Auditor General SA noted that the audit outcome for the Energy portfolio had worsened versus previous audit periods, in that only two entities had achieved clean audits. The quality of financial statements as well as that of the performance reports had regressed. Irregular expenditure had regressed to R108.2m vs. R92.8 in 2017/18. The entities that regressed were Nuclear Energy Corporation of SA (NECSA), Pelchem (a NECSA subsidiary), NTP Radioisotopes, Gammatec and the Nuclear Nuclear Regulator (NNR).
The audit outcome for individual entities in the DOE portfolio were as follows:
Unqualified (clean) audit - NERSA and SANEDI
Unqualified audit with findings - CEF, SFF, PetroSA, NNR, NTP and Gammatec
Qualified - DOE
Disclaimer - NECSA and Pelchem.
Most of the entities in the portfolio were financially viable going forward, except for PetroSA, NECSA and Pelchem.
An important concern raised by AGSA was that the oversight of state owned entities had to be strengthened, and that senior and accounting officer management had to act with greater urgency to resolve concerns raised on key controls and risk management. This was evident at CEF, SFF, PetroSA, DOE, NECSA, NTP, Pelchem and Gammatec. AGSA however did indicate that that although there were negative aspects revealed by the audit, there were also significant improvements and good governance in the portfolio.
The new Public Audit Amendment Act which will give the Auditor-General more power to act against audit irregularities was discussed and the Energy Portfolio Committee Chairperson said that supporting this was a strategic matter that had to be attended to urgently.
The AGSA delegation was led by Mr Fhumulani Rabonda: AGSA,Deputy Business Executive, supported by Mr Carl Wessels, Mr Ignatius Fourie, Mr Odwa Benxa - all senior AGSA managers. Also attending were Mr Zizamele Mbambo, DOE DDG: Nuclear Energy and DOE Chief Director Mr Abednigo Hlengwani, and Ms Nikelwa Tengimfene, NECSA GM: Corporate Communications.
Department of Energy (DOE) 2017/18 audit outcomes: Auditor General South Africa (AGSA)
Mr Carl Wessels said that the audit outcome focused on three key areas - the reliability of financial statements, the credibility of performance management information and the compliance with legislation.
The audit covered the DOE and its entities (11 organisations in total):
DOE (Department of Energy)
NERSA (National Energy Regulator of SA)
SANEDI (South African National Energy Development Institute)
CEF (Central Energy Fund)
SFF (Strategic Fuel Fund)
PetroSA (SA National Oil Company)
NNR (National Nuclear Regulator)
NECSA (SA Nuclear Corporation)
NTP (local manufacturer of nuclear medicine - radioisotopes)
Gammatec (NECSA subsidiary)
Pelchem (NECSA subsidiary)
Overall, the Energy portfolio audit outcome had worsened versus previous audit periods, in that only two entities in the portfolio had achieved clean audits. The quality of financial statements as well as that of performance reports had regressed. Irregular expenditure had regressed to R108.2m vs. R92.8 in 2017/18. Some of the entities that had regressed were NECSA, Pelchem (a NECSA subsidiary), NTP Radioisotopes, Gammatec and the National Nuclear Regulator (NNR).
In terms of accountability activities (plan, do, check and act cycle), DOE and its entities had regressed in some of its activities:
DO - overall internal controls have regressed
CHECK - senior management and accounting officer authority had regressed slightly and internal audit procedures remained regressed (same as previous audit period)
ACT - compliance with consequence management had regressed as well as the investigation into UIFW (unauthorised, irregular, fruitless and wasteful expenditure).
The audit outcome for individual entities in the DOE portfolio were:
▪ Unqualified (clean) audit - NERSA and SANEDI
▪ Unqualified with findings - CEF, SFF, PetroSA, NNR, NTP and Gammatec
▪ Qualified – DOE - it did not identify all irregular expenditure in its financial statements
▪ Disclaimed - NECSA and Pelchem.
According to AGSA there were substantial reasons for the disclaimer for NECSA and some its subsidiaries. Some of these were - uncertainty whether NECSA could remain a going concern (that is, it was technically insolvent), the previous Board did not have Ministerial approval for the Pelchem transaction; there were material differences between the annual consolidated financial statements and supporting information; and irregular expenditure information was incomplete. For Pelchem, AGSA also doubted its ability to remain a going concern; irregular expenditure information was incomplete; and the annual financial statements were submitted without supporting documents. AGSA raised a concern about internal controls at both NECSA and Pelchem, in that leadership at both organisations, as well as financial performance and performance had regressed. Another concern was that the new NECSA Board was not willing to sign off on the financials agreed to by the previous board.
AGSA reported on the financial health and management within the DOE portfolio:
▪ Most of the entities in the portfolio were financially viable going forward, except for PetroSA, NECSA and Pelchem.
▪ NECSA’s current liabilities exceeded its assets by R153m and the entity made a loss of R132.9m, whilst accumulated losses amounted to R510.7m It is envisaged that cash deficits would continue going forward.
▪ Pelchem continued to make losses and was dependent on NECSA for its solvency. In 2017 it incurred R172.3 m in losses.
▪ PetroSA’s ability to remain solvent remained problematic due to the current low crude oil prices (that impacted on its commercial viability) and it ended 2017/18 with a deficit. It will require additional capex for mandatory scheduled maintenance operations (e.g. refinery shut down) and this would further deplete strained cash resources.
Unauthorised, irregular as well as fruitless and wasteful expenditure in the portfolio had reduced when compared with previous audit periods. Currently this was about R168m, whereas in the past it was as high as R1.6bn (2013/14). DOE was the biggest contributor to fruitless and wasteful expenditure (overall figure in the portfolio was R10.7m) and this related to the storage of solar hot water cylinders. The biggest contributor to irregular expenditure (overall figure in the portfolio was R108.2m), was CEF.
