Department of Energy on Third Quarter 2014/15 Performance: hearing

Standing Committee on Appropriations

15 April 2015
Chairperson: Mr N Gcwabaza (ANC) (Acting)
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Meeting Summary

The Standing Committee on Appropriations was briefed by the Department of Energy on its financial performance as at 31 December 2014. The budgeted expenses for the third quarter of the 2014/15 financial year were highlighted, showing that the year-to-date expenditure had been R5.24 billion, against the projected R5.73 billion. This represented a variance of R491m, or 8.6%. So far, the Department had spent 70.5% of its full year budget, compared to the 75% linear projection. Most of the under-spending had occurred in the transfer payments category, where expenditure had been R4.89 billion against a budget R5.35 billion.

Spending challenges experienced had included delays in recruiting additional human resources due to the lack of specialized skills available in the energy sector, the long recruitment processes as well as structural change processes which had to be followed. There had also been delays in the commencement of projects and administrative challenges, delays in delivery, late receipt of invoices and a consequent delay in the processing of payments. Remedial actions had been implemented.

The Department had resolved to terminate the solar water heating (SWH) implementation agreement that had been handled by Eskom, and had embarked on a more robust implementation model. The DOE was proposing to be at the centre of the implementation instead of Eskom, which was responsible for generating electricity and should not be placed in the area of energy efficiency. The speed at which the programme was being implemented by Eskom was another reason for revising the model, which aimed to accelerate the programme.

The DOE would be making a submission to the National Treasury, motivating for a portion of the remaining budget balance to be rolled over into the 2015/16 financial year to enable the completion of some projects which had commenced in 2014/15 and were currently under way. Efforts were being made aimed at building internal capacity to reduce the use of consultants, and no consultants were used to perform core functions.

Members criticized the Department for the inadequate planning which had led to delays and under-expenditure on energy projects, pointing out that this had led to poor service delivery. They questioned the impact of withholding funds from non-complying municipalities on the tax-paying public, especially the “poorest of the poor.” What were the reasons for so many women resigning from senior positions within the Department? It was suggested that the DOE should collaborate with the education departments to address the country’s skills deficit on a long-term basis. Members asked what the Department was doing to address the Auditor General’s recommendation for urgent action against officials responsible for the crisis in supply chain management processes. There was general commendation for the Department’s achievement in being rated one of the best departments for the 30-day payment of invoices.

Meeting report

Opening Remarks
The Chairperson said that the mandate of the Standing Committee for Appropriations was to recommend to Parliament the adoption of departmental budgets through the Appropriations Bill, which was now before Parliament for processing. Once processed, it was appropriate for the Committee to engage with the Department for the purpose of establishing how State funds had been utilized by the Department in terms of their APP and their predetermined targets and objectives. The purpose of the exercise was not to find faults, but rather to look at the challenges that the Department might have and how those challenges could be resolved. It was to ensure that State funds were used to achieve the objectives for which they had been budgeted. The primary objective was to ensure that services were delivered to the people in terms of the mandate given to each department by legislation, hence the need for the Committee to work together with the Department to remove any barriers to their efficiency in spending and to ensure that there was value for money.

Briefing by the Department of Energy (DOE)

Ms Yvonne Chetty, Chief Financial Officer, DOE briefed the Committee on the financial performance as at 31 December 2014.The third quarter financial performance 2014/15 budgeted expenses were highlighted, showing that the year-to-date expenditure had been R5.24 billion, against the projected R5.73 bn. This represented a variance of R491m, or 8.6%. So far, the Department had spent 70.5% of its full year budget, compared to the 75% linear projection. Most of the under-spending had occurred in the transfer payments category, where expenditure had been R4.89 billion against a budget R5.35 billion. This included R454.6m under-spending on the Integrated National Electrification Programme (INEP) non-grid, Energy Efficiency and Demand Side Management (EEDSM)-Eskom for the Solar Water Heater Programme (SWHP), EEDSM Municipalities, INEP municipalities as well as international membership fees. The shortfall in compensation of employees of R21.3 million was attributed to vacancies in the Department.

Spending challenges experienced had included delays in recruiting additional human resources due to the lack of specialized skills available in the energy sector, the long recruitment processes as well as structural change processes which had to be followed. There had also been delays in the commencement of projects and administrative challenges, delays in delivery, late receipt of invoices and a consequent delay in the processing of payments.

