Central Energy Fund Group & SA Nuclear Energy Corporation Group 2021/22 Corporate Plans; with Minister

Meeting report

The Chairperson welcomed everyone. The Committee would receive presentations from the South African Nuclear Energy Corporation (Necsa) and Central Energy Fund Group (CEF). Necsa would present and then CEF thereafter. The executive branches of the CEF Group (CEOs and Chairpersons of SFF, CEF and PetroSA) would be participating in the presentations and responding to questions from the Committee.

The Committee had not heard from the Auditor-General in respect of the audit outcomes of CEF and this was not the fault of CEF. The Director-General said that the report had not yet been received from the Auditor-General, it still needed to follow the internal processes in terms of approvals. A follow up would be conducted to determine when the report would be available.

The Minister of Mineral Resources and Energy, Gwede Mantashe, asked to be released from the meeting at 12pm because of travel arrangements. The Director-General, Mr Thabo Mokoena, would fill in the absence of the Minister.

Mr M Mahlaule (ANC) assisted the Chairperson in chairing because the Chairperson had been experiencing connectivity issues during the meeting.

The minutes for this meeting were postponed to next week. Next week, the Committee would be dealing with the audit outcomes of the three entities.

Opening remarks
Minister Mantashe greeted everyone. Two entities would be presenting Necsa and CEF. He would introduce both of these entities and give them space to present. Governance in Necsa had been normalised. Necsa was hard at work turning its organisation around, it was forward looking.

When Necsa presented they spoke about SAFARI-1. Governance in Necsa had strengthened a CEO had been appointed, Mr Loyiso Tyabashe. Mr Tyabashe was hands-on and had looked into all problems the organisation was confronted with. The executives at Necsa were all appointed because when an organisation had a lot of vacancies without even analysing the performance; it was sub-optimal. The executives were working hard to reposition Necsa.

CEF was also working very hard as a group. The Board was in place and governance was working well. “PetroSA is our problem child, we are working on it”. A decision was taken not to sell PetroSA. There were quite a number of “vultures” who were trying to get PetroSA. It was a very important asset to the state. There had been “money problems” at PetroSA and a number of people had been “disciplined”; others had left while others were being dismissed. PetroSA was a difficult entity.

A decision was taken to merge PetroSA with the Strategic Fuel Fund Association (SFF) and iGas to create the South African National Petroleum Company. The project was still on track but progressing slower than expected. There was the issue of the strategic stock in Saldanha where stock was illegally sold. This stock had been recovered and was under the state’s control. CEF would elaborate further in their presentation.

The team was determined to succeed and would make CEF and Necsa work. The last area which would need a lot of attention was the African Exploration Mining and Finance Corporation (AEMFC). The AEMFC was a small mining company that needed to grow. It needed to be competitive and big. This was the work on the Ministries desk. The team was hard at work.

Presentation: NECSA
The Necsa Board had directed the Executive team to reposition the entity for better outcomes through an improved strategy. Necsa’s vision was to be a global nuclear and related technology leader, positively touching people’s lives socio-economically.

The key issues Necsa faced were related to leadership, business models which led to poor cost control, plant and infrastructure performance as well as governance. The rationalisation process aimed to develop a new sustainable strategy, a new business model, operational model and structure, achieving a reduced cost structure and increasing revenues and governance. Necsa’s new strategy was rooted in stabilising and growing the business out of its mandate and leveraging its core competencies. The group had been operating at a loss for the past four years, and this trajectory was unsustainable. The rationalisation programme that the entity was going through was aimed at turning around the company, achieving and sustaining a positive trajectory into the future. The rationalisation programme was aimed at ensuring urgent recovery. A new strategy had been developed to fast track the turnaround of the entity with five key pillars: Financial recovery and sustainability, research and innovation,  profitable commercial enterprises, business continuity and efficiencies, culture and talent excellence. Stakeholder engagement remained a fundamental bedrock for success. Necsa was committed to forming and maintaining productive relationships with all its key stakeholders and ensuring compliance with governance principles.

The labour and the executive team were fully involved in crafting new lower level structures aimed at drawing on efficiencies guided by an internal staff placement agreement. The key outcome to this was having an effective and efficient entity through functions that were centralised, centre-led and decentralised. 

Necsa’s mandate was to develop, utilise and manage nuclear technology for national and regional socio-economic development through commercial application of nuclear and associated technology and contributing to the development of skills in science and technology. This mandate emanated from the United Nations Sustainable Development Goals, Nuclear Energy Act (NEA; Act No. 46 of 1999) and the Nuclear Energy Policy of 2008 as well as other national strategic plans such as IRP 2019, DMRE Strategic Plan and the ERRP.

Discussion
Mr K Mileham (DA) thanked Necsa for the presentation. He had a number of concerns. Necsa gave a very high level presentation and did not get down to the “nuts and bolts” of what its key performance indicators (KPI) and actual programs and activities were. This made it difficult to hold Necsa accountable going forward. This had been a concern for a while. Annual reports and APPs (annual performance plans) had not been seen for a couple of years. There was concern around the lack of detail behind the presentation. There were a couple of issues that needed to be highlighted.

In respect of the timeline for the replacement of SAFARI-1 and the costs involved. The Committee needed clarity on those timelines. SAFARI-1 was due for decommissioning in 2030 but would there be a multipurpose reactor in place by then and what were the cost implications of this? Where would Necsa find the funding for that investment? How are you going to afford it given that you are running at an operational loss over the next two to three years? The turnaround strategy as a whole was heavily premised on receiving financing from government. The turnaround strategy made assumptions that Necsa would receive funding. What happens if it did not receive funding? What happens if you only receive some of that funding given the financial constraints experienced by the fiscus? How would Necsa address those challenges? What would you do differently? What contingency plans do you have in place for your turnaround strategy as a whole if the full amount of the investment is not received?

