NECSA on its 2014/15 & 2015/16 Annual Reports, with Minister

Meeting report

South African Nuclear Energy Corporation (NECSA) 2014/15 & 2015/16 Annual Reports
Dr Kelvin Kemm, NECSA Board Chairperson, explained that the 2014/15 Annual Report had not been previously presented because of a disagreement that arose with the Auditor-General. That was related to concept of decommissioning of nuclear facilities. The standard practice around the world is to put money aside for the eventual dismantling of a nuclear system in the future. For NECSA, there are two phase: this has been done for past nuclear facilities related to weapons development and other matters. The second phase deals with decommissioning costs in  20 to 30 years time of current facilities. Around the world where some guesswork on how to calculate the eventual costs and put money aside for this, though the methodology is improving. NECSA in order to meet international standards had set aside money for the decommissioning of nuclear systems that would be done in the future. The Auditor-General had argued that this was unusual and had never come across this. They eventually came to an amicable understanding on how to take the next few steps. He wanted to emphasise that in all of this, there was no issue or financial irregularity or mismanagement but only the matter of decommissioning costs.

He said the whole NECSA outlook is extremely good exciting, and positive. It wanted to pursue commercial interests considerable more now. He reported that South Africa is the second largest nuclear market shareholder in the world and it exported medicine to 60 countries. The country was considered as one of the world leaders in nuclear. He was proud to report that NECSA had obtained an ‘N’ Stamp which was recognition that allowed it to design nuclear commodities and export them anywhere in the world. South Africa was endowed with a lot of knowledgeable individuals in the field of nuclear resources however there was a shortage of skilled artisans in the field.

Mr Phumzile Tshelane CEO: NECSA, referenced nine key highlights from the 2014/15 year which included the project to recover enriched uranium (EU) from decayed Mo-99 (Molybdenum radioisotope used in detection and treatment of cancer) process residue and a number of contracts for the manufacturing of demonstration plasma systems used in the development of Waste-to-Energy systems were placed on R&D (Research and Development division).

For the 2015/16 year he identified ten key highlights and these included further development of the OSCAR-4 system now includes SAFARI-1 core design and the fuel inventory replacement tool. He noted that the neutron diffraction project team was selected as finalists for the 2015/2016 National Science and Technology Forum (NSTF) Awards in the category ‘Research leading to innovation by teams or individuals in organisations’.

He explained how NECSA was aligned to the priorities in the NDP: NTP medical radioisotopes were utilised in the South African health system for diagnostic studies and cancer treatments. NTP and Pelchem product sales on world markets contribute to SA balance of payments. Apprenticeship training offered by Necsa Skills Development Centre (As at end-June 2016  150 full-time students enrolled at NSD); DTTC - 77 apprentices undergoing trade test preparation and 66 undergoing artisans trade test; 40 students enrolled at Radiation Protection Training Centre. As at end-June 2016: Graduate-in-training programme 5 students, 78 Interns employed as part of Necsa’s Internship programme; post graduate research project support to twenty six students (sixteen PhD and ten MSc) on part time basis; Eleven own staff members (nine PhD and two MSc) are enrolled for post-graduate studies.

In terms of performance in the 2014/15, NECSA achieved 9 of its 13 predetermined objectives. In the 2015/16 year NECSA achieved 10 of its 13 predetermined objectives. He outlined which were and were not achieved.

NECSA financials
Mr Zakes Myeza, CFO: NECSA, reported on the 2014/15 and 2015/16 financial standing of NECSA. He noted that NECSA SOC Limited and its group companies had obtained unqualified audit opinions for both 2015 and 2016 financial years. AGSA had however drawn attention to matters of emphasis: Irregular Expenditure and Going Concern.

He reported that the concerns on irregular expenditure arose due to the AGSA’s assessment of the invitations to bidders where the functionality criteria specified on the Request for tender template was in his opinion "not clear and specific" as required by section 4(3)(c) of the Preferential Procurement regulations. To test the differences in interpretation, NECSA obtained an opinion from Treasury regarding the Auditors view. In their response, the National Treasury indicated that the section 4(3)(c) of the Preferential Procurement Regulations (PPR) was ambiguous. As a result, in the revised draft PPR, the National Treasury has removed section 4(3)(c). NECSA management had adapted its functionality evaluation criteria template as per AGSA’s advice to ensure that it was clearer. Effective steps were thus taken to prevent recurrence of such irregular expenditure.

The issue of going concern was due to the fact that NECSA SOC Limited incurred a net operating loss which prompted AGSA to emphasise the existence of financial sustainability challenges. He explained that NECSA was a creature of statute (the Nuclear Energy Act) carrying out the nuclear mandate of the State. The Act prescribed that NECSA would be funded by both government grants and external commercial revenue it would generate. However government grants had been diminishing in real terms and now constituted only 35% of total income. NECSA was thus exposed to the inherent commercial risk and global economic realities. Necsa’s intellectual property and its main operations are considered strategic to the Republic, hence the Government’s direct involvement in ensuring its continued existence. No evidence exists to suggest Government intends discontinuing Necsa’s operations. Whilst operating in a complex environment, growing external revenue is a strategic direction Necsa is vigorously pursuing, however the results cannot be immediate. Capitalising Necsa could accelerate the growth trajectory. Necsa is pursuing product development and commercialisation with a structured approach to reaping benefits from intellectual property transactions.