Remedial actions had been implemented. Progress on spending would be reported at the Finance Committee meetings held six times a year and branches advised of slow spending areas in the financial performance report. Spending against the procurement plan was also monitored and reported to the Finance Committee meeting for action. In addition to the monthly bid adjudication committee (BAC) meetings, six ad hoc meetings were held to accommodate requests and in order to accelerate spending.

The Department had resolved to terminate the solar water heating (SWH) implementation agreement that had been handled by Eskom, and had embarked on a more robust implementation model.

Further to the National Treasury instruction note on cost containment measures, the DOE had ensured that appropriate expenditure control measures were instituted to provide reasonable assurance that all expenditure was necessary, appropriate and paid promptly. Of the 27 cost containment measures provided for implementation, 22 were directly applicable to national departments and all 22 measures were immediately implemented by DOE. Of the 15 cost containment measures provided for consideration, 11 measures which were practical and implementable were immediately adopted for implementation.
The key areas for savings optimisation were the use of consultants, and travel and accommodation, where stringent measures were implemented. The use of consultants was restricted to specific technical services and requests were considered only where such expertise and skills were not available in the Department.

The DOE had been chosen as one of the best performing departments for 30-day payment of invoices by the Department of Performance Management and Evaluation (DPME) in the 2013/14 Management Performance Assessment Tool (MPAT) process.

In terms of section 217 of the Constitution, all goods and services had been procured in a manner which was fair, equitable, transparent, competitive and cost-effective. There had been price negotiations with recommended bidders in order to achieve a reduction in the total bid prices. The DOE had participated in a supply chain management (SCM) improvement forum, facilitated by the Office of the Chief Procurement Officer of National Treasury.

The DOE would be making a submission to the National Treasury, motivating for a portion of the budget balance remaining to be rolled over into the 2015/16 financial year to enable the completion of some projects which had commenced in 2014/15 and were currently under way. Efforts were being made aimed at building internal capacity to reduce the use of consultants, and no consultants were used to perform core functions. The Department’s organizational structure had 847 approved posts and 204 unfunded posts. There were plans for the vacancy rate to be filled, and training and development in 2015/16 would be focused on nuclear and workplace skills.

Turning to the Department’s non-financial performance, Ms Chetty said that it had achieved seven (21%) of its third quarter targets, with11 (33%) partially achieved and (15 46%) not achieved. Her presentation provided details of performance against all the targets (See document).

Major achievements and challenges of the second and third quarters were also described:

- Municipalities had installed 5 923 new electricity mains connections, while Eskom did 77 305 for a total of 133 228. In addition, 8 277 homes were electrified with off-grid solar home systems;
- The solar energy technology roadmap (SETRM) had been completed and would now be submitted to stakeholders for their comments;
- Fuel sampling and testing had been exceeded by 330 units;
- 100% invoices had been paid within 30 days;
- 634 retail site compliance inspections had been conducted.

The major challenge was that a number of positions within line function units were not funded.

Discussion

Dr C Madlopha (ANC) expressed concern over the expenditure on the energy policy and planning. The lack of adequate planning would result in under-expenditure which in turn would result in poor service delivery, such as the load shedding affecting the country. She asked about the INEP municipalities which were affected by the withholding of funds for non-compliance, the amount withheld per municipality and the measures taken by the Department to prevent such occurrences, since they had a negative impact on the economy. She asked about the reasons for the delay in accessing public buildings by the clean energy directorate.

She sought clarity on how long Eskom had had the Solar Water Heating (SWH) project implementation agreement with the Department before the agreement was terminated due to the challenges experienced, and asked for details of the robust SWH implementation model the Department intended to embark on.

She wanted more information on the 15 cost containment measures provided for consideration, and asked why 11 of the measures were practical and implementable, and why the others were not. How much had the Department saved under the cost containment measures? How much had it saved by reducing the usage of consultants, and had the reduction of consultants been productive with regard to skills transferred to technical staff of the Department? She asked for the Department’s plan to deal with those skills that were lacking in the Department which required the continuous use of consultants. She congratulated the Department for been chosen as one of the best performing Departments for 2013/14 with regards to job creation and skills empowerment.