In respect of the lack of aggressive competition. There was concern that NTP Radioisotopes SOC Ltd was maintaining its market share in radioisotopes instead of growing the market share. The entity was not aggressively marketing or competing for market shares and this was problematic.

There was concern around the new entity (old Pelindaba reformed). What would Necsa do differently in the new entity to make it viable? “We’ve heard in the past that Pelindaba Enterprises had lost its market in South Africa”. What would the new entity do differently? How was it planning on growing and becoming viable? Within this entire context, where does the profitability come from for Necsa? How do we turn this into an entity that is revenue positive and net profit positive in a short to medium term? Nothing radically different was currently seen being done.

Ms P Madokwe (EFF) asked about the Auditor-General's audit outcomes for 2020/21 in relation to the report received today. Feedback was received that there had been some progress made between the NTP and the AG. It was alarming that the entity received another disclaimer and amongst other things that were cited by the AG as upright in that disclaimer. The fact that they were not able to gather enough evidence to show that financial statements were in line with the International Financial Reporting Standards (IFRS) was alarming. The supporting information given did not in some instances collaborate with the information that was in the financial statements. There were no internal controls to ensure or to prepare consolidated financial statements in future. The AG could not find evidence to confirm reasonableness of the growth, cash flow focus and related assumptions, conditions and events to support their assessment for viability to continue as an entity. If it was said that there had been some progress made, which of these concerns that were raised had been addressed? What were the plans that would be put in place to ensure that these important concerns would be addressed?

In respect of the nuclear energy industry, was there collaboration between Necsa or the Department and institutions of higher learning to ensure that we start building the necessary academic and technical skills to run the industry? As opposed to bringing in foreigners because we do not have skills, what were the plans in place to ensure that by the time the industry was active there was a collaboration between Necsa and the education sector to breach the gap of lack of skills? Were there any recruitment plans by Necsa or the Department for young people to come into the space of nuclear energy? Were there also recruitment plans for young people to come into the space of what Necsa was dealing with? This was asked because a lot of learners once they reach grade 12 were uncertain about which career paths to take but there were certain career paths of which they were not aware. What was Necsa doing to meet young people halfway to make sure that they do get absorbed into the industry and are able to achieve a career for themselves in the in

On vacancies: Considering the fact that we had analysed that the vacancies that were there were of crucial responsibility and they do speak to the overall performance of Necsa. Why did it take so long to fill those vacancies? Why were the criteria of the people who were put before to oversee Necsa not the people that the entity needed?

In respect of the report where it said that the financial picture of Necsa was unsustainable and there were plans in place: What does that mean in relation to the programmes and projects Necsa intended to partake in that would need financial backing? What happens in the event that you do not meet the targets you had in place or the plans that you had in place do not yield the result you were planning by the end of this year? What plans do you have? “We do not want a situation where you are only going to review your performance after that three years”. Annual reports had not been forthcoming for the longest time.

Ms V Malinga (ANC) welcomed the long-awaited presentation by Necsa. There were a few questions based on the presentation. Necsa’s infrastructure was currently aging. What were the implications of this on business, growth and job creation? In respect of commercial programme objects, the nuclear medicine and industrial isotopes key performance areas show that the market share of Molybdenum-99 (Mo-99) was stagnant at 20% between 2021 and 2024 yet the NTP revenue had increased in the same period. What caused revenue increases amid a stagnant market share?

In respect of the nuclear energy policy, the government intended to expand the nuclear power programme but they were forced to halt this due to challenges ranging from, but not limited to, the cost of construction, reactor accidents, hazards involved in waste storage and so on. What was Necsa’s take on this since one of its mandates was to promote research and development in the field of nuclear energy?

Mr T Langa (EFF) said that other Members had covered him on some of the questions he had wanted to submit. The presentation was not as detailed as anticipated. This lack of detail did not make it easy for the Committee to hold the entity accountable. The financial overview presentation seemed too brief and went “over my head without grasping much”. Business was numbers and numbers needed to make sense. If one were to leave the meeting without clarity on this it would not do justice to the presence of the Committee. A request was made for the CFO to take the Committee through the financial slide again and to add more detail for it to make sense.

Mr M Mahlaule (ANC) asked Members to bear in mind that next week the Committee would deal with the Auditor-General’s findings on Necsa as well as the annual report on two or three entities. If Necsa wanted to expand on numbers they could do so. The same numbers Members might be requesting would however be presented in next week's meeting.

Minister Mantashe said he would give Necsa space to respond to most of the questions. He would touch on a few. “If you are fixing an entity that is in trouble you are fixing an entity in trouble”. The team walked into a situation where there was a Board that was fired on Friday with a new one appointed on Saturday. There was chaos. The new Board had left and there were only three people left. The first step was to normalise governance. Governance was stable and working. This had improved both performance and financial risk. It was up to the Committee to determine whether they saw these changes or not. The Minister gave this feedback to the Committee as a person who had worked with Necsa. The CEO made the point that “we don’t just look on papers, we visit these entities”. The Minister had made physical visits to look into the issues. When the point was made that a “fixer” had been appointed, this was the kind of leader which Necsa needed. “You don’t need an alpha who is bigger than life”.

The financial report would follow. The team would try to bring closer the reporting of audited financial statements to the timeframes that were set. Hopefully next time there would be full compliance. It was not by accident but by design.

The team would respond to the question of the Mo-99 market share. If the market share was not declining it was stagnant. In commercial terms, this was not a negative report. At some point, the entity was closed for 15 months and had to recoup a loss market sale. 

The team would be given time to respond to the issues.

