2009/10 ANNUAL REPORT Presentation to the Select Committee on Economic Development

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2009/10 ANNUAL REPORT

Presentation to the Select Committee on Economic Development

09 November 2010

Presentation

1. Introduction

2. Strategic Planning Process

3. Key/ Strategic Objectives

4. Energy Programmes Within DME

5. 2009/10 Programme Performance Review

6. Auditors General’s Report

7. Annual Financial Report

8. Conclusion

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INTRODUCTION

• Departmental strategic planning session was held in November 2008 under the DME umbrella;

• The split of the Department of Minerals and Energy was effected on 1 April 2010 (split of support services - human and finance resources);

• Some of the activities/projects that were identified during the November 2008 strategic planning session had to be either delayed/abandoned to prepare for the split, especially in support services; and

• Less changes were experienced in the line function activities.

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INTRODUCTION

• Challenges facing the implementation of the 2009/10 strategic plan:

– The split of the Department of Minerals and Energy;

– Resource constraints (both financial & human);

– Aging electricity generation and distribution infrastructure, electrification backlogs, bulk infrastructure;

– Liquid fuels infrastructure, supply challenges;

– Preparations and hosting of the Confederations Cup and the 2010 Soccer World Cup; and

– Global economic downturn .

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STRATEGIC PLANNING PROCESS

• Introduction of the Balance Scorecard methodology of planning during 2008 by DME;

• Poor understanding of the process by management – when cascading to lower levels of planning;

• Challenges of alignment with the format of DG’s performance agreement as prescribed by DPSA;

• Way forward – postponement of the BSC methodology by DoE.

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MANDATE, MISSION, VISION

DME DOEMANDATE: Provision of services for the effective transformation and governance of minerals and energy industries for economic growth and development.

MANDATE: Ensure secure and sustainable provision of energy for socio-economic development

MISSION: To regulate and promote the minerals and energy sectors for the benefit of all.

MISSION: To regulate and transform the (energy) sector for the provision of secure, sustainable and affordable energy.

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MANDATE, MISSION, VISION

DME DOEVISION: World-class minerals and energy sectors through sustainable development

VISION: A transformed and sustainable energy sector with universal access to modern energy carriers for all….

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KEY OBJECTIVESSTRATEGIC OBJECTIVES TO SUPPORT THE

MANDATE, VISION AND MISSION

• Promote and regulate the minerals and energy sectors;

• Ensure effective service delivery through efficient organisational processes;

• Promoting and maintaining a learning organisation; and

• Ensure efficient, effective and economic use of financial resources.

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PROGRAMMES COVERED IN THE ANNUAL REPORT

The activities of the DME were organised in the following seven programmes:

• Programme 1: Administration;

• Programme 2: Promotion of MHS;

• Programme 3: Mineral Regulation;

• Programme 4 : Mineral Promotion;

• Programme 5: Hydrocarbons & EP;

• Programme 6 : Electricity, Nuclear & Clean Energy; and

• Programme 7: Associated Services

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PROGRAMMES continued………..• With the split of the DME in October 2009, the two

energy line function programmes were delineated from the Mineral Resource functions, with a direct reporting line to the DG of Energy;

• Support Services functions were for the transitional phase, shared between DMR and DOE under the hosting Accounting Officer of DMR.

• Today’s presentation will therefore focus on the performance of the two line function specific branches, namely

-Hydrocarbons and Energy Planning as well as - - Electricity, Nuclear and Clean energy.

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PROGRAMME 5

HYDROCARBONS AND ENERGY PLANNING

• Hydrocarbons – Develops policy and regulation to manage

petroleum, coal and natural gas sectors.

– Petroleum controller – Controller of Petroleum Products administers and issues petroleum licences, and monitors and enforces licence conditions.

• Energy Planning – Promotes the sustainable use of energy

resources through integrated energy planning

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PROGRAMME 5 Cont….

• Implementation of the PPAA– 15 198 license applications received, 12 453

processed, balance 2 745.

– Inspectors from the Compliance and Monitoring Unit undertook 2309 site inspections for the year.

• Import and export of fuel products– 1200 import and export permits were issued

during the reporting period. South Africa exports petrol and diesel to neighbouring countries, hence the export permits.