On audit findings about fruitless and wasteful expenditure, decommissioning and decontamination (D&D) liability and Vaalputs After Care, he noted the disclosures made in the annual financial statements.

He highlighted that the revenue for the NECSA group of companies had increased from the previous year mainly due to increased foreign sales revenue in the NTP group coupled with contribution from the weak rand.

Investment Revenue/ Finance costs increased both in the company and the group mainly due to finance income from Stage 1 D&D liability accounting, this is however offset by the Finance charges relating to Stage 2 D&D. Operating expenses for company increased mainly due to higher legal costs, audit fees relating to D&D disputes and audit overruns. The NNR licence costs contributed.

He concluded by stating that comparative performance between the two financial years clearly showed a marked improvement, even with the severe financial constraints facing NECSA. Necsa continues to play an integral role in South Africa’s Nuclear New Build Programme

Discussion
Mr M Mackay (DA) expressed concern that NECSA was failing to commercialise its products. the firm faced strong competition from global firms around and needed to increase its competitiveness. NECSA had not made a single profit over years, had staffing issues and instability in its leadership and corporate governance. He asked if the current CEO was the correct man for the job and questioned how much he earned. Someone had to be held accountable for the issues in NECSA and the CEO was that person. NECSA was having dealings with a Russian company and asked which company it was. He expressed concern about NECSA’s long term sustainability and asked how NECSA planned to acquire a new nuclear reactor when its financials showed that it could not afford this.

He stated concern about NECSA's future revenues which were not sustainable. He asked to get a figure of the operational losses for a five year period so that the Committee to get a clearer picture of how much NECSA had cost taxpayers.

He asked if there had been any further security breaches at Pelindaba and if there had been any radiation issues in past two financial years. He asked what the progress was on the investigation of the individuals who had been caught with nuclear material at a service station.

Mr P Van Dalen (DA) asked for clarification if the board had been constituted properly. He asked NECSA to clarify some confusion over whether or not they had a shareholder compact as the Auditor-General and stated that they did not have one while NECSA had reported that they did.

He asked what the future plans for the high stock of uranium at Pelindaba was. He asked what security measures had been put at all entry and exit points in the country to detect radioactive nuclear material.

He asked how NECSA was affected by the move to have the responsibility of procurement for the nuclear new build project transferred to Eskom. He asked if NECSA had any dealings with the Gupta uranium mines.

Ms T Mahambehlala (ANC) welcomed the report from NECSA. She expressed concern that it was a summary report and she was not comfortable with the quality of the summarised version of the report. She stated that most people were worried about things they did not know and asked what NECSA had done to demystify nuclear energy.

She stated the 2014/15 and the 2015/16 performance reports were a copy and paste of each other and asked what the rationale behind this was. She said that NECSA had to provide explanations for the areas of non-achievement highlighted in the report, specifically the disabling injury rate that had not been achieved. She asked why the Pelindaba operational losses had not been reported on. She asked for details of the significant challenges that Pelchem had been undergoing.

She asked if NECSA was looking to take charge after the closing out of Safari 2 as they were better positioned to do so. She asked if NECSA was sourcing out the correct technical staff. Her was concern was for NECSA to be able to get the nuclear new build project underway. Many departments in South Africa prior to 1994 had been captured by the Stellenbosch Mafia and well as the Ruperts. The Committee was however only present for oversight and not to discuss such issues and the obsession with the Guptas was off the mark.

She asked if the CEO was appointed on a month to month basis and if this had been resolved

Mr Mackay requested that the MP not veer off the agenda of the meeting and only speak about the annual reports.

The Chairperson asked the MP to allow the current speaker finish her questions and he urged the members not to be distracted from the important mandate of the Committee to pursue oversight questions.

Dr Kemm replied that he believed that in terms of medical isotopes South Africa could make it to the number one slot in the world. There was a need to be aware of the existent competition however it was a very lucrative market. There were plans to move to other African countries and there was need to be more market orientated. He reported that Safari2 was now a commercial reactor and not a research reactor. He admitted that Safari 2 was late but efforts were being made to put 100% into production.

He replied that NECSA was exporting to a Russian company called Tenex [Rosatom subsidiary] and was proud of this fact. NECSA was exporting to South Korea and was having discussions with Argentina for more exports.

He stated for the record that he was not opposed to solar or wind energy but believed that nuclear energy would grow much faster than solar or wind.  South Africa had a lot to boast about in terms of solar or wind.

