Central Energy Fund; Oil Pollution Control SA; SA Diamond Board: briefings

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
2 March 2005
CENTRAL ENERGY FUND; OIL POLLUTION CONTROL SA; SA DIAMOND BOARD: BRIEFINGS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
Central Energy Fund briefing
Oil Pollution Control SA briefing
SA Diamond Board briefing

SUMMARY
The Committee heard briefings from the Central Energy Fund (CEF), Oil Pollution Control South Africa (OPCSA) and the South African Diamond Board (SADB). Highlights included that CEF was becoming involved in all aspects of the energy sector and not just the crude oil segment; that OPCSA hoped to become the nationally preferred supplier of oil pollution control services and that the SADB would soon be fundamentally restructured after amendment of the Diamonds Act.

Members raised numerous issues, including whether CEF’s research and investment initiatives would improve citizens’ quality of life; the continuing "myth" that overseas-based parent companies of local oil majors would assist in the event of a major oil spill off the South African coast; the fragmented nature of pollution control legislation in South Africa; the valuation of diamonds and the SADB’s responses to shortcomings identified by the Auditor-General.

MINUTES

Central Energy Fund briefing
Mr M Damane, Chief Executive Officer, made a short introductory presentation in which he stated that CEF’s strategic focus had to change after SA emerged from the apartheid-era oil embargo. It moved from an organisation concentrating on crude oil issues to one that could add value to government’s White Paper on Energy Policy and the Integrated Energy Plan (IEP) of the Department of Minerals and Energy (DME).

As a result, CEF was now concentrating on investing in all areas of the energy sector that would assist government’s developmental goals and provide support to its group companies and third parties to reach those goals. To this end, CEF had invested in a number of projects, including low-smoke fuel, bio-diesel, Bethlehem hydro, ethanol as an octane booster, ethanol fuel gel to replace paraffin, landfill gas extraction and commercial solar water heating. It was also in the process of establishing the SA National Energy Research Institute (SANERI) to increase energy sector research.

CEF retained 100 per cent control over subsidiaries PetroSA, the Strategic Fuel Fund (SFF), the Petroleum Agency of SA (PASA), iGas and Oil Pollution Control SA (OPCSA), while it had stakes in Baniettor Mining (49%) and Sud-Chemie (30%). It also managed the Equalisation Fund and administered the collection of Road Accident Fund (RAF) levies.

Discussion
Mr H Schmidt (DA) asked why many of CEF’s subsidiary companies that appeared in its annual financial statements were not covered in the presentation and whether ethanol would be an effective octane booster for lead-free petrol. Mr Damane responded that his briefing did not include certain companies because they were being liquidated, were dormant, were in the process of being wound-up or were being sold.

He said that PetroSA and the oil industry were investigating numerous possibilities for octane boosting, not just ethanol. However, ethanol appeared to be well-suited although health and safety limits on its levels in petrol still had to be determined.

Mr E Lucas (IFP) commented that CEF’s involvement in administering the RAF levies caused concern as the RAF had experienced massive levels of fraud and corruption. He wondered why the levies were still being collected when it appeared to be a wasteful exercise. He applauded the establishment of SANERI but cautioned that local scientists had to be employed as many hundreds were currently unemployed.

Mr Damane pointed out that CEF only administered the collection of the RAF levies due to its expertise gained in the past. The RAF dealt with the rest of its functions independently and CEF had no control over them. He agreed that SA scientists should be given preference at SANERI because they knew local conditions better than foreigners.

Mr E Ngcobo (ANC) asked for clarity on the establishment of SANERI as a DME official had told the Committee in January 2005 that it was "only an idea" at that stage. He also wondered exactly what SANERI would do and why there was a need for yet another energy research institute. Finally, he asked whether SANERI’s research would improve the quality of life of South Africans.

Mr Damane confirmed that SANERI had been established as a company and would become operational in April 2005. He pointed out that the Council for Scientific and Industrial Research (CSIR) had stopped energy research and SANERI would fill the resultant "gap". SANERI would focus on aspects that would achieve the government’s social development programme and would definitely improve quality of life through, for instance, the low-smoke fuel project that would have health and safety benefits for millions of people.

Mr J Combrinck (ANC) asked how far CEF had come with implementing the Air Quality Act. Mr Damane pointed out that air quality legislation was the responsibility of the Department of Environmental Affairs and Tourism.

Professor I Mohammed (ANC) asked whether heavy metals were present in the bio-diesel produced by one of CEF’s projects and whether they were present in ethanol. He also asked if the Bethelehem hydro project had considered downstream flooding and silting problems.

Mr Damane pointed out that the bio-diesel was produced from soya beans, a food product, that did not contain heavy metals. Similarly, ethanol was an alcohol that did not contain heavy metals. The Department of Water Affairs and Forestry (DWAF) had issued the hydro project with a license after an environmental impact assessment had found no downstream flooding and silting problem.

Oil Pollution Control SA briefing
Mr P Coetzee, CEO, informed the Committee that OPCSA had been established in 1992 at the Saldanha Bay crude oil off-loading facility as a full subsidiary of the SFF. When the Minister of Minerals and Energy decided to unbundled SFF, it was decided that OPCSA would become a wholly-owned subsidiary of CEF. It was the only company in SA that had the equipment and expertise to deal with major oil spills of over 500 tonnes.

After posting a loss of around R8 million in 2004, the CEF Board decided that OPCSA had to be refocused into a service provider for the entire country. A market survey indicated, among others, that SA had a very hazardous coastline; bunker fuel oil carried by ships posed the greatest risk; SA’s capability to deal with Tier 3 oil spills was suspect and the oil industry’s position that their overseas parent companies would provide oil pollution control in the event of a major spill was a "myth" as these services would only become available 36 hours after an incident.

