Central Energy Fund, NERSA, NNR, NRWDI & SANEDI 2018/19 Annual Reports
Mineral Resources and Energy
09 October 2019
Chairperson: Mr S Luzipo (ANC)
The Committee was briefed by the Central Energy Fund, the National Energy Regulator of South Africa, the National Nuclear Regulator, the National Radioactive Waste Disposal Institute and the South African National Energy Development Institute on their annual reports for the 2018/19 financial year.
The National Energy Regulator of South Africa (NERSA) said its responsibility was discharged mainly through licensing, setting or approving of prices and tariffs, compliance monitoring and enforcement, and dispute resolution in the electricity, piped gas and petroleum pipeline industries. It could therefore be regarded as was a key enabler in advancing economic growth and social development within South Africa.
Issues raised during the discussion included Eskom’s decision to take NERSA’s determination on review, how it was going to fund the legal costs involved, what they intended to do to meet their targets in the coming years, and what criteria it used to make a determination that a municipality had sufficient capacity to be granted a distributing licence for electricity.
The National Nuclear Regulator (NNR) indicated that the key challenges included that its financial sustainability was imperative, given the general economic downturn was resulting in operators such as Eskom and mining and mineral processing facilities having difficulty in paying authorisation fees to the NNR. The effective management of a safety culture at NTP Radioisotopes, a Nuclear Energy Corporation of South Africa subsidiary, remained a concern for the NNR, as well as generally providing effective and continuous nuclear safety regulatory oversight to a financially constrained industry.
Members wanted to know why the NNR had failed to achieve its targets. They were worried about the health risks posed by radon gas in ownerless and disused mines to illegal miners and surrounding communities. Did the regulator receive enough funding to fulfil its mandate, given the fact that its key role was to manage extreme danger?
The National Radioactive Waste Disposal Institute (NRWDI) said it was a maturing entity, and was deeply committed to delivering safe, sustainable and publicly acceptable solutions for the long term management and disposal of all radioactive waste classes. This meant never compromising on safety and security, taking full accountability for their social and environmental responsibilities, always seeking value for money and actively engaging with stakeholders in an open, transparent and respectful manner.
Members questioned the rationale for employing a foreign national in an unskilled position in the Institute. Why had the chief executive officer (CEO) been in an acting position for so long? Why had there been a huge R13 million jump in its cash and cash equivalents? Other issues raised involved achievement of targets, overseas travel expenses, and the entity’s employment equity performance.
The South African National Energy Development Institute (SANEDI) said its role was to direct, monitor and conduct energy research and development, promote energy research and technology innovation, as well as undertake measures to promote energy efficiency throughout the economy. Vacancies on its board had negatively impacted the functioning of the board committees.
The Committee wanted to know why this entity’s CEO had also been in an acting position for so long. Had the shortage of board members been responsible for the unqualified audit? They asked about an amount of R1.7 million reflected as irregular expenditure, which was in stark contrast to the previous year, when there had been very little irregular expenditure. Were there controls in place to prevent it happening again?
The Central Energy Fund (CEF) said the energy sector was a dynamic ecosystem that was driven by a number of global, local, external and internal forces that shaped a number of key strategic and operational decisions that they made on a daily basis. It was these forces that brought about waves of volatility uncertainty, complexity and ambiguity in a sector that was central to the growth of global and local economies, although the sector was risky, competitive and capital intensive. Despite the various strategic challenges that the CEF group faced, it remained a going concern, with the bulk of its assets comprised of cash of R18.9 billion, which was available for use in furthering its mandate. A key focus would remain stabilising PetroSA, and driving the group’ growth agenda by keeping up with changes in its operating environment. Five CEF subsidiaries outlined their individual performances against predetermined objectives.
The Committee sought an assurance that the CEF would implement the government’s stalled solar water heater programme. They asked about the plan to share services and expertise among the entities in the group. Other issues discussed were the payment of bonuses at loss-making operations, the lack of follow-up on Auditor General’s recommendations and consequence management, and the plan to improve the image of the CEF, which was perceived not to be an employer of choice.
National Energy Regulator of South Africa: 2018/19 Annual Report
Mr Jacob Modise, Chairperson: National Energy Regulator of South Africa (NERSA), said NERSA’s overarching role was to ensure the development and sustainability of the electricity, piped-gas and petroleum pipelines industries.
Mr Chris Forlee, Chief Executive Officer (CEO): NERSA, elaborating on the entity’s structure, said that in terms of the National Energy Regulator Act, the Minister of Energy appoints nine regulator members. The Act provides that the Regulator must act independently of any undue influence or instructions.
NERSA had received a clean audit for its financial performance and performance against predetermined objectives, and was the sixth consecutive clean audit. He described the key achievements in respect of tariffs/pricing, licensing, compliance monitoring and enforcement, complaints resolution and proactive investigations, setting of rules, guidelines and codes.
The Committee was told that NERSA was funded through levies and license fees collected from regulated industries, and was provided with details of irregular expenditure in prior years, the control environment and key ratios.
Mr Modise closed by commenting that, as indicated in the presentation, NERSA's responsibility was discharged mainly through licensing, setting or approving prices and tariffs, compliance monitoring and enforcement, and dispute resolution in the electricity, piped gas and petroleum pipeline industries. It could therefore be regarded as a key enabler in advancing economic growth and social development within South Africa. Its performance and relevance were informed by the tangible impact; benefits and meaningfulness of its work for the citizens as well as the economy of the country.
The Chairperson congratulated NERSA for its good performance and its consistency regarding clean audits, and urged it to try to maintain this quality of performance.
Mr K Mileham (DA) said he shared NERSA’s concerns about its target setting and the dates that it imposed on itself over which it had no control over. Concerning the debtor’s days, which were sitting at 35 days, it should preferably be below 30 days going forward. Regarding the fact that Eskom had taken Mr Forlee’s determination on review, what provisions had been made for legal costs? What provision had been made for potentially losing that court case, or any court case for that matter?
Ms V Malinga (ANC) said when NERSA presented, they had said they had not met their target because Eskom had delayed to submit. She was worried that Eskom was giving the country a big headache by not submitting on time. What was NERSA intending to do so that they could meet their targets in the coming years?
Mr M Mahlaule (ANC) referred to the control environment and key ratios, and said what was written and what had been said was not the same thing. The Acting CFO had referred to percentages instead of days. What was meant by 4.66 days?
Ms Malinga pointed out that an executive position was vacant. What delaying NERSA from filling that position?
Mr Modise replied that there were two vacancies at board level. There was a vacancy for a part-time regulator member, and a vacancy for a fulltime regulator member responsible for electricity. The process was administered by the Minister and was not in the hands of the board. The Minister had advertised the positions. In fact, the recruitment process had commenced. Hopefully, the Minister would be finalising this process soon.
Mr Forlee, concerning target-setting, explained thatin this current year they were using timeframes instead of dates. The target setting had been already addressed. Concerning Eskom’s late submissions, they have a requirement that they submit four to six months before a decision was required. There was not a set date by which they had to apply. It was dependent upon when they needed a decision. They had found that many applications were not adequate and had had to be returned.
Regarding Eskom taking NERSA on review, they had made provision for legal costs. They believed they had applied the methodology correctly, but did not anticipate losing. The regulator as an organisation was always looking at their methodologies and the way that they were doing things. In the context of a changing world, were they still doing things as optimally as they should? Was the way they regulated fit for purpose?
Mr Modise added, concerning Eskom’s review, that NERSA was hoping that the judges were not going to go to Eskom and say that they wanted to set the targets. They were hoping that the most that a judge would do was to take the matter back to NERSA to take another look at it. It would be overreach for the judiciary to say that Eskom must be given a 60% target increase every year for the next three years. NERSA would have to see what the judges rule the mistakes are, if any.
Mr Forlee, referring to NERSA’s mandate, said that if there was was a complaint to NERSA or a request for it to mediate, it would do that, although it did monitor quite closely what was happening. Anything Eskom had to do had to be within the statutory requirements. NERSA knew that this was a big problem across the board.
They had shortlisted the applicants for the executive manager for electricity position that was vacant, and only one had qualified in terms of the requirements. They had then had to go into a headhunting and re-advertising process. They could not proceed with just one applicant, and were busy with that process at the moment.
The entity indicated that it had noted the concerns around the average collection date of debtors, which was 35 days. The challenge was that, in the first quarter, while they were awaiting the approval of the levies, they normally used the budgeted rates. Some of the licensees had concerns about paying using budgeted rates that were not approved. However, they had reached agreement with all of them to make adjustments later when their levies were approved. Concerning the 4.66 days, it was an average of five days’ collection of creditors’ payments.
Mr Forlee said NERSA was in the process of recruiting a CFO. The shortlisting had been done and the interviews had been on Friday. They hoped to have a permanent CFO before the end of this year.
The Chairperson said that while there would be a competitive process, the qualifiers may in actually be in the House. Was it not strange that the actual people who had a problem were the ones who were working with time frames? It appeared as if Eskom did not realise that it was in trouble. NERSA were the ones who seemed to be begging them. It was like they were helping people who did not want to be helped.
NERSA had 42% male and 58% female representation. They needed to show others how they had achieved this. They were setting a very good example. Because they were regulating the industry, it may be good for them to track the demographic and gender statistics reflected in the licensing.
Lastly, this morning it had been asked why Eskom could not supply electricity directly instead of going to municipalities. The answer was that municipalities were given the licensing by NERSA to distribute electricity by regulation. What criteria did they use to make a determination that a municipality had got capacity, and therefore should be granted a distributing licence for electricity? The big concern was, if they do not do it and creditors argued that they had paid but the municipality that NERSA had licensed was not paying Eskom, Eskom would attribute the blame to NERSA because it was NERSA that had the regulatory powers on electricity distribution by municipalities. What was their view on that?
Mr Modise said that in future, the demographics of the recipients of licences would be indicated, with statistics on how many were previously disadvantaged, female, etc. NERSA did have the information, but it was not tabulated currently.
He said the country had grappled with the structure of electricity distribution. There had been an attempt to combine elements of Eskom’s distribution with the municipalities that were not strong. That project had failed. The biggest challenge was constitutional. The municipalities were claiming that the constitution gives them the right to reticulate. There was a lot of pushback. Be that as it may, this was an area where the Committee could assist. It was an area that needed to be looked at because municipalities had capacity issues and other challenges. They had not been able to structure the industry in the best possible way for the country, but one could not blame NERSA.
