn around their performance from the 2011/12 year. Mr Sizwe Mncwango was new in his role as the Chief Executive Officer (CEO) of the CEF Group but that he was a veteran in the energy sector. At that time the CEF was in the midst of restructuring and implementing its turnaround strategy.

Apologies
The Chairperson had apologies for Mr K Moloto (ANC) who could not attend the meeting due to a meeting he had in Johannesburg, as well as Ms B Tinto (ANC), who was on sick leave.

CEF Overview
Mr Sizwe Mncwango, CEO, CEF Group, provided an overview of the group and said that it would be restructuring due to lapses in processes, systems and controls while it was facing requirements to comply with the Companies Act of 2008 and King III recommendations. There were gaps in people’s skills which posed a significant challenge to delivering the agenda on large scale projects. The credit crunch of 2008, as well as general pressure to deliver sustainable financial results, made it important to ensure long time viability of the business. A major transformation was underway to streamline the Group by reducing the number of subsidiaries and to position CEF to act as a holding company and provide oversight and assurance. The board, audit and risk committees were also appointed as part of complying with the Companies Act of 2008 and King III recommendations. The CEO also went through other committees that they had appointed, key executive appointments as well as the processes at the executive level that were put in place to support the restructuring of the group. The Group Strategic Framework encompassed general housekeeping, such as restructuring the CEF group, strengthening their core business, and trying to find new sources of energy and income.

Central Energy Fund (CEF) Annual Report 2012/13
CEF Financial Outcomes 2012/13
Ms Nonhlanhla Mona-Dick, acting Chief Financial Officer (CFO), CEF, presented a detailed report on the Annual Report of the Group for 2012/13. It had received a profit R1b which was R782m short as compared to the previous year. This shortfall could be attributed to the weak exchange rate, sabre contribution, and the increase in coal sales by 243%. As a result, lower gross profit margins were realised due to higher costs incurred in purchasing products. Operating expenditure also increased by R1.8b as compared to the previous year, as a result of R360m written off on a demo plant that increased depreciation due to new assets that were acquired. Total assets for the group increased from R35b to R43b. Although CEF received an unqualified audit opinion, there were certain matters of emphasis that were raised which encompassed restatement of corresponding figures and other significant uncertainties. CEF had to restate their financial statements after the audit report and reflect fruitful and wasteful expenditure, which could not be uncovered at the time that the audit opinion was issued.

Central Energy Fund Subsidiaries’ briefings on 2012 Annual Reports
The African Exploration Mining and Finance Corporation (AE)
Ms Bathandwa Mgedlwa, CFO, AE, stated that it had celebrated its first full year of operations with a gross profit margin of 48% with the current year also being positive. Their key areas of achievement encompassed production and sales, safety and exploration to competent persons report. Their areas of concern encompassed the finalisation of the T project due to funding delays as well as the Vlakfontein Extension Environmental Management Plan that experienced regulatory delays and extra vigilance. The current year was positive but there were looming and severe Eskom challenges to be expected. They had a promising cash position, their assets were rationalised, and they had improved working capital (inventory, debtors and creditors) as well as a growing their financial position. Improved liquidity had been achieved and operations were performing well but had some challenges with the required investments for accelerated growth. AE’s goal was to be in the top ten of coal mining companies in Africa.

The Petroleum Agency of South Africa (PASA)
Ms Olivia Mans, CFO, PASA, reported that they had received an unqualified audit report without any matters of emphasis. They continued to derive income from unconverted old order rights (R56.6m) and deduced R10m from data sales. Their operation costs remained consistent with those of the previous financial year and they had no fruitless and wasteful expenditure. They also had an initiative of promotional activities that included exhibits and presentations at American Association of Petroleum Geologists (AAPG), South African Oil and Gas Summit, Africa Upstream, Geological Society of South Africa (GSSA) Energy Conference, Integrated Energy Planning (IEP) Colloquium, Shale Gas 2012 and African Economic Freedom amongst many other activities. They also embarked on the Shelf Claim Project that was underway. All applications of licensing and reregulation were received and processed within the legislated time frames. They had 67 new submissions and 57 submissions and that the agency continued to monitor and enforce compliance with legislation, particularly with regards to environmental compliance. They had had a continued interest in shale gas from majors and local players with the contributions to regulatory framework still on going.

