DMRE Portfolio Audit Outcomes; DMRE & NECSA 2022/23 Annual Reports; with Deputy Minister

Meeting report

The Chairperson welcomed everyone present and acknowledged the presence of Deputy Minister Dr Nobuhle Nkabane. Members had just arrived from Johannesburg as they had been working for the past three weeks in three provinces -- Limpopo, Mpumalanga and North West for public hearings. The North West province hearing was concluded yesterday. He hoped that in the next term, Parliament would not subject Members to an emergency task of processing these reports.

Apologies were received and acknowledged.

AGSA on DMRE's overall portfolio performance

Ms Madidimalo Singo, Business Unit Leader, Auditor-General of South Africa (AGSA), said that the AGSA would present the audit outcome of the Department of Mineral Resources and Energy (DMRE) portfolio, which excluded the Central Energy Fund (CEF) Group for reasons which would be provided.

She reflected on the positive movement in the audit outcomes in the portfolio. She acknowledged the auditees who performed well, as well as the auditees who did not perform well or regressed or staggered. The root causes that led to these audit outcomes would also be provided. The AGSA went deeper to assess the mandates of the institutions to ascertain whether they performed well in delivering their mandates.

The DMRE portfolio was critical for the country now, and energy security was a critical element. Given the current challenges, several key role players were required to collaborate to ensure that energy security was realised in the country.

Audit outcomes

The AGSA reported that 60% of entities under the DMRE had achieved a clean audit. Those entities were:

The South African National Energy Development Institute (SANEDI),
The National Energy Regulator of South Africa (NERSA),
The National Nuclear Regulator (NNR),
The National Radioactive Waste Disposal Institute (NRWDI),
The South African Diamond and Precious Metals Regulator (SADPMR), and
The Council for Geoscience (CGS).

Regarding the quality of financial reporting, seven (64%) of the auditees had submitted credible financial statements without material errors, and four (36%) had submitted financial statements that contained material misstatements that were subsequently adjusted, and this had been mainly due to inadequate reviews.

The Nuclear Energy Corporation of South Africa's (NECSA’s) audit of the annual financial statement had improved to a qualification in four areas. A qualification was not a good audit outcome, but the progress to better audit outcomes was noted.

Within the portfolio, there was some reliance on the audit process to ensure that the annual financial statements were credible and free from material misstatements. This was because four of the financial statements were submitted with material misstatements, and only three had managed to adequately correct the financial statements.

See attached for full submission

Discussion

Mr K Mileham (DA) expressed concern about the DMRE and NECSA for their poor audit outcomes and financial performance over several years. Was there any improvement at these entities? What was still not being rectified at the Department and NECSA level? He also asked about the disagreements over the delays in the submission of financial statements, and at what point it became unacceptable.

Mr V Zungula (ATM) asked about the unachieved key performance targets of the DMRE and if the reasons advanced were legitimate or if it was merely poor performance that would require consequence management. Was the AGSA in a position to comment on whether the reasons provided for poor performance were legitimate or not?

Ms N Makeke (ANC) asked the Department to unpack its low-performance rate. The DMRE had achieved below 50% on three programmes.

Ms V Malinga (ANC) said the AGSA had had recommendations for the Director General (DG) and the Executive Authority, but in its remarks, it had also referred to what the Committee must do. Secondly, she asked the AGSA to elaborate on the key performance indicators (KPIs) and targets that did not talk about what the DMRE was doing, or its mandate. What framework did the AGSA use to ascertain if the KPIs, and what was provided for audit, were not aligned?

The solar water heater programme continued to come up from the AGSA, and it attracted wasteful and fruitless expenditure at the DMRE. The Department must unpack in detail how it was mitigating this finding. There were always issues with the suppliers, storage, and others. What was the AGSA’s advice to the DMRE regarding this programme?

She questioned where the disagreements within management on the CEF Group financial statements stemmed from. Were there disagreements within the AGSA on how to deal with the CEF Group matter, or within the CEF Group itself?

Mr M Wolmarans (ANC) also wanted to know where the misalignment between the DMRE’s KPIs, or targets, and its mandate was. He asked about the nature of engagements between the AGSA and the DMRE on the solar water heater payments and storage costs that had led to fruitless and wasteful expenditure.

Mr J Lorimer (DA) said he was disturbed about the response to the recommendations of the AGSA, which had talked about action plans not being adequately implemented and lack of consequence management on irregularities. Did the DMRE take the AGSA seriously?

AGSA's response
 
Ms Singo responded to the delays in the finalisation of the audits. She said that AGSA engages the entities before the audit period commences to outline its expectations during the audit period, among other things. Once the financial statements were submitted, AGSA further engaged entities on the submitted financial statements after reviewing them to advise on whether issues had been picked up. When an auditee was unhappy with the audit or a particular matter, they could pursue the dispute resolution process.

