Department of Energy on its 2015/16 Annual Report with Auditor-General & DPME input

Energy

12 October 2016
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The Auditor General of South Africa (AGSA) reported that the portfolio received good outcomes although there were numerous areas that needed improvement. Department of Energy (DoE), the National Energy Regulator of South Africa (NERSA) and the National Nuclear Regulator (NNR) received clean audits. The National Radioactive Waste Disposal Institute (NRWDI) did not submit annual financial information and therefore the audit has not been finalised. In general, the entities struggled with compliance with key legislation and findings which need to be addressed mainly involve procurement, contract management and wasteful expenditure. AGSA recommended that entities should report quarterly to the Committee. Irregular expenditure amounted to R127 million, fruitless and wasteful expenditure was R13 million and there was no unauthorised expenditure in the 2015/16 financial year.

Non compliance matters included:
• South African Nuclear Energy Corporation (NECSA) Board of Directors was not constituted as required by the Nuclear Energy Act. The executive authority did not appoint board members timeously to fill the vacancies.
• The Strategic Fuel Fund (SFF) of the Central Energy Fund (CEF) failed to inform Minister of Finance of the sale of 10 million barrels of strategic fuel reserves as required by the Public Finance Management Act (PFMA). SFF also suffered material financial losses from 300 000 barrels of crude oil which were loaned to a service provider that had not paid. The entity assessed the crude oil as irrecoverable and to be written off. This resulted in non compliance with section 51(1)(c) of the PFMA. Further, the purchase of 10 million litres of diesel by SFF led to irregular expenditure of R80 million. Reasonable due care was not exercised by the accounting authority prior to entering into these significant contracts.

Members were concerned about the 300 000 barrels of oil loaned to Enviroserv that had been written off and demanded more information about the deal. Due diligence and proper procurement procedures were not followed that had led to loss of money or oil. They expressed concern about the security of oil supply and asked if security of supply could be guaranteed. Members noted that the sale of oil was done in a hurry at a time when fuel prices were at their lowest and SFF should have waited for the price to improve.

The Department of Planning Monitoring and Evaluation (DPME) stated that generally there was progress in meeting the MTSF targets but it was too slow. The reason for this is the very lengthy procedures that involve approval which makes progress very slow. DPME recommended that the DoE needs to provide a precise plan as to how they are going to meet targets. In some respects there was good progress especially with regard to the target of over 800 MW which is likely to be met.

DPME overall performance assessment for the DoE was as follows;
• The DoE, in line with the Cabinet Lekgotla recommendations, must submit the Revised Integrated Energy Plan and the Integrated Resource Plan in the second quarter 2016/17
• The development and implementation of a Gas Infrastructure Master Plan need to be fast tracked
• Slow progress on the gas to power initiative as well as the conversion of OCGT’s from diesel to gas must be accelerated and have clear timelines in place
• National Coal Policy with regulations that will include a strategy to secure coal supply is lagging behind, there is need for the department to fast track policy development
• The Coal base-load IPP rollout continues to be delayed. Overall private sector participation is critical and will be an important contribution towards meeting electricity demand
• A funding model for upgrading existing refineries is behind the MTSF target
• Although DoE exceeded its target of 12% by 11.7% on percentage of energy efficiency improvement in 2015/16 FY, new commitments/targets for the reminder of the MTSF is required
• Significant progress has been made by DoE in the installation of solar home systems (PVC).
• Progress on publishing energy balances for 2013 is lagging behind since the departments missed the March 2016 deadline.

DPME provided the following recommendations:
• DoE should produce a recovery plan for the indicators where target dates have passed
• Proper channels for refining the MTSF indicators were opened but the department never refined their MTSF targets. The Department should adhere to the Cabinet processes
• The department should highlight when submitting the quarterly reports to the Cabinet, any blockages hindering or delaying progress and to act on the recommendations by Cabinet timeously
• In addressing poor attendance with regard to participation in the outcome 10 implementation forums; attendance is crucial for the coordination and collaboration of the sector’s efforts and work towards achieving the vision of the NDP on ensuring environmental sustainability

Members expressed concern as to the poor participation by DoE at the implementation forums organised by DPME. They asked if DPME had the capacity to do monitoring for the whole government system and what support from government was needed by DPME.

The Department of Energy, on its 2015/16 Annual Report, said that it spent R7.14 billion or 98.27% of its adjusted budget. Key audit findings were:
• On oversight, there was non-compliance with State Owned Corporations (SOC) oversight framework
• On Audit of Predetermined Objectives (AoPO), the 4th quarter report of 2015/16 relating to Independent Power Producer Procurement (IPPP) was excluded from the AoPO draft
• On commitments, there was understatement of commitments
• On transfer payments, there was non-compliance with DoRA
• On procurement, deviations were not reported to National Treasury and AGSA within required timelines
• On information technology, there was evidence for approval of the initial ICT plan for 2011/12 – 2015/16.

