SA Nuclear Energy Corporation (NECSA) on its 2017/18 Annual Report

Meeting report

Apologies were received from the Minister, who had to be at NEDLAC

Nuclear Energy Corporation of South Africa on the Annual Report of 2017/18
Dr Rob Adam, the new NECSA board chairperson, and Ms Mbali Mfeka, NECSA General Manager: Finance, presented the briefing. Cabinet had approved the appointment of a new NECSA board in December 2018, after the Minister dissolved the previous board. NTP Radioisotopes SOC LTD was mostly shut down from November 2017 to November 2018 as it was focusing on improving its safety culture. The 2017/18 Annual Report was glaring about the challenges faced by NECSA. There was a commitment from the board to steer the ship on the right track. Liabilities did not exceed assets as at 31 March 2018, but there was a likelihood that it could occur, going forward. Key turnaround priorities included refocusing the organisation to extract value from nuclear technology development and exploitation in specific impact areas; implementation of a new business model to support the nuclear research and technology mandate; future strategy in the light of government's policy decision to delay the nuclear new-build programme, and improved liquidity and financial sustainability.

Discussion
The Chairperson asked what had led to the closure of NTP Radioisotopes, and the implications for NTP and the NECSA group. It must have led to loss of customers and trust. He was concerned about whether Pelchem was viable as a company, aside from financial challenges. What was to be done about the company? The Auditor-General (AG) was concerned about the solvency of NECSA. Was it to continue as a going concern? Problems might be deeper than was visible. The board had to be frank with the Committee. NECSA was one of the biggest problems in the Energy portfolio. The Auditor-General report was damning. The previous NECSA board was dissolved and the members were gone, without being held accountable. It was also possible to simply blame the previous board. The matter had to be raised in the Committee legacy report. He doubted if a turnaround for NECSA was indeed possible.

Mr K Mileham (DA) said that the Chairperson had raised pertinent matters. The current board was appointed two and a half months after the normal tabling of annual reports in September. He asked if inputs by the previous board were not in the audit report. Why did the current board refuse to sign off the annual financial statements? If the AG was trusted to have done a good job, the board had to sign off on them. He asked Dr Adam when he was first approached by the Minister to assume chairpersonship of the current board. He referred to the matter of access by customers to NTP intellectual property and processes. Lantheus Medical Imaging (LMI) reportedly had full access. Why was access granted? Was there an MOU or letter of intent in which NTP assets were intended to be sold off to LMI? Did any money change hands? The NTP was shut down for one year. Could that not be seen as overkill by the Regulator? There were only small infractions. A 12 month shutdown could be viewed as excessive. What was the motivation of the National Nuclear Regulator (NNR) to do so? The NECSA group was seen as a going concern in terms of assets and liabilities. The AG referred to its going concern status. The question was if short and medium term obligations could be met. He referred to slide 9 saying NECSA was not looking good in terms of assets and liabilities, ability to meet obligations was doubtful, and exposure to debt had to be reduced. The AG doubted Pelchem’s ability to remain a going concern in spite of the intellectual property it owned outright. It had a near monopoly on some products. How could a company which owned IP, with a customer base, run at a massive loss?

Mr J Esterhuizen (IFP) said that in the previous financial year NECSA had obtained a clean audit. The NTP had revenue of R3 billion before it was shut down. NTP accounted for 50% of NECSA revenue. The Public Audit Amendment Act allowed the AG to approach the Hawks. Parliament has granted NECSA an extension until 15 February to present its annual report but it only did so now. He referred to slide 9 which showed liabilities had jumped by R769 million from the previous financial year.

Mr R Mavunda (ANC) remarked that NECSA was a thorn in the flesh of the portfolio. He asked that liabilities exceeding assets be elaborated on in slide 17. What difference did the new NECSA board propose to make? An old car did not become new when painted. Was everything wrong about the previous board? If not, what was it that was not achieved? Change had to be reflected in actions taken, not only in a change of names.