 She expressed concern over the expenditure on the payment for capital assets, which was not improving. She required a response in writing for the projects that were carried over from 2012/13 into 2013/14, and which required the Department to expend so much. Planning was a great concern as it resulted in poor service delivery. She asked for the reasons for the resignation of some women in senior management service (SMS) and asked if the Department had a retention strategy for its staff. She expressed concern over the lack of progress on the enforcement notices issued, which was due to a lack of sampling and testing because of the lapsed contract with a service provider. She asked if the Department was not aware of when its service providers’ contracts would end.

Dr Wolsey Barnard, Acting Director General: DOE, replied that Eskom or municipalities supplied electrification in South Africa. Allocations were done on an annual basis, so some areas could be municipal areas of supply while others could be Eskom areas of supply. Allocations were done on a long term plan. Funds could be withheld from municipalities because of mismanagement, non-performance or non-delivery. The measure put in place by the Department was to allocate officials to physically visit municipalities to check the status of projects. 36 officials moved through the regions to verify projects’ progress. Also the Department appointed contractors to assist the municipalities with designs. There was a critical shortage of skills -- for instance, Limpopo had just two electrical engineers and no qualified officials in the municipalities, so the Department had had to step in to assist. The list of the allocations to municipalities and amounts withheld would be provided to the Committee.

Mr Jacob Mbele, Chief Director: DOE, replied that in terms of the EEDSM programme, 26 municipalities had been identified at the beginning of the 2014/15 financial year, and five out of them had not received the allocation due to non-expenditure in the previous financial year. The total allocation withheld from these municipalities was about R32.5 million, which had been reallocated to other municipalities. Three other municipalities had been added to the programme. Non-expenditure and failure to submit some requirements as required by the Department were the conditions that had led to the withholding of funds from these municipalities.

The delay in access to public buildings was a result of process management, as access to all national buildings was granted by the National Department of Public Works through their regional offices. The problem had been resolved, as a dedicated project manager had been appointed who worked full time with the Department to ensure that such delays were not experienced again.

The Department had proposed a new SWH model, which had been shared with other national departments to get their input. The DOE was proposing to be at the centre of the implementation instead of Eskom, which was responsible for generating electricity and should not be placed in the area of energy efficiency. The speed at which the programme was being implemented by Eskom was another reason for revising the model, which aimed to accelerate the programme. The Department had consulted with the National Treasury, which agreed with the proposal. It offered an opportunity to consolidate procurement around local content, which was a requirement from the DTI, and also allowed the Department to work closely with local government on training and maintenance. The DOE was collaborating with more stakeholders to reduce the burden on consumers.

Mr Victor Sibiya, Chief Director: DOE, said that most service providers contracted for target samplings had contracts for 2014/15, which was based on the number of samples to be tested, not on the timeframe of their contract.

Mr Justin Daniel, Chief Director: DOE, said that the budget on assets was R3.7 million, which was only for internal assets -- it did not relate to infrastructure assets. The under-spending on the purchase of office furniture and equipment was due to a delay in the bid and procurement processes beyond their control, and had amounted to about a 25% saving, which was R1.4 million.

Mr A Shaik Emam (NFP) asked for clarity on why the Department had expended 70.95% on transfer payments, while on goods and services it had spent 58.79% yet it had achieved only seven targets out of 33. He said that over time there had been challenges with vacancies and skills, so he wanted to know what the DOE was doing in collaboration with the Departments of Basic Education and Higher Education to ensure that the basic skills needed were taken in from the school level to address the skills deficit problem on a long-term basis. He added that under-spending was a challenge.

He asked if the Department had a reporting style for its entities, if there were consequences for non-compliance and non-performance by the entities and the measures put in place by the Department to prevent future occurrence. He said the under-achievement of targets by the Department was due to inadequate planning. The challenge of importing compounds, which often resulted in delays, could be addressed with the Department of Trade and Industry as it could be an avenue to create an industry, thus creating employment too. He asked for the way forward to prevent INEP municipalities from not performing. He commended the Department for been rated among the best performing Departments for 2013/14, but expressed concern over the transfer of funds from one area to another, and asked if this would not affect service delivery for those areas. He commended that Department for starting some of its procurement programmes well in advance.