Ms Forlee responded on the criteria for licensing municipalities. He explained that when NERSA gets a request for a distribution licence, it looks at the ability of the applicant to provide the support in terms of network services and its technical capabilities. A major factor was the portion of the constitution that gives the municipality the right to reticulate. Through various processes, all of the areas had already been allocated to different licencees. NERSA had received requests where a municipality would acknowledge that it did not have the capability, but would like Eskom to run an area for it. NERSA had to ask whether, if someone else was brought in to run this area, additional costs would be added into the system. Would it affect the affordability to those customers? Furthermore, why could Eskom not supply directly to these customers?
In the current situation, many customers had voiced their unhappiness with the service in their areas, requesting that the license be withdrawn and given to Eskom. The problem was that the networks that supply these customers are owned by the current licensee that should be collecting money from them for the network maintenance, refurbishment, expansion, strengthening etc. If that customer was to pay that money directly to Eskom, the municipality would not be collecting it and it would get very messy. They were currently looking into it. According to the Act, what was open to NERSA was to say that if they determined that a municipality had contravened its licence conditions, NERSA had to do an investigation. In that case, it goes into a tribunal process. There had been only one situation like this so far, which had to do with the independent power producer (IPP) contracts. There were developments in progress that would come to fruition in the next six months. This area was very difficult at the moment.
The Chairperson explained that the Committee could not help NERSA if it did not present a proposal on what could be done so that the Committee could consider it, including the issues in relation to the constitutional limitations, and where there was a possibility for mediation and other related issues. The ball was in their court as to how they thought the Committee could assist them.
Mr Modise stressed that NERSA was not responsible for policy. This was the preserve of the Department of Mineral Resources (DMR). The most they could do was advocacy through the Department. They would carry out the licensing process in terms of what the legislation permits. Any proposal would need to come via the Department, and he hoped the Department would help the Chairperson adequately.
The Chairperson insisted that NERSA must tell the Committee how it could assist. The Committee could then go to the department and propose how it thinks NERSA could be assisted. The Department would then need to gauge what the possibilities were. He was not saying that NERSA should propose a policy, but what it believed could be a workable arrangement.
National Nuclear Regulator: Annual Report
Dr Bismark Tyobeka, Chief Executive Officer (CEO): National Nuclear Regulator (NNR), said the NNR was listed as a national public entity in Schedule 3 of the Public Finance Management Act (PFMA). He outlined its performance for the 2018/19 financial year, stating that its annual performance plan (APP) had contained 17 strategic objectives and 26 key performance indicators (KPIs). The organisation had achieved a performance score of 96.52%.
Mr Dakalo Netshivhazwulu, CFO: NNR, gave a breakdown of the audit outcomes, a summary of financial information, and the revenue and expenditure trends. It was mainly funded from authorisation fees and conditional and unconditional state grants in the form of transfers. The NNR had invoiced R184 million in authorisation fees, which was 6% more than the previous financial year. It had been less than the 7,5% approved for the year due to the reduction in regulated activities. The appropriated funds transferred from the fiscus for the year amounted to R16 million, in line with the Medium Term Expenditure Framework (MTEF). Other income had decreased slightly from the previous financial year. to R30 million. This was mainly attributed to a decrease in application fees.
The NNR highlights had included:
- a strong integration of risk management culture into NNR’s day-to-day activities;
- no incidences of fraud or corruption cases reported; and
- implementation of a new organisational structure designed to improve efficiency and effectiveness.
By way of conclusion, Dr Tyobeka identified the key challenges, which include:
- The NNR’s financial sustainability was imperative, given the general economic downturn, and the operators -- Eskom, Necsa, and mining and minerals processing facilities -- faced financial constraints in paying authorisation fees to the NNR;
- The effective management of a safety culture at the Necsa subsidiary, NTP Radioisotopes, remained a concern for the NNR; and
- Providing effective continuous nuclear safety regulatory oversight to a financially constrained industry in South Africa remained a challenge.
Mr Mileham expressed a concern regarding the financial sustainability of the NNR -- although their revenue had declined, their expenditure had increased. They were not cutting your costs to fit their budget. What was the NNR doing to ensure that it operated within its budgetary constraints? Although the performance review was very positive, with 96% of the targets, why had they failed to achieve the other targets? Lastly, the radon gas issue in gold mines, especially the ownerless and derelict mines, posed a potential health risk for illegal miners. What exactly was the magnitude of the danger, given that radon had a half-life of about 3.8 days? If the mine was abandoned today and in three weeks’ time someone went down it, was there an opportunity for the radon to build up, or had it decayed to the extent that its effect was negligible? Should they be putting an effort into something that did not really pose a long term risk, or rather focus their energies on something they could manage and control?
Ms C Philips (DA) referred to the mines that were processing mine dumps, where the waste was being pumped back into the shafts to dispose of it. A key concern was that there was acid mine water. A lot of the waste was, moreover, contaminated with uranium, and acid was used to leach out uranium. What was the likelihood of this uranium being leached out of the waste that was being pumped into abandoned shafts?
Mr Mahlaule stressed the importance of congratulating the NNR for having achieved an unqualified audit opinion, with two findings reduced to one, which suggested they were going for a clean audit. A concern with the presentation was that there was not enough detail. It was important to include explanations as to why a given target had not been met. In most cases, there was a perception that Parliamentarians were lazy and could not read, and therefore reports should be summarised as much as possible. However, Members even had the ability to compare what had been presented before with what was now being presented. They should therefore make the presentation informative and long, if it needed to be long, otherwise it limited the degree to which the Committee could hold the NNR accountable.
Dr Tyobeka said that the biggest problem with regard to radon gas was what occurs underground. The mines operate on a 24-hour shift. Even if the radon decays, it begins to generate again. A ventilation system was utilised to remove the gases. This was one of the key things that was inspected in the mines – one could not stop radon from being produced as it was a natural process. They needed to police, however, how effective the systems were for removing it. It was a problem for the mines that were operating. For the ownerless mines, there was a bigger problem than radon, and that was uranium. One had uranium lying there as part of the by-product of gold.
Regarding the targets that have not been achieved, Technical Scientific Services (TSS), was tied to the NNR’s Centre for Nuclear Safety and Security. One of their core responsibilities was to provide regulatory research and development, training and education of NNR’s staff, and rendering technical support services. Services that none of their internal units could provide would be outsourced through the Centre. At one nuclear Installation site, for instance, a core expertise needed was geohydrology. The NNR did not keep a geohydrologist in the organisation because it did not encounter that in their normal day to day activities. The Centre of Nuclear Safety and Security would recruit the relevant personnel to work on the geohydrology project.
The NNR had been supposed to initiate certain projects around specialised services which were called Scientific Support Services. They could not do so because a certain memorandum with a French entity did not materialise, so the target was not achieved.
Concerning the possibility of contaminated water with uranium being pumped back to the surface and having uranium leaching out, the NNR monitors the effluent and the level of radioactivity from the mines. If disused mines pump their water there, this poses a problem because most disused mines are derelict and ownerless, and the NNR does not have jurisdiction over them. When it is reported to them by members of the public that this type of thing taking place at an ownerless mine, the NNR could only go so far as going there, taking measurements, and if they thought there was danger, they would alert other authorities such as the DMR to intervene. The NNR had no control over this.
He did not subscribe to the idea that Parliamentarians were lazy, and assumed that the big report was read and then it was summarised. In the future, even the unachieved targets would be included in the presentation, with an explanation.
Mr Gino Moonsamy, Deputy Information Officer: NNR, explained that there was another aspect to radon -- of radon gas seeping into homes when there was uranium. It was lucky that in South Africa there was good ventilation. The World Health Organisation (WHO) was one of the bodies that had identified radon as the second largest contributor to cancer after smoking. This had increased public interest and concern about radon. There were countries that had started to develop regulatory programmes. The NNR was also looking forward to this in the next year. This was not an NNR issue, but a national one. They had had an interview with Carte Blanche in order to create an awareness of radon in homes.
Mr Netshivhazwulu said the issue of expenses exceeding income and resulting in a deficit in their income statement had been more a matter related to certain design issues. Treasury had given the NNR funding for the Eskom process. It meant that, in the first two years (2017 and 2018), they had been accumulating surpluses. In line with the PFMA, they had applied to retain those surpluses, specifying their reasons, and what expenses they would use them for. In 2017, they had accumulated R35 million, and in 2018 R15 million. That money was then available on their balance sheet and budgeted to be used in the current year. They knew that there would be a dip in the government grant that had been forecasted. That funding was then used to offset the current year deficit. It had not put the NNR into any adverse or negative financial standing.
Regarding the male figures representing the organidation, they have made progress, and the executive consists of 50% males and 50% females. It was unfortunate that they had not presented the latest representation ratios, as their employment equity statistics were looking very healthy.
The Chairperson stressed that when the Committee talked about gender or demographics, they were not talking about numbers, but active participants. What criteria were they using? It was not adequate for the female representation to be just a cosmetic exercise to please the Committee.
He asked if the NNR received enough funding to fulfil its mandate, given the fact that its key role was to manage extreme danger. In the areas that they had not achieved, were those risk areas? Were all the targets not achieved due to financial constraints? It was the highest risk that they were carrying. If they did not have enough capacity to fulfil their mandate, what would have to be done? If they failed, they could not use budgetary constraints as an excuse, because they had never mentioned this when they were here.
Mr M Wolmarans (ANC) said the safety aspect had been a focus of the presentation. What collaboration could there be without taking one’s eye off the ball in terms of safety and, at the same time, ensuring that sight was not lost of the aspect that deals with the Nuclear Technology Radioisotopes (NTP) problem. The Minister had said that it was a lost opportunity and that they should not have gone into that direction and, at the same, if one did not it was also a problem involving the safety aspect with regard to the regulations. He asked for the NNR’s comments on this matter.
Dr Tyobeka was pleased that that Committee understood the NNR’s mandate. When one explained how important nuclear safety regulations were, one could actually say that they were more important for defending and protecting the people and the environment than the South African National Defence Force. While the SANDF always fought an enemy that they could see, radiation was invisible, yet one may be in the midst of a very highly radioactive environment. In order to ensure one was safe, one needed constant monitoring, and therefore the need for a regulator. If one settled a village in a highly radioactive area, within five years 80% of the inhabitants would be exhibiting signs of cancer. That was genocide.
The NNR had not made requests for money today. They did, however, have worries of sustainability. Their funding model was such that the fundamental appropriation was the smallest part. The biggest chunk of their existence depended upon the sustainability of the licencees. If NERSA and Eskom were a fix financially, it meant the NNR were in a fix financially, and that therefore they could not effectively fulfil their mandate. That was the biggest risk in relation to financial sustainability. If they were not sustainable, it meant that the workers atthe Koeberg power plant, for example, could continue to be exposed to radiation. The country could have a near catastrophic nuclear accident if they could not send their inspectors to monitor this. If one had a nuclear accident at Koeberg, it would send shock waves to the economy of the country. Marine life in the vicinity would be affected. This would cascade into the entire food and value chain. There were not direct concerns per se, but there were risks that emanated from the potential non-viability of the people that the NNR regulates. The Committee could assist by helping them to examine the funding model of the Regulator. The state could assure the Regulator of 100% funding, and the money from the licencees could be given back to the Treasury. This was the most sustainable funding model.