When the AE had requested an extension to deal with the material misstatements that the AGSA had identified, the AGSA referred the entity to the National Treasury, which declined the extension, and the AGSA also put its foot down. The AE had opted to follow the dispute resolution process, and AGSA had to observe this process until it was completed. The extension of the audit did not seem to garner any support, but the decision on the dispute resolution process would come out this week.

Entities must ensure that financial statements are credible and that internal controls are implemented, with reports and financials submitted timeously.

AGSA had noted an overall improvement at NECSA. The audit outcomes in the prior years had had qualifications in several areas. It had moved from disclaimers over the past four years. 17 qualification areas had been reduced to four qualification areas. There were entities within the portfolio that adhered to the recommendations of the AGSA, although not all of them. At the core, clean audit outcomes were basic before the discussion on the achievement of the mandate or not. It was important that entities had the necessary internal controls to at least produce basic clean audits.

When AGSA had engaged with the Minister on derelict mines, he had indicated that 6 000 holes must be rehabilitated because mines had holes that must be addressed. The target set was three mines, so to get to the rehabilitation of 2 000 mines was going to take a long time. However, the issue here was the funding. AGSA had advised the DMRE to engage with National Treasury to improve its performance on the rehabilitation of mines. The rate at which these mines were being rehabilitated was concerning. She also asked the Committee to note this.

The reason for the deviation in the rehabilitation of mines indicator was community unrest. AGSA had requested additional information that could substantiate the information submitted to make these conclusions. AGSA had evaluated this information to ascertain if it was within the control of the Department or not. In this case, AGSA did not identify any instances where the reasons provided for deviation were not in line with the portfolio of evidence that was provided.

Ms Singo said that when AGSA reviewed the performance information, the starting point was always the mandate established for the portfolio and its entities. The mandate was then reviewed in line with the government priorities, enabling legislation, the medium-term strategic framework and the National Development Plan (NDP) to ascertain if there was alignment between the strategic objectives the Department was driving, and the government priorities. One could not have a disjuncture between the two. The AGSA started with the government priorities and compared them to the strategic plan and annual performance plan (APP) of the department, and assessed it for completeness. The reason why this was important was because AGSA wanted the entities to achieve the outcomes and key objectives of the government. If these key objectives were not included in the APP, it became difficult to hold the auditee accountable.

Regarding the solar water heating project, the AGSA had issued recommendations in the past on the project. A material irregularity was often a last resort for the AGSA. The starting point was that it would make a finding or observation which was shared with the Accounting Officer, and the AO would provide a representation of what they had done. The AGSA only got to issuing a material irregularity when it did not see adequate action being taken to address that irregularity. In the past, the AGSA had advised that a clear project plan with timelines that were adequately monitored must be devised by the DMRE on this project. This project plan must clearly outline who the beneficiaries were. This was now included in the report as part of the recommendations. After the conclusion of the audit, some work was done to install the geysers. The AGSA welcomed this, but more traction was expected.

The disagreements with the CEF Group were around the accounting method, which emanated from findings that the audit team had raised, and how management had to deal with certain matters.

Regarding the outcomes of the Department and what it needed to do to improve its audit outcomes, the financial statements submitted for audit in the current year had a significant reduction in findings of material misstatements. It was moving into a space where it could submit credible financial statements.

If the audit action plan had been applied in all the programmes in the current financial year, it would have seen an improvement. However, the AGSA may not audit the same programmes or samples in the coming financial year.

The recurring compliance issues stemmed from consequence management – the starting point, which was the investigation, would provide a clear path on what consequences needed to be applied.

Regarding debt collection, the controls that were in place within the Department must be implemented throughout the region consistently, and this would resolve the debt collection compliance issue. The irregular, unauthorised, fruitless, and wasteful expenditure would be significantly reduced once the solar heater programme was concluded.

NECSA had started with 17 qualifications in the prior year, with several disclaimers in the last four years. It had moved from a disclaimer to a qualified audit opinion, which was positive. It had also listened to the AGSA, and part of the reason why it had improved was the stability brought at the chief financial officer (CFO) level. This contributed significantly to improving the audit outcome.

Chairperson's comments

The Chairperson said generally, what the AGSA audited was the output of the input. The issue may not be at the input level. The first part was that departments were supposed to work with the Department of Planning, Monitoring and Evaluation (DPME), and when all these plans were done, they were aligned with the government priorities. Were they not making a mistake when they approved those KPIs and budgets, which was the input -- were they not making a mistake without considering the overall government objectives? Should the Department’s planning be consistent with the DPME? Perhaps the issue was not a misalignment of policy and mandate, but a misalignment of departments, which was beyond the Committee.

The AGSA had also indicated in its presentation that not all the indicators of the portfolio were audited. Was the report inclusive only of what had been audited? Was the decision or outcome influenced by what was not audited at all? How did the AGSA audit a derelict and ownerless mine? The closure of the 6 000 holes also depended on other mechanisms required to close these holes. He thought the AGSA would say that if the state was not fast-tracking a new system that would close these holes, it would be creating a future crisis, because the question was: who was going to close those mines now because they were ownerless? In some areas, even if the state closed a hole today, tomorrow, people would open another one next door, and he was uncertain if this should be classified as fruitless and wasteful expenditure.