Elaboration was required on the success rate of the cost containment measures and compliance from people. He said that Departments were dependent on consultants, and asked why the Department did not employ people with skills in order to do away with consultants. He sought clarity on the bidding price negotiation process. He commended the Department on its cost containment measures and asked if there were areas where it experienced consistent problems every year from its spending trends. What was the cost impact of delays? Why were women in senior management service (SMS) positions resigning, and what was the Department doing to retain them in order not to lose them to private companies? Elaboration was required on the issuance of notices for non-compliance, identifying the culprits and what had been done. He asked what percentage of households in South Africa was covered in terms of electrification and how long it would take to increase the number of SWHs to an acceptable level.

Mr Sandile Ntanzi, Acting Deputy Director General, Corporate Services: DOE, said that the Department had a Learners’ Focus Week, where about 250 learners from grades 9 -11 were brought together to encourage them take mathematics and science subjects so that they could become engineers in the electricity industry. It was done in collaboration with some state owned-entities, including Eskom. There were learners who were now studying towards engineering field, and these learners were usually taken from disadvantaged communities. The Department worked through the Skills Education Training Authority (SETA) to organise training to deal with skills shortages. The Department had prepared for the Nuclear Bid programme by sending 50 South Africans to China from different entities, universities and Eskom. He agreed that women in SMS posts were resigning, but they did not leave the system as they left for other positions within the national departments. The department had selection and retaining policies as it retained scarce skills. The feedback from exit interviews showed that people left for career growth.

 

Mr Mthokozisi Mpofu, Acting Deputy Director General: DOE, commented that an allocation of R7 million had been made to Mpumlanga in 2014/15, and R10 million would be provided for the next financial year. He said that when municipalities issued tenders for electrical equipment, overseas manufacturers often won the contracts on the basis of cost and major elements, hence the reason for importation. There was a need to analyse, with the Department of Trade and Industry, to see what needed to be done to boost the local manufacture of these electrical items, as a large backlogs and refurbishment in the electricity industry needed to be dealt with. He said the Department was constantly in touch with municipalities to give them guidance on what they needed to do. For instance, they needed to be planning for the next financial year now, so the Department had created an opportunity for them to submit their proposals in order to eliminate chances of failure.

Mr Daniel said that once the cost containment measures were implemented, the issue of quantifying the success rate became a bit difficult, as year after year there was no need for the same type of consultants, and this made it difficult to compare a previous year to another. Similarly, with traveling, the amount of international engagements and travel would be different from year to year. However, the Department worked within the limits given by the National Treasury guidelines. He said that price negotiation raised the challenge of corruption in the public sector and tender processes in terms of negotiation with suppliers. Negotiation took place in unique circumstances and price negotiation was not allowed without the BAC process. He added that some delays could be from the service providers, as sometimes service providers also lose some skills. However, the Department always ensured for all its extended projects that there were no financial implications.

Mr M Figg (DA) asked why three of the delegates from the Department were in acting positions, including the Director General. He wondered why the positions were not filled. He expressed concern over the absence of the DG for Nuclear Energy at the meeting. He said that under-spending had been attributed to the lower compensation of employees while there were vacancies and soon positions to be filled, so he asked for the likely impact in the last quarter. What were the consequences of non-compliance with the Division of Revenue Act by municipalities? Why did the Department lack specialised skills? Elaboration was required on how the Department had arrived at seven branch self-assessments that were moderated. He expressed concern over the inadequate reason for the partial achievement of retail site compliance inspections conducted, which had been attributed to study leaves and unroadworthy state vehicles used to conduct inspections. The Department should factor the capacity of its resources into its plans before setting a target of electrifying 265 000 houses. He added that time frames should be provided for the anticipated dates of completion of partially achieved targets. He asked if inspection of calibration certificates was conducted alongside retail site compliance inspections.

Dr Barnard said that the Director General’s position was vacant and the process was waiting for vetting, which could take two to three months. The DDG for Corporate Services had retired last month and the post had been advertised and short listing had been done. He apologised for the absence of the DG of Nuclear Energy, as he was leading a technical investigation task team in Pretoria.

Mr Ntanzi said that the challenge of unroadworthy vehicles had been addressed, because by next month four 4x4 vehicles would be obtained, mainly for regional offices where roads were not in good condition.