The CEF Board therefore decided that OPCSA had to develop a national capability to deal with oil spills in all of SA’s major harbours. This mandate was currently constrained by a lack of sufficient funding, although the company hoped to be self-funding within the next five years. To this end, the CEF Board had approved bridging finance for the 2005 financial year to enable OPCSA to expand its services to all harbours. It also hoped to provide similar services in Angola, Mozambique and Nigeria.

OPCSA believed it should report to the DME via the CEF as it had a long-standing relationship with the oil industry, but it needed an enabling legislative framework as current pollution-related statutes were fragmented and spread between a number of departments and agencies, including DME, DEAT, the SA Maritime Safety Organisation and the National Ports Authority.

Discussion
The Chairperson asked about the demographic profile of OPCSA’s employees and also wanted to know where the overseas assistance "myth" had come from. Mr Coetzee said 74% of the staff was male and white, while only one manager was from the historically disadvantaged. The organisation’s transformation plan was being hampered by a lack of funds, and high-level training was required to bring new persons into the company as oil pollution control was a highly specialised area.

The "myth" was due to the fact that local oil companies paid annual levies to their overseas parent companies for oil pollution control services and therefore believed that their parent companies would definitely provide these services when requested. That, however, did not take into account the time lapse between request and on-site assistance that at best would be 36 hours. This was too long as spills would by then have "beached" meaning massive increases in clean up costs.

Mr Lucas asked why air pollution from oil refineries had not been included in OPCSA’s mandate. Mr Coetzee agreed that air pollution was a big problem, but that it was by law the remit of other government departments and agencies. He felt SA should follow the example of the United States of America which had passed a dedicated Oil Pollution Control Act which set out the responsible federal agency and its powers and functions.

Mr C Molefe (ANC) asked OPCSA for their opinion on legislative changes that they required to become the country’s main oil pollution control entity. Mr Coetzee said the CEF Board had approved bridging finance for a legislative review during the next financial year and that the results of this review would be communicated to the Committee at the earliest possible opportunity.

SA Diamond Board briefing
SADB CEO, Mr L Selekane, stated that the 2003 / 2004 Auditor-General’s report on the accounts of the SADB had shown a number of problems, including inadequate control over fixed assets, the lack of an audit committee and the absence of provision for bad debts. These shortcomings had since been rectified.

The Auditor-General had also not been satisfied with the validity of exemptions granted under Sections 59 and 63 of the Diamonds Act, 1986. After meeting the Auditor-General in July 2004, it had been agreed that the National Treasury and the DME would approach the Chief State Law Advisor for a final, definitive legal opinion. That opinion was still awaited.

The Kimberley Certification Process (KCP) for diamonds had been launched in September 2002 and was implemented from January 2003. Its review of South Africa had found that the country had met all requirements and was fulfilling its duties satisfactorily. SA had been complimented for its four-part certificate, integrated database system and tender system for small-scale miners.

The KCP had recommended, among others, that SA should compile an inventory of stock held by all privately-owned mines and other agencies, should ensure that small-scale miners were registered, should apply tracking from the mine to the point of export of rough diamonds and should centralise its filing system to permit an audit of the paper trail.

Anticipated amendments to the Diamonds Act would mean restructuring of the SADB, the imposition of a 5 per cent levy on rough diamond exports, the establishment of a Section 21 company that would focus on the Diamond Exchange, the cancellation of Section 59 agreements and ending the practise of deferment

From 1 April 2004 to today, the Board had approved 157 license applications, 33 per cent of which was for black applicants. However, 75 licenses had not been taken up. Of these 41 per cent were by black applicants.

Discussion
Mr Ngcobo asked how the SADB prevented fraud when issuing KCP certificates; whether the US$75 service fee charged by the Board was levied per export and whether the Board tried to assist black applicants who had received licenses but were not able to take them up.

Ms J Lemka, Chief Inspector, explained in detail that blank certificates were numbered, kept in a safe in her office and that she had to be present when the blanks were completed. She was confident that fraud could not take place. She added that the Board imposed a 0, 17 per cent of value levy on rough diamonds for export and that the US$75 was for every other transaction or service provided.

Ms S Engelbrecht, Administration and Licensing Manager, said that successful applicants had six months to take up the licenses. However, often their circumstances had changed from when applying and they could not take up the licenses. The Board followed up these applicants and assisted them where possible. The CEO had discretionary power to give applicants more than six months to take up their licenses.

Professor Mohammed asked exactly how diamonds were valuated. Rather than provide an explanation, Mr Selekane extended an invitation to the Committee to view the valuation process first hand. He added that valuation problems and disputes had occurred in the past, but that these had been solved by valuation benchmarking against 2003 London sample prices.

Mr S Louw (ANC) asked how long it took the Board to process and approve a license. Ms Engelbrecht responded that it normally took about 2 and a half months.

Mr Combrinck wanted to know why the Board had only now started making provision for bad debts. Mr J Mthethwa, Financial Manager, said previous accounting software packages had not allowed the Board to extract debtor information. A new package had been acquired in 2004 that provided this function and the Board had since made enormous progress in retrieving outstanding debts.

Mr Ngcobo wanted clarity on the Section 59 agreements referred to in the presentation. Ms Engelbrecht said the agreements allowed the major local producers, De Beers and TransHex, to export production to London where it was mixed with other global production and then returned to SA where it was offered to sightholders. She commented that although legislative changes would cancel these agreements, an alternative type of arrangement would have to be found in future.

The Chairperson concluded the meeting by indicating that the Committee would definitely accept Mr Selekane’s offer to view diamond valuation at the earliest opportunity.

The meeting was adjourned.