Dr Tyobeka indicated that the legislation did not need to change to allow this to happen. It needed to be decided through policy discussions between the Department and perhaps the Portfolio Committee and Treasury, whereby the Regulator presents its budget and is funded 100%, and this money is recouped from the licensees. This would take a lot of losses away from the NNR. On this rests the importance and the rarity of skills within the entity.
Money had to be constantly pumped into capacity building. Most of this capacity building was not within the country. SA did not have a big enough nuclear programme to warrant huge investments in training facilities etc. The NNR had this new Centre for Nuclear Safety and Security. It was not developing as fast as they would like because of the fiscal constraints that they faced. They had to send special requests to the Treasury and they were always declined because they did not see it as a priority. If they did not maintain a live pipeline of skills, so that as people retired from the Regulator, the Centre for Nuclear Safety and Security pumped in new skills for continuity, the NNR risked having a skills gap, and this would mean they could not effectively regulate. If they could not effectively regulate, the licensees could take advantage of the situation, and one could find oneself in a catastrophic situation because the Regulator was not capacitated enough to pick up some of the mistakes of the operators. It had all to do with the funding model.
On the Nuclear Technology Radioisotopes, it was a painful concern. He always insists that it was self-inflicted. The NTP brings in a lot of capital inflows for the country through the sale of medical pharmaceuticals. Two weeks ago, he had been at the general conference of the International Atomic Energy Agency, and had had an opportunity of talking to their counterparts in Australia. There was competition with Australia, Belgium, the Netherlands and Canada in the production of NTP. The market was huge and the demand was high. When the NTP facility was down, someone would grab a chunk of the market. In their discussion with the Australians, they had asked for this meeting because they had a similar program. Their own NTP facility was down. They had a problem with the safety culture. They had committed the same mistakes repeatedly, to the extent that 1% was over exposed, meaning that one was standing in a radioactive area of the plant, because of the high level of radiation, one was required to be rotated. This had not happened, because the individual in question was the most experienced and there was no fitting replacement. This had resulted in an accident of over exposure. This could mean that this person could not come to the plant for an entire year because they needed to cool down. They were down for almost two months. There had been a huge outcry because of the shortage of this medication for cancer patients. There was a realisation that they could not continue regardless, of the nuclear safety concerns. The facility had been shut down.
South Africa had the same situation. The NTP facility had repeatedly failed to meet their requirements. The NNR had cut them slack. They had had 13 major non-compliances which had caused them to shut themselves down, because they knew their licence conditions. The NNR had used a graded approach to these 13 non-compliances in terms of the magnitude of the consequences of each if left unattended. If the risk was too high, it was regarded as a non-negotiable. Out of 13, they had given them six non-negotiables. Even those non-negotiables they could not address. It was very difficult to bend over backwards. The Regulator was not taking their minds off the ball in terms of the impact it would have on the health of the patients. It would be a dereliction of duty if they ignored the very near catastrophic circumstances, should a nuclear accident happen in that facility. It was a very delicate balance.
The Chairperson said the NNR’s duty was to apply the regulations. It was good to appreciate this matter from their perspective, as well as the types of interventions that could be done. It was not about policy. An allocation could be recommended to fix what needed to be fixed. What they generated would close the gap. That must be included in the funding model. He would be more interested when a comprehensive submission was made. Even though they were not that big a player, this did not mean that skills development had to be ignored to the point where even at a minimum, they could not meet their requirements. The issue of the funding must be a part of this submission. It was another risk area. Furthermore, a potential collaboration may also be looked into. Regarding the derelict and ownerless mines, there may be other role players to deal with some of the aspects.
Mr Tyobeka said that the Regulator would welcome the opportunity to brief the Committee purely on the NTP matter so that they were very well versed. As to how the NTP situation could be resolved, this could be left for the next Portfolio Committee appearance, lest they be accused of interfering in the NERSA affairs. After they had accounted, NERSA, NNR and the Committee, could meet together and come up with proactive suggestions on how to take the matter issue forward. The Chairperson said that these silos were not assisting the Committee. They could not sit and wait for a catastrophe to occur. They could not take action on what the NNR was reporting. That was their duty.
National Radioactive Waste Disposal Institute: 2018/19 Annual Report
Mr Tsepho Mofokeng, Board Chairperson: National Radioactive Waste Disposal Institute (NRWDI), said the functional mandate of the NRWDI included:
- Long term management of radioactive waste, including the disposal, on a national basis;
- Operation of the Vaalputs low level waste repository;
- Developing criteria for accepting and disposing radioactive waste;
- Managing, operating and monitoring operational radioactive waste disposal facilities; and
- Siting, designing and constructing new disposal and related facilities as required.
Mr Alan Carolissen, Acting CEO: NRWDI, delivered the annual performance report, with specific reference to the targets and matters related to human resources, staff composition, and the staff profile in terms of race and gender distribution. 80% (8 of 10) of the targets had been achieved for the period under review.
Mr Justin Daniel, CFO, dealt with the annual fnancial report and explained the NRWDI’s statement of financial position, cash flow statement, comparison of budget and actual amounts, and audit outcomes. There was no unauthorised, irregular and fruitless wasteful expenditure, no material financial misstatements, and no material misstatements with regard to performance targets.
Mr Carolissen made a few concluding remarks, istating that notwithstanding that the NRWDI was a maturing entity, it was deeply committed to delivering safe, sustainable and publicly acceptable solutions for the long term management and disposal of all radioactive waste classes. This meant never compromising on safety and security, taking full accountability for its social and environmental responsibilities, always seeking value for money and actively engaging with stakeholders in an open, transparent and respectful manner.
Mr V Zungula (ATM) referred to the NRWDI’s human resources, and asked what the rationale for employing a foreign national in an unskilled position was. There was also a huge imbalance between female and male representation in the top and senior management positions, especially in the permanent positions at senior management level. Was the CEO permanent or acting? Regarding the finances, it was unclear as to how to draw a distinction between savings and under-spending. If there was going to be a huge R13 million jump in terms of cash and cash equivalents, and they also had an increase in government grants, would they say that they had saved, and therefore in the future this increase must actually revert back to what it was before? Instead of being allocated these funds, they should be directed to another entity that had more needs. Lastly, overall there had been a lot of under-spending and resulting savings. There was operating material for which they had budgeted R2.8 million, but there was no spending. What was the reason behind not spending anything that had been budgeted for?
Mr S Kula (ANC) also referred to the fact that there was only one female at the top and senior management level, which was unacceptable. When NRWDI had said in its presentation that the bulk of its staff was female, it was very exciting to hear. However, more than half of them were temporary. Regarding its actual performance against the targets, it was mentioned that one target under operations could not be met. What was it doing to fix that particular problem? Would it still set this as one of its targets when it still had to rely on the Department of Trade and Indsutry (DTI) to be able to meet that target?
Mr Mileham said that a strategic objective in programme two was excellent radioactive waste management and disposal services on a national basis. Their measure was an 80% compliance rate with regard to the annual Safety, Health, Environment and Quality (SHEQ) audit. It was worrying that it seemed to be quite a low compliance target for something that was so potentially dangerous. A target closer to 95%-98% compliance would be far more acceptable and beneficial to the country.
Ms Philips pointed out that on the NRWDI’s ethics committee, a Mr Gordon had attended no meetings and Advocate Tsineng had attended had attended one out of three. On the technical and operations committee, there were three members that had attended only 30% of the meetings. If these people were actually being paid to do this job, they were not doing the institution any justice.
Ms Malinga indicated that there was a woman on the NRWDI’s board, yet it had chosen not to bring her. What were the reasons? The Committee would appreciate seeing the affirmative action of the entity. For this entity to function properly, they had to permanent people there, such as a CEO.
Mr Mofokeng said the CEO had been acting for 18 months. The previous CEO had left on 1 April 2018. Regarding the attendance of meetings, the members that had been referred to were not necessarily paid board members -- for example, members who came from government departments. The only challenge they had was around scheduling some of the meetings, becauset members could not attend because they had other commitments. The work of the board had proceeded and the meetings had happened. Regarding the female senior executive who was not present, she had resigned during the course of this financial year. She had been there at the end of March when the report was done, but was no longer in the employ of the company.
Mr Carolissen responded on the target in programme two with the 80% compliance rate, and said he completely agreed with the sentiment of the Committee. They had set themselves a standard of more than 90%. Form a regulatory perspective, the requirement was 80% because the regulator audited the NRWDI on a quarterly basis in terms of the licence conditions. In this case, the reason why they had not achieved more than 90% was because their certification process was not completed. It was actually an integrated assessment in so far as safety and environment was concerned. The Institute believes it is capable of a minimum of 100% compliance rate. They had set a target of 90% or more, but had missed that, based on the audit.
Mr Zweli Ndziba, Corporate ServicesExecutive: NNR, referred to the female representation in top management and the appointment of the foreign national employee, and said that all of the Institute’s staff had been appointed by its inaugural board in October 2016. When the management team took over, they inherited the imbalance and the foreign national that had been appointed. He fully agreed that in terms of the laws of the country, one could not appoint a foreign national to a non-critical skill area. However, this was something that had landed in our laps when they took over the Institute. They had looked into the matter and sought legal advice. Fortunately, all the appointments were on fixed term contracts. They would address the issue of the foreign national. In terms of the legal opinion, they were bound by the contracts that were currently in force. They were five-year contracts that would be expiring in the next 18 to 24 months. Even the predicament around the representation at top management level was a legacy issue. However, they had forged ahead and had clearly articulated an employment equity policy which the board had approved. Any future top management appointments would target females.
Mr Daniels responded on the issue of under-spending, and said the financials indicated under-spending as a surplus as opposed to savings. The surplus arose from some of the issues related to the non-appointment of the CEO, and the number of posts that had been filled during the course of the financial year. Whether or not the NRWDI required the funds going forward now that the posts had been filled, they would require them for the compensation of employees. Once the CEO post was filled, the funding would be required for that post.
Regarding the operating material and the surplus on that particular line item, he said that was mainly related to obtaining the nuclear installation licence from the National Nuclear Regulator. It was fundamental in their commencing that particular set of projects for which, going forward, they had budgeted conservatively for R2.8 million in the last financial year. It could be anything from R5 to R6 million rand. Once they had obtained the licence, the landscape of the organisation would change dramatically in terms of what they would be doing and could do. Certainly, the Committee would see a clearer budget and spending against the budget. The reason for the surplus at this point was largely as a result of the fact that they had not yet obtained the licence and could not proceed with certain critical activities as an Institute.