Necsa Response
Mr David Nicholls, Board Chairperson, Necsa, said that the annual report had been submitted at the beginning of February. The report was delayed because the AG’s report was delayed. The details were available in the annual report. Necsa was not trying to hide KPIs.

In respect of SAFARI-1, Mr Mileham was correct. The current approval of SAFARI-1 went into 2030. The goal was to extend the approval to 2032/33. This was a technical issue. It was adequate timing for the MPR (Multi-Purpose Reactor) to come online given the available funding. This would be a function, to a large extent, of what comes back from the RFI (Request for Information) just issued which was asking the market how Necsa could go forward. It would principally be looking at “how do we bank the future income from the NTP process over the next 20/30 years against the value of that?”. 

In terms of the market share. Necsa was 20% of the entire world market for these items. The premise was that the NTP share if it could be maintained as the market evolved, would be very good. The market was growing at approximately 9% per year in real terms. Necsa was aggressively maintaining that market share. It was important to note that 20% of the entire world market for a high tech item was a good thing for South Africa to have. Maintaining this was the challenge.

On delayed vacancies, the previous Chief Executive was in the labour court appealing his termination. Necsa could not search for a new CEO until the CCMA/labour court issues were resolved with the previous CEO.

The new CEO, Mr Loyiso Tyabashe, was appointed in January 2021. Mr Tyabashe was therefore tasked with appointing his team. The team could therefore not be appointed without having a CEO. This was the reasoning behind the delay in filling vacancies.

On the nuclear energy policy, it was important to understand that if one ring-fenced the entire nuclear industry in the country, and you look at Koeberg’s life extensions which were currently being processed and had been planned for years and the cost of that and the cash cost of running Koeberg. If Koeberg was to have a contract to provide power to the grid for 20 years at the current tariff level for generation in the country, Koeberg would be generating a cash positive position of more than R7 billion a year.

If one modelled the procurement of a new nuclear plant and assumed that four would be bought for about 1 000MW, and assume funding them through the classical export credit agency financing and, moreover, if they have their initial PPA (Corporate Power Purchase Agreement) for the first five or ten years at the average market price, then one would end up with the nuclear industry having no cash shortfall at any point in a programme which has a first 1 200MW coming out during 2033 and one year thereafter for four years. This also provided good funding for the next year if one ring-fenced the whole thing and the free cash would support the next grant for around R1 billion a year. This would include a complete cash payment for the MPR and might even include money for development. If the nuclear industry was seen as a whole you would find that the next take was that if the nuclear industry was ring-fenced at a rate commercial in the open market it would be a nil-cash issue for government. It would become a valuable asset after 20 years.

It was asked whether Necsa was efficient in using its money and was there a world benchmark to hold Necsa against. The nearest benchmark which could be found in the world was the Australian Nuclear Science and Technology Organisation (Ansto). Antso was almost a carbon copy of SAFARI-1 without the overheads of the previous nuclear programmes it had 1 500 people; similar to Necsa. Antso had a cash inflow of something over R3 billion a year from the state. Nesca was running one-third the price of their nearest competitor in the world.

Mr Tyabashe said he would start off with the questions in the order that they came. The presentation had more detail should anyone want to delve into them. The details were centred around the efforts that were incorporated in the corporate plan for the current financial year which would end in the next month. What the team sought to do was “not to go to town” in explaining the KPIs premised on the old strategy but rather give an overall view of where Necsa was whilst also attaching the details as supporting slides. The Chairperson would advise whether the presenters should present that detail to the Committee. 

On the timelines for SAFARI-1 replacement, SAFARI-1 was currently operating and was being maintained through a management programme. Through the programme many studies had been done which looked at the components that were important for safety. Necsa determined that SAFARI-1 could be operated beyond 2030 subject to changes and modifications being made. This information had been shared with the National Nuclear Regulator. Whilst we talk about SAFARI’s end of life being around 2030, it did not mean SAFARI-1 would go off at the end of 2029 this could not be achieved even for a nuclear power plant. In terms of its operations, SAFARI-1 could operate beyond 2030 subject National Nuclear Regulator allowing Necsa to do what it had set out to do. The intention was to make sure that there was no gap between SAFARI-1 and NPR that was being worked on. There must be an overlap of about a year or two until everything was set in order before SAFARI-1 is retired. The effort towards the NPR was to ensure that it would be operational on and around 2030/2032 and plans were being refined as Necsa moved forward. This was being shared with the Board. The positive news was when the Cabinet in September 2021 announced the support of starting the project of replacing SAFARI-1. This had been taken forward and the team was well on its way. The request for information had been started. This request for information would allow Necsa to finalise and firm up. The goal was to understand the full scope as well as the total costs of the project itself. The business case on the project would have firmer information as Necsa moved forward.

On timelines, the typical timeline was around five years from start of construction to commercial operation.

Mr Mahlaule asked Mr Tyabashe to repeat the last point which was not heard.

Mr Tyabashe said Necsa was working towards having an overlap between retiring SAFARI-1 and starting the commercial operation of the NPR. The Cabinet had endorsed starting the project for the NPR this was in September 2021 which was subsequently followed by issuing a RFI request for information to the market so that we can get firm information in terms of the timelines to construct, the scope of the project in detail as well as the costs that were related. Associated with the costs was the funding because there were different funding methodologies by different international vendors. The RFI information was needed to synthesise and internalise into the business case and to take this forward in Necsa’s strides. 