Ms T Gqada (DA) said that the presentation was too summarised. She asked how long the acting CEO would be appointed for. Slide 4 stated that the NTP shutdown was exacerbated by mismatched expectations and leadership approach between NECSA and NTP. It states that those challenges were resolved by the Ministry in 2018, but what were they as those are not listed? It states that no customers were lost. Was it claimed that there were no challenges and that it was business as usual? Slide 13A refers to a lack of evidence to support a going concern status. What would be done about that? She agreed with the AG that additional resources had to be allocated to deal with the 2018/19 audit. Slide 17 states that liabilities could exceed assets, going forward. The audit report did not provide much hope.

Mr M Matlala (ANC) felt that the report was too much of a summary. NECSA had to go back and produce a full written report, which could be sent to the Committee. No answers had been provided. He referred to those in acting positions as “Hollywood actors”. One could not expect full commitment from an acting official. Full-time appointments would ensure a hands-on approach. The NTP had its own board and management, and did not account to NECSA. He asked if the new NECSA board had a realisable plan to recoup monies from dismissed board members.

The Chairperson asked the Department of Energy (DoE) to comment on NECSA challenges. Why was the previous board fired? Dr Adam was not conveying a sense of deep trouble.

Mr Lloyd Ganta, DoE Acting DDG: Governance and Compliance, replied that the Minister had dealt with the reasons for dismissal of the previous board in the media. A major challenge was that sustained losses at Pelchem were impacting NECSA. NTP had to provide surety for Pelchem. Hard work lay ahead for the new NECSA board about the future of Pelchem. The question was how to ensure that Pelchem did not bring the whole group down.

Dr Adam replied that he wished to apologise for not properly conveying a sense of crisis. He had been involved with NECSA for a long time [as CEO between 2006 and 2012], and it was the most negative report he had ever had to give. Slide 16 did indeed state that “the 2017/18 Annual Report is glaring on challenges faced by NECSA”. The current board was drafted to address the challenges. The previous board failed because it kept on supporting loss-making entities. The problem was that for a decade and a half there was talk of a nuclear new build. NECSA was requested to retain nuclear capabilities during that period, but the nuclear build never materialised. Rather than draw on the fiscus, NECSA was advised to look for commercial opportunities, some of which were possible, and some not. Commercial viability became questionable. A central challenge was the salary bill. The NECSA salary bill was R800 million, and the grant received from the DoE was only R513 million. If its entities were let go of, there would be implications. The board knew that it had to formalise. The shareholder would be consulted, but then the board would have to act, whether the shareholder agreed or not. He agreed with the Committee that it was a dire situation. The best course would be for NECSA to focus on what it could do well. It had to be granted that there were good things. There had to be a focus on research and commercialisation. NTP would recover its market. The entity was strong and had a good market share. Once it was allowed full production, it would generate pre-shutdown revenue. Revenue had been reduced as NTP did not produce the same number of products.

Dr Adam replied that his opinion was that the shutdown was justified. The Regulator had to protect the safety of the public. Even if there was no spillage or contamination, if it felt that there was no process, it could step in. There was the example in aerospace of a nationwide airline being grounded because the use of certain bolts in an aircraft could not be justified.

Dr Adam explained why the board had not signed the annual financial statements (AFS). The AG had issued a disclaimer as he believed that AFS were not accurate. The Minister and the AG had advised him not to sign as incoming chairperson, because that would imply that he was the author of the statements. The AG management letter suggested that the audit opinion was presented to him, but he was not to own it. There had been a delay with the AG management letter to the previous board, as the previous board did not accept having to clarify the financial statements, and the AG did not accept the previous explanations as sufficient. Not signing the AFS was done in consultation with the AG, and it was given to the Minister to table in Parliament.

