Technology Innovation Agency Annual Performance Plan; Eskom tariff increases 2017/18

NCOP Public Enterprises and Communication

14 June 2017
Chairperson: Ms E Prins (ANC; Western Cape)
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Meeting Summary

The Committee received briefing from the Technology Innovation Agency (TIA) on its Annual Performance Plan for 2017/18. 

The Agency indicated that it was planning to have 10 innovation project outputs taken up in the market in the 2017/18 financial year. TIA was also planning to have 27 knowledge innovation products produced by TIA supported programmes receiving additional funding. 2 800 Small, Medium and Micro Enterprises (SMMEs) would be supported in this period. TIA also aimed to utilise 70% of the funds for projects and programmes as a percentage of total expenditure. The Medium Term Expenditure Framework (MTEF) income for 2017/18 was R396.7 million and expected to increase to R443.8 million in 2019/20 financial year. The total income for 2017/18 was expected to be R548.5 million and to increase to R612.9 million. The annual performance of the agency in the last four years showed that it achieved 93% of the targets in 2015/16 financial year, 73% in 2014/15, 86% in 2013/14 and 85% in 2012/13.

The Agency pointed out that there are a number of projects that it was doing with various State-Owned Entities like Eskom. TIA developed a world-class technology for monitoring potential power failure from corona discharge. This is an impact tool in the utilities’ preventative maintenance capabilities that enables rapid detection and quantification of the nature of the possible failure. The camera will be produced by a hi-tech spin-off company of the Council for Scientific and Industrial Research. TIA was supporting Transnet in the training of Master of Artisans in technologies such as moulding pattern makers and designers. Assistance was also provided to Petro SA in developing new curriculum for chemical process technology engineers targeting young black professionals. Government spent R12 billion in Science and Technology Innovation (STI) in 2014/15 financial year and business expenditure for Science, Technology and Innovation (STI) amounted to R11 billion including SOEs.    

Members appreciated that TIA was playing its role in helping SOEs like Eskom and Transnet. They said it would be important to hear about what TIA was doing to deal with the problem of dumping sites as they are mostly located in poor areas and likely to be a health hazard to the communities. Some Members asked about the breakdown per provinces of the programmes and projects that TIA was involved in and what was the total amount that had been allocated to these projects. They further said the TIA should brief the Committee on its audit outcome and asked how sustainable was the entity in terms of its finances and generation of profit.

Eskom also briefed the Committee on its tariff increase for 2017-18 and amended pricing structure for municipalities with effect from 1 July 2017. This tariff increase had already been tabled by the Minster of Public Enterprise on 31 March 2017. National Energy Regulator of South Africa (NERSA) is responsible for the regulation of electricity prices and tariffs and Eskom may only charge a tariff as determined by NERSA. Section 42 of the Municipal Finance Management Act (MFMA) requires the proposed increase for municipalities to be tabled in Parliament by Eskom’s executive authority. The MFMA determines the annual tariff adjustment for Eskom and NERSA time-lines. MFMA creates two tariff rates for Eskom and this was a factor to be taken into consideration. On 23 February 2017, NERSA made a decision to maintain the allowed revenue of R198 954 million for standard tariff customers. The decision that was taken was that the average price increase to be applied to Eskom’s standard tariffs for 2017/18 must be 2.2%. Eskom pointed out that NERSA’s revenue decision for the five year period ends on 31 March 2018. All consumers have experienced a decrease in the real cost of energy for the 2017/18 year as the expected inflation rate is 5-6%. Eskom’s own operations have received only approximately a 1.1% increase for approximately 45.000MW of capacity. A total of 60% of South African consumers are supplied by municipalities. In order to facilitate convenient access to electricity, government provides grants or cross-subsidies and these are available through the national electrification programme. There is also lower electricity prices to specific and deserving customer categories based on poverty levels or self-targeted tariffs.