On the turnaround strategy which was premised on a government grant: If there was no grant what would Necsa do? Necsa was doing all it could to ensure that it remained less of a burden to the fiscus. There were mandates Necsa had to fulfil on behalf of the government. These mandates included for example the defunct facilities that needed to be decontaminated and decommissioned which did not speak to production of isotopes including safeguard facilities. There were several such programmes that were being funded not necessarily for the viability of Necsa but to fulfil the mandates previously mentioned. The effort was to make sure that Necsa on the profitable commercial enterprises stand alone and that they were market facing in the true sense of the word. Research needed to be funded. Some of the research was done and it stopped while some of it proceeded all the way into commercialisation. The effort of Necsa was to be less of a burden to the fiscus.

The issue of NTP was touched on. Necsa was recovering from the historical closure of the NPT around 2018. The target of 20% had to be put there because of the global demand. The 20% should not be seen as stagnant because it was growing every year because the market size was growing every year. What had been included in the strategic project plan for NTP was to ensure that there was product diversity. Presently Mo-99 was dominating the revenue space in NTP. Other products were needed because it was not good to rely on one product in the market. The isotopes were being diversified. Necsa was increasing its base into the radiopharmaceutical strategy as well as increasing its customer base. Although Necsa had a good footprint in the USA, Europe and there was growth in South Africa, nevertheless there is a desire to grow further into the African continent and in other regions. It was not only to admire the 20% but to ensure that there was focus kept while also exploring other areas where the market share could be grabbed.

The power industry part of the entity was a viable aspect of the business in how Necsa had repositioned it. It was discovered that the old construct of Pelindaba Enterprises was that everything was under one house. In the event that you did not have orders coming from the market, equipment and personnel would stand idle. Necsa had refocused that all the equipment goes to the unity centre which was the nuclear operations. The project management was also centralised so that that part of the entity was to seek the market and grab the market share while utilising the resources that were centralising the entity. This would ensure that Necsa’s facilities would have a high utilisation rate and that staff would be highly utilised too. Projects start and stop because the entity worked on projects. So the idea was that when projects stopped, personnel would be moved to another project which had commenced instead of waiting. Marketing also needed to be done. Although those facilities were nuclear-qualified they could not produce compounds for general industry which means we produce components to a higher standard. There was a big market that was not tapped into. Necsa would set out the new lead of that organisation to ensure the footprint of Necsa was fully established in that market.

On profitability: Although focus today was on the current financial year's corporate plan, the profitability would be seen in the corporate plan submitted for the next financial year. Moving forward, you would actually see how our revenue versus cost is taking us from the current picture that was shown here, but for the 2022/23 corporate plan which would be submitted in two weeks, you will see a fundamental shift because we are migrating towards lower loses which is premised on ensuring that we have a very healthy balance of revenue versus costs. We have found that there were duplications in some areas of the business. The restructuring had allowed Necsa to not enable those duplications to exist. In the past, there were three CFOs and presently only one CFO was accountable for the group. There were general managers who would focus on the financial aspects of the different entities.  Necsa was really driving costs down while seeking out new revenue avenues.

On Ms Madokwe’s question on the AG’s outcomes, it was alluded that this would be presented on the 1 March as part of the annual report. At a high level, Necsa came from the past financial year of 2019/20 with approximately 160 AG findings to the present report which would be presented in March which had 63 AG findings and some of those had been fully resolved and some were in the process of being resolved before the end of the financial year. What we are doing is also are getting internal and external audits to look at whether the findings were effectively closed before the financial year is finished.

The view of Necsa was to make sure that as it moved into the next financial year none of the historical matters still burdened it. The CFO would talk about the Auditor General outcomes at high level.

Ms Precious Hawadi, Group Executive: Financial Capital, Necsa, said that in terms of the disclaimer AG opinion that was indicated, the team had looked at the auditor’s opinion and it had been put into seven themes that they were able to address.

There was a question raised around the cashflow forecast which was one of the aspects of a going concern and in that what we have been able to show I think the proof of the pudding is in the eating. We are currently in the month of February and the financial year ends at the end of March so we are able to show that we are a going concern. An audit recovery plan had also been started and all the required supporting documentation had been compiled. Part of this was to have all the supporting information readily available so that we are able to have evidence. With the cashflow forecast that aspect had been addressed.

On International Financial Reporting Standards (IFRS), the various checklists would be reviewed. The audit recovery plan was one that was monitored on a bi-weekly basis and the actions had been agreed with the AGSA. One feature is looking at how the team would address the IFRS. There was some IFRIS aspect the team would look at as part of the recovery which needed to be addressed.

On supporting documentation, there were two avenues and facets of that which was the third element of the seven themes looked at. One aspect was the opening balances. The auditors were looking at historical opening balances into 2004 and 2015 that were part of the audit. There were some supporting documents that were not readily available timeously. What had been done this time around and as part of the audit recovery programme, the supporting documentation would be put together and go back into historical years to be able to show that the documentation was not available. Documents were usually kept on site for a period of time, however because the audit period was a three-day turnaround time there was an issue with timing. This was being resolved.

On internal controls and the preparation of financial statements, these had been prepared and Necsa had been able to display—especially with the audit recovery plan—the manner in which internal control had been addressed was the weaknesses that were cited and as part of that a recovery plan that was put together and was monitored on a bi-weekly basis with supporting documentation. The entity was also able to show the process flows of how the various transactions aligned and work to be able to get rid of any auditor’s fears that there were no processes. The entity had those documents and was currently seized with compiling them. The intention was that in the next month there would be engagement with the AG to do an early audit. The AG would then be able to look through the documentation that had been compiled to have a sense to say that the aspects that they had raised had been adequately addressed.

There was a comment on the financial statements. Moving forward the picture looked positive. This had been achieved through looking at the expenditure and streamlining this expenditure according to the various revenue streams available. On the revenue line, the entity had been looking at diversifying revenue streams to be able to see how it could expand on the revenues. Expenditure was then curtailed by streamlining and prioritising the various expenditure to ensure priorities were being addressed not meeting a “wishing list of things that would be nice to have”.