Why was the AGSA concerned about NECSA licensing, but not mineral licensing? The AGSA did not mention what must be done with the backlog on the exploration licences, and what the loss implications were. With the current state of municipalities, did the AGSA believe that NECSA would be bold enough to implement the licence conditions effectively?

Lastly, regarding the solar water heater programme, how did the DMRE get out of this payment of storage costs? The only way out was their installation on roofs.

AGSA's response

Ms Singo noted the Chairperson’s remarks, and indicated that the AGSA would consider some of his comments. At the centre of what he was saying was what was the reason the Department existed, and how one should measure its performance in terms of the outcomes on the table.

There was an Integrated Resource Plan (IRP) which looked at how the demand for electricity was going to be met and clearly outlined the energy mix required to meet that demand. One needed to ascertain how the Department was doing in meeting the IRP’s requirements. The AGSA would re-emphasise this message because it was at the core of measuring the Department's performance outcomes.

Regarding the solar water heating programme, the AGSA’s view was that these heaters should not be stored, but installed. This was the most effective and quickest way to get rid of the storage costs. If the DMRE had a clear project plan, and if it was implemented and adequately monitored, these disputes on contractual arrangements would be resolved. The Committee should consider monitoring the installation of these heaters.

Regarding planning, there must be greater collaboration and integrated planning and coordination across the government so that one could work towards achieving the same policy and strategic objectives. However, whilst the planning, collaboration and coordination must take place at the overall level, there were still some things within the control of the executive authority and accounting officers. Part of the recommendation to the government was how to get the different executive authorities to come together and decide where they were taking the energy portfolio, and who the key role players were that had to be present. To an extent, a forum or structure must be devised to continue the conversation and monitoring among the key role players.

From a policy perspective, there were certain things that the Department could do on its own, and there were certain programmes where it needed to collaborate with other key role players. The Department could play a critical role in bringing these key role players together.

The Committee should be playing an oversight and monitoring role.

In the current year, the AGSA included binding recommendations to the DMRE for the solar water heater programme. The binding recommendations often followed material irregularities.

The reasons for the regression stem from the State Diamond Trader (SDT). The issue at the SDT was like the DMRE, where the AGSA had selected a different programme from what had been audited in the prior year. The breakdown in controls would mean that the recommendations were implemented in the programmes that were audited.

Regarding auditing samples, the AGSA’s key focus when auditing was the programmes that impact service delivery and the achievement of the core mandate. There may be some administrative areas that were important for the effective operation of the auditee, and these were also considered to be included in the auditing sample. The ones that were not audited were often unrelated to the core mandate of the delivery objectives.

If regulators were enforcing the licence conditions, the Regulator would be able to see which municipalities and agents were struggling, and this could assist in bringing in other role players that could deliver. As for NERSA, the auditing scope in the current year focused on the energy availability factor (EAF) and the supply of energy in the country.

The Chairperson welcomed the AGSA’s responses. Once one understood the mandate, the tools that one used must be effective.

DMRE Annual Performance Report 2022/23

Dr Nobuhle Nkabane, Deputy Minister of Mineral Resources and Energy, laid out the presentation content and who would be presenting which part.

Mr Jacob Mbele, Director-General (DG), DMRE, took Members through the presentation, which covered the 2022/23 financial year performance; key performance areas; reasons for the non-achievement and mitigation plans; and the financial performance. The Department had received an unqualified audit opinion with findings, consistent with the previous year.

The Department had eleven public entities reporting to the Minister, of which ten had submitted their audited 2022/23 annual financial statements on 31 July, except for the CEF Group.

[See the presentation for the audit outcomes of each entity that reports to the DMRE]

Ms Yvonne Chetty, Chief Financial Officer, DMRE, presented the financial performance and reported that the DMRE had underspent by R329 million  (3%). No unauthorised expenditure had been recorded for the current financial year, but the recurring balance of R50.6 million was from the previous financial years, and irregular expenditure confirmed in the current year was related to multi-year contracts awarded in previous financial years. R7.8 million of fruitless and wasteful expenditure had been recorded, which was related mostly to storage fees paid to service providers for solar water heaters.

[See the presentation for more details]

Discussion

Mr Lorimer noted that the report was two days late, and Members used to get a hard copy of the annual report and asked if that would happen. He referred to slide 10, where it was reported that 249 mining rights and permits had been issued to historically disadvantaged South African (HDSA) entities, and asked how many entities were involved. Secondly, he referred to slide 31 on mineral publications, and asked the Department how this worked because he thought they were written in-house. He asked for an explanation of the delays in the procurement processes.