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Safe Illuminating Paraffin (IP) Pilot Project• 1000 IP safe stoves were distributed by the

Department to households in Gauteng (350 stoves), Western Cape (350 stoves), KwaZulu Natal (150 stoves) and Eastern Cape (150 stoves) Provinces to promote use of safer appliances.

• The project has resulted in prevention of fires.

• The higher cost of stoves remains a challenge.

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PROGRAMME 5 Cont…

National Integrated Energy Modeling System (NIEMS)

• User requirement specifications for the development of NIEMS were finalized.

• Due to funding constraints alternative approaches to developing the modeling system were evaluated and certain recommendations were made.

Integrated Energy Planning Strategy (IEPS)• Draft IEPS completed.

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PROGRAMME 5 Cont…

Energy Data• The Energy Digest was finalised in December

2009 • The Energy Price Report was compiled and

finalised• The Energy Balance for 2006 was finalized and

published on the Department’s website

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FIFA World Cup Task Team

• A task team was set up by the DoE to ensure adequate supply of jet fuel and other petroleum products during WC2010.

• Operational plans were developed in conjunction with the oil industry and Transnet.

LPG

• The Draft Regulations and the associated Draft Working Rules were published in the Government Gazette for public comment in November 2009.

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PROGRAMME 5 Cont…

Regulatory Accounts

• One aspect in the regulatory accounts project namely, the Benchmark Service Station (BSS) model was completed and discussed with relevant stakeholders. The project will be completed during 2010/11 financial year.

Funding mechanism for New Multi Product Pipeline (NMPP)

• A security of supply levy of 7.5 cents per litre was determined by the Minister of Finance to contribute funds towards the construction of the NMPP.

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PROG 5 PERFORMANCE

Cleaner Fuels

• A draft Position Paper and Roadmap was developed, having engaged the two key stakeholders, namely the South African Petroleum Industry Association (SAPIA) and National Association of Automobile Manufacturers (NAAMSA)

• The Department also engaged SAPIA on their proposal on Clean Fuels

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PROG 5 PERFORMANCE

Integrated Energy Centres (IeCs)

IeCs under development during the 2009’10 financial year include:

• Three IeCs, namely Ulundi (KwaZulu Natal), Qunu and Mbizana (both in

the Eastern Cape) were at advanced stages of their Environmental Impact

Assessments.

• A sod-turning ceremony for the Qunu IeC was held in February 2010

• The establishment and registration of the Mbizana and Qunu cooperatives

with the Department of Trade and Industry in the Eastern Cape was

completed

• Two energy needs assessment surveys were done in Western Cape and

Limpopo

• Information sessions on energy safety and energy education were

organized in seven Provinces, namely Western Cape, Eastern Cape,

Kwazulu-Natal, North West, Mpumalanga, Gauteng and Limpopo).

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PROGRAMME 6

ELECTRICITY, NUCLEAR AND CLEAN ENERGY• Electricity

– Provide the policy and regulatory framework for the electricity sector.

– Ensures energy security, universal access, diversification of primary energy sources and the promotion of clean and efficient technologies.

• Integrated National Electrification Plan (INEP)

– Overall management of the electrification programme, electrification planning in the quest to achieving universal access to electricity.

• Nuclear Sector

– Improve governance of the nuclear sector.

• Clean Energy

– Facilitate implementation of renewable energy and energy efficiency.

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PROGRAMME 6 Cont.....KEY /POLICY DEVELOPMENTS.

• Review of the 2003 Renewable Energy White Paper.

• 17th Constitutional Amendment.

• 2nd Amendment to Electricity Regulation Act.

• Development of the country's first Integrated Resource Plan (IRP1).

• Development of New Generation Capacity Regulation.

• Development of Standard Offer Policy for Energy Efficiency and Demand Side Management.

• Nuclear energy implementation strategy.

• The National Radioactive Waste Disposal Institute Act, 53 of 2008, was promulgated during the past financial year.

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PROGRAMME 6 Cont....• Electricity

– Integrated Resource Plan (IRP1) gazetted.– New Generation Capacity Regulations promulgated.– 17th Constitutional Amendment released from DoE to

lead department (DoJ) for Cabinet. – Standard Offer Policy gazetted.