Mr Tyabashe said that Necsa previously had audits that took eight months while the present audit only took three months. The AG was tough with the Necsa and Necsa was also tough with the AG. There was a healthy engagement in the process. The two months standard set out for the audits would be kept going forward. A very good job was done in that regard.

On the questions raised by Ms Madokwe, one of them was about nuclear energy and whether Necsa collaborated with institutions of higher learning. The nuclear domain was a domain in which there was a free flow of traffic in terms of collaboration and the sharing of information. This starts all the way from the International Atomic Energy Agency (IAEA) where there was a body of knowledge of different streams on what they do. Necsa did have some of its young people participating in those forums. Locally there were collaborations with various research institutions around the country.

On academic institutions, there was a very close link with the Steve Biko Academic Hospital which worked very closely with Necsa and provided great support. Work was also being done with the South African Young Nuclear Professionals Society (SAYNPS), which was very active within Necsa’s site. The was also involvement with  Women in Nuclear South Africa (WINSA). These structures made it possible for the youth to be exposed to Necsa in various forums around the country to make sure that cross-pollination and collaboration were possible. On the key projects, transformation informed the benchmark of participation.

On recruitment plans for young people, there were school programmes. There was a school nearby that was part of their partnering. There were also public safety information forums held to make sure people were aware of where Necsa was going and what the organisation's outlook was going into the future.

On vacancies, the Chairperson touched on this, especially at a senior level, the Board, the CEO and the executives were being finalised. The finalisation of the executive would be followed by senior management.

Ms Malinga mentioned the issue around the aging infrastructure. The reality was that Necsa was on a campus which was built many years ago. The nuclear industry was highly regulated, so maintenance could never be skipped in respect of maintaining the minimum standards of compliance. The equipment was old but it was reliable and functional. Maintenance programmes and regimes were held for all the equipment. There would not be a point where Necsa placed more focus on production than nuclear safety. The view was that Necsa equipment must stand the first test (nuclear safety) followed by the second test (production).

Mr Nicholls covered the issues of stagnation and nuclear energy policy.

The issue around the detail of information. Mr Nicholls would speak on this.

Mr Nicholls said that in terms of the reliability of Necsa’s equipment the SAFARI-1 reactor was statistically the top-performing production reactor in the world in terms of “days online per year”. It was one of the best if not the best in the world.  Did the Chairperson want Necsa to present and go back to financial discussions?

The Minister said the financial reporting would be dealt with next week. 

Mr Mahlaule (acting as Chairperson) thanked the Minister and his team. Members were asked to allow the presentation on financials to be presented to the Committee next week and step off the presentation on Necsa to move onto CEF. The Chairperson was back on the platform and the meeting would be handed over to the Chairperson.

The Chairperson thanked Mr Mahlaule for assisting. He was experiencing a blackout in his area which caused connectivity issues. CEF was given an opportunity to present.

Mr Langa told Mr Mahlaule that one needed to check with the person who submitted that question. He felt suppressed even though he had no issue with his question being deferred to next week. This should be done differently in future.

Mr Mahlaule apologised.

The Chairperson noted what Mr Langa had said. The actions of Mr Mahlaule were not intentional. The Minister was called upon to say a few words.

The Minister said that he had covered CEF in his introductory remarks. He had put on record that he wanted to be released from the meeting at 12pm.

CEF Presentation
The CEF Group was the execution arm of the DMRE in support of broad government national energy imperatives in support of the NDP. They operated across the entire value chain. The mission of the CEF was for it to be the catalyst for economic growth, to alleviate poverty, provide sustainable energy solutions for Southern Africa, to ensure security of supply, and be a leading diversified energy company. Its vision is to ensure access to acceptable affordable energy in Southern Africa and to contribute to national energy security.

The CEF intended to execute its vision and mission by securing energy-producing and beneficial mineral resources, promoting exploration for onshore and offshore oil and gas resources and driving transformation in the mining industry.

The CEF Group Corporate Plan was developed in an increasingly volatile and unpredictable world. There was a need for resilience as global forces continuously increased in importance and impact on local markets and minimised dependency on multinationals. The CEF had the opportunity to diversify South Africa’s energy mix and to uplift the local economy. The CEF had a competitive advantage as an SOE in the energy landscape, it was in close proximity to policy development, it had limited leverage with deployable cash reserves and had strong cash reserves by various entities in the Group. The weaknesses of the CEF included limited participation in the energy value chain, poor implementation track record on complex projects, single-source entities, cumbersome governance, resource constraints, its weak group value proposition, poor performance management and limited growth.

The strategic trajectory plan was to stabilise the CEF Group and improve long term commercial sustainability and strategic relevance, drive growth and increase market share through diversification of income streams and product portfolios, to develop key energy infrastructure programs in support of economic development and growth, as well as group consolidation to exploit synergies and improve scale for strategic relevance thereby turning around struggling entities.

CEF was projected to generate an average net loss of R168 million per annum for the first three years (2022 to 2024) of the planning period and an average net profit of R233 million per annum thereafter.  This was because the average net loss for PetroSA for the first years was R825 million per annum. The net losses were mainly driven by the sub-optimal performance of the GTL refinery and low oil price projections for PetroSA Ghana.

The CEF SOC was expected to generate an average net loss of R227 million per annum over the planning period due to the rising operating costs and low income generated to fund costs.

The cash and cash equivalent balance would decrease from R13.7 billion to R3.7 billion over the planning period. The cash decrease of R9.6 billion was because of the increase in investing activities and operating losses incurred in the first two years of the planning period. During the planning period, the Group planned to invest R11 billion (see slide 19 for a breakdown).