On the matter of the NECSA liability, legal opinion was NECSA carries the legal liability for the R3.6 billion decontamination and decommissioning costs of past strategic nuclear facilities at Phelindaba but the state has the funding responsibility.

DOE then addressed concerns raised by the Committee on 30 August 2016. Strategy planning sessions will be held to review the number of targets and reprioritize them in line with the budget and human resources. A communications strategy has been developed and is still undergoing internal review and approval process about the nuclear programme. An early warning system has been developed to track and monitor slow moving projects to ensure reprioritization of budget on a quarterly basis. The IRP and the IEP have been updated taking into account inputs received during the stakeholder consultation process and would be presented to Cabinet within October 2016. DoE’s response on the Eskom media statement on IPPs was the matter has been resolved. Various engagements at the highest level of Eskom, National Treasury, NERSA and DPE were held to address Eskom’s concerns on this matter. DoE takes stock of the challenges Eskom has faced including lack of resources to deal with some of the projects.

Members insisted DoE explain the circumstances under which 300 000 barrels of oil was loaned out and another 10 million barrels illicitly sold. DoE replied that a review process was ongoing to ascertain the circumstances under which such transactions were concluded. SFF stated that their preliminary findings were that there was a breakdown in governance but that a forensic investigation was likely going to be done.

Members were concerned about the nuclear deal particularly the 13 pieces of work reported as concluded. They demanded to know the value of those contracts, the procurement methods used and the source of funding for the nuclear project.

DoE proposed that it return at a future date to discuss the nuclear deal as the report at hand only concerned transactions from the past financial year. It was generally determined about the transactions highlighted in the audit findings that there was failure to follow the regulations or due diligence which led to financial loss.

Meeting report

Auditor General South Africa (AGSA) on Department of Energy 2015/16 audit outcomes
Ms Margaret Seoka, AGSA senior manager, stated that the portfolio received good outcomes but there are areas that require improvement. The portfolio’s overall outcomes remained unchanged for the last two financial years. The Department of Energy (DoE), the National Energy Regulator of South Africa (NERSA) and the National Nuclear Regulator (NNR) sustained clean audits which was commendable. National Radioactive Waste Disposal Institute (NRWDI) however has not submitted annual financial statements for the financial years 2014-15 and 2015-16, and the audits have therefore not been finalised. Overall, the entities struggled with compliance with key legislation.

She indicated that the key compliance findings which need to be addressed are mainly on procurement, contract management and wasteful expenditure. She advised that entities should ensure that the information they provide to the auditors and to accounting authorities is dependable. They found that the internal audit for most of the entities was doing well. She added that this is an important tool for the entities to assess their controls and audit action plan. Compliance with regulations is the area that requires the most attention and needs to be addressed with an audit action plan. She recommended that entities should report quarterly. For 2015/16, the irregular expenditure amounted to R127 million, fruitless and wasteful expenditure amounted to R13 million and there was no unauthorised expenditure.

The following non compliance matters were highlighted:
• South African Nuclear Energy Corporation (NECSA) Board of Directors was not constituted as required by the Nuclear Energy Act. The executive authority did not appoint board members timeously to fill the vacancies.
• The Strategic Fuel Fund (SFF) of the Central Energy Fund (CEF) failed to inform National Treasury of the sale of 10 million barrels of strategic fuel reserves as required by the Public Finance Management Act (PFMA) at a bargain price. SFF also suffered material financial losses from 300 000 barrels of crude oil which were loaned to a service provider. The entity assessed the crude oil as irrecoverable and to be written off. This resulted in non compliance with section 51(1)(c) of the PFMA. Further, the purchase of 10 million litres of diesel by SFF led to irregular expenditure of R80 million. Reasonable due care was not exercised by the accounting authority prior to entering into these significant contracts

Discussion
The Chairperson asked which service provider the 300 000 barrels of oil was loaned to. He asked about the status of NECSA as a ‘going concern’.

Mr P Van Dalen (DA) asked for more information on the company that was loaned 300 000 barrels and why South Africans must suffer the loss. He asked whether enough steps were in place to recover the loss and whether AGSA was satisfied with the explanation it received as to why this money would be written off. He asked about the loss incurred from the illicit selling of 10 million barrels of diesel. He asked who the accounting authority was and who is to bear the responsibility, whether is it the Minister or the Board Of Directors. To his mind, although the Minister delegates authority, he/she cannot delegate responsibility and therefore remains responsible. He asked if SA’s security of supply of oil had not been compromised by the sale of strategic oil.

