SA National Energy Development Institute on its Annual Report for 2012/13; Financial and Fiscal Commission briefing on its recommendations related to energy.

Meeting report

Briefing by SA National Energy Development Institute (SANEDI)
Mr Kadri Nassiep, CEO: SA National Energy Development Institute (SANEDI) briefed the Committee on its Annual Report for 2012/13. He said it had a staff complement of 42, with 75% HDI representation and 53% female representation.   This was set to increase with the filling of the positions of CFO and company secretary in the near future..

SANEDI received R50.1m in transfers from the Department of Energy and had an expenditure of R33.5m. It was currently rolling out its own Enterprise Resource Planning (ERP) system in November. This would follow the Schedule 3 regulations, and be according to the GRAP accounting method.

SANEDI had incurred R12.6m in irregular expenditure through procurement processes not being followed. In the case of R3.3m, it was because of procurement processes inherited from the Central Energy Fund (CEF) when SANEDI was still a Schedule 2 entity. In the case of R0.3m, it was because three responsive quotes had not been received in all instances. In the case of R7.6m, it was because of CEF procurement, but for which SANEDI took responsibility, and in the case of R1.4m, no board approval was sought for an amount above the R1m threshold. All of the above were not audit findings, but were voluntary disclosures which were found in the process of SANEDI’s transition from a Schedule 2 to a Schedule 3 entity. It had gone to the Board for a condonation, as the correct processes had been followed. There was no financial misconduct.

The South African Centre for Carbon Capture and Storage (SACCCS) had a strong government component, but there would be no economic driver until 2015, when tax breaks would kick in. It was doing a pilot carbon dioxide storage project in the east coast region, but there would not be a commercial plant until 2025.
Under its corporate social responsibility programme it supported a different charity each year. This year it was the Children’s Early Learning Centre.

It had not met its performance target of establishing a meteorological station at the Solar Park because a suitable site had not been identified. The Green Transport Centre and the Working for Energy (WFE) programme were the two main problem areas with regards to performance targets.  It had had a firm undertaking from the Department of Transport (DOT) for support of R10m annually for three years, but this had not materialised, as DOT had reprioritised its budget and SANEDI had not received the support. SANEDI had taken this item out of its annual performance plan (APP).  It had, however, appointed a senior manager for one year to get the transport centre operational. Regardless of the transport centre’s establishment or not, Gauteng province would be running some busses on natural gas.

The WFE programme might not become operational because of a lack of funding.  However, a lot was being done and might continue to be done under a different guise or plan. If the biomass renewable energy project intended to be located in Kwa Mashu could not be sited there, then the project would incur an additional R10m to R15m in capital costs. The Bela Bela biogas project upgrade had been delayed because purchase agreements were not in place with the service provider. The Philippi biogas project had been delayed due to reprioritisation. At the Lucingweni biomass project, the control room solar panels had been vandalised and stolen. The control room would now be set up as an early learning development centre. The project would have to be moved to Walter Sisulu University, which was currently under administration, so a parallel facility would be established at Nelson Mandela University. When the Walter Sisulu University challenges were resolved, it would move the project there. The coal fuel tablet project had been delayed because the service provider refused to hand over intellectual property rights. A Memorandum of Agreement with Tshinelco High School in Kimberly had been finalised and work would commence in the first quarter of 2014. It was partnering with the Centre for Scientific and Industrial Research and the Technology Innovation Agency on the development of battery control systems for electric vehicles and with BMW on analysing electric vehicle refuelling, to see how effective electric vehicles were.

SANEDI was introducing its own risk management process, now that it had moved away from the CEF. It had an effective audit committee and held workshops through the year, and was reviewing its internal and external audit plans. It had moved from the GARP to the GRAP accounting method. This had resulted in discovering irregular expenditure which it had voluntarily disclosed. While the spending was irregular according to procedures and processes that should have been followed, all monies had been spent gainfully.
Irregular expenditure on procurement had resulted in disclosure in the annual financial statements of R12.6m, while fruitless and wasteful expenditure had been incurred when a penalty of 5%, or R2 090, had been raised for late payment of a previous supplier invoice.  The presentation then outlined SANEDI’s action plans on all the audit findings of the Auditor General.

Mr John Marriot, Deputy Chairman, said it had been a busy time moving from the SA National Energy Research Institute (SANERI) to SANEDI, and the imminent introduction of a CFO and Company Secretary would assist greatly.

Discussion
The Chairperson asked to what extent smart grids could work, given what was currently being done. Could clarity be given over data management -- would it be at a separate centre, or at SANEDI? Could the outreach programme be expanded upon? He said he was impatient with the rollout of the energy efficiency programme.  Did they engage with the Department of Science and Technology (DST)? What did the future hold for SANEDI?

Mr L Greyling (ID) said a lot of the budget was spent on the carbon capture and storage project, yet in the integrated energy plan (IEP) there was not as much emphasis on carbon capture and storage. Did SANEDI have any input into the IEP? Why was there no massive uptake by municipalities on biogas projects? SANEDI should look at the institutional barriers that were preventing a quick uptake.