Ms R Nyalungu (ANC) asked what measures the Department had put in place to ensure that funds were not withheld in future from municipalities, as this affected service delivery to the people. She asked for the progress on the Thembisile Hani local government project, which had been delayed. How often did the Department train its staff in supply chain management?

Mr Daniel replied that SCM training was ongoing and a number of interventions were done, like the performance management intervention system. In-house training workshops were conducted and SCM staff also trained other branches to help them understand SCM.

Ms M Manana (ANC) expressed concern over the funds withheld from some Municipalities. She asked for a list of the municipalities affected, and the amount withheld per municipality. Clarity was required on the assistance provided by the Department to enable these municipalities to comply, and future plans for assisting them. Clarity was also required on the cancelled projects in Eastern Cape due to a land dispute. She added that the President had said 20 iZimbizo’s would be conducted, but only five had taken place. When would the Thembile Hani project be completed?

Mr Ntanzi apologized for the poor explanation on the iZimbizo projects, as five targets had been achieved in the quarter and by the end of the financial year the annual target of 20 izimbizos would have been achieved.

Mr A McLoughlin (DA) expressed concerns over the delays in the Department that had resulted in under-spending, as this was an indication of serious constraints that needed to be addressed. He required clarity on the essence and benefit of paying international membership fees (R12.1m). He asked at what stage the Eskom agreement on the SWH project had been terminated, and when did the Department intend to implement the robust SWH model. An explanation was required on the number of cost containment measures for implementation by the Department. Elaboration was needed on the services rendered by service providers under the INEP Non-grid project, which required a R35.5million transfer payment. More information was required on the R12.16 million to be rolled over on goods and services into 2015/16 for all outstanding payments. Elaboration was required on the number of vacancies in the 847 approved posts and how the 204 unfunded posts were to be funded.

He asked for clarity on the third quarter 2014/15 targets, and an explanation on why three-quarters of an annual target could be targeted in one quarter – 2 000 retail site compliance inspections were targeted to be conducted in the 2014/15 annual target, while 1 500 retail sites were targeted to be inspected as the quarterly target. What further steps were taken by the Department after issuing enforcement notices for non-compliance. He asked for the prospect of succession on the Regulatory Accounting System (RAS) implementation. He asked if the submission to Cabinet for approval of implementation plan to support nuclear fuel cycle strategy was now completed. He asked if SARS and DOE could combine their efforts on fuel sampling and testing.

Mr Ntanzi said that the Department had 114 vacancies and efforts were being+ made to ensure that the recruitment process was fast tracked.

Mr Sibiya said that the Department did not do inspections of calibration certificates, but it required from all retail operators a declaration that they complied with all the laws that governed the operation of the service stations and ensured they complied with the laws governing the licences. The 1 500 number of inspections was a cumulative figure for the first three quarters, not only for the third quarter. The annual target was 2 000 and by the third quarter a cumulative of 1500 was expected to have been achieved. The department had done 1 463 as at the third quarter, hence the target had been partially achieved. He added that after issuing enforcement notices, people often complied. However, the Department could withdraw their licence of operation if they failed to comply. The Department had a memorandum of understanding (MoU) with SARS on fuel sampling. However, their reasons for fuel sampling were different, as SARS did sampling in respect of the relevant tax/VAT, whereas the DOE did sampling in order to set standard specifications. However, they both assisted one another to take test samples.

Mr Daniel said that when the instruction note was issued in 2013 by the National Treasury for implementation in January 2014, it had an annexure that stated the cost containment measures that had to be implemented, and they were mandatory. Some were discretional because they were for consideration, but the 22 that were for implementation were implemented. Those that were not practical were under consideration. He added that some projects required specific technical skills which could be short term in duration, so full term staff could not be employed for short term jobs. The Department had a consultant reduction plan which meant that consultants would be engaged only when the necessary skill or resources to perform the project were not available and if the Department was unable to train the staff in the time available. Whenever a project was brought before the Department’s committee, that particular branch had to motivate why a consultant was required for that particular project and also indicate if there was a consultant reduction plan. This was to ensure that the Department was not hiring consultants to perform what it should have otherwise performed internally.