Mr M Tshishonga (AGANG) directed his question to the low level of assurance provision. Senior management did not provide assurance and he asked what the reasons for this might be. His second question concerned the implementation of AGSA recommendations and if AGSA has the power to enforce its recommendations.

Ms Seoka replied that AGSA’s mandate is to audit and report and that is done through advice and recommendations they make to the executive authority so that proper governance is achieved. She reiterated that the accounting authority in most of the entities is the Board of Directors. On the level of assurance provided, in the majority of entities, it was as a result of the many vacancies in the entities. Senior management is responsible for implementation of policies. When there is a vacancy in senior management, the levels of assurance given will be low. NECSA has implemented several measures to manage the cash flow effectively. NECSA’s mandate should be looked at and if we are happy with it, we should look at how to fund it so that they do not find themselves in a position where they do not have cash yet they have this important mandate.

The Chairperson stated that they must have been in a hurry to sell the oil because of the time of the year this took place and he wondered why they were in such a hurry. They could have waited until the fuel price was higher. He spoke about the oil being ‘unpumpable’ as it had to remain in the tank.

Ms Seoka replied that the oil was bought when the market price was at its lowest. The 300 000 barrels that was loaned was worth about R60 million. The feedback from SFF is that legal measures have been taken against this company. AGSA does not believe that proper due diligence was conducted by SFF. On security of supply of oil, she stated that when SFF concluded the contract, there was a clause stipulating that SFF can borrow the oil from the buyers if it needed oil. The security of oil supply would be at risk if the buyers decide to move the oil from the tankers based here, otherwise SFF has first right to borrow the oil. SFF’s mandate should be looked into as they have moved to selling. This could raise issues of tax.

Ms Zolisa Zwakala, AGSA Business Executive, said that AGSA recommended that SFF needs to have very strong procedures and processes in place including a stock rotation policy.

Mr Van Dalen asked how one can be sure that the ‘unpumpable’ oil remains in the tanks, because he had information that facilities were being erected nearby to transfer all this oil from the control and possession of the government. He asked who decided on the loan of the 300 000 barrels of oil.

Ms Seoka recommended that the Department should adopt other measures such as performance audits, and regretted that AGSA’s mandate was reserved to audit and advice.

Mr Tshishonga asked how it was that SFF sold the oil but could later borrow it. ‘How do you sell a house and come back to rent a room?’ This means that you do not have a vision of what you want to do.

The Chairperson thanked AGSA for the presentation.

Department of Energy performance: Department of Planning, Monitoring and Evaluation (DPME)
Mr Rudi Dicks, DPME Deputy Director General, noted there was a specific request from the Chairperson to provide an update on the performance of DOE in terms of the Medium-Term Strategic Framework (MTSF). The following outcomes would be dealt with in the report as they are the ones relevant to DoE:
- Outcome 6 efficient, competitive and responsive economic infrastructure network
- Outcome 9 responsive, accountable, effective and efficient local government system
- Outcome 10 environmental assets and natural resources are valued, protected and continually enhanced.
 
Outcome 6 is further broken down to 6 different sub outcomes, of which two are relevant to DOE:
Sub-outcome 1: Regulation, funding and investment improved
• Amended National Energy Regulator Act and Electricity Regulation Act.
• Establish appropriate mechanisms to prefund capital and create a smooth price path over a longer-term for Eskom
• Develop a Private Sector Participation Framework (PSP) in the energy sector in base load and renewable electricity generation, liquid fuels and gas.

Sub-outcome 2: Reliable generation, transmission and distribution of energy ensured
• Develop the Integrated Energy Plan (IEP)
• Develop and implement a Gas Infrastructure Master Plan
• Refine, update and implement the Integrated Resource Plan (IRP)
• Establish an independent system operator
• Reform of the electricity supply industry to introduce IPPs in support of electricity security of supply

He discussed progress based on the performance indicators for these outcomes over the past 15 months and identified those at risk. Generally there was progress in meeting the targets but it was too slow. The reason for this is the very lengthy procedures that involve approval at various levels which makes progress very slow. DoE needs to provide a precise plan as to how they are going to meet each target. There was good progress with demand-side management with the target of over 800 MW likely to be met.