Members asked if the 2.2% tariff increase was the last increase to be expected from Eskom in the current financial year. They wanted to know the progress that had been made with regards to the outstanding debt owed by municipalities and enquired about the prepaid method that would be introduced in Soweto. Further issues raised was whether the increase was justified, if the power utility was still using diesel, the indigent list and the effect on small businesses when Eskom cut off electricity to municipalities.

Meeting report

Briefing by Technology Innovation Agency (TIA)
Mr Marlow Manilal, Chief Executive Officer (CEO), TIA, indicated that the agency was planning to have 10 innovation project outputs taken up in the market in the 2017/18 financial year. TIA was also planning to have 27 knowledge innovation products produced by TIA supported programmes receiving additional funding. 2 800 Small, Medium and Micro Enterprises (SMMEs) would be supported in this period. TIA also aimed to utilise 70% of the funds for projects and programmes as a percentage of total expenditure. The Medium Term Expenditure Framework (MTEF) income for 2017/18 was R396.7 million and expected to increase to R443.8 million in 2019/20 financial year. The total income for 2017/18 was expected to be R548.5 million and to increase to R612.9 million. The annual performance of the agency in the last four years showed that it achieved 93% of the targets in 2015/16 financial year, 73% in 2014/15, 86% in 2013/14 and 85% in 2012/13.

Mr Manilal stated that there were 37 youth projects from across the country that received support from TIA during the 2015/16 financial year. 9 technologies were taken up by the market and this was an increase from only 2 technologies in 2013/14. TIA supported 52 youth projects leading to employment opportunities for 78 young technology entrepreneurs. There were remarkable female investees who as part of the Agency’s portfolio had risen through the odds to develop some interesting innovations. These women contributed greatly towards growing the economy and building a better South Africa, through a diverse range of technologies that address both local   and international needs. The operational impetus for 2017/18 focused on increasing the scope of technology development interventions by leveraging on synergistic relationship within the National Systems of Innovation (NSI) in a bid to optimise resources and achieve a broader impact in addressing the triple challenges.
           
Mr Manilal pointed out that there are a number of projects that TIA was doing with various State-Owned Entities (SOEs) like Eskom. TIA developed a world-class technology for monitoring potential power failure from corona discharge. This is an impact tool in the utilities’ preventative maintenance capabilities that enables rapid detection and quantification of the nature of the possible failure. The camera will be produced by a hi-tech spin-off company of the Council for Scientific and Industrial Research (CSIR). TIA was supporting Transnet in the training of Master of Artisans in technologies such as moulding pattern makers and designers. Assistance was also provided to Petro SA in developing new curriculum for chemical process technology engineers targeting young black professionals. Government spent R12 billion in Science and Technology Innovation (STI) in 2014/15 financial year and business expenditure for Science, Technology and Innovation (STI) amounted to R11 billion including SOEs.    

Discussion
The Chairperson welcomed the presentation and said that there are a lot of issues that are affecting SOEs in the country. It was good to hear that TIA was playing its role in helping SOEs like Eskom and Transnet. It would be important to hear about what the Agency was doing to deal with the problem of dumping sites as they are mostly located in poor areas and likely to be a health hazard to the communities. She also wanted to know if TIA paid attention to the media in order to identify key challenges affecting SOEs. 

Mr J Julius (DA, Western Cape) asked how regularly SOEs requested assistance from TIA as this was not indicated in the presentation. It would also be important to hear how TIA was working with other entities involved in technology as there might be confusion between their mandate and that of TIA.  

Ms Z Ncitha (ANC, Eastern Cape) asked about the breakdown per provinces of the programmes and projects that TIA was involved in. What was the total amount that had been allocated to these projects? The Committee should be provided with more information on the glass piped models that TIA was involved in. It was unclear if TIA was benefiting in any way from the various projects it was involved in. TIA should brief the Committee on its audit outcome. How sustainable was the entity in terms of its finances and generation of profit?

