Minister and Department of Energy briefing on 2017/18 Annual Report


26 February 2019
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The Minister of Energy stated that petroleum export countries under OPEC were impacting liquid fuel prices. Substantial amounts of crude oil were removed from the market, which could lead to petrol and diesel price increases. The bout of load shedding was sending a bad signal to investors and government was committed to placing Eskom on a different trajectory. Exploration for offshore gas and oil would commence at Mossel Bay. 2017/18 had been the most difficult year to date for the Department of Energy (DoE), with secondments, vacancies and suspensions at the senior level impacting performance. In spite of challenges, the DoE exceeded its targets for electricity connections, completed a substantial number of solar home system installations, and built three new bulk substations

The DoE reported that 42% of targets were achieved, 19% partially achieved, and 39% not achieved, despite expenditure being 99.8%. Key highlights included completion of the National Energy Efficiency Strategy; awards received for successful skills development programmes, internships and learnerships; and absorption of fuel price shocks to cushion the economy. Challenges included lack of specific skills; leadership changes; governance challenges in some SoEs, and challenges with the implementation of the solar water heater systems. The DoE obtained a qualified audit opinion on the basis of understated irregular expenditure.

Members complained that key examples of poor performance were not mentioned in the presentation. They commented on the failure to implement the solar water heater programme, and the continued payment for storage of these heaters. The Chairperson said that it was the most spectacular failure of the Department. Opposition parties expressed lack of confidence in the Grand Inga electricity uptake project from the DRC. Also discussed were the poor achievement of targets; regression in internal controls and compliance with legislation; the Independent Power Producers Office; plans to address its legislative backlog; vacancies and the consequent instability which impact on service delivery; leadership and managerial capability; electrification; consultation with the Department of Planning, Monitoring and Evaluation; audit qualification and failure to address Auditor-General concerns, and challenges at NECSA and with the NECSA board. The Chairperson concluded that one had to consider if the structure of the Department suited its mandate, and if there was a lack of skills in departments to hold entities to account. The relation between the state and the SoEs had to be reconsidered.

Meeting report

Introduction by the Chairperson
The Chairperson welcomed a new DA member, Mr Mileham. The Auditor-General had mentioned in a meeting with the Committee, that the Department of Energy (DoE) did not submit an annual report in the previous year. The AR would be received on that day. He noted that the Nuclear Energy Corporation of South Africa (NECSA) and subsidiaries would appear before the Committee in the following week. He welcomed the Minister and thanked him for the media statement the Minister had made on the previous Sunday.

Minister of Energy on performance of the Department of Energy for 2017/18
Minister of Energy, Jeff Radebe, apologised for not being able to be present at the meeting with the Nuclear Energy Corporation of South Africa (NECSA) on 5 February, as he was asked by NEDLAC to be present to finalise the Integrated Resource Plan (IRP). He thanked the Chairperson for reading his media statement on the previous Sunday. The Fourth Industrial Revolution had arrived. Disruptive technologies were happening at a rapid pace. The DoE 2017/18 performance reflected emerging concerns in the energy sector. Petroleum export countries under OPEC were impacting liquid fuel prices. OPEC removed substantial amounts of crude oil from the market, which led to a 20% price increase. The impact on the price of petrol and diesel would be announced at the end of that week.

The bout of load shedding was sending a bad signal to investors. The President had announced that government was committed to a turnaround at Eskom, to place it on a different trajectory. It could be proved in the foreseeable future that SA is endowed with oil and gas resources. There was an announcement by TOTAL that there would be exploration by a French company for offshore gas and oil at Mossel Bay.

In terms of performance, 2017/18 was the most challenging ever for the DoE. He had assumed office only during the last six weeks of that financial year, and he was the third Energy Minister in this five-year term. During the year, the Accounting Officer was seconded to an SoE for seven months. Two of the three Deputy Directors General were on suspension for most of the year. There were DDG vacancies in three programmes, and critical senior management positions were not filled when he assumed office in February 2018, due to concerns about not repeating the unauthorised expenditure of 2016/17. There was an ongoing impasse on the issue of Independent Power Producers (IPP). A key policy document, the Integrated Resource Plan update, proved difficult to finalise.

In spite of challenges, the DoE achieved life changing objectives, although there were some spectacular failures due to leadership instability. The integrated national electrification programme produced 292 700 connections, 20% higher than planned. There were 275 832 third degree connections, and 16 875 solar home systems installed. Three additional substations were completed. There was women’s dialogue with eThekwini municipality, empowerment of poor learners in Limpopo, and the national youth and energy dialogue. Two DDG vacancies were filled, and a third is being finalised. 27 renewable power projects were signed in terms of the power purchase agreement. Two suspended senior managers were back at work, with their names cleared. There was an audit on transformation of the retail section. He thanked the Portfolio Committee for its guidance.   