The Chairperson referred to the non-attendance of board members at board meetings, and indicated that when meetings were scheduled, there had to be agreement on the dates of the meetings which were diarised. Value for money was not only being paid in cash -- it was about the purpose of serving on the board and the value that they were adding to the work of the board. What value were they adding if the record of attendance was as it was? Assuming that they were not attending because they were not being paid, was the Department aware that poor attendance? In some of the entities, there was a requirement to attend. If they were not adding value, what then could the board decide to do?
It was difficult to understand why a non-critical skill position had been given to someone who was not South African. Moreover, the acting CEO have been in office for two years by April 2020. The truth of the matter was that ‘necessary’ expectations should not be created. The longer acting positions were maintained, the more uncertainty was created, and the person in this position would not be certain about the future. If the board had been in office for this long, surely by now it should have done something about the acting positions. When a board knows that its term of office is coming to an end, they create a problem for the coming board in that they appoint when they are supposed to go. Assuming that the contracts of senior managers come to an end when the CEO was still acting, how could one say that the CEO had not performed? This vacancy should be filled.
Concerning the surplus, could the CFO explain what the surplus constitutes in plain language? On the financial position, what was the R13.3 million -- which was R2.7 million? On the statement of financial performance, what was the R10.6 million? On the cash flow statement, what was the R20.1 million from R7.6 million in terms of cash and cash equivalents? Moreover, could they unpack the expenditure, variances and actual amount on a comparable basis? Because of the critical work it had to do, he did not believe the NRWDI was an institution that should have a surplus.
Mr Kula asked why the amount for travelling abroad had almost tripled.
Mr Daniels explained that the statements of financial performance and cash flow were in conjunction with each other from an accounting perspective. In the comparison budget and the actual amounts, in the current financial year, there was a budget of R46.9 million of which they had spent R36.8 million. The underspending of R10.6 million was an operating surplus. The personnel budget was underspent because they did not fill critical positions, such as the CEO. In terms of the general expenses, especially the R1.7 million, they had an amount of just over R1 million for the training of staff which they could not undertake because they were undergoing a skills audit to find out what the skills gap was in order to develop a training plan. That amount was sitting in the R1.7 million. Regarding operating material at R2.8 million, this was related to activities in terms of the relicensing. The Institute could not commence projects because they did not have the licence in their hand. On that basis, they had an operating surplus of R10.6 million. That was the reason for the under-spending. Mr Daniels also gave a detailed explanation for the growth of the accumulate surplus, which then impacted on the cash and cash equivalents figure of R20.154 million. The true surplus or cash was R7.6 million. If they had to surrender anything to National Treasury, it would be the R7.6 million, but they had motivated for it to be retained to fund the licensing of the organisation, which would cost the same amount.
Mr Mofokeng said there had been less overseas travel in 2016/17 because they had fewer commitments in relation to their mandate as an entity. The overseas trips had increased because the entity was functioning better, and they had activities that they needed to attend to and cooperative agreements with entities.
Concerning the value for money provided by board members, they were currently undergoing an assessment of the board for a report that had to go to the Minister on the board’s performance. The people who were doing the assessment were combining the results of last year and this year. The Department could make the reports available should the Committee like to inspect it. It should be completed by the end of November.
Mr Carolissen stressed that the concerns around the surplus were justifiable because of the circumstances that currently prevailed. They were busy rolling out a new structure that needed to be populated. According to their new figures, when the Institute was fully populated there would be over 100 personnel. They desperately needed money, in particular for discharging their mandate according to the Nuclear Energy Act. They were asking for the Committee’s support in order to maintain the surplus. There was no money in government. They needed to optimise their resources. As they were starting with their exponential growth and fully discharge their mandate, they would need additional money. They were one of the youngest entities in the Department, but played a very critical role.
The Chairperson said that the Committee would wait until the NRWDI pleaded for the budget of next year. His discomfort was around how such a critical institution could have a surplus. In private sector terms, that constituted a profit.
Mr Mofokeng said that the organisation was going to grow. They were exploring something called a borehole disposal programme, which was currently being researched. If it panned out, they would have a budget for it in the long term. Koeberg was coming close to the end of its life. There would be a lot of waste that would have to be put in long term storage. As a growing institution, even though there was a surplus, there would be a number of funding requirements.
South African National Energy Development Institute: 2018/19 Annual Report
Dr Thembakazi Mali, Interim CEO: South African National Energy Development Institute (SANEDI), commenced by giving the backdrop to SANEDI’s mandate, energy landscape and strategic direction. The Act provided for it to direct, monitor and conduct energy research and development, promote energy research and technology innovation, as well as undertake measures to promote energy efficiency throughout the economy.
SANEDI’s programmes for 2018/19 covered corporate governance and administration, cleaner fossil fuels, renewable energy, smart grids, cleaner mobility, Working for Energy, data and knowledge management, and energy efficiency.
Ms Lethabo Manamela, CFO, addressed the financial performance and financial position of the entity, and elaborated on the statistics regarding SANEDI’s board of directors and board committees. She said vacancies on the board had negatively impacted on the functioning of the committees. The board had, however, managed to takeover most of the responsibilities. She also gave details of SANEDI’s employment equity status.
Mr Mileham congratulated SANEDI on achieving an unqualified audit. He suggested that in the future it should go into a little bit more detail on the performance indicators that it did not achieve, and its financial expenditure. To only give a graph on financial expenditure does not really allow the Committee to interrogate where the issues were. He sought clarity on the increase in operating expenses and the huge decrease in personnel costs, and asked why did SANEDI did not achieve its KPIs?
Ms Philips asked that SANEDI expand more on its unspent conditional grants.
Ms Malinga queried how long the CEO had been in an acting position. Was it because of the shortage of board members that it had received an unqualified audit? Were the absent board members the ones put forward by departments?
Mr Mahlaule referred to the two resignations from the board, and said nothing had been mentioned about the member who had never attended any meeting and who happened to chair the committee on human resources and remuneration, was a member of the board audit and risk committee, and the social justice and ethics committee. Seemingly, SANEDI had not asked for an intervention in this regard, only on the two resignations. There was no explanation for the resignations. Regarding the performance indicators, the Committee needed guidance in order to help SANEDI. When one looked at the strategic objectives, a common challenge was the number of energy-related research students. What were the underlying reasons? It may need intervention.
Mr Nkululeko Buthelezi, Chairperson: SANEDI, responded on the matters relating to the board, and explained that one board member, the Chairperson, had resigned. There were a number of reasons that were in the public domain that had led to her resignation. The other board who resigned had not been participating in board activities and meetings to the point that the issue was raised at the Department. The board member was given an ultimatum to justify why he should not be removed. He was given a timeline. He did not respond or do anything. Whether he was invited or not, he did not attend meetings. It affected the operation of the board committees. Both former board members were independent, and did not come from any department. There were certain departments that had been asked to participate in the board, and some had sent representatives and alternate members and been very active in supporting the work of SANEDI. The board continued to operate and quorate. The sub-committees, however, could not quorate.
The interim CEO had been acting for 26 months and a few days -- the former had CEO left in June 2017 and the she had started acting in July. As a board, the intention was to replace her. However, the process was deemed insufficient. They had just presented a shortlist to the Department and were awaiting advice. If all went well, SANEDI should have a permanent CEO in the next two months. The interim CEO had been holding the fort and had been doing her best. There was a timeframe in which a person could act, but they had unfortunately not replaced the CEO within that timeframe.
Ms Manamela said that currently there were two vacancies. They had communicated with the Department and were waiting for the vacancies to be filled. At the same time, because of the impact on the committees, they had advertised to fill the vacancies on the committees, and were in the process of appointing two people to the board’s audit and risk committee and one to the human resource committee. Those should be up and running by the end of the year.
Dr Mali referred to the contracted researchers, and said they had not as yet started the carbon capture and storage pilot project because SANEDI had been dealing with stakeholder management issues which had taken longer than anticipated. In Kwa-Zulu Natal, they had had to start talking to the tribal authority and the economic development department of the province. This was taking longer than anticipated. There was another project which they were doing with the Nuclear Energy Corporation of South Africa (NECSA), and things just got stalled and the project was not getting any finality. Those were the two major projects that were giving them problems. Internally, procurement and contracting processes had taken quite a long time, and they could not contract last year. However, they were contracting this year.
Mr Buthelezi said that in future SANEDI would provide more performance information in their presentation. They aimed to fulfil 100% of their targets, not just 80%. Some of the KPIs were very thin in terms of the work that was involved. The carbon capture project was really about stakeholder engagement. The government in KZN also had to be taken on board. They were respecting the relevant processes, some of which were beyond them, but things were progressing.
Ms Manamela responded on operational costs, and explained that last year there had been expenditure related to an organisational review. Every five years, there was a review to see how to run the organisation better, and what kind of a structure they should have to implement the new strategy. The deferred income arose from some municipalities being put under administration and delays in implementing, resulting in certain funds not being spent by the end of the financial year. They would have to send that money back and request it back from the Department for finalisation of the projects. Furthermore, in the previous financial year incentives had been paid to staff, and because of delays in getting approvals, they had paid for two incentives in one year. In the last financial year, there had been provision for incentives, but none were paid.
Ms Malinga said that she hoped that the acting CEO had been shortlisted for the permanent post, as she had been in this position for 26 months. One could not keep someone for 26 months if she was not doing a good job.
Mr Mileham said there was an amount of R1.7 million reflecting as irregular expenditure. It had been due to costs incurred after a contract had expired, and was in stark contrast to the previous year where there had been very little irregular expenditure. Were there controls in place to prevent this happening again?
The Chairperson said it had been indicated that vacancies took time to be filled because of government processes. Part of the task of the board was to ensure that there was stability. He did not believe that there was instability because board members were replaced. It was as if the entity had accepted that government processes took time to fill vacancies. If there were some KPIs which they did not meet, it was likely that there was also the problem of stability on the board. In that case, it was important to engage the shareholder to show the potential of not performing to the optimum in the absence of a fast-tracked process. Furthermore, concerning the lack of strategic direction from some ministries to representatives, what did this mean? The departmental representatives on the board were there to guide it in understanding its purpose. Lastly, if the board was quorating, when had the chairperson resigned? Was it immediately after appointment? What had stopped the board from appointing the chairperson?
Mr Buthelezi, referring to leadership and corporate governance, explained that there had always been a difference between corporate governance in the private sector and in the state-owned entities (SOEs) because of the shareholder relationship. At all times, they tried to respect this because they did not want a situation where there was tension between what the Department wants and the SOE which was supposed to represent the Department’s interests. The Minister would want a certain direction, and the board was also empowered to take certain directions. It was a grey area, and he was happy to say that they worked well together.