Mr Mileham referred to slide 19 on releasing the request for proposal (RSP) for 2 500 MW of nuclear procurement. The Integrated Resource Plan (IRP) 2019 Decision Eight said that the DMRE must commence preparation for the procurement of 2 500MW of nuclear energy at a pace and scale the country could afford. What affordability and needs analysis had been done and what feasibility study had been done? Who would procure this 2 500 MW of electricity? Secondly, regarding unauthorised, irregular and fruitless expenditure, the annual report lacked detail, and although it provided a number, it was not specific. Some of it was related to prior years, but there was no indication of how much was related to prior years. Some of it related to the solar water heater storage, but he asked for a breakdown of this figure, and said it should be included in the annual report going forward.

At what point did it become non-viable to continue with the storage of these heaters? Another R7 million had been incurred related to this project. Since 2019, this issue has been ongoing, and no progress has been made. Surely, the project could be scrapped and written off? Earlier, the AGSA had mentioned that the Department had incurred R350 million in relation to this project.

The AGSA had identified some areas of concern, like the misalignment between the mandate of the Department and its KPIs. They had said this was an area of significant concern and had led to some of the findings on performance. What were the Department’s plans to address that misalignment, and how did it account for it in the current financial year?

The AGSA had also identified that the debt collection period was extensive. What were the interventions of the Department to address this? What were the Department's plans to align the accounting and reporting practices with those expected by the AGSA?

Mr Zungula referred to the challenges related to illegal mining and rehabilitating these mines to address the persisting challenges. He asked if the target of closing three mines a year was reasonable, given the extent of the problem. Secondly, on improving Eskom plant performance, was there a reason why there was no actual number of power stations or plants that would be targeted, and how many plants were operating at full capacity?

Ms Malinga did not believe that the DMRE’s audit findings would improve any time until the solar water heater project was scrapped. Apparently, the audit outcome of the DMRE was based solely on energy, and excluded minerals. She understood that perhaps it could be doing well on its mineral component.

She lambasted the DMRE on the preferential procurement of RFPs, because the AGSA had indicated that the DMRE was not supposed to focus on this. The mandate of the DMRE was to ensure that the country had sustainable energy. Was the DMRE concentrating only on procurement?

The challenge of vacancies in the DMRE seemed to persist. When the two departments merged, the DMRE had told the Committee that it was dealing with the organogram, so the vacancies were not filled. Now, the new problem was that while vacancies were being filled, staff were leaving the DMRE. This meant that the Department was not adequately addressing the issue. The DMRE should lead its entities, but if it was not performing well in its audit, how was it setting a good example for its entities?

Lastly, regarding the solar water heaters, Members had been taken to Milnerton by the former DDG, and they had been left traumatised. Until these geysers were on top of the roofs of the intended households, this problem would persist. The fruitless and wasteful expenditure stemmed from the storage costs of these geysers, not their repairs. The Committee had recommended that the former DG should engage or have bilateral agreements with the Department of Human Settlements (DHS) and Cooperative Governance and Traditional Affairs (Cogta) to expedite the installation of these geysers. Would the DMRE be able to achieve the unachieved targets with the remaining 3% of its budget? She had reservations about this.

Mr Wolmarans also lambasted the DMRE for the recurring costs of storage related to the solar water heater project. This would continue to be a nightmare for the Department, and there was a great possibility that it would still come up next year. However, one of AGSA's biggest concerns was the lack of consequence management for officials who were responsible for this project. Rumour had it that the person who said they were responsible had since left the DMRE. Now that these individuals were no longer in the DMRE, what was the plan to hold them accountable?

Secondly, in relation to the ownerless mines and the failure to reach the target, one of the reasons cited was community unrest. He wanted to know which community this was, and what the unrest was about. He also asked the DMRE to unpack the misalignment of targets or KPIs with the mandate of the Department.

The Chairperson asked if the Department was aware that the reason there was no audit outcome for the CEF Group was that one of its entities had requested an extension. The reason provided by the AGSA stated there was a “pushback from the board and management on an extension of audit timelines,” and it had gone to the extent of an appeal to National Treasury, and it was now using the internal processes within the AGSA. The Department must indicate what its plans are about this matter. Part of the delays were also attributed to the acquisition of a new subsidiary.

Secondly, he asked the Department to unpack the “pushbacks from management and board on provisions of onshore and offshore liabilities.” What was the Department’s relationship concerning the format of what needed to be planned for? This should be derived from the overall strategic objectives of the government. Had any work been done in the Department by the DPME on the issue of misalignment?

He asked about the challenges with mining, health and safety amendments. He found it odd that people complained daily, but nothing seemed to move forward because the trade unions should be at the forefront of ensuring workers were protected. It seemed that the DMRE was thumb-sucking this and hoping for a miracle, but nothing was moving in terms of legislation. The underspending of R78 million was mainly due to vacant positions, which was a lot of money for just vacancies in the administration.

He also expressed his concern about the R7.2 million in underspending on mineral and petroleum regulation, as one would argue that this was where the Department should be generating revenue.