In recent business performance, the CEF Group had generated a net loss of R329 million because of the medium-term shutdown of GTL refinery, which is likely to resume production in May 2022. The inefficient operating model—which has high fixed costs—was depressed by the external environment due to the impact of COVID-19. 

The execution pace for turnaround, sustenance and growth initiatives required urgency. The CEF would focus on initiatives like merger projects and obtaining Cabinet approval, CEF SOC repositioning, PetroSA War-Room Group and driving consequence management to rid the entity of corruption and poor performance.

Discussion
The Minister cautioned that where there were too many acting positions this was a sign of instability. He handed over to DG Mokoena. 

The Chairperson thanked the Minister and released him from the meeting.

Mr Mileham said his questions would focus on the new entity. What was being done about rationalisation of functions and positions? There were three Boards, three HR departments, three legal departments and three finance departments. What was being done about rationalisation?

What would be the impact of jobs on those entities moving forward? Could a more accurate timeline be given in terms of what the merger process would looked like. When would it be completed?

There were concerns about capital investment. What major capital projects were CEF and its subsidiaries investing in, in the short to medium term? Sources had mentioned the potential of  CEF buying Sapref oil refinery and there was mention of the development of a regasification plant at the port of Ngqura. This was not seen in the plans. “Is this on the cards or not?”. If not, would the Department and Minister confirm that it was something that was not being done?

PetroSa, SFF and iGas were merging to form the new national oil company. Meanwhile, the South African Agency for Promotion of Petroleum Exploration and Exploitation (PASA) was of its own accord regulating and promoting exploration in upstream petroleum. It would make sense to include PASA in the new national petroleum company and move the regulatory function across to the National Energy Regulator of South Africa (NERSA). Why was there a reluctance to consider this?

Mr Mahlaule said that it appeared as if the refinery in PetroSA required approximately R1.2 billion to refurbish. If this were the case, then if PetroSA were given gas and condensate tomorrow, the belief was that they would not be able to process it. How would this situation with the refinery be fixed? We did not have the R1.2 billion to refurbish. The idea of functioning March or May was not realistic. Could something be said on this?

On the CEF Group’s financial crisis, income had always been badly affected by the financial crisis in PetroSA. Were there no other entities within CEF who could generate enough profits to offset PetroSA’s financial crisis? So that when CEF financials were discussed we get to a point where PetroSA’s situation was not cited repeatedly as a problem to the CEF group itself.

In respect of PetroSA’s operating costs which were operating at a loss. Without income who was covering the monthly operational costs of PetroSA? To whoever was covering the operational costs, was it sustainable? If it was not sustainable what was the plan?

Why was PetroSA allowed to make approximately a R825 million loss? Why was this loss not checked earlier by both CEF and PetroSA? Why was this allowed to happen?

The Committee sat in the meeting a year ago and spoke about the restructuring plans of CEF to merge PetroSA, SFF and iGas. This strategy was presented in the meeting. Why has it not happened? Why did it take so long to merge the three entities? Could the Committee be informed of what the “real problem” was?  

Mr Langa said the Committee welcomed the commitment by the Minister to not sell off PetroSA and to safeguard it. It was witnessed that state assets were strategically unbundled and sold off. It was hoped that nothing contrary to what was committed today would be heard on a different platform.

The Minister had said that in respect of the merge of SFF, iGas and PetroSA “we are on track” and “moving lower than expected”. “Which is which, madala (old man)? Oh sorry! Which is which the Minister”?

How far was the merger of the entities from completion and what were the set targets for the end of 2022?

Ms Malinga thanked the Chairperson of the CEF group for the introduction of new voices heard on the platform which the Committee was unfamiliar with. This was appreciated.

In terms of slide eight presented by the CEO on the SWOT (strength, weaknesses, opportunities and threats), how did the CEF intend to improve on their weaknesses? These weaknesses are worrisome.

On the issue of strategic fuel farm storage capacity. Trade in the international oil market was denominated into dollars. This meant that the purchase of crude oil was determined by the value of the rand relative to the dollar. In instances where the value of the rand was lower relative to the dollar, purchasing crude oil would become too expensive for the CEF group. Why did SFF struggle to keep refined product stocks when South Africa was importing?

On strategic fuel farms, Astron had put SFF on notice that it would no longer lease Tank 1 in Saldanha. How true was this? What would be the impact of this on SFF’s financial sustainability?

On the net loss, the CEF group was expected to generate an average net loss in 2022 through 2024. One of the cited reasons for this was the escalating operating costs. The CEF ironically intends to attract private sector partnerships in some of its projects. How would CEF manage to attract private sector investment when it had an uncertain revenue stream? What was the plan to increase the revenue?

In terms of generating profits, CEF said that they would generate profits post-2024. The projected profits were forecasts. Was there any tangible profit-generating plans that were not based on anticipations? Could the Committee be provided with tangible plans?

The Chairperson made an announcement before allowing CEF to respond. Members were alerted that in the programme the Committee adopted there was a scheduled meeting on the audit outcomes of the South African Diamond & Precious Metals Regulator (SADPMR), Necsa and the CEF who could not present.

The CEF was still expected to make the presentation on the merger of the PetroSA, SFF and iGas and how far the process was. This was scheduled in the Committee's programme. The CEF could however provide the responses as requested by Members. The Director-General, Chairpersons of CEF and the team were given an opportunity to respond.

Mr Mokoena (DG) handed over to the CEOs of the CEF Group to respond as well as chairpersons of the other entities. The technocrats would respond first followed by the Chairperson of CEF, the Chairperson of PetroSA and the Chairperson of SFF. This order of response would be followed starting with CEF.