There were things that from a government and SOE point of view still needed to be clarified going forward. The SANEDI board was appointed in terms of the Act, which says that the Minister will appoint the chairperson, the deputy chairperson and two other independent board members. There were also representatives on the board from the Departments of Science and Technology, Trade and Industry, Transport and Energy. The board could not elect a chairperson. Fortunately, the Act allows the deputy chair to take over in the absence of the chairperson, and this was what had happened in his case. The Department of Energy had had successive Ministers in a short space of time. The process of appointment had had to start over. He had also resigned from a committee of the board because the Act says that the chairperson could not act on certain committees.
Regarding the lack of strategic direction, Ministers did contribute but there was a lack in terms of what SANEDI believes could be done further by the other departments. Another problem was that the participation of departmental board members was included in the KPIs. When they spend time on board issues, it was not recorded as performance. From time to time there was reluctance to come to these meetings because it was seen as a waste of time. It was another area that had to be fixed, but they had done their best under the circumstances.
Dr Mali added that within the Department there was no structured report back mechanism for the board members to report back to their various departments. Some of them did not even understand why they were sitting on the SANEDI board.
Ms Manamela said irregular expenditure was the issue that pained her the most, because SANEDI had had clean audits for the last two years. One of the steps taken to ensure that this did not continue was that SANEDI was automating its contract management process. Previously, it recorded everything on an Excel spreadsheet, and people were not able to see when contracts were expiring. Unfortunately, one contract had fallen through the cracks. They were implementing a system that would warn them when a contract was about to expire. They also had a bit of a difference of opinion with the AG over how they interpreted the legislation.
The Chairperson advised that those were unwinnable battles. SANEDI should just agree and go ahead. He stressed that the Committee would deal with the entity’s issues, especially with a view to restoring stability. Leaving posts vacant for a long time came at a price. They would ensure that the entity had a fully-fledged operational board.
Central Energy Fund: 2018/19 Annual Report
Mr Kholly Zono, Acting Group CEO: Central Energy Fund (CEF), said the energy sector was a dynamic ecosystem that was driven by a number of global, local, external and internal forces that shaped a number of key strategic and operational decisions that the CEF made on a daily basis. It was these forces that brought about waves of volatility uncertainty, complexity and ambiguity in a sector that was central to the growth of global and local economies, despite it being risky, competitive and capital intensive.
Population and income would be the key drivers behind the growing demand for energy in the next 20 years. The world’s population was projected to increase by around 1.5 billion people, to reach nearly 8.8 billion people by 2035. Over the same period, gross domestic product (GDP) was expected to more than double. Around one-fifth of that increase would come from population growth and four-fifths from improvements in productivity -- GDP per person. China and India together would account for almost half of the increase in global GDP, with Organisation for Economic Cooperation and Development (OECD) economies accounting for around a quarter.
Mr Lufuno Makhuba, Group CFO: CEF, elaborated on the key ratios and statistics, and the state of the group entities. He presented a summary of the 2018/19 group performance and key board matters, and reported on the CEF group external audit outcomes. The board had dealt with a number of key matters that were of strategic importance. These were related to both internal and external elements that were important for stabilising the group, and building the organisational reputation, capability and its overall long term sustainability. They had included a strategic stock investigation, leadership and board capacitation, a South Sudan project development, group sustainability, and a group strategy review and future outlook.
In his overview of the CEF Group, Mr Makhuba explained the CEF Group’s commercial structure, value chain overview, values and strategic pillars, corporate social investment (CSI) initiatives, and the management of stakeholder expectations. He also reported on the performance against predetermined objectives, with details from the group’s financial statements, and the key challenges affecting the CEF.
Mr Zono described the CEF’s risks, sustainability agenda, exploration and production, and the growth agenda in terms of renewables. The key risks were related to financial sustainability, security of supply, human capital, regulatory and governance, stakeholder and reputation management, and project execution.
In conclusion, it was highlighted that despite the various strategic challenges that the group faced, it remained a going concern, as its assets exceeded its liabilities. The bulk of the assets were comprised of cash of R18.9 billion, which was available for use in furthering its mandate. Further to its cash balances, the CEF had the capacity to borrow money to fund key growth projects. A major focus would remain on stabilising PetroSA and driving the group’s growth agenda, keeping up with changes in the operating environment.
The South African Gas Development Company (iGas), the Petroleum Agency of South Africa (Pasa), African Exploration Mining and Finance Corporation (AEMFC), the Strategic Fuel Fund (SFF) and the Petroleum Oil and Gas Corporation of South Africa (PetroSA) outlined their individual performances against predetermined objectives.
The Chairperson explained that each entity within the CEF would be interrogated separately, but also in conjunction with their relationship to the CEF.
Ms Philips said that while it was very pleasing that iGas was making a profit and paying dividends, did the profit that was being made include profits being generated in Mozambique and coming to South Africa, or were he profits from the South African sales shared with Sasol Gas?
Mr Mahlaule stated that the report indicated that in the next two years it was crucial to grow its asset base because the Rompco pipeline income was expected to decline in 2023 due to upstream gas supply challenges. They were experiencing here what had been experienced at PetroSA. It had been predicted that they would run out of fixed stock. How iGas plan on growing its asset base so that there was an improvement by 2023?
Mr Mohsin Seedat, Acting Chief Operating Officer (COO): CEF, explained that Rompco was a South African registered entity that operated within both Mozambique and South Africa in terms of jurisdiction. The bulk of the product shipped – more than 75% -- was for Sasol, and most of the revenue came from Sasol’s payments for transportation along the pipeline. However, some 20% of Rompco’s profits came from sales of gas in Mozambique. iGas were paid by the shippers in Mozambique. It was a combination of Sasol on the South African end, and Mozambiquan shippers in Mozambique. Concerning the upstream gas supply challenges, every single deposit -- coal, gas or oil -- was finite. At some point in time, the product would decreases to a point where one would know one was in negative territory. From 2023 to 2029, the current production rate in terms of supplying to the pipeline would start to decline. Two things had been done to address it. There was additional technical drilling work that had been looked at to extend the life of a gas field, and also work being done that was looking at a north-south pipeline to connect with large gas finds up in the north of Mozambique. That work was currently in the pre-feasibility phase with the Mozambique government. They were looking for partners for the project. Further to that, they were pushing very strongly on the liquefied natural gas (LNG) project to ensure that they had diversification of their asset base and, from a country perspective, because currently they were very dependent on a single neighbouring country for their gas supply.
Mr Mahlaule confirmed that the South African government owned 25%, while the Mozembique government owned 25% and Sasol 50%. In this plan with the Mozambique government, did iGas -- through the South African government -- negotiate with Mozambique or did Sasol, or did iGas come in because the pipeline that they had to use at a certain point belonged to South Africa?
Mr Seedat said that if one looked at the establishment of iGas back in 2000, it was to represent South Africa’s interests in gas and gas infrastructure. The investment in Rompco was based on Sasol first being there in the gasfield and having the need and putting that infrastructure in place. They had been invited into that investment at inception, or pre-inception. However, as things stood right now, they were looking beyond a Sasol situation. The concern from both governments was the monopolisation and non-support of the broader growth of the gas economy of South Africa. This was why they were engaging with the Mozambique government, as a South African government entity, to discuss to support the growth of the gas economy of South Africa beyond a single a single private sector entity’s interests. However, it was common knowledge that Sasol was also engaging the Mozambique government in terms of its own commercial interests.
The Chairperson referred PASA’s finances, and said that the report dealt with exploration and data indicating that revenue was affected by legislative uncertainty. What was the relationship between the decrease of exploration and data, and the legislative uncertainty?
Ms Lindiwe Mekwe, Acting CEO: PASA, explained that what they had actually been trying to highlight as a comment in those financial income statements, was that during the uncertainty during the processing of the Mineral and Petroleum Resources Development Bill they had not received a lot of data requests from potential explorers. As a result of that, not much revenue had been generated. The contribution to the new oil and gas legislation was an exercise which had started last year. This was a reflection of information in relation to the decrease that was basically identified two years ago, before the oil and gas legislation was actually initiated by the department.
The Chairperson replied that the legislators had noted this, as they were at the meeting.
Mr Mahlaule queried whether AEMFC was in the process of engaging or finalising the discussions of increasing its volumes of coal supplied to Eskom. In terms of the discussions of finalising the volumes, was it talking about the ones that were written in the previous years, or was it was increasing volumes on top of these? In support of increasing the volumes of coal to Eskom, another goal was to research clean coal alternatives in support of environmentally friendly power generation. Was this within its mandate? If so, how soon could there be technology to clean coal, because that sector was under threat from lobbyists that did not want the coal that SA had in abundance to be used? If it was within AEMFC’s mandate, it needed to be prioritised before many South Africans lost their jobs. There needed to be a balancing act between the phasing in of renewables and job creation. If the research for technology to clean coal was not completed, SA would run out of scientific arguments to back up the blessed resource that Africa as a whole has.
The Chairperson said his main worry was that the main focus was on African exploration on coal in particular. It seemed that they were mainly a ‘coal mining company,’ not a ‘mining company.’ He did not think they would have had the problems that they had had if there had been laws, for example, that allowed for taking over Lily gold mine. In the mentioned research, help the Committee to think beyond coal.
Ms Mapula Modipa, General Manager: Corporate Services: CEF, said that AEMFC was increasing its volumes to Eskom. The new coal supply agreement, if properly concluded, would see it supply beyond the current 2.3 million tons. In comparison with the big players at Eskom, it comprised only 1%. As a state-owned entity, with the objective of occupying the space, it still had a long way to go. It was hoped that in the future that it would have a greater share of Eskom’s business.
When it came to the research on clean coal, the main objective of AEMFC was purely to ensure that it got coal and other supporting minerals, but for future consideration it could look at whether this should be another investment to ensure that they had a competitive edge, but they were not there yet.
Concerning diversification into other minerals, it was not a priority at this point. For now, they were mining coal in Vlakfontein, and had a 15-year life mine. Other projects under consideration also produce coal through open pit mining, and there were other acquisitions and partnerships to ensure that they grew the group’s balance sheet going forward. They were not confined to coal in terms of legislation. However, coal was the most common commodity in the business of Eskom.
Ms Philips queried whether the environmental impact of the gasification of coal had been studied. Did it have a greater or lesser impact compared with burning coal to generate power?
Ms Modipa responded that AEMFC had not looked into this, and if there was such information it would be forwarded in writing to the Committee.