He criticised the Department for its poor performance versus its entities. How would the Department hold its entities to account if it never showed any improvement in its performance compared to its entities?

Who were the people present during the solar water heater project contract engagements? The AGSA was also not clear on who had to be held accountable. There was no way that only one person was responsible for this gargantuan mess. Who came up with the idea that there must be an arrangement for storage when the project was underway? The recurrence of these irregular costs was not on the new devices, but the old ones. To simplify the matter, who was the DG of the DMRE at the time? Who was the CFO and project manager as well? It felt as if the Committee was talking to ancestors on this matter. He asked the Department to take the AGSA report and present it to National Treasury to substantiate the acquisition of funding to close the ownerless mines. It had been said that it would take 69 years for the DMRE to close all these mines.

Ms Malinga commented on the closure of the ownerless mines, and said that the Department had committed that by 24 September, holes would be closed, but Members wanted to know where the money was going to come from to do this.

DMRE's response

Deputy Minister Nkabane replied to Ms Malinga, saying work was still in progress. The South African Police Service (SAPS) and the DMRE had just conducted investigations around the area from 1 to 3 August. Mintek was also busy doing some work in the area, and all relevant stakeholders had been consulted, and there were appointments to work closely with the contractors. On 16 September, the employees started, the health examinations had been conducted, and these would also be conducted upon their exit or completion of the work. There had been delays with this work, but hopefully, by the end of November, this would be done.

As for the target of closing only three ownerless mines, the issue was financial constraints. The DMRE had only about R140 million for closing derelict and ownerless mines. This may be minimal to meet the expectations of Members and the targets. This was a complex issue that required funding to be done. Minerals were being extracted from these mines which were sold to other countries. However, one of the interventions was the National Organising Committee established to address this issue. A joint operation team on the ground was working with the SAPS to arrest the situation.  

The Department was trying its level best to improve its audit outcomes. She did not agree that the solar water heater project should be scrapped, because poverty-stricken South Africans needed this programme. However, the DMRE must improve its consequence management and mitigation measures to implement this programme, and improve its financial performance.

Mr Mbele replied that the mineral publication was for the DMRE’s team to access research papers, as many research bodies did research in the sector. These studies often contained the data the Department needed to feed into its plans.

In response to the IRP and its reference to nuclear energy, the Act indicated that the Minister may determine when new generation capacity is required. The IRP provided a framework for the Minister to make that decision. However, it was not the only instrument used. Besides the IRP, there was also a medium term system outlook, an annual review done by Eskom where it published a five-year view relative to its planning. The 3 000 MW of gas for Richard’s Bay was not in the IRP, but it was justified on the back of the fact that there was a lower EAF, but even if it improved, it would not improve to the level of the expectations of the Department. Similarly, the Regulator had asked for a justification regarding the current capacity and baseload currently required. Thus, NERSA concurred with the procurement on the basis that there was sufficient motivation for the additional capacity. The state does not have R3 billion to build a renewable facility and uses private money for that facility. Thus, the procurement framework considered those issues. The outcome would be shared with the Committee. 

In response to the solar water heater issue, the impression created was that nothing had been happening until the AGSA recently raised a material irregularity (MI) on the Department, but the DMRE had been reporting progress on this project. Its intervention had been multi-pronged. The Department had tried to stop the bleeding by moving the heaters away from the manufacturers to stop paying for storage. The R7 million spent in the financial year resulted from alternative dispute mechanisms and legal processes with various service providers, as per the signed contracts.

The R300 million was up to the 2020/21 financial year. The DMRE had been spending over R100 million per annum for storage. However, it had stopped this bleeding and reduced this amount to only R7 million. All the heaters had been moved from the service providers, except for the ones that were refused, hence the R7 million legal costs incurred. Installations were ongoing, and there were now about 30 000 heaters installed -- an increase of 10 000. The reasons for the delays could be explained to the Committee.

As for consequence management, the DMRE did not want to start dealing with people without having followed the proper processes and without evidence. However, there was a forensic report that KPMG had completed. The AGSA had asked for it, but the DMRE had refused to present it to the AGSA as it was still being processed by its senior counsel, who had since gone back to KPMG to rectify a few issues contained in the report. The report was now with the legal team, and the management was finalising the process of appointing a chairperson for the disciplinary committee (DC). At face value, the report claimed that the decision had been to pay service providers up to a certain period, and that cost was viewed as fruitless expenditure as per the Public Finance Management Act (PFMA). Most of the officials in the Department did not even want to come close to this project because of its perception. The report identified several people with different transgressions.

He attempted to explain the reasons for the misalignment of targets and KPIs, and said that the AGSA had argued that the DMRE must not set targets that were outside its control. However, the value chain of how one got power into the grid involved multiple parties. The only thing within the control of the Department was to initiate the procurement of this power, and a lot of the capacity took time to come online. If the DMRE set a target for next year, it would have to put a target accounting only for what was already procured, and be silent on everything else. This would not provide an indication from a practical point of view of the Department’s plans. The DMRE measured itself in terms of the work planned for the year. There seemed to be a bias as to how the AGSA reported, because its reporting was not consistent with the mineral component of the Department.