The Strategic Fuel Fund (SDD)
Mr Mfano Nkutha, Acting CEO, SDD, presented their business model which was to be a lender of last resort. They were involved in the leasing of unused storage capacity as well as the leasing of property. The market actors that impacted their performance were also presented and they included crude oil volatility, crude oil market structures as well as the impact of the US quantitative easing on investor risk aversion. The impact these market factors had on their income was evaluated by Mr Nkutha and it indicated that cash and cash equivalents had decreased by R880 418 from the year 2012. SDD had received an unqualified audit report but with matters of emphasis regarding actions taken not being sustainable. Key deliverables were the refurbishment of Milnerton, drafting the Strategic Stock Policy, focusing on the Auditor-General’s findings as well as the recruitment of key personnel. 

The South African Supplier Development Agency (SASDA)
Mr Lunga Saki, acting CEO, SASDA, presented the financial status of SASDA, which was established as a section 21 company, a non-profit company and depended on contributions or grants for its survival. It was misleading to talk about profit or loss with regard to SASDA and it would be more appropriate to talk about a surplus or a shortfall. The Statement of Comprehensive income showed R14m loss for 2013, which had characterised SASDA over the years. Without any source of funding, the NTT saw itself rebooting those operating losses year in and year out. This had proven to be a precarious situation for SASDDA. Its financial position indicated that its loss has risen from R43m to R58m with the loan from CEF rising from R40m to R52m. The directors of SASDA were under tremendous pressure. NTT was declared insolvent and it was warned that SADSA was approaching the danger lines of s424. The restructuring of CEF had to be done with speed and address the situation of SASDA. The directors would be approached by auditors given the protocol of s424.
The board of SASDA had five objectives for SASDA and SASDA had achieved 89% of them. The five objectives had been weighted out of a hundred by the directors. The first objective was to undertake supplier development initiatives. This was weighted as 20 out of 100 and was partially achieved because there was no contract awarded to their suppliers. The second objective was the establishment of SASDA as a supplier developer of choice. This was weighted at 20 out of 100 and involved supplier development and flagship projects, including Ikwezi, Irene and Umthombo, to develop suppliers within that space. There were discussions underway with PetroSA but there had been no confirmation or agreement in that regard.
The third objective was the development of existing and new suppliers with participating SOEs. This was weighted 10 out of 100 and the objective had not been achieved because the SOE contract was not renewed to be in progress in the 2013/14 year. The fourth objective, weighted 20 out of 100 was the development of existing and new suppliers with participating companies. This target was exceeded as 44 companies were developed, beyond the 30, which were targeted.
The last objective was to operate a sustainable verification unit. This was weighted 30 out of 100 but the target was not met. The board proposed to shut down the verification unit on the basis that this was not the core business of SASDA, given the restructuring of CEF and that SASDA needed to concentrate on its core business of executing its mandate of developing suppliers.
Most of the Auditor-General’s findings had been implemented up until the end of September 2013. The Auditor-General’s report had highlighted that there was no policy for long outstanding debtors and no provision for bad debts was raised. However, this related to a policy that SASDA did not have because it was not a trading subsidiary. The nature of SASDA’s main business activities did not require a specific policy on debtors, more specifically long outstanding debtors. Where it was necessary, judgment based on best business practices, which were benchmarked against the holding company’s policy, was be applied. There was no firm indication from the relevant companies that owed these funds to SASDA that they will not honour on their commitments made to SASDA. Despite this, the necessary adjustments had since been made.
SASDA had the same issues as every other subsidiary with the AG report, in that if they had received 99% of their objectives they were considered as not having achieved them.

Mr Mncwango said that the situation on SASDA needed to be looked into and everyone on the SASDA board and the CEF Board needed to raise the issue with DOE because it put a lot of people under pressure.

Discussion
The Chairperson gave the floor to the Members present, Ms N Mathibela (ANC), Mr S Radebe (ANC) and Mr L Greyling (ID), to ask CEF and its subsidiaries any questions they had on the presentations.

Ms Mathibela asked the CEF about its financial report and focused on the five targets it had not achieved during the year. The CEF needed to explain the AG’s report on irregular expenditure and how it had got there. The AG findings did not relate logically to an aspect of the institution and she asked if CEF had any explanations with regards to this finding. The AG had three findings with regards to compliance with laws and regulations, lack of efficient controls over monitoring and lack of adequate policies and procedures on supply chains. She wanted to know what the CEF had done to aid these findings. The AG also found that the appointment of the members of the Audit Committee was not in compliance with the Companies Act, further problems were mentioned in relation to contracting managers and there were two investigations by the board, the Risk Committee and the Minister of Energy. She wanted to know the current situation with that Act.