Strategic Fuel Fund
Mr Mileham said the SFF was a section 21 company, which was an association not-for-gain in terms of the Companies Act, yet the CFO had framed its importance in terms of its contribution to the profitability of the CEF. If it was an association that was not-for-gain, why was it concerned about profitability? There was madness in their business model if they were concerned about profitability. There had been a comment by the CFO of the CEF about stock rotation, but this was not the case because no new stock had been purchased to replace the stock that was sold. If the court found against the SFF, there would be a shortage of 1.2 million barrels, because it had sold 10.3 million barrels and not replaced it? They had the cash for 10.3 million barrels, and the oil was sitting in the tanks. Either the cash had to be given back, or the oil. This was how he understood the potential outcomes of this case. Moreover, in terms of the National Energy Act, the SFF had the mandate in terms of section 17, to acquire, maintain, monitor and manage national strategic energy fuel stocks and carriers. This had been devolved upon the SFF by Ministerial directive. In terms of the same Act, there was supposed to be a strategic fuel stocks policy, which had been sitting in draft format since 2013. There had seemingly been no effort to revive this.
The 1998 Energy White Paper states that there should be 19 days of fuel stocks held in strategic reserve. It was the only promulgated and government-approved policy that talks about strategic fuel stocks. The draft fuel stocks policy, which had not been approved, refers to a 42-day supply of crude oil plus 18 days of refined oil, plus a further 14 days’ stock held at various refineries. Yet they did not have any fuel stocks at the moment. Why not? Why were 10.3 million barrels sitting subject to a court order, which only amounts to 17 days’ supply? Why did the country have such little stock? Why was the SFF failing so horrendously at its mandated task? There was a fundamental problem here.
In the annual report, there was a whole section on South Sudan. Information had been sought from the Department and the SFF for exact details on the exploration and the production sharing agreement that was signed between the South African Department of Energy’s Minister, Mr Jeff Radebe, and the South Sudanese. When they last met on 13 September, the late Deputy Minister had promised this Committee that there would be openness, transparency and honesty in dealing with the Portfolio Committee, and that any information requested by the Committee would be given. He had submitted a Promotion of Access to Information Act (PAIA) application, asking for this agreement to be provided to this Committee. The Committee and the people of South Africa would like to see it. The SFF was investing billions in other countries instead of investing in SA’s own development. There was a need to re-examine the vision, direction and role that the SFF was playing.
Mr Mahlaule voiced his pleasure at the performance of SFF. The Committee was happy to hear that it was making a profit. They did not need to consider the fact that it was not in their mandate. They had gone into tank storage and capitalised on an opportunity. He commended their plan to accelerate the revenue diversification programme, and the fact that they were contributing to the CEF group.
Mr Mileham asked whether SFF had distributed any funds to the CEF, based on what the CFO said -- that the SFF contributed to the CEF’s financial performance? Were any funds distributed from the SFF to the CEF?
Mr J Bilankulu (ANC) commented that this was not a court. Where there were challenges, they were the Committee’s challenges.
Mr Mileham responded that the Portfolio Committee’s role was to conduct oversight. That meant interrogating and asking questions.
The Chairperson interjected that the Committee Members would need to debate how they saw oversight at a different meeting, when the report was discussed. There was no question asked at this meeting that would not be answered at the meeting, or reported back on. Any question was allowed unless it was unfair.
Mr Mojalefa Moagi, Acting Group CEO: CEF, responded on the shortage of 1.2 million barrels. When the sale happened, the SFF had sold 10 million barrels. The 10 million barrels was in tanks and was at Saldanha. The difference was that the 1.2 million barrels was sitting in the pipes so it could not be pumped out. It would be taken out the day the facilities were dismantled.
Regarding the National Energy Act mandate, there was a part that addressed the Ministerial directive. Some of the activities the SFF got involved in were accompanied by Ministerial directives.
Regarding the profitability of the SFF, this entity needed to be self-sustaining. It did not get levies from the government as it used to get in the past. Therefore, the money that it generated gets invested back into the SFF. It did not go to dividends, as IGas was doing.
Regarding the limited stock, this was a Ministerial directive. It was based on affordability and how much the SFF could afford. The total facilities could store 45 million barrels. The empty tanks were rented by traders. There was a Ministerial directive that went with that. The level of stock was based on a Ministerial directive, and was usually based on affordability.
Regarding the agreement with South Sudan, last week he had received a letter from the Department talking about the Member’s request. The timeline given had been 30 days. They would deal with this letter accordingly and would respond within 30 days. Regarding the billions that were invested in other countries, this issue had been discussed several times in the past. There was a figure of US$1 billion floating around. The projects were at a feasibility phase. In the nature of the project in this industry, when the feasibility phase was over and one had a business case, that business case could then be used to invite partners. The whole business tended to work mostly on partnerships. At this stage, they could not say that the figure was definitely billions. They were still at a very early stage of the project, and once they had a business case, they would be able to stipulate the amount that was needed for it.
Mr Sivuyile Ngqonqwa, Chief Financial Officer: SFF, said they were dealing with reputational issues that arose from the past. It was partly their fault as an entity. However, it was also important to underline that those were historical issues. They were focussed on correcting the wrongs that had happened.
Regarding the not-for-gain status of the SFF, the Companies Act of 2008, schedule 1 to 8, addresses and clarifies that a non-profit organisation was not excluded from engaging in commercial activities, with the proviso that those commercial activities would be used to finance its not-for-gain mandate. This was what the SFF was doing -- it was purely to advance the mandate of security of supply for South Africa. There was nothing untoward about it. The R932 million profit had assisted the group’s financial statements, consisting of all the entities on a consolidated basis. Excluding the R932 million profit, the group would have incurred a much bigger loss. It had closed with a R470 million loss.
The SFF still contributed positively to the financial statements as long as they conducted their business in a responsible manner. In terms of their not-for-gain status, they could not by law distribute dividends. However, to advance the security of supply for this country, they had invested R1.1 billion in the National Multi Product Pipeline (NNPP) pipeline between Durban and Johannesburg in 2011. That pipeline would not be functioning without that investment.
Regarding the strategic stock policy, it had gone to the Cabinet, and had been referred back to find a mechanism to fund the policy. The Energy Act of 2008 clarifies what needs to be done before that mandate could be activated by the SFF. The strategic stock policy must first be approved by Cabinet. However, the conundrum was around funding the strategic stock for the government. The SFF were aware that the White Paper of 1998 placed certain expectations on them. It did not state how to fund, because the government must be able to fund the strategic stocks. The SFF had recognised this, hence the efforts to explore commercial activities. The aim was to see if SFF could have a strategic stock for the country without depending on the national fiscus. The reality was that to activate the strategic stock policy, it required funding. When compared to the other socio-economic challenges of the country, it was not that urgent to find funding for the strategic stock policy.
Mr Moagi concluded by saying that if SFF were to fill up Saldanha, it would need US$3 billion which at this stage it did not have. This was a financial challenge. Most of the issues they were dealing with were historic issues. Since 2015/16, the SFF had been focused on running a business with positive profits, working hard on compliance and trying to resolve historical challenges.
Mr Mileham reiterated that schedule 1 of the Companies Act says that the SFF may not amalgamate with, consolidate, merge with, or be part of a for-profit entity. How could the CEF take the profitability of a not-for-gain entity and apply it to their books? They AG would maybe need to give a ruling in this regard. It seemed unlikely that it was permitted to take the profitability of the SFF and apply it to the CEF’s income statement.
The Chairperson said that the Committee would resolve this matter.
Mr Mileham said that the Acting CEO was in Russia. Did this have to do with the RosGeo contract? If this was the case, could the CEO enlighten the Committee with regards to the contract? RosGeo had 70% and PetroSA had 30%, and RosGeo was going to pay all the general and administrative expenses during the exploration phase. They were going to pay the interest on the loan that they had taken out to do the exploration, which was $359 million, or about R5 billion. PetroSA would pay back the loan out of the potential profits that they make on this deal. What would happen if there were no profits? Would they be out of pocket for 30% of the loan? Furthermore, RosGeo’s share for the operating expenses had been capped at $13 million per annum. This was only 20% of the operating expenses that were expected on that particular activity. Did this mean that PetroSA would be liable for the rest of the operating expenses? PetroSA was going to buy the gas from this exploration and production at a cost of $7 per mmbtu (metric million British thermal units). However, at the Committee’s last meeting, the CEF had said that the affordable cost was $3. One would purchase it at $7 and sell it to the CEF at $7, but they could not afford it because it was $4 more than what the affordable cost was, according to their own presentation at the last meeting. He did not understand the logic. PetroSA had a problem with feedstock supply, and were going to run out in December 2020. The CEO had said that they were operating one train instead of three at the Mossel Bay refinery. The indications were that they were overstaffed by a factor of 30%. What were their plans – and when would they start implementing them – to right-size PetroSA?
Mr Mahlaule said that PetroSA needed to rehabilitate, and that it required R9.8 billion. At present, it had only R2.4 billion. Because it had initially been over R8 billion before the rand depreciation, would it not be wise to invest that R2.4 billion so that they could catch up with the recovery of that money, rather than it not being invested anywhere? Furthermore, big words like ‘downsizing’ implied retrenchments, which would mean African people would be retrenched. The Committee would not allow that because it was requesting Petrosa to work out a plan to turn the entity around. It appeared they were getting there, so why go and retrench?
Mr Mileham continued that as a group, PetroSA had for the past five years made an R18 billion loss, and had not once made a profit during this period. If one looked at what contributed to the loss, it was that its cost of sales was higher than its revenue. That suggested two things. Firstly, it suggested that PetroSA had enormous production inefficiencies. For example, their plant costs too much. It was not being utilised properly. There were too many staff. Secondly, could also be suggested that PetroSA was pricing their products incorrectly. What was the cause of their cost of sales exceeding their revenue?
Mr Nhlanhla Gumede, Chairperson: PetroSA, stressed that what PetroSA had tried to show was that the upstream business was about partnerships. PetroSA was many businesses in one. They had an upstream business and how this was undertaken was via partnerships. They had had a few partnerships before and were in the process of trying to establish another partnership with RosGeo. The first part of the process of partnerships was that PetroSA starts with a framework agreement which is non-binding on anybody and all parties put forward their premises. When the framework agreement is signed, they go into the more definitive agreements. What had stalled were the discussions related to the framework agreement. The details that came out of the framework agreement were not contractual. It was non-binding on PetroSA.
Furthermore, to indicate that PetroSA was trying to get into partnerships, Block 9 was prominent. There were a number of blocks, however. Almost all of them were gone into with partnerships. In terms of this arrangement, there were people out there with the risk appetite to fund these activities. Partnerships were what defined this business.
PetroSA had promised the Committee that it would come back with a turnaround strategy. It was working on it and planned to return with a turnaround strategy by November. They would need to talk to their shareholders about the strategy, and then their broader shareholder, the Department of Mineral Resources and Energy. They needed this space to solve the problems at PetrolSA -- not just at the Mossel Bay plant, but to substantially define the role of the organisation.