Dr Adam apologised for the brevity of the presentation, but it had to be conceded that there was a difference between the legal Annual Report and a power point presentation. He did however agree that the presentation style might be viewed as high level.

Dr Adam replied that the Minister had approached him in August 2018. He was called again at the end of November. There had been no offers from customers to buy into any part of NTP. LMI as a concerned customer wanted to assist NTP. A non-disclosure agreement would have been signed if LMI had access to NTP processes. As to the going concern status, Dr Adam said that the massive salary challenge would have to be resolved otherwise there could be no sustainability. There was no quick solution to commercial viability. Things would have to be done the hard way. NTP could be relied upon to get back on its feet, but the rest of the group would have to be reshaped.

On the regression from clean audit status, Dr Adam answered that there were things hidden beneath the surface in the past. The AG had outsourced the audit in the past to Ernst & Young and KPMG. The fact that the AG then took over, itself contributed to the audit regression as things were uncovered that had previously remained unnoticed.

Ms Mfeka answered about the late AFS and the regression from clean audit to disclaimer. NECSA was required to submit the AFS two months after year end, by 31 May 2018, but by then there were issues about the Pelchem disclaimer. NECSA did not have a strong enough balance sheet to provide a letter of support for Pelchem. The NECSA CEO and the audit chairperson advised that the audit be extended from 31 July to 31 August. But the complication still remained at 31 August and there was a further extension until 31 December. That placed the AG in a dilemma, because NTP had already submitted its AFS and wanted them signed, so that it could trade. The AG approached the Minister about the challenges with the NECSA group. On 8 October 2018, the Minister met with the AG and NECSA to agree on a unified approach. The NTP statements had to be signed off so that it could trade. It was resolved that NECSA had to submit outstanding information by 31 October 2018, but as the information was not cascaded down, that deadline was not met. When the new board was appointed, the AG met with the board and it was alerted to the disclaimers given to NECSA and Pelchem. In the end it was agreed that the 31 May 2018 signed off version of the AFS would be the one accepted. Pelchem as a commercial entity had to have a clean audit, and its disclaimer affected the entire group.

About the NECSA acting CEO, Dr Adam replied that the CEO Phumzile Tshelane had been suspended, and there could only be certainty once the disciplinary process was resolved. Don Robertson, former NTP Managing Director had been appointed as interim CEO for a six month period, which might have to be extended. To his knowledge, no one on the previous board would be prosecuted for theft. The current board had resolved to get monies back from anyone who had benefitted unlawfully from employment at NECSA.

Ms Tina Eboka, NTP Group Managing Director, replied about reasons for the NTP shutdown, saying there had been a need to calibrate the system at the end of October 2017 but the maintenance person proceeded wrongly, and created a safety protocol violation. The limits of the systems were not balanced. At first one production cell was closed down, and then the investigation uncovered further errors. The calibration instrument use date had expired, and even though it functioned well when tested, the Regulator asked why it had not been changed. In November 2017 the NTP was requested to shut down its plant at Pelindaba and to review all systems in the plant. The NNR made the right call. The process had to be made safe at all levels.

Ms Eboka explained that the “mismatched expectations” referred to the fact that the NTP did not have a nuclear licence, and the nuclear licence was operated under NECSA. NECSA and the NNR wanted different things. The leadership and executive were placed on special leave, and acting people were brought in. Acting managers and engineers were not familiar with the plant. The Regulator had to ensure that standard operating procedures made sense across all systems. Persons who were not familiar with the systems could make suggestions that could cause problems in another part. At a certain date the Regulator allowed NTP to make readiness runs. But other problems emerged, and the plant was shut down again. There were different requirements from the licencee and from the Regulator. Still the plant was not closed all the time and production sometimes continued. LMI was allowed to assist the NTP, as it offered to do so. It could not survey the process as the plant was not operational and it did not have access to IP. It was a matter of engineers assisting with technical problems. NTP was a key supplier to LMI, which had bought $30 million worth from NTP. LMI was a listed company on the New York stock exchange, but it showed no interest in buying into NTP. There was no sale agreement with anyone. The NTP shutdown was not to be viewed as overkill. The problem was that NTP took long to answer questions and deliver on NNR requirements. NTP had technical discussions with the NNR. Although NTP revenue was down as sales were lost for four months, overall it was still profitable. It was ahead of budget when the shutdown occurred. NTP could pay taxes and dividends. The NTP got a clean audit in 2016/17 and it was still unqualified in 2017/18. The NTP was a commercial entity that had to pay taxes. It signed three-year contracts. There was full oversight of judicial matters, about which the NTP reported to the NECSA board.