• INEP – Integrated National Electrification Programme– Targeted household connections 150 000 achieved

167 119. Challenge to be discussed under the Auditor General’s report

• Solar Water Heating (EEDSM)– Detailed project implementation plans developed.– Joint implementation with Municipalities, CEF and

Eskom.

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PROGRAMME 6 Cont...

• Nuclear Energy

– Research and Development (R&D) agreement signed with USA, anticipate more next year

– The development of the business case to list the entity is underway, as well as the appointment of a Board of Directors

• Renewable energy

– Held a successful Renewable Energy Summit to review the Renewable Energy Policy

– The revised White Paper, which will be finalised before the end of 2010 financial year

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MTEF ALLOCATION INEP

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INEP ALLOCATION2009/10

ALLOCATION (R’000)

YTD ACTUAL TRANSFERS

(R’000)

VARIANCE

% VARIANC

E

Municipal Allocation 932,957 914,413 18,543 3.6%

Eskom Allocation 1,467,365 1,467,365 0 0%

Eskom Special Schools Allocation

148,950 148,950 0 0%

Non-Grid Allocation (appointed service

providers)84,000 1,290 82,710 98%

Total Allocation 2,633,272 2,532,018 101,253

PERFORMANCE PER PROVINCE INEP ALLOCATIONS TO MUNICIPALITIES

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PROVINCE ALLOCATIONS(R’000)

YTD ACTUAL EXPENDITURE

(R’000)VARIANCE

(R’000)% VARIANCE

Eastern Cape 234,300 234,300 0 0%

Free State 88,456 87,988 468 1%

Gauteng 82,580 75,740 6,840 9%

Kwazulu Natal 123,303 123,303 0 0%

Limpopo 139,761 134,681 5,080 4%

Mpumalanga 98,436 98,436 0 0%

Northern Cape 28,675 28,675 0 0%

North West 59,122 52,967 6,155 12%

Western Cape 78,324 78,324 0 0%

Total 932,957 914,413 18,543 2%

REASONS FOR UNDER SPENDING INEP

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• Overall under spending for INEP is within the threshold tolerance of 5%;

• The under spending is mainly attributable to the misalignment of national and local government budgeting cycles.– Municipal tender processes only commence after July, once

the budgets have been passed • Procurement processes in the municipalities take too long• Municipalities technical capacity challenges

REASONS FOR VARIANCE

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PROVINCEMUNICIPALITY

NAMEAMOUNT

SCHEDULEDREASON

LIMPOPO – R5,08M

Musina R343,000.00

Poor performance by the municipality; measures to rectify the situation being discussed with them

Elias Motsoaledi R 1,457,600Unavailability of network capacity to electrify the other 136 houses.

Mookgopong R 3,280,000.00The project was cancelled due to the fact that it already formed part of Eskom plans.

GAUTENG PROVINCE

Nokeng tsa Taemane

R 6,840,000.00

The Municipality was intending to refurbish their old network with the INEP funding at the areas where there is no Backlog.

REASONS FOR VARIANCE

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PROVINCESMUNICIPALITY

NAMEAMOUNT

SCHEDULEDREASON

NORTH-WEST R6.1M

FREE STATE

Madibeng R6,154m

Municipality currently busy with 2008/9 projects, and through regional office interactions it was discovered that the Municipality has not prepared sufficiently to be able to complete both projects for 2008/9 and 2009/10 financial years.

Illegal occupation of houses – no certainly as to when this will be resolved.

Mantsopa R468 000There is no readily implementable project.

Analysis of 2009/10 Financial

Performance

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FINANCIAL PERFORMANCE

• From May 2009 the Director General of Mineral Resources was the hosting Accounting Officer, and through a MOU offered financial and Human Resource support services to the Department of Energy.

• The next Financial Performance presentation includes expenditure and performance of the Department of Mineral Resources.

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Analysis of variance in Statement of Financial Performance

Item2009/10 2008/9 Variance % variance

R’000 R’000 R’000

Compensation of employees

Basic salary 259,530 207,803 51,727

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Periodic payments 1,526 2,950 (1,424)

(48)

Pension 33,503 26,771 6,732

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Goods and services

Venues and facilities 5,454 11,239 (5,785)

(51)

Advertising 2,829 16,009 (13,180) (82)

Communication 19,875 17,207 2,668 15.