Department of Energy briefing on 2017/18 Annual Report
At the meeting, Mr Maqubela was acting as Director General. Both Mr Tseliso Maqubela, DDG: Petroleum and Petroleum Products Regulation, and Mr Lloyd Ganta, Acting DDG: Governance and Compliance presented. The DoE achieved 42% of its Annual Performance Plan (APP) targets, partially achieved 19%, and failed to achieve 39%. Key highlights included the completion of the National Energy Efficiency Strategy; awards received for successful skills development programmes, internships and learnerships; and the absorption of fuel price shocks to cushion the economy. Challenges included lack of skills; leadership changes; poor governance in some SoEs, and the implementation of the solar water heating programme. The Department obtained a qualified audit opinion on the basis of understated irregular expenditure. The audit report also contained an emphasis of matters of material underspending of the budget, and inclusion of the IPP Office in a related party note, but the IPP would be subject to its own independent audit.

The Chairperson noted that slide 11 mentioned that DoE obtained a qualified audit opinion on the basis of irregular expenditure of R98.382 million. Yet elsewhere an amount of R89 million is referred to?

Ms Nonhlanhla Tshabalala, DoE Chief Director: Financial Management, replied that the R98 million referred to a disagreement with the Auditor-General that DoE’s participation in a contract with another organ of state was irregular. R89 million irregular expenditure was the amount that DoE identified itself, recognised and included. The two amounts referred to two different contracts.

Mr J Esterhuizen (IFP) commented that the South African Strategic Fuel Fund (SFF) sold 10 million barrels of oil at $28 per barrel at a time when SA could least afford it. What about National Energy Regulator of South Africa (NERSA) figures? Eskom was also not included. Operating expenses for one entity escalated from R8 billion to R24 billion. In spite of the courts having concluded that nuclear energy was not feasible, R795 million was spent on it. NERSA had increased electricity prices by 440% since 2008/09. The Public Audit Amendment Act was currently in force, which enabled Auditor-General South Africa (AGSA) to get the Hawks involved. AGSA had the right to demand answers on why billions were spent of the Energy Fund, and on performance bonuses, and millions of barrels sold. Such matters were not mentioned in the briefing. A summary of performance information showed that only 42% of targets were achieved, with 58% not achieved, which was shocking.

Mr K Mileham (DA) commented that the Auditor-General had noted areas of concern were that both internal controls and compliance with legislation had regressed. An investigation into irregular and fruitless and wasteful expenditure had indicated regression there also. There was uncertainty about the going concern status of NECSA, Pelchem and Petro SA. NECSA had incurred losses of R510 million, with R132 million in the current year. He asked what was to be done about the Office of the Independent Power Producers (IPPs). The AG had advised that it be an independent entity. The expenditure was 99.8% but targets achieved were 43%. Either targeting or implementation was poor, or both. DoE had failed in developing legislation. No legislation was tabled during the Fifth Parliament. He asked about plans to address the legislative backlog.

Ms Z Faku (ANC) referred to vacancies and instability. There was a lack of leadership and managerial capability. There was no improvement in internal controls as pointed out by the AG. Vacancies in the Clean Energy branch were especially disturbing. It would not do to blame municipalities for lack of progress in the solar water heater programme. The Committee had to know why the programme was failing.

Mr Z Mavunda (ANC) referred to the payment for the ongoing storage of unused solar water heaters. He asked about plans to put the heaters to use. It was unacceptable to store the heaters without installing them. Money paid for storage could have been used for development. What was the implementation plan?

Mr M Matlala (ANC) remarked that the solar water heater programme was previously implemented by Eskom then moved to DoE and DoE had put it on hold. Project funds for this had been surrendered to Treasury. What was the current position? What changes could be made that could lead to improvement in electrification? How often did DoE meet with the DPME and with AGSA? It was not advisable to wait until AGSA had to intervene. The DPME and AGSA could be consulted about challenges. Implementation plans for the energy and climate change strategy were not developed. What was the current situation? Why was the National Nuclear Regulator Bill not submitted for approval? DoE was supposed to submit the Annual Report on 30 September 2018 to Parliament, not now. This Committee was thus prevented from compiling its Budget Review and Recommendations Report (BRRR). DoE had received a qualified audit opinion for two years in a row, as its finances were not properly managed. Why were the previous AGSA findings not addressed? Why were shareholder compacts with the Minister not signed? There had to be compliance with legislative requirements. How did the high vacancy rate impact on service delivery? The NECSA board failed to approve its annual financial statements. The board failed to take responsibility for the performance of previous board members. AGSA gave a disclaimer to NECSA. Reasons for the disclaimer, among others, were that the board as the accounting authority had failed to provide written management representations letters.

Minister Jeff Radebe responded that DoE was called to present by the Committee to present its Annual Report. The DoE entities should account for themselves, and NECSA would be before the Committee on 5 March, on which occasion questions could be directed to NECSA. DoE was called to report on the FY 2017/18, but Mr Esterhuizen had referred to concerns dating back to 2015/16. The leadership vacuum was a fundamental challenge. There was no Director General for a considerable time, and there were two DDGs on suspension. But two DDGs were appointed by Cabinet, and a third appointment would soon be made.