Scrapping the solar water heater programme would not assist. About 6 000 solar heaters in the Eastern Cape had been offered to the Department of Housing, and the municipality that was going to install them had decided otherwise. After a back-and-forth for three months, the Department decided to find another installer due to the lack of progress on the offer that was on the table.

There was also another metro that had asked for a significant number of heaters to be installed. While the installations were underway, the Department continued to explore ways to expedite them.

The Department should be leading the entities in terms of performance. He assured Members that the DMRE was working hard to implement the AGSA’s recommendations.

On the ownerless mines, work was ongoing under the justice, crime prevention and security (JCPS) cluster to address illegal mining. There were a few workstreams, and the DMRE was responsible for filling holes. National Treasury had been approached and there was consensus on prioritising the issues around Gauteng. The DMRE would need about R500 million to close the holes. This would not be new money, but money that may be reprioritised from other programmes.

The community unrest was because of various groups that were demanding various things from the programme. The contractor and workers had had to leave the site because they were being threatened. The village was called Taung, in North West Province.

Mr Tseliso Maqubela, DDG: Mineral and Petroleum Regulation, DMRE, requested an opportunity to come back with a correct number for the year 2022/23, but on average, the DMRE issued around 300 mining rights and permits, although the majority of these were mining permits. Mining rights tended to go to companies that were well-capitalised and established.

As for the Mine Health and Safety Bill, the National Economic Development and Labour Council (NEDLAC) has given the Department immense challenges. The challenges had been structural. By law, the Council must involve the finance, the trade and industry chambers, among others. When the Department submitted the Bill to NEDLAC for consultation, it had submitted this Bill to all the chambers, although they did not meet often, and this caused unnecessary delays. However, the Department had since engaged NEDLAC and indicated how this was impacting negatively on the timeframes of the Bill. Through the engagements, the DMRE had managed to convince the Council to reduce the timelines. Once these chambers had disagreements, the Act that established NEDLAC provided that it must seek to obtain consensus, and there were many areas where consensus had not been reached. When labour and organised unions sat on opposite sides of the table on issues relating to mine workers, it became a boxing match and affected the entire process. The DMRE has since recommended the amendment of the legislation that established NEDLAC. The issue was that there was no consistency, because some bills were processed quickly while others were just dragged through the chambers.

A DMRE official responded to the gateway review, and said the target that had been achieved in terms of the multi-purpose reactor. The service provider had been appointed to conduct the feasibility report on the gateway review. This had also been done on the central interim storage facility for which a feasibility report had been submitted, as the service provider had completed the first phase of the gateway review.

Ms Chetty presented a detailed report on the fruitless and wasteful expenditure for the financial years 2020/21, 2021/22 and 2022/23. The expenditure for the year 2020/21 was R20.6 million, for 2021/22, it was R3.9 million, and for the year 2022/23 it was R7.8 million, which included the expenditure for the previous year. It was noted that the expenditure for the upcoming years was expected to decrease. She also provided information on the irregular expenditure, which was R11.4 million for 2020/21, R3.2 million for 2021/22 and R1.2 million for 2022/23.

She agreed that the debt collection period was extensive. However, the issue had been raised by the AGSA due to the length of time that made up the balance, dating back to 2005. The Department had taken a stance to review the collection model to centralise the function, but discussions were still ongoing. However, where it had been difficult to recover the revenue, it had been referred to the legal department.

There had been many engagements with the AGSA, and many disagreements. The AGSA sets a materiality level. Once set, if an adjustment beats that figure, it would automatically take the definition of the quality of financials or material misstatements. It was the standard reporting template. However, the balance and income statement submitted did not change.

The vacancy turnover has been extremely high this year, even in administration.

The Chairperson noted many issues in the annual report that required further deliberation, and some of them needed urgent resolution. Hopefully, the House would allow for this to take place.

NECSA's annual performance report 2022/23

Mr David Nichols, Board Chairperson, Nuclear Energy Corporation of South Africa, remarked that the NECSA Group had posted an excellent set of results for the 2022/23 financial year, showing marked improvement in its operations and finances. The total comprehensive income of R145.3 million in the year under review told a story of financial recovery. These results laid a good foundation for planned recovery and growth in the years ahead.

The Board had maintained tight governance, and compliance with statutory requirements like the PFMA was improving as evidenced by a dramatic reduction in material findings over the period. The NECSA Group was advancing to re-establish itself within the greater role that nuclear technology should play as South Africa battled an energy deficit. NECSA was ready to contribute towards a solution with clean, dispatchable, baseload power that would support South Africa’s developmental and climate change goals.