CEF
Dr Ishmael Poolo, CEO, CEF, said that in respect of the merger, the CEF requested that this matter be deferred to when they would present to the Committee. Cabinet had requested for CEF to do some work on the merger. This work had been done and they were in the process of getting a slot to report on the issues the Cabinet requested a presentation on. The work was done. CEF was waiting to take the process forward. They envisage that before the end of the financial year progress should have been made in terms of the incorporation of the merger.

On the issue of profitability, the CEF was looking at deriving around R1.5 billion as a result of rationalisation with the shared services model. The possibility of approximately 10% of the staff could be accessing that. It was a question of how best to deal with this. Whether to redirect staff. Everything was being done to avoid the aspect of job losses in that regard. The shared services model had value in it and a R1.5 billion net improvement was seen as a result of such rationalisation.

On the investments in liquefied natural gas (LNG), SFF would respond to this.

The CEF was engaged with a number of projects. The strategy of CEF addressed issues of growth. The limitation was that CEF had signed a number of non-disclosures with a number of entities so it was constrained in some sense. They had been on a drive on acquisition. There were a number of acquisitions that were concluded like the Republic of Mozambique Pipeline Company (ROMPCO) projects and there was the 50% acquisition of the BP terminal in the Western Cape. Overall there was engagement with a number of sellers on different aspects of some of the assets that were being disposed of. There were certain constraints as negotiations continued.

The Department would respond to the question on PASA in respect of its relocation.

In addressing Ms Malinga’s question on the SWOT analysis on slide 8, one central issue was the fact that CEF was a single source entity. The organisation was attempting to diversify so that it would be able to manage its risks. This was more of an aspect of diversification so that CEF would be able to absorb some of the risk as market movements and dynamics take place.

On private ownership, the losses of the CEF were not consumption-based, they were due rather to investments made on new projects. What had been happening so far was that money had been received in respect of interest income. Instead of maximising on the return, there was a limitation in terms of what was received. A decision was taken to drive the growth agenda. Since 2007, the CEF had not invested in significant projects. Those investments were yielding like other portfolios that were doing well (e.g. iGas and SFF), when one looked at the investment cycle in terms of the return, there would be a five to seven-year period before the return was realised. “We had actually wasted time”. A decision had thus been taken to invest now so that in the next three to five years the returns would be realised. The CEF had been partnering with the private sector in the investments it had been doing.

PetroSA
Mr Pragasen Naidoo, CEO, PetroSA, said, in terms of the PetroSA offshore and onshore refineries in Mossel Bay, that if liquid feedstocks were received tomorrow, subject to the funding thereof, the refinery would be reclaimed within 12 to 18 months. It would take this long because the offshore assets needed to be fixed and reinstated.

On the PetroSA refinery reinstatement in Mossel Bay, should PetroSA receive liquid feedstocks tomorrow, subject to the funding thereof, it would take PetroSA approximately 12 to 18 months from the offshore to the onshore infrastructure to get it fixed, reinstated and ready for operation. The shortest duration of the operation was 12 months and the longest duration was 18 months. This was a ramp-up from the one-by-one to a two-by-two to a three-by-three. Should it be gas feedstock and the funding thereof, it would take an additional six months to get the facility reinstated. The would be a ramp up over that period of time.

On operating costs, as of 31 January, the intended budgeted revenue was in the order of R9 billion but the actual revenue was in the order of R11 billion. There was significant revenue into the company. This revenue was generated through the downstream business largely through importation of finished products and the trading sales and marketing of the product into South Africa. That revenue together with other funding mechanisms like utilising the PetroSA Ghana asset and the PetroSA Europe asset for dividends. This was in addition to a huge cost optimisation exercise where PetroSA was receiving costs on both variable, fixed and operating costs. This funding was used to presently operate the business. Support had been received from the CEF group in terms of funding and feedstocks (through SFF) interventions over the last financial year. These interventions had allowed the remuneration of all the PetroSA fixed manpower to date. It was a challenge with regard to which they were not out of the woods yet. If the interventions were completed there would be better sustainability in the future.

On the loss, it was by no means that the team had not anticipated the loss. There was introspection. The anticipated loss, not only the budgeted loss but the actual loss, would have been significantly more if PetroSA had not invested and implemented the cost optimisation cashflow management processes. It was true that PetroSA had not reduced the loss to zero and turnover profits to zero. The entity had however significantly managed to reduce the losses from where it was the previous financial year to where it ended in March 2021 and where it was expected to end in March 2022. The expectation was that the intervention identified and the funding source for those interventions internally within the CEF group and externally would elevate and turn those losses to zero and then to a positive profit margin going forward.

SFF
Mr Godfrey Moagi, CEO, SFF, said he would answer the three questions which had been directed to SFF.

The issue around the port of Ngqura. The Minister pronounced on this a while back in terms of the development of an LNG hub in Ngqura. SFF was in the process of dealing with the regulatory requirements to be able to develop the LNG terminal in Ngqura. Presently there were no massive plans in terms of investments. “What we’ve got was the cost of the studies”. SFF was working through the regulatory compliance and after that issues of feasibility would be dealt with. After these issues are resolved only then would SFF be able to head project investment which would require the approval of the Board, the group approval and the Minister's approval for section 54. It was early to talk about the level of investment. Supplier agreements had not been signed at this stage. “We are not there yet”. What you may have seen was that CEF had also embarked on directing the activities with other sister state-owned entities like CDC and Transnet.

On the storage of finished products, SFF was aware of the fact that they needed to make the adjustment towards finished products. The corporate plan and strategy focused on this. There was the acquisition of 50% of the Cape Town BP terminal which would be able to supply Eskom. SFF was looking at LPG (Liquefied petroleum gas) infrastructure. There was a push to get into finished products. The reality was that there were not a lot of refineries. 