Mr Manilal said he was pleased that a stakeholder like the South African Local Government Association (SALGA) was present in the Committee. The focus of TIA was more on ways to fast-track service delivery innovation than to amass profit. TIA was looking at focusing on social innovation that would not be necessarily for market but rather focused on improving the lives of people through innovation like waste removal or delivery of water to remote areas. TIA would be looking at how the innovation could be able to assist in addressing problems that we have at local level. There was a realisation that waste beneficiation had the potential to create a lot of job opportunities especially for people in rural areas. It must also be highlighted that TIA could not undertake some of the projects because of limited budget allocation. The increase in budget from the Department could mean TIA could be able to extend its mandate and be involved in more projects. The Committee could be provided with the breakdown of projects per provinces as this was indeed important for oversight purpose.

Mr Manilal responded that TIA obtained a clean audit for two successive years with no matter of emphasis. TIA had proven its ability to manage funds and the entity was ready to be given bigger mandates by the Department. The Committee could assist TIA so that the allocated budget could be increased and the entity can focus more on innovation. The Minister was looking at escalating the budget of TIA to a billion rand in five years. The majority of the projects are in the Western Cape and Gauteng as this was where innovation was taking place. TIA was currently working with Sweden on the international stage. The entity was trying to create a relationship with other African countries so as to work on innovation. TIA was not engaging with SOEs regularly enough but the country would need to start focusing on institutional arrangement.

The Chairperson proposed that the Committee should adopt the APP for TIA.

Mr E Mlambo (ANC, Gauteng) moved for the adoption and seconded by Ms Ncitha.

The APP was adopted as is.

Briefing by Eskom on its tariff increase for 2017-18
Mr Deon Conradie, Senior Manager: Electricity Pricing, Eskom, stated that the power utility planned to increase the price of electricity by 2.2% from 1 July 2017 and municipalities received a 0.31% increase. This tariff increase had already been tabled by the Minster of Public Enterprise on 31 March 2017. National Energy Regulator of South Africa (NERSA) is responsible for the regulation of electricity prices and tariffs and Eskom may only charge a tariff as determined by NERSA. Section 42 of the Municipal Finance Management Act (MFMA) requires the proposed increase for municipalities to be tabled in Parliament by Eskom’s executive authority. The MFMA determines the annual tariff adjustment for Eskom and NERSA time-lines. MFMA creates two tariff rates for Eskom and this was a factor to be taken into consideration. On 23 February 2017, NERSA made a decision to maintain the allowed revenue of R198 954 million for standard tariff customers. The decision that was taken was that the average price increase to be applied to Eskom’s standard tariffs for 2017/18 must be 2.2%.

Mr Conradie pointed out that NERSA’s revenue decision for the five year period ends on 31 March 2018. All consumers have experienced a decrease in the real cost of energy for the 2017/18 year as the expected inflation rate is 5-6%. Eskom’s own operations have received only approximately a 1.1% increase for approximately 45.000MW of capacity. A total of 60% of South African consumers are supplied by municipalities. In order to facilitate convenient access to electricity, government provides grants or cross-subsidies and these are available through the national electrification programme. There is also lower electricity prices to specific and deserving customer categories based on poverty levels or self-targeted tariffs. The lower than the average price increase to the Eskom Homelight tariffs in 2008 and 2009 resulted in significant cross-subsidies to the Homelight tariff customers.  Eskom provided assistance to customers to implement energy efficiency initiatives such as better insulation of homes, or the use of more energy efficient appliances and lights.

 In conclusion, the tariff was proposed by NERSA and tabled in Parliament before implementation as per MFMA requirements. Eskom will continue to collaborate with stakeholders across South Africa engaging in discussions on the future tariff frameworks. The municipal business is a key component to Eskom’s revenue and therefore proactively working together with them to address key issues around the tariff, as well as outstanding debt. The issue of affordability of electricity for the poor at a time of increasing prices is of great importance for Eskom.

Discussion
The Chairperson wanted to know if NERSA was consulted to approve the tariff increase.

Mr L Gaehler (UDM, Eastern Cape) asked if the 2.2% tariff increase was the last increase to be expected from Eskom in the current financial year.