Dr Kemm replied that NECSA would provide a written report on how much it had cost taxpayers and acknowledged that there was need to be more aggressive in creating revenue from nuclear commodities. He identified that NECSA had developed the plastic petrol tank concept but had not made any revenue from this multi-million dollar innovation. He identified that NECSA had developed the dust filters that are used in nearly every tractor but again was not receiving a cut from this innovation.

He reported that IP had been protected to develop Generation IV reactors and fuel which was still under assessment. Some feedback had been received that it was good fuel and there was a huge market to see it.

He replied that the CEO was on a month to month contact and that the board had decided to reappoint him for the next three year period.

NECSA did have the intentions to take back the role of Safari 2 and it was looking to develop a specific reactor which they could use to make Safari 2 for commercial purpose.

Dr Kemm replied that a lot had been done to demystify nuclear including learner awareness programmes, schools hosted at NECSA Science Week that was also targeted at universities and technical colleges. He did however admit that more had to be done.

Mr Tshelane replied that NECSA dealt with the Russian company as its profitability was based on the ability to supply anyone within the constraints of the Non-Proliferation of Weapons of Mass Destruction Act, 1993.

Some of NESCAs problems were that the funding from the government was declining and more had to be done with less.

He replied that NECSA's sustainability was not intertwined with the nuclear new build programme. The nuclear new build programme allowed NECSA to achieve its goals.

He was happy to note that there had been no security breaches in the past three years and NECSA had not been complacent because of this but had upgraded security to prevent any chance of breaches.

On the investigation of nuclear material found at the garage, the material did not belong to NECSA. However chances of catching the culprits were fading with time.

He replied that the uranium stock was a national asset and NECSA did not make decisions about national assets as it only carried out decisions by the state.

He replied that the Renewable Energy Independent Power Producer Procurement (REIPP) was an IP belonging to the state under the control of Eskom. NECSA was in control of certain aspects of it. Exporting was part of their plans and it would be wasteful if NECSA did not utilise this IP.

He replied that NECSA did not have any dealings with the Guptas and it would procure uranium from the market and not form relationships with particular mines.

He replied that the reporting format would be improved and asked the MPs to highlight specific areas which needed improvements.

On the demystification of nuclear, he hoped that entities other than NECSA would participate in order to provide a variety of clarifications.

He admitted that a section of the report had been a copy and paste but this was only the predetermined objectives which were the same for both years. However the actual performance for the two years was different. The disabling injury target had not been achieved because one individual who had not worn the correct clothing had unfortunately been involved in a fatality. This fatality had to remain on the report for 18 months as the issue was being dealt with. He assured the Committee that it would not reoccur.

He replied that Pelindaba had not been reported on as Pelindaba is only a division and not a company and so did not have its own separate financial statements. The losses were already reflected in the NECSA financial statements.

He replied that commercial risks arise largely as more than 65% of revenue came from products they sell.

The Chairperson commented that the CEO should not have mentioned the Guptas.

Dr Kemm announced that he wanted to congratulate South Africa on behalf of NECSA on the appointment of Ambassador Tebogo Seokolo as the chairman of the International Atomic Agency for 2016/17

Mr Van Dalen stated that his question on whether NECSA had shareholder compact was still unanswered.

Ms Mahambehlala asked who was responsible for safety health regulations. She said the NECSA chairperson's version of the demystification of nuclear was at a very high level and targeted only the elite and those at universities. She stated that the ruling party was concerned with the ordinary person and therefore a clearer basic understanding of nuclear needed to be provided for the ordinary person

Mr Mackay commented that NECSA had been listing all the various isotopes they had been supplying but he was still waiting to get a picture of why the company was not making a profit and why it was behaving like a charity case.

He asked the Minister why the recommendation to have a new board had happened. He asked for the remuneration of the board to be stated on record so there could be a comparison of this to the losses that NECSA was making.

He stated that it would be difficult for SA to process its own fuel and asked for a specific list of countries that had showed interest in purchasing this fuel.

Dr Kemm agreed that public awareness of nuclear had to be provided even to the ordinary person however it was going to be in a difficult process as the misconceptions about nuclear were very deep as the public was being sold various false stories by green groups.

He admitted that there was need to address the profitability of NESCA. He reported that there was a R1.2 billion turnover in nuclear medicine and that South Africa was the second largest market shareholder in nuclear medicine.

He replied that many of the ideas that NECSA had were viable and stated fluorine as an example. Only six countries in the world were producing fluorine and South Africa was exporting it to two countries. There was need to figure out how to make the company more profitable.

Mr Tshelane replied that the issue of profitability of NECSA was a problem with the NECSA Company and not necessarily with the NECSA Group because the company received funding from government grants. On the payment of executives in 2014/15, non-executive directors were paid R1.3 million and in 2015/16 they were paid R600 000. In 2014/15 executive directors were paid R11.6 million and in 2015/16 they were paid R9.4 million.

The Chairperson thanked NECSA for its presentation and stated that, despite the commercialisation issue, NECSA needed to be commended for the positive progress they had made.

The meeting was adjourned.