The Minister noted that NECSA currently had a new board. The previous board had proved incompetent. Legislation pertaining to the Integrated Resource Plan had been delayed, but he would consult with NEDLAC about the matter in the following week, and it would then be taken to Cabinet. The legal standing of the IPP Office would be finalised. There were options to be considered, which would be reported to the Committee.

The Minister replied that NECSA would discuss nuclear challenges. Lack of internal controls had caused the fruitless and wasteful expenditure. Vacancies would be filled to address that. Eskom did not report to DoE but to DPE when funds were distributed for electrification. The Portfolio Committee on Public Enterprises was in a better position to deal with that.

Minister Radebe commented on the Grand Inga electricity project, saying that he had had several meetings with the previous DRC Energy Minister. The treaty for the uptake of electricity was ratified in 2013. DRC had appointed a Spanish consortium to build a dam. There would be a 2500 megawatt electricity uptake. The SADC countries all faced electricity challenges, and would benefit.

The Minister agreed that the storage costs for the solar water heaters could not be justified. NECSA would discuss nuclear challenges under the able leadership of Dr Rob Adam, who was present in the meeting. He was cracking the whip about qualified audits.

Mr Maqubela replied about the solar water heater programme. The programme manager was instructed to move the units into storage space that would not require payment. NECSA could provide a site with high security warehouses where solar water heaters could be stored free of charge. Petro SA also had high security warehouses at Mossel Bay. Municipalities were identifying priority areas for implementation, and had to finalise that by no later than 31 March. Resolutions to accept had to be obtained from municipalities. DoE would respond to that. There was a need for social facilitation, for which service providers had to be appointed. Service delivery programmes suffered if job creation was not considered. Local labour had to be employed.

Mr Maqubela replied that DoE met with DPME on an ongoing basis to assist with reviewing the APP. It pointed out that DoE might be setting too many targets. DoE had to be assisted to set smarter targets. He conceded that there were legislative shortcomings, but as the Minister explained, there were inescapable linkages. For example, it was hard to bring in amendments pertaining to the IRP in the middle of a court case. The surrender of non utilised funds from Eskom was normal practice. Funds from the National Revenue Fund would be allocated. It was a good thing, as DoE was not yet ready for implementation.

Mr Esterhuizen commented that DoE set too many targets, which were not achieved in spite of a R50 billion budget. He was disappointed to hear that the Deputy Minister Majola had resigned as she was a competent and pleasant person, and that would be missed. The Minister’s mention of hydro power made him think of her. R150 million was paid to DRC in 2014/15 for the Grand Inga electrification project. The Minister claimed that the project was ongoing, but that was not what the media was saying. Joseph Kabila was not even in charge of Grand Inga. Rebels were in control. The project would be bringing electricity over the most hostile area in Africa, over thousands of kilometers.

Mr Mavunda remarked that Mr Maqubela had referred to the ceasing of payment for the storage of solar water heaters as “stopping the bleeding”. He asked what had informed DoE to pay for storage. Was there a legal agreement with the storage owner. If so, who was it? Did DoE have a legal leg to stand on if challenged?

Mr Mileham commented that to him, energy security meant the ability of the country to provide its own energy. The Grand Inga project would be taking power lines across areas where there was internal strife. The Cahora Bassa project was sometimes disrupted. There was conflict in the DRC, and a stretched out supply chain would have to be maintained. Was that right?

The Minister replied that a consortium was at work on the project. South Africa was committed through a treaty. It was not only SA that would benefit from the Grand Inga project.

Mr Maqubela answered Mr Mavunda that there was indeed a contract with all the solar water heater manufacturers who stored the heaters. The contract did not prevent DoE from moving the heaters to another storage space. However, there were warranty issues that had to be resolved. It was within DoE rights to move the heaters to a halfway station, once the hurdle of warranty had been crossed.

The Chairperson agreed with the Minister that NECSA matters had to be dealt with when the entity appeared before the Committee. All eyes had to be kept on the big ball, as he phrased it. There was not much that the Committee could do in the time left to it in this term. The Committee had to prepare its legacy report. He would suggest that the big issues be focused on. There was an emerging problem in NECSA. In his mind, the most important question to ask was whether the structure of DoE fitted its mandate and the purpose for which it was created. The question had not been adequately considered. Questions had to be asked about the capacity in line functioning departments, vis a vis their entities. If there were more skills in the entities than in the line functioning departments, the entities could not be held to account. Departments did not always have the capacity to know and understand strategic problems in its entities. Instability in executive management led to the failure of organisations. The Sixth Parliament would have to attend to that. The relationship between the state and SoEs had to be looked into. There was transformation in the petroleum industry, and government had to have the ability to achieve downstream interventions. It had to be asked where the IPP Office was going, in terms of accountability. No legislation was passed during the Fifth Parliament. It was not to be a burden to the current Minister, but it had to be acknowledged that if there was a high executive turnover, there could not be stability, and Parliament could not hold the Executive to account. The solar water heater programme had become the most spectacular failure of DoE. It could have had a good impact on the lives of many people.

The Chairperson adjourned the meeting.

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