There are 68 performance indicators as to what DoE is required to do but in the last few months, the number has reduced. He provided a performance assessment for DoE which included the following points:
The Department of Energy must submit the revised Integrated Energy Plan and the Integrated Resource Plan in the 2nd quarter 2016/17 as there is uncertainty in the energy market.
•The development and implementation of a Gas Infrastructure Master Plan need to be fast tracked
•Slow progress on the gas to power initiative as well as the conversion of OCGT’s from diesel to gas must be accelerated and have clear timeframes
•National Coal Policy with regulations that will include a strategy to secure coal supply is lagging behind, there is a need for the Department to fast track policy development.
•A funding model for upgrading existing refineries is behind the MTSF target
•Development towards firmer commitments and clearer private sector participation proposals are required at least for key large infrastructure projects in the energy space
•Significant progress has been made by DoE in the installation of solar home systems (PVC). To date the department is sitting at 39 700 against a target of 105 000 by 2019
•Continue to commend the department on the successful implementation of the Renewable Independent Power Producers (REIPP)
•More than R13bn of funding supported by the IDC for the REIPP
•Attracted just under R200bn foreign direct investment in the REIPP programme
•Resulting in 6 327 MW of renewable energy procured thus far
Some MTSF indicators such as establishment of an independent system operator and an indicator to improve government support for combating illegal use of electricity were removed from the reporting template making it difficult to monitor progress as per the MTSF

He concluded with the following recommendations
• DoE should produce a recovery plan for the indicators where target dates have passed
• Proper channels for refining the MTSF indicators were opened but the department never refined their MTSF targets. The Department should adhere to the Cabinet processes
• The department should highlight when submitting the quarterly reports to the Cabinet, any blockages hindering or delaying progress and to act on the recommendations by Cabinet timeously
• In addressing poor attendance with regard to participation in the outcome 10 implementation forums; attendance is crucial for the coordination and collaboration of the sector’s efforts and work towards achieving the vision of the NDP on ensuring environmental sustainability

Discussion
Mr van Dalen asked who is responsible for poor performance and who is not participating? He asked how the slow process such as in signing documents is affecting DoE’s ability to meet its targets.

Mr Tshishonga asked about the reason for poor attendance at the DPME forum by DOE. He asked what strategic intervention DPME gives with regards to on outcome 10 which is about the environment;

The Chairperson asked about DPME’s capacity to do monitoring and evaluation of the entire government system. He asked if DPME has the right staff size and competence to do this. In 2014 it was agreed that strategic planning, monitoring and evaluation must be institutionalised. He asked what kind of strategic planning DPME wants from the state. It should not be just restructuring to ensure efficiency but generally to improve capacity.

Mr Dicks agreed that there is a funding challenge for DPME but stated that new technologies improved opportunities in doing their work successfully. There were other problems DPME faced such as requests for incentives from shareholders. DPME has taken a decision to restructure itself to deal with capacity challenges. It is significantly increasing its capacity. There must be an intervention strategy to help meet the capacity bottleneck and there have been suggestions to Cabinet such as with regard to broadband. DPME has advised the senior leadership of DoE to ensure the outcome is addressed but they do not implement and do not come to the forums. You cannot force a camel to drink the water. On poor attendance, he stated that DPME cannot say the reasons for poor participation. It could be that they are ill advised.

Department of Energy on its 2015/16 Annual Report
Ms Yvonne Chetty, DOE Chief Financial Officer, led the presentation which noted performance highlights and challenges. Performance highlights were DOE managed to overcome the energy challenge of inadequate electricity, the stable oil price cushioned the economy and motorists from high fuel prices, the renewable energy IPP programme moved towards maturity and was further entrenched as part of the energy mix, preparation for the Nuclear Build Program continued, electrification of households ensured that more people have access to modern forms of energy, and there was progress in the African continent becoming the main source of crude oil imports to South Africa. Challenges were identified as being key vacancies during year-end audit period, the NECSA liability, verification of projects’ activities, slow moving projects, payment of suppliers within 30 days, and targets not being achieved.

She opened with a breakdown of the DoE’s accounts for 2015/16.

She indicated that by 31 March 2016, the department had utilized R7.14 billion or 98.27% of its 2015/16 adjusted budget. There was a remaining budget balance of R125.50 million or 1.73% as follows;
Compensation of employees:                                                    R 210 000
Goods and services:                                                                 R 2.29 million
Transfer payments:                                                                    R 123 million
Capital assets:                                                                          R 8 000
Financial assets:                                                                       R 1 000

No funds were retained but were transferred to National Treasury. The DoE received aid assistance from the Swiss Agency for Development, the Kingdom of Denmark and the EU Commission amounting to R 291.222 million. It spent R 185.537 million and surrendered R 105.685 to the Reconstruction and Development Program (RDP). There was unauthorised expenditure for 2015/16. Wasteful and fruitless expenditure of R12 million was incurred as a result of interest paid for a late payment of contributions to the government employees pension fund. Irregular expenditure of R 678 000 was a result of non compliance with the procurement process.