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Analysis of the Statement of Financial Performance

Item 2009/10 2008/9 Variance % varianceR’000 R’000 R’000

Travelling 67,458 79,317 (11,859) (14)

Operating leases 34,231 19,413 14,818 76

Financial transactions in assets and liabilities 925 593 332 55

Tangible capital assets

Buildings and other fixed structures 26,917 3,978 22,939 577

Machinery and equipment 20,467 12,565 11,133 88

Software and other intangible assets 1,306 2,312 (1,006) (44))

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Statement of Financial Performance: Variance analysis

• The staff cost increased in relation to the increase in staff numbers (1272 vs.1169)

• The G & S cost is relatively low compared to 2008/9 owing to cost containment measures implemented during the year under review. The related costs include, travelling, venues and facilities, advertising and catering.

• Tangible capital assets increased significantly owing to acquisition of furniture and servers for new building

• Intangible capital assets decreased as only security related software were acquired during 2009/10

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Statement of Financial Performance: Variance analysis

Item 2009/10 2008/09 Variance %variance

R’000 R’000 R’000

Current Assets

Cash and cash equivalents 192,279 127,225 65,054 34

Prepayments and Advances 5,902 19,133 (13,231) (224) Receivables 14,580 29,674 (15,094 (104) Current Liabilities

Voted Funds to be surrendered 137,288 54,105 83,183 61

Revenue to be surrendered 74,344 115,158 (40,814) (55)

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Analysis of variances: Statement of Financial Position

Item 2009/10 2008/09 Variance %variance

R’000 R’000 R’000

Net Assets Recoverable Revenue 1062 844 218 21

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Analysis of major variances : Statement of Financial Position

• The asset base increased by 24% from last year attributable to bank balance (R158m) for payments projected to disburse at year end , late revenue payments (R33m)

• Prepayments and advances went down by 224% due to rehabilitation of ownerless and derelict mines projects that were concluded during the 2009/10 financial year.

• Recoverable expenditure (R7.6m fraud and approximately R1. 9m – land for IPP project).

• Notable decrease in long outstanding staff debt (R2.2m vs. R2.7m)

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Analysis of major variances : Statement of Financial Position

• Total liabilities of R201m(also 24% increase) include R 74 m revenue and R137m of voted funds for surrender

• Net assets of R3.2 m include the capitalization reserve (R2.2m) and R1m recoverable revenue

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Analysis of variances: Cash Flow Statement

Item 2009/10 2008/09 Variance %variance R'000 R'000 R'000 Receipts 4,899,148 4,068,731 830,417 17

Net cash flow available from operating activities 113,526 27,808 85,718 76

Net cash flow available from financing activities 218 (17) 235 108 Cash and cash equivalents 192,279 127,225 65,054 34

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Analysis of major variances: Cash Flow Statement

• The increase in net cash flow available from operating activities is attributable to the increase in unspent funds by 60%. (as explained under unspent funds)

• The significant increase in net cash flow from investing activities is due to acquisition of furniture and servers for the new building as well as the improvements made to the new building

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Analysis of variances: Disclosure notes

Items 2009/10 2008/09 Variance %variance

R'000 R'000 R'000 Contingent liabilities and contingent assets 367,474 273,800 93,674 25 Commitments 99,002 87,526 11,476 12 Accruals 40,525 13,358 27,167 67 Employee Benefits 42,201 30,241 11,960 28 Lease commitments 368,526 359,464 9,062 2 Receivable for Departmental Revenue 25,567 10,437 15,130 59 Irregular Expenditure 4,203 - 4,203 100 Related Party Transactions 17,600 58,349 (40,749) (232)

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Items 2009/10 2008/09 Variance %variance

R'000 R'000 R'000 Key Management Personnel 33,377 24,738 8,639 26

Provisions 10,559 7,847 2,712 26

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• Contingent Liabilities is made out of legal claims against the department, guarantees for car schemes and housing; and interdepartmental payables (unconfirmed balances).

• Accruals increased by 67% as a result of R20.4m due to Public works, invoice of which is still awaited

• Increase on employees benefits is as a result of leave payouts and performance bonuses due.

• Receivables increased as a result of uncollected monies due to the department.

• Irregular expenditure incurred in the current financial year was due to officials not following the departmental financial delegations.