Mr Loyiso Tyabashe, Group Chief Executive Officer, NECSA, presented the entity’s 2022/23 annual report, and said that the organisation was on an upward trajectory with a 73% operational performance achieved. Only four KPIs were not achieved. NECSA had now come out of the loss-making position of the past four to five years. The focus now was on supporting Pelchem's recovery, in line with its turnaround strategy approved by the Board in May.

NECSA had finally turned positively out of a disclaimer audit opinion, which had been in place over the past five years. The focus for the current financial year and beyond was for all in the NECSA group of companies to achieve unqualified audit opinions.

[See the presentation attached for further details]

Discussion

Mr Mileham welcomed the remarkable report and the improvement in NECSA’s audit outcome and profitability. He wanted to know about the profitability, and said that the bulk of it was sitting in Nuclear Technology Radioisotopes (NTP). What was done differently at NTP this year that was not done last year? Why was NECSA so far ahead of last year’s projections, and was it sustainable?

He expressed his concern about Pelchem, and noted that the energy and turnaround were not the same as at NTP. He understood that NTP had operational and human capital challenges, and these were reasonably easy to fix. However, Pelchem remained a bigger issue. How much of the R63 million loss was attributable to Ketlaphela Pharmaceuticals? What was the status of Ketlaphela Pharmaceuticals?

He did not see anything about Pelindaba Enterprises in the report, yet a year ago, it was mentioned in the report and opportunity for cross-utilisation at PetroSA. Had NECSA sold those assets to boost its financials?

He did not understand how a payment to a supplier to expedite goods could be classified as fruitless and wasteful. This seemed like something that could be adequately justified.

Regarding the multi-purpose reactor (MPR), the implementation date was set to 2029 in the last engagements. Was NECSA still on track to achieve this target, given the licensing and environmental impact assessment (EIA) issues, and was the decommissioning of the Safari research reactor aligned with the installation of the MPR?

Last year, there had been a discussion about transferring some of the intellectual property of the Pebble Bed Modular Reactor (PBMR) and possibly commercialising and selling some of it. What was the status of that? Lastly, R17.5 million was a lot of money to be processed with just a mere purchase order. He expected some formal documentation between the parties, rather than just a purchase order.

Mr Zungula focused on the turnaround strategy at Pelcham, and asked what this entailed and what was being considered. He was pleased to learn about the manufacturing of active pharmaceutical ingredients (APIs) for the anti-retrovirals (ARVs), and asked if this was part of the turnaround strategy.

Ms Mekeke welcomed the improvement in NECSA’s performance, and urged the Department to learn from its entities. To ensure positive results, she wanted to know about the mitigation plan for the KPIs that were not achieved. Positive results brought hope to South Africans. Today, any positive performance in any entity of government is much appreciated and those that were performing well must be applauded.

Ms Malinga said Members used to take anti-depressants when they had to engage with NECSA, so the stability of its finances and audit outcomes was welcomed. Issues with Ketlaphela Pharmaceuticals would be raised continuously by Members until they were resolved. Members had been asking about the state-owned pharmaceutical company because it could be done. Why were there delays, and how soon could it commence operating?

Under NECSA, the NTP continued to perform well, unlike Pelcham because of issues of dilapidated infrastructure, but what were the plans to mitigate that, given the improved financial position? What were the delays with Safari One reactor?

Regarding unachieved KPIs, the decontamination and decommissioning (D&D) programme stage one referred to the shortage of specialised staff and equipment. This had been reported in the previous engagement with the Committee, but what was the plan to address this?

NECSA's response
 
Mr Nichols said the profitability of the NTP was a combination of two things, which was getting back to where it was about four to five years ago, and the fact that there were several failures at production reactors in Europe. The market had thus become favourable, but it would be tight to maintain this level of profitability.

Ketlaphela Pharmaceuticals was being moved out of Pelchem and merged with AEC Amersham, which was a radio-pharmaceutical company, to form one pharmaceutical group. None of the Pelchem improvement was based on Ketlaphela Pharmaceuticals making money. The new managing director (MD) had indicated that they would break even sometime in November this year. The problem had been the machinery, which had been breaking apart. NECSA was now in a better financial position to invest in it and use the on-site facilities to build components for them.

Mr Tyabashe, there were only five reactors like Safari in the world. There had been a couple of breakdowns, and NECSA had taken advantage of that. At the forefront of this performance, it showed that the ageing management programme for the Safari reactor was doing well. The licensing of these reactors did not have a definite end of life -- it was assumed, not designed, so every ten years, a review was done in terms of longevity. There was no end date or decommissioning date for the Safari, but an ageing management programme to assess the state of the reactor. At this point, he assured Members that Safari would operate well into his retirement, and he was not close to retirement.

Building these infrastructure projects required a ten-year period. The plan was to ensure an overlap, because if there was a gap, the market for isotopes got stolen and it took a long time to recover. One needed to progress in parallel – manage the Safari well, and progress the MPR. There was no certainty as to how long the reactors would keep breaking down overseas, but NECSA was riding the wave for now. The NTP has now secured a reputation for itself as one of the top isotope producers in the world.