SALGA acknowledged that Eskom had not been acting faithful in tariff increase on municipalities as there was no proper consultation that was undertaken. SALGA would like to know the process that was followed in approving the 2.2% tariff increase as this increase was likely to have a negative impact on households.

Mr Julius asked about the progress that had been made with regards to the outstanding debt owed by municipalities. It would also be important to know about the progress in place on the proposed prepaid method to be introduced in Soweto. What was the justification for the 2.2% tariff increase by Eskom? It was unclear if Eskom was still using diesel as this increased its operational cost and this might compel Eskom to increase the tariff in order to be sustainable. The reality is that the challenges in management at Eskom had a bearing on other problems within the entity and this was something to be taken into consideration. The tariff increase should be complemented by cost-cutting measures and not R30 million “golden handshakes”.

Ms Ncitha asked about strategies in place to ensure that there was credibility with regards to the people in the indigent list so that the right deserving people get to benefit. The cut-off of electricity in various municipalities was affecting business and potential investment in these municipalities and this was something that Eskom needed to be taken into consideration.  

Mr Anoj Singh, CFO, Eskom, responded that the 2.2% tariff increase was approved by NERSA and there is an electricity board that took that decision. The 2.2% tariff is the final increase that had been approved by NERSA and it would last until the end of 2017/18 financial year. The only way Eskom could increase the tariff is through NERSA determination. Eskom is not under any obligation to engage with SALGA in relation to the 2.2% tariff increase. However, there is an obligation from Eskom to consult with SALGA when submitting a revised tariff increase as it had been done for the 2018/19 financial year. There is a new tariff application that had already been submitted for 2018/19. The application for tariff increase for 2018/19 is still within NERSA and they are yet to determine the exact increase that would be implemented.

Mr Singh replied that the municipal debt as it stands from March 2017 was around R9 billion. There was quite an escalation of debt from March 2016 to September 2016. The debt that was accumulated in March 2016 was R6 billion and by September 2016, it had already escalated to R9 billion. Eskom made an arrangement with various municipalities so as to fast-track the payment of debts and there were only four municipalities where electricity was turned-off. Eskom had mitigated the risk of the debt growing beyond R12 billion. There is a long process that is involved in the turning off of electricity including the application of Promotion of Administrative Justice Act (PAJA). 32 out of the total of 62 municipalities where Eskom signed an agreement were paying and the rest were still delinquent in terms of payment. Even those municipalities that are paying are not up to date with the arrangement that they had made. There is a potential threat that the debt could indeed escalate beyond R12 billion and Eskom would be compelled to once again go through the process of PAJA in trying to mitigate this problem. NERSA lost the initial case on the adjudication of the revenue paying account application. However, the Supreme Court of Appeal overturned the initial judgement. Eskom does not have the discretion to decide on the justification of the tariff increase. NERSA decides on the tariff increase and also looks into the justification of the increase.

Mr Singh added that any business would like to have an inflationary increase in order to be able to operate and inflation in the country is currently sitting at 5-6%; however Eskom would apply a 2.2% tariff increase. In essence, the tariff increase had only increased by -4% for the consumers on a year on year. Therefore, there is a justification for the 2.2% tariff increase. Eskom had reduced the reliance on diesel. It is a real fact that diesel was eating up a lot of budget in the past as the entity was burning diesel at the rate of R1 billion a month. Currently, Eskom was burning diesel at R250 million for the entire financial year and this is because of reducing the burning of diesel for energy production. Eskom did not have any plans of using diesel in the future but it might have to be used in the unforeseen circumstances.         

An official from the Department of Public Enterprises said there is a ministerial committee that is chaired by the Minister of Cooperative Governance and Traditional Affairs (COGTA) together with the Minister of Public Enterprise and Finance and they are dealing with issues related to municipalities. There is a legal team that had been setup in order to look at who had a jurisdiction in terms of the distribution of electricity. The Constitution talks about municipalities having the jurisdiction for the distribution of electricity while NERSA also has a prerogative to issue the licenses for the distribution of electricity.

The meeting was adjourned.

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