Mr Bongani Sayidini, Acting CEO: PetroSA, confirmed that his visit to Russia was related to the RosGeo venture. In the main, there had been a change of leadership. The CEO had changed, as well as the Minister at the political level, so it had been mainly an introductory session between the two CEOs -- him being introduced to the new CEO of RosGeo. It was also to allay concerns of RosGeo in relation to delays in concluding the deal. Indeed, what had been signed with RosGeo had been framework agreements that were almost at the level of memorandums of understanding (MOUs). They were non-binding and consisted of the principles of the parties. There was no definitive agreement, where the commercial terms were agreed, without which there was no deal. They had not yet signed the definitive formal agreement or the joint operating agreement. Another agreement was the gas sales agreement where, among others, the price was worked out, but the specific details of the agreement could not be given with confidence.
Regarding the oversized nature of the organization, PetrolSA would be taking the guidance of Mr Mahlaule. Historically when producing, PetroSA had been producing at design rates. It carried a particular staff complement as well as a particular fixed cost structure. That fixed cost structure had not changed in tandem with the fact that gas was depleting, and they were now producing at rates of about 30% in relation to the design rates. The fixed cost structure also explained the absence of a profit in the last five years and the significant loss. The fact that they were running a plant that was supposed to have three trains with one train meant that there were inherent uncertainties.
Ms Alison Futter, CFO: PetroSA, said that while the decommissioning liability was set in dollar terms, the funding thereof was in rand terms. They did not benefit from the exchange rate. The funding of R1.9 billion was sitting currently in a rehabilitation company. Part of the tax statement with status as a section 37 company was that one was confined in the type of investments that one may utilise in relation to that rehabilitation company. Petrosa could not pursue an aggressive mandate with regard to their investments. They were limited to the money market and fixed deposits. They also had an amount of R470 million that sat as cash collateral with their parent company. Against that, they issued parent company guarantees to secure mining rights. The R1.9 billion, together with the R470 million, made up about R2.4 billion that they had already set aside. The investment returns they had received from the CEF was from their own investment of those funds.
PetroSA had over the last five years sustained continual losses at company and group level. Their cost of sales had been higher than the revenue only in 2019 and 2017. In 2019, this had been a shutdown period, and they had continued to sustain costs that were incorporated in the cost of sales. On a monthly basis, they had a fixed operating cost of about R250 million.
Mr Gumede stressed that PetroSA understood the concerns that had been raised. They were asking for an opportunity to present a turnaround plan. The business that they ran in the past was a very different business from the one that they had today. The original business involved treating their own indigenous feedstock, which was largely a fixed cost. They were mining their own feedstock and bringing it to the plant. They now had to come up with a plan that resonated with this new business. In the last few years, they had looked for further indigenous gas opportunities, but had been unlucky that they had not found them. The key was to optimise. They had a good asset at PetroSA which was operating at low capacity. They were looking for an opportunity to turn this company around and would come back to the Members with a possible solution.
The Chairperson stressed that Mr Mileham’s comment and question was different from that of Mr Mahlaule. Mr Mileham’s issue was that PetroSA had overheads and was overstaffed. It had nothing to do with what Petrosa was going to do about it. Mr Mahlaule had argued that a solution could not be found through retrenchments. Retrenchments could not be their first port of call. It needed to be thought through seriously and the consequences taken into consideration. The fact that PetroSA could not sustain itself from a human resource standpoint, and what it was going to do about it, were not conflatable issues. They had to be answered separately.
He asked what was forcing them to involve foreign currency in the rehabilitation. If it was in a rehabilitation company, what was the benefit to PetroSA? Under normal circumstances, one should be able to put funds in an investment management company that would run it. The concern was that the R2.4 billion was just sitting there. Probably there were accumulative benefits that went to the rehabilitation company. It was important to deal with that issue.
Mr Sayidini stressed that at this point in time there were no retrenchments. If the turnaround strategy was supported, it would mean PetroSA would be able to participate in all exploration initiatives that were awarded. In that scenario, they would require significant numbers of personnel to support every block in those joint venture partnerships. There were processes under way in terms of that conversation. They were not there yet.
Mr Gumede said that at this stage, they were sharing resources among the group. In the turnaround, cutting people or personnel may not be the appropriate response. There may be a very different PetroSA, but which may need the same number of people. It was just that they may be deployed differently. They could speak to this until the turnaround plan had been discussed with their principals.
Mr Sayidini answered about whether the money that was sitting in the rehabilitation fund could be utilised for more value-creating activities with a much higher return, and said there were limitations in terms of the National Environmental Management Act (NEMA) financial provisions in relation to how those funds must be managed.
The Chairperson said that if the issue was in relation to NEMA, this Committee could address it.
Ms Futter explained it involved a combination of NEMA, tax legislation and South African Reserve Bank (SARB) regulation. In the context of NEMA, there were particular forms of financial provisioning that were recognised. Deposits held in escrow or asset management companies were not recognised as acceptable forms of financial provisioning. The bulk of their funds were in the rehabilitation company, which was recognised as one of those acceptable forms. Their current rate of return for 2019 had been 10.27%. This was pretty substantial, given the conservative type of investments that were accommodated through tax legislation for a tax exempt rehabilitation company. If they had to outsource the management of those funds within the rehabilitation company to an asset management company, they would be limited in terms of the amount that they could invest in foreign currency. The SARB limits would confine them to a maximum of 30% in so far as foreign denominated currency was concerned. Over and above that, they could invest 10% in Africa, excluding South Africa. The problem with the African type of investments was that they carried a high risk, so they would not be considered acceptable forms of investments.
Central Energy Fund
Mr Mahlaule, in the context of the AG’s findings, highlighted the disregard for compliance with legislation. Of concern were the five non-compliance areas. It seemed like the CEF was involved in all the areas of non-compliance. This was a problem that could not be ignored because one couldnot be an entity that was faltering everywhere. Regarding irregular expenditure, it had contravened the procurement policy by R8 million. There had to be consequence management, otherwise these issues were not going to be investigated, and there would be another finding next year because action had not been taken. This needed to be focused on.
The deficit in the Department of Energy was mainly attributable to the financial performance in the CEF by PetroSA. The AG said that measures needed to be implemented to ensure the sustainable financial viability for PetroSA. Next time the CEF comes, the Committee had to see an expression of this point so that it knew how to move forward.
In terms of the findings of the Department of Energy (DOE) itself, the majority of the disclosed, fruitless, and wasteful expenditure for the current year had been caused by the storage cost for geyser units to various suppliers by the Department. The DOE had reported yesterday that it was giving responsibility to the CEF for these solar water heater units. It was agreed yesterday that this project needed to be rolled out with urgency. It seemed like every problem that the DOE faced was given to the CEF to attend to. What assurance could the CEF give to the Committee that those geysers would be installed so that further costs were not incurred and, most importantly, the beneficiaries that the geysers were intended to assist received them within six months? When would this be rolled out?
Mr Wolmarans said that the constituency work at the entities that the Portfolio Committee undertook a couple of weeks ago had been very helpful. Most of the information had been given by the entities then. When the Committee was in that environment, it had been difficult to ask questions. There was a lot of doom and gloom. This had not been picked up entirely in the AG’s report, however. There were pockets of improvement within the CEF, irrespective of the challenges that were there. There had been improvements in a number of reports after the audit. However, there were a number of challenges. A key challenge was within PetroSA -- that it was insolvent at the company level. At group level, it was not insolvent. In the report, the CEF had highlighted its risks, among which were the financial sustainability of the group which was under threat, the progress on risk mitigation etc. He hoped it would include the issues related to PetroSA.
Could the shared services model business case that had been submitted to the CEF board be elaborated on? Were they talking about the shared services of the group of companies, or the shared services within the Department as a whole? What was the plan around that? Another risk factor which was giving rise to the perception that the CEF was not an employer of choice was that the group did not have adequate skills. What was their plan to change this perception around its bad publicity? This matter had been raised before. Why was the irregular expenditure not investigated, as directed by the AG?
Ms Philips was concerned that there had been a lapse in the CEF’s supply chain management, as they dealt with huge sums of money. In addition they also dealt with a lot of entities. Some kind of strategy should be implemented, so they could come back to the Committee to say what was being done about irregular expenditure. When there were so many people acting in positions, it was very easy to just let matters slide, as acting officials disappear off the face of the earth when there is a finding against them. Regarding the installation of the solar-powered geyser units, she asked for a report back within 30 days of how and when these units would be installed.
Mr Mileham commented that the number of acting positions in the CEF was quite problematic. It meant they were not doing enough to fill the vacancies. There was a need to take a strong look at corporate governance, because there was a failure somewhere. Regarding the group value chain overview, it seemed like PetroSA wanted to get into the retail segment of the fuel business. The reality was that it was extremely expensive to do this. Secondly, there was no existing capacity within PetroSA to do so, such as skills, experience, infrastructure, logistics etc. Why would they be looking at that as a solution when the entity was not able to deliver on its existing skills set?
Regarding PetroSA’s performance against objectives, in the annual report these objectives were weighted, and 50% of the weighting was for financial sustainability, 15% was for energy, poverty alleviation and transformation, and another 15% was for operating excellence. This meant that all of the non-achieved KPIs in their 80% weighting were where their priorities were. This was problematic, because they had not delivered on the things which they had identified as being the most important.
In regard to the Equalization Fund, why had there been such a significant increase in both the levy income and the levy payments? Why were the levy payments now exceeding the levy income, whereas in previous years they did not? In the annual report, it said that the CEF Group paid R96 million in bonuses, yet the Group made a R470 million loss. Did they think they deserved those bonuses?
Mr Kula asked, given the fact that many projects were being taken over by the CEF, if there sufficient capacity within the Fund to complete many of the projects that they had been assigned. The entity had 71% male representation and 29% female representation, so could the CEF make a firm commitment to the Committee as to when they would improve in that regard? There had been a donation of two cars to Mpumalanga Safety and Security, but there should be capacity with the department of safety and security in Mpumalanga to procure those cars for themselves. What had been the rationale for such an action?
In terms of the Group’s financial performance, it was said that revenue had been on the decrease over the last five years. How long was this likely to continue, and what were the plans to turn this situation around? At what stage would they take the Committee into their confidence and update it on its position on strategic fuel issue -- where it was and where it was heading? In the Group’s external audit outcomes, the CFO had stated that one of the contributing factors to the negative outcomes was that late adjustments in the Group needed to be avoided. Why had this not been done, and who was responsible? There were insufficient women in senior positions, and they were also not doing enough to open up space for business opportunities to historically disadvantaged South Africans. This matter was at the top of this Committee’s agenda. They could not compromise of transformation.