Regarding the state-owned pharmacy, NECSA realised that Pelchem was a chemical company, and it had now been moved to where the pharmacy's strength was, which was NTP. It operated under the Health Council and SA Health Products Regulatory Authority (SAHPRA), so it understood the medical fraternity. NTP made active pharmaceutical ingredients, such as the input to medicine like iodine tablets and injectables for prostate cancer and other forms of cancer.

The NTP was currently undergoing a due diligence process to assess the viability of this project, as there was consideration to partner with a certain organisation, but it was dependent on getting a set aside from the Department of Health, which had not happened. He did not want a business model that was dependent on a government set aside, but would pursue a parallel strategy that would ensure how far the support could be provided and what the other plans or priorities were. This might mean that when the due diligence and strategy were done, the medicine part may or may not be viable, or the API aspect was the viable option.

Hopefully, by the time NECSA came back, some progress would be made that could be reported to the Committee. Ketlaphela Pharmaceuticals made no profit or loss, but there was movement in the methodical steps for it to be housed in the medical fraternity of the business.

Mr Nichols said that NECSA had gone through substantive management restructuring in health care, and had found that information believed to be the status of things was not a true reflection for several years. NECSA had been confused by some of the information provided to it.

Mr Tyabashe commented on Pelchem again, and said NECSA was being approached by customers willing to place orders with it, which had become the basis for a case study going forward. Regarding its recovery and turnaround plan, which was just approved in May, funding was firstly required to improve the plant because there was old infrastructure that had been abandoned. Private sources and bank lending would be considered for such funding. Secondly, the product range was being increased, and there was a new exotic product used in electronics which was helping with the turnaround strategy.

At NTP, NECSA was also diversifying its product range. It had previously relied on one product and one customer. This was viewed as a challenge, hence the diversification. The same strategy implemented at NTP was being implemented at Pelchem.

The R2 million loss at Pelchem had had no effect on Ketlaphela Pharmaceuticals. Pelindaba Enterprises had been stopped because the utilisation rate of both the plant and people had been around 30%, which was a heavily loaded infrastructure. As part of the restructuring, some of the assets had been taken back to the line to produce much-needed equipment, either for internal use or the industry. For example, NECSA had recently fitted water-cooling pipes at Koeberg which had been manufactured in those facilities. The business model had changed significantly in power and industry. This was a virtual model that NECSA was trying to apply.

Ms Nto Rikhotso, Acting CFO, NECSA, said that no assets had been sold. The production facilities were ready for whatever was required and when an opportunity presented itself for their utilisation.

Regarding the wasteful and fruitless expenditure, NECSA had approached National Treasury to be the referee on this matter. This was a business imperative, and NECSA could not lose out on money by not keeping the contract. The AGSA had interpreted the matter differently. As for the R17.5 million purchase order, this order was firm because it was related to a supplier that was utilised daily for gas usage. NECSA received gas from Afrox Gas daily, and could monitor it daily. The gas was used for two facilities. The quality of the gas was also monitored, and the purchase order was used as a tool to monitor the quality of the gas.

Regarding the MPR timelines, the plan was to have this commissioned by 2032, but NECSA was still doing the work at this point. There were delays in the action plan because of the work that still needed to be done, which was primarily the pre-feasibility work. The two sub-items that NECSA did not do well on were to apply for the EIA to be approved and signed by the Department of Forestry, Fisheries and Environmental (DFFE). This was a process issue -- it should not have happened, but it would be rectified. The other sub-item was that there was an overarching licensing strategy that had been submitted to the Regulator. The measure of success on this was the response of the National Nuclear Regulator (NNR). However, the work had been done, and it was sent to the Regulator. The current measure for this year was to have the feasibility study signed. He did not anticipate any delays this year.

Regarding the D&D, early this financial year, the skills needed in this area had been approved. Above all, this was a classic case of project management, and he admitted that NECSA should have done better on it.

The audit outcome was also out of their control, but management would ensure alignment with the AGSA in all spheres. NECSA was well on the way to getting an unqualified audit opinion.

Chairperson's concluding comments

The Chairperson lambasted the conditions they were subjected to to process the Budgetary Review and Recommendation Reports (BRRRs), saying they were becoming untenable. Every year, Members were subjected to the same congested process, which was taxing on people’s bodies and health. People were forced to be flexible because of the fear of failure, but that was also a form of abuse. Parliament could plan the processing of BRRRs better, because Members wanted to process these reports thoroughly.

Some entities had disclaimers for audit outcomes. The Chairperson pleaded with the DMRE to find ways to encourage the entities that were performing well. These officials had known how bad the situation was at NECSA when they were appointed to serve. Members had been subjected to manufactured information from NECSA. At times, the AGSA could not even comment on NECSA’s performance or audit outcomes. He did not want NECSA to come back with an unqualified audit outcome -- it must be unqualified, with no material findings.

The meeting was adjourned.