Other concerns raised by AGSA were:
▪ Supply Chain Management - NNR and Gammatec did not adhere to the minimum threshold for local content; NECSA, NTP and Pelchem did not invite competitive bidding and a board member did not disclose a private business interest in a matter at Gammatec.
▪ Fraud and consequence management - SFF and CEF did not investigate allegations (irregular, fruitless and wasteful expenditure ) and investigations took far too long to conclude, some dating back to 2016/17).
▪ Compliance - AGSA was concerned (amongst other matters) that there were no shareholder compact signed between the Minister of Energy and CEF, PetroSA and SFF.
▪ An important concern raised by AGSA was that senior and accounting officer management teams did not act with urgency to resolve concerns raised on key controls and risk management. This was evident at CEF, SFF, PetroSA, DOE, NECSA, NTP, Pelchem and Gammatec.
The audit for EDI Holdings, based on financial statements up until July 2014, had been completed and it received an unqualified audit. The entity had since been liquidated.
The Chairperson commented that the primary concern was the regression of DOE and problems at NECSA and Pelchem. The financial viability of PetroSA, NECSA and Pelchem was also a concern. The annual reports had been received late but the Committee would have to conclude its work on them before May 2019. He felt that the audit outcome was a reflection of bigger problems at these organisations.
Mr M Matlala (ANC) asked if it was not perhaps more prudent for AGSA to have waited until it had received all the relevant information from the auditees, before pronouncing on the audit outcomes. He asked if AGSA had consulted with the Department of Planning, Monitoring and Evaluation (DPME) on these entities and the problems AGSA had encountered.
Mr R Mavunda (ANC) asked if DOE was consulted on the outcomes during the audit. He was concerned about the attitude of the new NECSA Board not wanting to sign off on the financials approved by the previous board.
Ms T Mahambehlala (ANC) asked if there were specific key matters in the audit that AGSA wanted to Committee to take note of. She said the information related to DOE’s qualified audit outcome was not clear. The values shown on page 26 were not clear and it was difficult to ascertain which entities were at fault. Who was responsible for the irregular expenditure shown - was it DOE or the other state owned entities?
She wanted more information on the missing shareholder compact between the Minister and certain entities.
She was satisfied with the feedback on the irregular expenditure for solar hot water heaters which was due to costs incurred for storage. She was concerned that AGSA could not advise on PetroSA’s turnaround strategy to address the problems picked up by the audit - was this strategy submitted to AGSA?
Mr J Esterhuizen (IFP) said he was concerned about the lack of consequence management at AGSA. It had identified all these problems during the audit but did not act to address the problems identified such as the debt burden at Pelchem, 10m barrels of oil sold at below market value by CEF, severe losses at PetroSA on Project Ikwezi. It seemed that political factors played a bigger role at AGSA rather than expediency to address problems.
The Chairperson reminded Mr Esterhuizen that AGSA could only report on concerns raised in audits and had no mandate to take action. This would be addressed in the near future once new Public Audit Amendment Act approved in Parliament recently, was signed into operation by the President.
Mr Wessels replied that the delay in finalising the audit was due to numerous requests by NECSA and DOE officials (including the Minister) to delay the audit as a result of developments at NECSA and elsewhere. Other challenges were that not all relevant audit information was provided to AGSA by NECSA. A new Board was installed on 5 December 2018 and this led to further delays and complications. Several meetings were held with NECSA and DOE (some attended by the Minister of Energy) to resolve the concerns hampering the conclusion of the audit. A further delay was encountered at DOE due to the inability to get agreement on the status of the IPP (Independent Power Producer) as an ‘unlisted public entity’. There was no official guideline on the audit procedures for unlisted public entities - and this had to be resolved first.
Mr Wessels replied that AGSA does meet with DPME on matters and that there was cooperation between the two entities.
Mr Wessels replied that AGSA could not dictate to Members which matters to investigate or concentrate on. Its mandate was to report on the three aspects: reliability of financial statements, credibility of performance management information and compliance with legislation.
Mr Wessels replied that the shareholder compact with the Minister was a document that outlined the contract between the entity and the DOE and set out clear performance targets. If this was not signed, it was therefore non compliant.
Mr Wessels said that the new NECSA Board had sent a letter to the Minister of Energy on their reluctance to sign off the financial information approved by the previous board. According to him the new Board was serious about addressing the challenges at NECSA. He felt that it would be a good idea for the new Board to engage with the Committee on their plans to stabilise NECSA.
Mr Esterhuizen said that the Public Audit Amendment Act would help AGSA to recoup the money lost due to negligence at state owned entities.
Mr Matlala asked if AGSA had a view on what the constraints were at DOE that prevented it from performing better - was it perhaps the frequent changes at the “top” with four ministers in five years?
The Chairperson commented that Mr Matlala was addressing his question to the “wrong people”.
Mr Mavunda asked if AGSA was able only to report on matters or if it could also take action to address problem areas.
Mr Rabunda, AGSA Deputy Business Executive, responded that the new Public Audit Amendment Act provides additional powers to AGSA to act on audit outcomes. It was in the process of being enacted by the President and that the Office of the Auditor-General was ready to act accordingly once empowered by the new Act
Mr Wessels said that the audit outcome was not all “doom and gloom” - there were significant improvements and good governance in the portfolio, but that the oversight of state owned entities had to be strengthened.
The Chairperson that the matter of providing more support to AGSA to give it the power to address audit outcome concerns was a strategic matter that had to be attended to urgently.
He said that the Committee would engage DOE and entities such as NECSA and CEF on the matters discuss at the meeting today.
The meeting was adjourned.