Mr Zungula said the audit outcome had been unqualified with findings for the past three years. Were there new issues each and every year? Was there a commitment to work around the negative audit findings to make sure that in the next financial year they did not continue with the trend? Regarding the dominance of multinationals, it was true that the Committee spoke with one voice when it comes to transformation. Therefore, the group had to have the same attitude of transformation as well. South Africa could not continue to have a colonial and exploitative energy sector. What were the reasons that this sector was still dominated by multinationals instead of the South Africans who owned the resources and companies? Was it an issue of legislation, or did South Africans not have the appetite or resources to participate in the energy sector?
Mr Zono said that the CEF was improving with its procurement policies by ensuring that people adhered to the procurement policies. Concerning the attitude that the CEF was taking to ensure that PetroSA was sustainable, they had committed to reporting back on this in November. However, they were not waiting for the turnaround plan to do certain things. The sharing of resources and leveraging on the capacity within PetroSA was very critical. For example, for the new refinery project, 80% of the resources had been taken from PetroSA and the CEF were funding that to ensure that PetroSA’s costs were manageable. A number of things were being done to ensure that resources were being shared with PetroSA. One of the big cost items for PetroSA was feedstock. The CEF was facilitating a conversation between PetroSA and SFF concerning the SFF’s capability in terms of trading and how they could leverage so that they could import feedstock at reasonable costs and improve margins. What this had done was to present an opportunity for the group not to compete, but rather to collaborate and work together.
Regarding the projects that were being undertaken with South Sudan and the SFF, they had leveraged on PetroSA. To grow the mine, they were leveraging on PetroSA’s geological experience. In so far as the solar water geyser programme was concerned, for strengthening our project management capabilities and all the systems in place, they were also leveraging on PetroSA. The benefit for PetroSA was, among others, to improve the morale.
Regarding the responsibility that CEF had been given with respect to the installation of solar powered geysers, Mr Zono said they had met with the Department and the Cabinet Committee on this programme. They had presented a plan and a detailed schedule of what would be done to ensure that the situation improved. They had committed to the President and the Minister to ensure that they did not sit with geysers that were decorating roofs instead of doing what they were supposed to do.
Concerning the shared services model, and in terms of the some of the functions, they were beginning to integrate and leverage on resources. For example, ordinarily PetroSA would have recruited additional internal auditors, but now within the group they were providing that service. Ordinarily, they would have recruited on the refinery project, but now they were utilising all the engineers and business development people at PetroSA. They had realised that PetroSA had a very mature and well-established occupational health system. The benefit was that they were giving people a sense of job security whilst leveraging on their capabilities, so that they knew it was about working for one CEF group company.
The issue of bad publicity had been raised at a previous meeting. They would be introducing a brand strategy. They were setting up a team and were going to ensure that they had representatives from all the entities, and would ensure that they were adequately skilled. One of the things they had realised in doing high level assessments of their skills had been that they could be sitting with a highly skilled person and did not have to use consultants. This was the work they were aiming to do with their general manager of corporate services.
One thing they were doing at the technical and middle management levels was leveraging on the personnel they had. One could not be recruiting, yet they were a family and should be sharing.
Regarding the retail sector and whether they had the capacity, they could not keep doing the same thing the same way and expect different results. Therefore, they needed to be customer-centric. South Africa imported about 200 barrels per day, which was a market. It had allowed that market to be dominated by traders. The issue of transformation in the wholesale space was non-negotiable.
One of the biggest barriers to this business was access to infrastructure. If the national energy company did not have control of infrastructure, then all the new companies that were coming in would be blocked because they would not have access to infrastructure. There were numerous black economic empowerment (BEE) entities, but they had been moved to the areas where there had been high costs. Currently, the ownership of infrastructure was being used as a barrier to transformation. It was a critical transformation imperative, and the CEF could not achieve its commercial mandate if it did not have a market. One could not always depend on a third party. One could not want one’s entities to be profitable, yet they had access only to low profit margins. The CEF’s greatest risk was financial sustainability. If it managed that risk, it would improve its commercial viability and the entities within CEF.
Mr Zono concluded that if each entity wanted to be successful at the expense of the other, they did not have capacity. They were deliberate about partnering and collaborating. At the operational level, even in projects, they were deliberate in terms of female and youth representation. At the next meeting, they would be able to report on the progress.
PetroSA was designed for growth. Unfortunately, in the past five years, they had not been growing in the exploration or downstream business. They believe they have sufficient capacity, but in case they do not, they were going to the market to ensure they had that capacity. When they work with overseas partners, they think of seconding South Africans to work with them so that if in the new refinery they were working with a company that was developing models, they wanted to ensure that at the end of a phase, South Africans and especially youth would benefit.
He said they would ensure that they did not have recurring audit findings. With regard to the multinationals, one of the biggest barriers was not only infrastructure, but also the zones where the production price was made to be uncompetitive. Not being able to partner with an SOE was also making it difficult for entry.
Mr Makhuba said the CEF was having challenges trying to move from an unqualified audit to a clean audit. There were about five challenges, among which was the legal compact between the Department and the entity. CEF had had a struggle to get the Department to sign this compact. Concerning the submission of financials that meet the requirements of the AG or the PFMA, one of the challenges had been that both the CFO and the procurement manager had resigned. This had had an impact on the AEMFC being able to disclose information that needed to be provided. Regarding the irregular expenditure, one of the biggest irregular expenditure items was the sourcing of the lawyers that were assisting CEF with the strategic stock matter. As the court papers were being processed, CEF had been informed of a conflict of interest, and had had to change law firms. In that process, there had been a miscommunication between National Treasury and the entity. This matter was being attended to so that it could be regularised. It also was aligned with the question of consequence management. An instruction had been issued whereby entities had to establish a loss control committee.
Mr Makhuba stressed that where there was fraud, it must be reported. From their preliminary investigation, it seemed to have been a misplacement of documents and a lack of understanding of the processes. This had to be dealt with. These financials and aggregated numbers applied to all the subsidiaries of the CEF Group. Each entity had its own KPI and bonus policy. Most of the entities were performing well. These entities got rewarded, based on the targets that they had. Furthermore, whether the issues were the same every year or different, the issue of the signing of the compact had been with them for more than three years. The last time a compact was signed was in 2017. The Chairperson was engaging with the Minister. They were looking for ways to fast-track that process.
Concerning the levies in the equalization fund, the main contributor was the slate levy. Basically, the oil industry and the Department had an agreement. Last year, there was a time when the petrol price had been increased. Minister Hadebe had announced the petrol price increase, and when that happened, they had had to use the money from the slate levy. The levy did not apply every year. It depended on how the market functioned. They were busy collecting the money that had been paid out. The equalization fund was not supposed to make a profit.
A CEF representative, regarding the solar water heater programme, said the CEF had quite a long relationship and history with the solar water heater industry, and did not view its new responsibility as a dumping of the programme at CEF’s door. They saw it as a partnership that furthered the work that the CEF had been doing in this industry. They had met with the Department of Energy and put together the resources. The 87 000 solar water heater units that had been procured by the Department and were in storage were the ones that would be installed under this programme. The CEF board had availed R200 million to make sure that installation would take place and there were no budget constraints. At the end of October, they would be appointing the companies who would be training the local people in the participating municipalities which were ready, and where they had already identified the installer systems which they needed to train for. In the second week of January, they were starting the installations.
Concerning the donation of two cars to Mpumalanga Safety and Security, Ms Modipa explained that the reason why the CEF had a CSI programme in Mpumalanga was first to ensure that it supported crime prevention in the areas where it worked. They also had a partnership with the Mpumalanga government, and it was important for the CEF to support its partners and ensure that there was capacity to deal with general crime and prevention.
A CEF representative said that bonuses were awarded mainly as a reward and recognition aspect to retain skills. Each of the entities applied their own bonus policy based on their performance agreements with their employees, and with whatever their board and audited results would deem necessary. The amount denoting bonuses in the report was a consolidated amount and did not belong to just one entity.
Mr Neville Mompati, Acting Chairperson: CEF, said the CEF board had almost concluded the filling of the vacancies and posts in the subsidiaries. They had submitted a detailed report after the verification of the credentials of the individuals that had been identified to the ultimate shareholder a week ago. The vacancies on the board would be filled very soon. The report on the sale of stock, which was still a very sensitive matter, was in the hands of the law enforcement agencies. The matter was still sub judice. As soon as this matter was resolved, the CEF would bring a full report to the Committee. At this point, CEF could not give details because the matter was in the hands of the police.
The Chairperson commented that the DOE had said that it would be difficult to implement the solar water heater programme because the heaters were not designed for the South African context. The DOE also said that it did not want to work through the municipality. If that were the case, the municipality would instal the solar water heaters as part of the grid, and they would be untraceable. He asked the CEF to give the Committee the implementation strategy, including the timelines by the end of this month.
He said they could not bring to the Committee a consolidated amount of bonuses without indicating where these bonuses were coming from. Although he could not generalise, it was shocking that there had been bonuses. He asked for a breakdown of the bonuses, including the people that were paid and whether they were still in the employ of CEF? What were the allowances that were given? Apparently R12 million had been set aside for this project. Where was that coming from -- from the Department, the Presidency, or from the CEF?
Regarding the cars for Mpumalanga, the difficulty was whether those cars were reflected financially on the side of the Mpumalanga government. Had they been declared by the department of police? Was the CEF executive aware of such a donation? The CEF was the holding company. It was a project that he had heard of for the first time. Why had this information not been shared with the Committee? It was as if the CEF was hiding something.
Lastly, the Chairperson indicated a key issue was the status of the CEF board, and its capacity to appoint when it was being replaced. It would have been a better arrangement if there had been a CEF board first, and that it was a stable and legitimate statutory body that appointed in terms of the rules. The CEF would come before the Committee, even if it was a new board, with its annual performance plans (APPs), budgets etc. By 25 January, apart from the report back from PetroSA on its turnaround strategy, the CEF turnaround strategy had to be presented to the Committee. Sufficient time was being given. Concerning investment, if SFF and PetroSA did not come with a turnaround strategy, it would be very difficult to believe what the CEF was saying. When one considers the amount of money that had disappeared or been spent on drilling, it was a trail of financial destruction. They needed to take every measure possible to ensure that whatever project was entered into would not come back and be an albatross around their necks.
The meeting was adjourned.
Luzipo, Mr S
Bilankulu, Mr JH
Dlamini, Mr MM
Kula, Mr SM
Mahlaule, Mr MG
Malinga, Ms VT
Mileham, Mr K
Nxumalo, Mr MN
Phillips, Ms C
Wolmarans, Mr M
Zungula, Mr V
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