Ms S Shope-Sithole (ANC) asked for a copy of the completed Solar Energy Technology Roadmap (SETRM).She said that the Constitution encouraged spheres of government to work together, so she wanted to know if the Department had tried to assist municipalities whose funds had been withheld, and whether there had been resistance from those municipalities. She asked for the list of those that resisted assistance, as a Section in the Municipal Finance Act stated that other spheres had to assist the local spheres. If funds were withheld, the poorest of the poor and the tax payers would suffer, so Parliament would not keep watching poor service delivery.

A member of the Parliamentary support staff commented that in the Auditor-General’s report for 2013/14 there had been concern about irregular expenditure of R1.6 million, which had increased significantly. In line with Section 39 of the PFMA, the Accounting Officer must put in place measures to prevent irregular expenditure. He asked what measures the Department had put in place to address irregular expenditure and how much of the irregular expenditure had been recovered.

Mr Daniel replied that the irregular expenditure of R1.6 million had been attributed to the entities under the energy portfolio, and not the Department of Energy itself.

Mr Shaik Eman said that the Auditor General had recommended that urgent action be taken against officials responsible for the crisis in the Supply Chain Management (SCM) processes, and asked what the Department planned to do to address this recommendation. Elaboration was required on the business plan for the utilization of the INEP conditional grants which had not been approved prior to the start of the financial year, as required by the Division of Revenue Act (DoRA).

Mr Daniel replied that there were no serious SCM issues within the Department, but the recommendations were meant for the energy portfolio, as the Department had firm SCM policies in place.

The Chairperson expressed concern over the clean energy item on the budget which showed no improvement in terms of spending. What measures had been put in place by the Department to step up its act on clean energy, which was meant to create jobs and reduce gas emissions? Legislative challenges that could hamper progress on planning should be brought before the Parliament in order to facilitate the implementation of policies. He asked how the Department intended to speed up the start and completion of delayed projects in order to avoid future delays. To what extent had the delays in project implementation eaten into the budget? He said that the Department’s budget for 2014/15 was R7.44 billion, while the Appropriation Bill before Parliament was proposing R7.48 billion. The Department was asking for a roll over, so the Department had to convince the Committee that it would be able to spend the R7.48 billion, including the rolled over funds. If the Committee did not have enough assurance, it might be unable to ask Parliament to approve the R7.48 billion in the Bill.

The Chairperson said that the delayed completion of projects and spending of budgets suggested delayed service delivery to the people, which was a concern. Energy was the source of all economic activities, and given that the 2% economic growth had to be increased to 5% economic growth by 2019, this was a cause for concern. He asked that the Department give the Committee enough confidence to convince the Parliament that it would ensure that this economic growth would take place.

He commended the Department for its 30-day payment record, and asked how many black-owned SMMEs were doing business with the Department. How much of the budget did that translate to? Each state department had to advance in inclusive growth in order to expand the economic cake for those who were disadvantaged.

Mr Daniel replied that the Department strongly applied the Broad-based Black Economic Empowerment (BBBEE) Code and Act.

Ms Chetty replied that there would be some remedial action taken this financial year to make up for the 58% expended on goods and services. This action included better planning around projects, setting up a project office to register all projects, and upfront negotiations with service providers. She said that the transfer of funds from one programme to another had been done for good reasons. A substantial amount of the under-spending had been on the compensation of employees. International membership payment had happened in January. The Department would provide an enabling environment to prevent delays going forward.

She gave an assurance that the budget and rolled over funds would be spent with the project office, which would give progress reports on all projects. The filling of vacancies would be expedited and training would be made available to municipalities, while assistance would be provided to municipalities not complying with DoRA, to strengthen them. The Department had to abide by Preferential Procurement Act and also encouraged BEE suppliers, but was often not able to get the suppliers to be compliant enough, which contributed to delays. The repercussions for non-delivery had been endorsed by the Director-General’s office, and corrective action would be implemented.

Dr Barnard commented that the SWH roadmap was a technical document that spelt out the technologies that could be applied in the country for those who wanted to go into the energy business. The Department was engaged with the International Energy Atomic Agency, with three of its officials presently on training in Europe at a specific nuclear plant. The expense of this training was borne by the Agency, not the Department, and the benefit of international membership could be seen in SA’s plans for dealing with nuclear energy.

The Chairperson thanked the team from the Department, and added that further questions would be sent in writing to the Department for written responses.

The meeting was adjourned.

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