The NECSA liability was outlined. Legal opinion was NECSA carries the legal liability for the R3.6 billion decontamination and decommissioning costs of past strategic nuclear facilities at Phelindaba but the State and/or the Minister of Energy has the funding responsibility.

Ms Chetty stated the following key audit findings:
• On oversight, there was non-compliance with State Owned Corporations (SOC) oversight framework
• On Audit of Predetermined Objectives (AoPO), the 4th quarter report of 2015/16 relating to Independent Power Producer Procurement (IPPP) was excluded from the AoPO draft
• On commitments, there was understatement of commitments
• On transfer payments, there was non-compliance with DoRA
• On procurement, deviations were not reported to National Treasury and AGSA within required timelines
• On information technology, there was no evidence for approval of the initial ICT plan for 2011/12-2015/16.

DOE then addressed various concerns raised by the Committee on 30 August 2016 (see document). Strategy planning sessions will be held to review the number of targets and reprioritize them in line with the budget and human resources. A communications strategy has been developed and is still undergoing internal review and approval process about the nuclear programme. An early warning system has been developed to track and monitor slow moving projects to ensure reprioritization of budget on a quarterly basis. The IRP and the IEP have been updated taking into account inputs received during the stakeholder consultation process and would be presented to Cabinet within October 2016. DoE’s response on the Eskom media statement on IPPs was the matter has been resolved. Various engagements at the highest level of Eskom, National Treasury, NERSA and DPE were held to address Eskom’s concerns on this matter. DoE takes stock of the challenges Eskom has faced including lack of resources to deal with some of the projects.

On underperformance within Clean Energy, where 39 RE:IPPs were behind schedule - since 5% completion has been reached in Window 3, DOE responded that procured IPPs are at different stages and they take on the risk of the construction schedule. Effectively it means that government has contracted the IPPs such that we do not manage their schedule, but they are penalised if they do not meet their contracted operations date. To date none of the projects have failed to meet their operations.

Discussion
The Chairperson asked about NESCA’s business model which had to be explained and looked into. He asked if the SFF report can be brought on to the Committee on Tuesday 18 October. He asked for clarity and assurance that the oil will not be removed from the control of government.

Mr Van Dalen asked why DoE did not take up the invitation from DPME to review its targets. He asked about the 300 000 barrels of oil loaned to Enviroserv and what the DOE’s role in that deal was. He asked if DoE agreed to the deal or not. He asked what DoE did to try and stop the sale of oil when prices were at their lowest. He asked how the oil could be recovered if it was illicitly sold. He inquired what DoE is going to do to ensure that strategic oil is kept?

Mr G Mackay (DA) directed his inquiry to the 13 pieces of work reported as done with regard to the nuclear deal. He asked what their total cost was and what procurement system was used and why it was chosen. He asked who would pay for the multipurpose research reactor and from where the money would come. He asked if any donor funding is dedicated to these specific projects and how DoE goes about acquiring direct subsidisation from donors.

Ms T Mahambelela (ANC) said that the Committee should give SFF a chance to conclude the report. She stressed that the Committee cannot prevent the movement of oil that has already been purchased by other individuals.

Ms Chetty responded to some of the concerns indicating that the funding for the NECSA liability will and should come from the state according to the legal opinion they got. Out of 13 nuclear service providers DoE got 11 service providers. She added that R200 million is for the prep work for any nuclear related work. She said that there is a process underway to look into the legal and contractual obligations with regard to the SFF oil transactions. All the work DOE has done to date with regard to this financial year will be considered.  DoE’s recommendations to Cabinet will include what Eskom needs to do. The new strategy will be presented at a later date. That information is part of the recommendations to be presented to Cabinet.

Mr Godfrey Moagi, SFF interim CEO, replied that they had found that there was a breakdown of government and the following of processes was not done regularly. He said that SFF had decided to follow a route of consequence management and that their preliminary assessment is that processes were not followed. He was not in position to give assurance that the oil will not be moved because there are issues of sanctity of contract that we have encountered as well. We believe that the ownership of that oil could have passed to other entities. He added that the Minister has directed that the contracts be reviewed and that is what DoE has decided. DoE kept coming across addendums to those contracts

A DoE representative stated that DoE wants to find out what the motivation was for those processes not to be followed. DOE is going through that process meticulously so that it can hold some people to account. DoE is convinced that it is going to have a forensic review but it cannot say that until the contract review process is complete. The review is going to look at all correspondence and all emails.

The Chairperson thanked the DOE for the presentation and the meeting was adjourned.

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