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Details of Transfers and Subsidies

Recipient

2009/10

Actual transfer

Purpose of transfer paymentR’000

Assistance to Mines 31,100

Assistance to marginal mines in the form of pumping subsidies and research to prevent ingress of water into underground holdings (CGS:R17.6m and Mining companies R13.5 m)

Council for Geoscience 132,677 Core funding in terms of establishing actCouncil for Mineral Technology Research 161,108

Core funding in terms of establishing act

South African Diamond and Precious Metals Regulator 39,412


Mine Health and Safety Council 5,118


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Transfers and Subsidies

Recipient

2009/10

Actual transfer

Purpose of transfer paymentR’000

South African Nuclear Energy Corporation 564,144 Core funding in terms of establishing act

National Nuclear Regulator 23,793 Core funding in terms of establishing act

Electricity Distribution Industry Holdings 72,214 Core funding in terms of establishing actEskom 1,616,315 Electrification programmeIndustrial Development Corporation of SA (Small scale mining) 25,058

Small scale mining projects

State Diamond Trader 1,000 Bail out during recession

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An overview of the audit report and the report of the Audit Committee

Audit opinion

• Qualified audit opinion issued

Basis for qualified opinion

• Completeness of receivables for departmental revenue (R25m) could not be verified

• This is related to disclosure note 26 (page 189)

• Although the department prepares AFS on modified cash basis, such disclosure notes are necessary as part of the preparation for migration into accrual basis of accounting

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Root Cause

• Lack of a comprehensive debtors system

• Skills gaps

Management action plan

• New debtors system to be developed as part of the new system – BAS to be used in the interim

• Monthly workshops with regional offices to review registers

• Additional staff with Financial background to be appointed in all regional offices

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Emphasis of matter

• These matters are not a qualification but are intended to draw the readers attention to such matters due to their importance.

Matters reported are:

• Basis of reporting - this is a standard paragraph for all national departments – No further action is required in this regard.

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Matters reported are:• Irregular Expenditure –

– expenditure that was incurred without adhering to the internal delegation of authority, e.g. services rendered prior to approval by the relevant authority

– These were picked up the internal controls established by the department

– All cases were evaluated and condoned by the Accounting Officer during the year

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• Restatement of previous financial year figures.

• Changes effected on prior year’s reported figures

• These changes were either made as a result of a query from the AG or initiated by Management

• The intention is to align prior year’s figures to the current for comparability.

• One of the major causes for these adjustments is change in reporting framework, e.g. disclosure of minor assets.

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• Material under-spending of budget

• Although the amount appears significant it only represents 2,9 percent of the total budget – which is below the materiality threshold set by National Treasury

• The under spending was primarily caused by delays in finalising contracts for non-grid service. These contracts were signed towards the end of the financial year

• Approval was granted by National Treasury for the roll over of the funding to the 2010/11

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Matters reported are:• Potential unauthorised expenditure due to

accruals exceeding saving

• Of the R22.2 m accruals disclosed, R20.4 m relates to the DPW disputed invoices.

• There was no deliberate intention to withhold invoices

• At year end DPW had not submitted a revised invoice on the confirmed amount

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State of Financial Management systems

Report on Financial Misconduct• 4 cases of financial misconduct were reported during

the year.

• Outcomes of the hearing are: 2 were found guilty, 1 is in progress while the other 1 has already left the Department.

• Further action taken - 2 of the cases were reported to the police while the other one was suspended without pay for 3 months and the 4th one is still in progress

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State of Financial Management systems

Supply Chain Management Issues:

• The SCM component has been fully restructured and aligned with the SCM Framework requirements. This enables effective implementation of all functionalities and improves productivity.

• All SCM Committees as required by law have been constituted and fully operational. This enhances internal control measures within the SCM environment

• Departmental Internal control systems in place are able to pick up irregular expenditure effectively

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CONCLUSSION

• Although a significant amount of effort was directed at reorganization and implementation of the structures of the new departments minor deviations to the initial business plan were experienced.

• As of the 1st of April we successfully implemented the two new departments with independent organizational structures, budgets and dedicated personnel.

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THANK YOU THANK YOU

Documents

2009/10 ANNUAL REPORT Presentation to the Select Committee on Economic Development