Mr Nassiep said the renewable energy project could be managed, but needed a smart grid.  There was a disjuncture between the metro municipalities and ESKOM.  ESKOM did not have an actual residential electricity demand profile and was working with 1997 figures. The Soshanguve high mast lighting pilot project showed that 35% savings could be achieved, and this could be expanded to provide free Wi-Fi on limited bandwidth and allow textbooks and the like to be downloaded by students in the area. It was investigating whether cheap tablet computers could be integrated into such a plan. It would advise on the status of Section 12L tax incentives, which would stimulate an energy-efficiency drive in business. It would show the figures for energy-efficiency achievements for sectors such as cement and fertilizer, for example.  However, the figures would be overall figures, as some figures were sensitive business information.  The DST provided core funding, but the DST and SANEDI’s vision regarding the data projects were different.   The Centre for Energy Systems Analysis and Research (CESAR) would be housed at SANEDI and would include statisticians and economists, etc.

Regarding WFE, he said the technology was not new, but how to make it applicable was, and it was learning lessons from the 100 units it had operating.  Outreach Communities need to be educated on biogas projects and it was working with a company on developing educational materials. It was working with other provinces like with the City of Cape Town and with the Nelson Mandela Bay Metro, and was bolstering awareness inside metros.  It was engaging with the DST on green transport, CESAR, SACCCS and the energy efficiency hub.  The move from CEF had been the biggest challenge, and there had been no funding for support services. It needed to deliver on a broad mandate which included everything except nuclear energy.

The Chairperson asked if legislation to guide its existence would assist SANEDI.

Mr Nassiep said the Energy Act did not prescribe the CEF.  SANEDI needed to work with the Department and Treasury as, in its new scenario, it was currently operating in what could only be described as a survival budget mode.

Regarding Mr Greyling's question on the SACCCS, he said budget limitations meant it was focusing only on proven commercial technology, yet it was looking at a 20-year horizon and acknowledged that the CCCS had energy and cost penalties.  SANEDI needed better modelling skills.

It would not give up on the Green Transport Centre, but it would be dependent on funding from the Department.  It had assigned a senior manager with the responsibility for one year to set up the centre in the hope that by that time, funding would be available.

Briefing by Financial and Fiscal Commission (FFC)
Ms Sasha Peters, Senior Researcher in the local government unit of the FFC, said their recommendations focussed on energy and the National Development Plan (NDP), on previous and current FFC research on energy related issues as well as on asset management, the maintenance of energy infrastructure and the free basic energy service.

She said the FFC recommendations which had been made before the NDP was created, were still relevant. In the past, a Regional Electricity Distribution Services (REDS) had been proposed in which bigger distributors were regarded as better. The FFC’s research had found no empirical evidence for this, with capacity to distribute and implementation more important as determinants of cost.  In 2011, the Commission undertook a study on how environmental sustainability and climate change impacted on local government, and to assess its impact on public finance. Their research looked at the fiscal implications of urban land use patterns.  It found that low density housing cost the fiscus R6.4bn, and high density housing could decrease carbon emissions by 22% at transport modes. In 2012, it reviewed the local government fiscal framework. This review showed that the repair and maintenance of electricity distribution infrastructure was a challenge at the local government level. Currently, in 2013, it was assessing the impact of electricity price increases on municipalities. One argument here was that municipalities were using the electricity tariff to cross-subsidise other services. Municipalities used a range of methods to calculate their electricity price and it was difficult to prove whether cross-subsidisation was taking place. The FFC was also researching the cost of basic services.

Its recommendations were that Treasury develop local government-specific infrastructure asset management legislation and guidelines, and provide technical assistance to prepare and implement asset management plans. Provincial and local authorities should monitor operational costs of capital funding to ensure the maintenance and renewal of such infrastructure.  There was no legislation to govern asset management at the municipal level, and maintenance planning was not in line with international best practise.  The FFC further recommended that the government adopt a methodology to differentiate municipalities based on performance and context, which would inform funding and capacity support.

Other energy-related recommendations of the FFC were:

• A review of funding for capital expenditure, as this was under-funded by R42bn.  This led municipalities to be dependent on Municipal Infrastructure Grants.

• Municipalities should ensure that their tariffs were cost reflective and sensitive to the indigent profile of the municipality. Non-payment by defaulters for basic services was highest for electricity.

• In municipalities where Eskom was the service provider, municipalities should be allowed to apply a surcharge on the electricity tariff. Treasury was supposed to regulate the surcharge by municipalities, but this area was hazy and there were no regulations.

• Transferring officers should ensure that a comprehensive analysis of the outcomes of retrospective and current grant allocations be undertaken.

• The national government should enforce the provisions of Section 74(2) of the Municipal Systems Act so that the tariffs accurately reflected the cost of providing the service.

• Government should consider providing municipalities with performance-based conditional grants, with the grants giving attention to municipal-specific factors, such as topography. These grants should not be about cash rewards, but about changing behaviour.