Mr Greyling said that the primary concern for the Committee related to monitoring and oversight with procurement processes and issues of irregularities. He understood the context that the CEF worked in was sometimes difficult, and there were some grey areas where one did not know whether to act or not or whether to implement policy or not. He noted that the report had stated that a consultant was hired for R16m and proper processes were not done with regards to the appointment of that consultant. He was interested to find out whom that consultant was and he requested more details on that appointment so that the Committee could look into it.

Mr Radebe was concerned about the Audit Committee given that the Committee had to monitor that there was compliance. The AG found that there was no compliance with regards to submitting documentation and receipts and that the CEF had contravened section 51b, which was a challenge. The AG found a lack of leadership in procurement procedures and that was not a good indication. He asked if it was true for all facets of the CEF.
Mr Radebe asked what had caused the loss of R9.3m in AE’s assets. He knew that SASDA had a lot of challenges and asked how Parliament could assist SASDA. Was it still relevant in its existence given the amount of debt it was in? Why were staffs receiving bonuses when they were not working well and had so much debt? He wanted clarity on PASA’s corporate social responsibilities. What was a ‘bread bin’? Why had SFF not met its performance targets? Was this related to capacity and skills? Would they be able to survive and meet their targets with the lack of skills they had? SASDA should bear in mind that they were contravening the Companies Act by not submitting invoices. What was SASDA doing in terms of the solar water heaters?
The Chairperson asked SFF about the transgressions in its presentation because it amounted to gross negligence in his eyes. While PASA had had a relatively good performance, in their projections, if they were not able to reach their targets what would happen to their data management? He concurred with what Members had to say about SASDA and asked if it was not facing competition, regardless of the fact that they were a non-profit organisation. Regarding the Renewable Energy Project and the Darling Farm Project, according to the agreement in the Cape Town Metro the tariff was low and there was attempt to renegotiate it, but he did not understand how it was reached. B entities had problems in securing crude and there were holding costs involved, were there any attempts to make sure that B entities could participate in this space as CEF as a whole? Problems with procurement procedures were noted with SFF and what were they doing about this.
Mr Radebe said that SASDA was becoming more and more irrelevant in its work to support companies to comply with enterprise development and matters of procurement. Now those companies were achieving level two and three status and did not need SASDA at all. SASDA’s reason for being for was thus more and more questionable. SASDA was now fully dependent on CEF and this was strenuous for CEF.

The Chairperson remembered the audit of July 2012 with regards to the anchor tenant owing the government a lot of money.

Mr Radebe said that the anchor tenant had not transformed and that they got a good score in terms of enterprise development without developing a substantial enterprise. Issues of contravention were unfortunate. The benefits of SASDA could not be measured by monetary value but rather the number of suppliers they have had, the jobs they had created and all of these noble objectives assisted they had achieved. Unfortunately development cost money and took time.

Ms Mans said that one of the ‘bread bins’ the entity had bought resided in a library in Khayelitsha where school children could go and access exam papers and all kinds of information with teachers also being able to upload information for all those who did not have access to computers. She did not know where the name came from but that it was an interactive computer for children who did not have access in their own homes. The regulatory function of data management went to DMR and the topical function, which was resource evaluation, and data management went to the council. In terms of skills, there was a team that looked after the continental shaft and were trained to protect it.
Ms Mgedlwa explained that most of the costs incurred by AE were due to PetroSA and their competitor which cost them R50m. Legal action was being taken to recover the amount. They had stock loss due to coal that was burnt and it was unlikely to be recovered, as it was not adequately insured. There was a R3.1m levy on sale stock due to underestimation of tax and since the year ended on 31 March 2012 they had asked SARS to pardon them but they had not gotten a response on the matter. The bulk of their irregular expenditure resulted from the fact that the group could not apply a previous exemption that was granted by the Minister of Finance. As a group they were not able to properly implement those provisions and that had resulted in over expenditure and it being deemed as irregular expenditure. The remainder of the irregular expenditure was due to a contract that was awarded.

The meeting was adjourned.