Other possible customers were being looked at to bring on board and to occupy the space. The loss of one customer—especially a key customer—would have an impact on the financials of SFF. In terms of sustainability, SFF was sustainable and the business would not collapse. Customers would be found.

Ms Neliswe Magubane, Chairperson, SFF, said the corporate plan included the diversification of the income stream by getting involved in finished products and in engagements with various stakeholders. SFF was also looking at the acquisition of other storage facilities to make sure that the mandate of the Department of Energy to ensure security of energy supply was met by SFF.

PetroSA
Mr Nkululeko Poya, Chairperson, PetroSA, said the comments made by Members were noted specifically on how PetroSA's performance could be improved. As the Board of PetroSA working with management, we have put a lot of initiatives in place to see how we can improve the financial sustainability and viability of PetroSA as outlined by the CEO, as well as the cross-cutting measures. What was critical was for PetroSA to secure funding specifically for the refinery, so that the refinery could operate in terms of the timeline outlined by the CEO. Funding was critical and key in getting the refinery to run and operate again. This was the biggest challenge PetroSA had and this would be outlined in the corporate plan which would be submitted to the CEF group and Parliament. The Board was looking at options it could put in place to start the refinery but to also secure funding.

CEF
Ms Ayanda Noah, Chairperson, CEF, said she did not have much to add. The executives had covered most of the questions which had been asked. Everyone was working as a team. There were a number of Board collaborative efforts implemented to strengthen the oversight role. There was a merger steering committee which was comprised of executives from the merging companies and also CEF. The details would be shared to the Committee when the presentation on the update of the merger was held.

There was a ‘Tripartite War-Room’ group that met on a weekly basis to look at the PetroSA issues. A sense of urgency was created and PetroSA was receiving support to help them focus on their initiatives towards recovery. There was an opportunity to leverage strengths across the business by engaging and enlisting support from the other subsidiaries in better positions to assist in these endeavours.

As part of the oversight role played by CEF, there was a Chairpersons’ forum that met on a quarterly basis. Matters which involved the whole group were looked at during this forum. The group also looked at how they could leverage one another’s strengths to fulfil individual obligations.

Mr Mokoena said justice had been done on most of the questions asked. On the issue of PASA. CEF was currently busy with the repurposing and rationalisation of the state-owned entity. All the entities were being looked at holistically. At the right time, CEF would return to the Committee to give a presentation in respect of the progress around the repurposing and rationalisation of the state-owned entities.

In terms of the acting positions and stability. CEF would make sure as per the commitment by the Minister that it attended to all the issues related to stabilisation and filling vacancies within the group. There was a proven positive track record based on the commitments made by the Minister around the filling of vacant posts. A lot of work had been done. In respect of the other issues, a progress update would be given to the Committee when the time arrived.

The Chairperson thanked the presenters. Next week the Committee would be dealing with the audit outcomes of the three entities. The Committee had not heard from the Auditor-General in respect of the audit outcomes of CEF and this was not the fault of CEF. The audit outcomes of CEF had not been tabled in Parliament which made things difficult. The issue would be investigated to determine whether there was a delay in the Department or the AG’s office. Members were correct in that it would be difficult for the Committee to wait endlessly. The term “appropriate time” was subjective. The Director-General did not help the Committee in using those subjective terms. This was a process, that amongst others, would have been finalised almost a year ago. CEF was urged to bring some form of information regarding the progress of the merger. This would assure the Committee that some degree of progress was being made. The Committee was responsible for ensuring that it performed its duties of oversight. A request was made for a one or two-pager from CEF which outlined as little as intentions to merge. When the Committee dealt with the first, second and third quarterly reports with the Department there were issues that were not provided in detail and there were sent back because there was an impact on other entities of the Department. Extra classes may need to be convened to finalise those responses. The matter should be dealt with holistically. The floor was opened for Members to answer.

Ms Malinga said that her second question had not been answered which addressed the financial sustainability of SFF given the fact that Astron was not going to be leasing Tank 1 in Saldanha.

The Chairperson said the silence of Members attested to the fact that matters were being dealt with holistically, including the audit outcomes of the three entities. SFF was given an opportunity to respond.

Mr Moagi said that Astron had given SFF notice to leave the facility by June. SFF was still very sustainable. In accordance with the business plan, the entity should be able to manage itself within the cost space and revenue. It was also worth noting that the new acquisitions (Cape Town, Montague Gardens, and so on) were bringing in revenue. SFF was moving away from being a Saldanha Tank 1 business to becoming a much more revenue diversified business. This was the agenda moving forward.

The Chairperson asked the Director-General, Mr Mokoena, to add to the next week’s presentation the process of the merger. The difficulty was that there were many challenges. There was correspondence coming from a community structure or forum. The matters relating to PetroSA seemed to be significant. A solution in the final analysis needed to be found and would be appreciated by everyone. The solutions needed to be found by the entities themselves and their leadership structures.

The Department and Members of Parliament were responsible for conducting oversight on these entities. Collectively, opinions must work towards finding solutions. The desire was that even when the Committee was ceased with challenges, entities and Departments must continue to appreciate individual and collective structural opinions that are presented. The Director-General was given an opportunity to conclude.

Mr Mokoena thanked the Committee and said that the issues had been noted and responses would be provided. It would be appropriate for CEF to wait till next week to respond to the issues. The report had not yet been received from the Auditor-General, it still needed to follow the internal processes in terms of approvals. A follow up would be conducted to determine when the report would be available.

The Chairperson said one of the things that would complicate the committee's work was that the Committee would be going for the budgets and the APPs of the Department and the entities after the budget speech of tomorrow. Proper information was needed before discussions were had. The staff would advise. Members agreed that the minutes of the meeting would be postponed to next week.

The Chairperson thanked everyone who participated in the meeting

The meeting was adjourned.