• Government should actively pursue the development of a spatially compact urban form and conduct a review of the efficacy of the current housing finance arrangements.

• A blanket regionalisation approach should not be supported, as current legislative provisions allowed for alternative service delivery arrangements, and a differentiated approach should be considered.

She said many municipalities were uncertain of the location of assets, which raised questions about how they planned and budgeted for repairs and maintenance.  If one took into account the aggregate actual expenditure for maintenance and compared it with the budgeted figure, there was a R6bn deficit, and when compared to the recommended spending amount, the deficit rose to R10bn.  South Africa would experience a severe deterioration of its electricity distribution infrastructure in five years’ time at current investment levels for repair and maintenance.

The revised Local Government Equitable Share (LGES) made provision for repair and maintenance. However, the question was whether the monies would be used for their intended purpose, as once the monies were transferred, their use was at the discretion of the municipalities. The Approach to Distribution Asset Management (ADAM) had been drafted following the 2008 energy crises, but the ADAM document had not been updated since then.  Funding for ADAM of R320m was allocated only in 2013 in the form of a pilot project called mini-ADAM, so the pace of reform was very slow.

Free Basic Electricity (FBE) and Free Basic Alternative Electricity (FBAE) were funded through the LGES,   with a bias towards rural and less resourced areas.  FBE and FBAE accounted for R5.7bn of the total LGES, which was equivalent to R56.66 per household. Ten per cent of this subsidy was meant for maintenance. There was a need for proper targeting of FBE and for assistance to be given to B4 municipalities.

She said most of the FFC recommendations had been accepted by the Treasury, but that Treasury had divided the recommendations into those that directly related to the Division of Revenue (DoR) and those that did not. The FFC, however, felt that its mandate was on all matters and that those that were not directly related to DoR would fall through the cracks. It recommended that the Portfolio Committee ask Treasury why those recommendations were not being used.

Discussion
The Chairperson asked which recommendations it wanted Treasury to respond to.  What informed the selection of research topics?  How had municipalities reacted to the FFC findings?  What was Treasury’s response to the international best practise figure of 2% for the maintenance budget?  He noted the drop in alternative energy users. Could REDS / mini-ADAM be expanded upon?

Mr Greyling said the maintenance of the grid was a “band aid” approach, rather than a holistic one. Energy-intensive users were starting to put in their own energy generation, which meant that revenue collected for cross-subsidisation purposes would decrease. He had seen many different tariff structures and there needed to be more transparency in billing. There should be a payment for network grid charges included in the billing statement. There also needed to be a move to billing for ‘time of use of electricity’.   Alternative systems to the indigent register were needed to identify FBAE users -- for example, a card like that used on the my Citi bus service.   In B4 municipalities, less than half the population were getting FBE.  Were they connected to the grid, or were they getting FBAE?

Ms B Ferguson (COPE) asked how the recommendations were monitored.

Ms N Mathibela (ANC) asked for the names of the service providers supplying alternative energy.

The Chairperson said the indigent register was not compiled and maintained properly.

Ms Peters replied that the FFC made recommendations two years in advance. It looked at what would be topical in two years’ time, informed by input from attending budget forums and Intergovernmental relations meetings.   Treasury might agree with its recommendations, but they did not see it as relevant to the DoR. The FFC also submitted its findings to the SA Local Government Association working groups.

The REDS/EDI restructuring was not off the table, and this affected municipalities’ investment plans. For example, when it was thought that REDS would be taken away from municipalities, municipalities had shifted their investment into other areas. The ADAM, or mini-ADAM, was not broad enough to address the challenge.

She agreed that a holistic approach was necessary, as work was currently being done in isolation.

The FFC had not looked at the FBAE in detail, but that would be an interesting area of research.

Regarding B4 municipalities, she said it could be that they were people that were not connected to the grid, yet were on the indigent register.  A big problem with the indigent register approach was that it was costly. A broad-based approach was better and more cost effective.

 Municipalities were not learning from their peers through sharing their experiences.

The Committee raised concerns on the evaluation and monitoring of conditional grants. It needed independent evaluation, as it was intended to be implemented according to the grants design.

The FFC had shifted away from just looking at what needed to be done, and had moved to include possible ways it could be done.

She said local government had a range of revenue streams which the provinces did not have, and the approach to revenue enhancement needed to change.

The FFC had done research on consumer non-payment of debt, which was due mainly to a lack of affordability and the inability to pay.

Mr Sabelo Mtantato, Senior Researcher, Fiscal Policy Unit, said the portfolio committees provided requests which informed their research.

On the progress of implementing some of the recommendations, some progress had been made on efficient land use in human settlements being incorporated into their annual performance plans.

The performance of the Department of Energy in connecting households to the grid was not very good, as indicated in their annual report.

Mr Mtantato said there were challenges regarding the data about indigent households, and questions had been raised that the indigent register was open to abuse.

The Chairperson asked what the response was on energy use.  Had they taken up other forms of energy, like fossil fuels?

The meeting was adjourned.