Ms Precious Hawadi, NTP Group Executive: Finance, answered about estimated losses and the cost of the shutdown to taxpayers. One had to look at the revenue differential and the profit after tax differential figures for the entity and the group. At the time of the shutdown in October 2017, NTP was ahead of target. The revenue was budgeted at R1.282 billion, and R940m was received. The differential was R342 million. Profit after tax was budgeted at R102 million, and it came to R108 million. NTP exercised mandatory restrictions, and was prudent in financial management. Some things were shelved, and others were relooked at. The revenue figures for the NECSA group was R1.53 billion and R1.155 billion, with a differential of R375 million. The group profit after tax target was R124.5 million, and it achieved R122.156 million. The differential was R2.3 million. Prudent financial management and extreme spending caution prevented a significant bottom line effect.

The Chairperson cautioned against removing the people in charge at NTP. Big organisations had to be careful about removing people. To say that the shutdown was “exacerbated by mismatched expectations and the leadership approach between NECSA and the NTP” was a polite way of putting things. NTP would recover, but Pelchem was the problem. There was no immediate commercial solution. He asked if the headcount referred to NECSA alone, or to the whole group.

Dr Adam replied that it referred to the whole group. One had to ask what was viable, not only about Pelchem but also parts of NECSA. The immediate problem lay with Pelchem. It would be premature to come up with a comprehensive proposal at the current moment. The Minister had given permission for the strategic plan to be delayed until the end of April.

The Chairperson remarked that structural and systemic problems had to be addressed. Ill-discipline and dysfunctionality was the cancer that infected every part of the state. There was a lack of policy direction, especially a lack of clarity on whether there was going to be a nuclear build or not. The Sixth Parliament would have to deal with that.

Mr Matlala referred to the Pelchem loss of R35 million, and the loss of R77.9 million at Pelindaba. He asked about the board member who had not disclosed his business interests. The NTP awarded a contract to a bidder who did not score the highest points on the evaluation.

Ms T Gqada (DA) asked that the Committee be given assurance that NECSA would meet with the AG to avoid a repeat of previous disputes, and to be accountable.

Dr Adam replied that Pelindaba accounted for the largest loss in NECSA. Pelindaba originally manufactured a wide range of products such as pressure vessel pipes for non-nuclear purposes. The problem was that Pelindaba had geared up for a nuclear build, as it received what was known as the nuclear stamp. It began to manufacture according to nuclear quality standards, as it anticipated nuclear work. That caused it to be less equipped to do ordinary work, which it could manufacture only at great cost. NECSA had bloated components. There was only one job in the Pelindaba order book, and that was the pipeline to Koeberg. Pelchem had suffered losses because it could not meet sales targets. Operating expenses were high. The matter of the former NECSA board member not disclosing business interests was sub judice. The former NECSA board chairperson had also brought a court action against the Minister.

Mr Mileham asked when Pelindaba received nuclear certification. It had been profitable two years before.

Dr Adam replied that Pelindaba received it in 2011. Pelindaba failed to divide manufacture into two different areas, and its order book dried up.

Ms Hawadi replied about the tender awarded to a contractor who did not score the highest on evaluation. Two suppliers were neck and neck, but preference was given to the one who had B-BBEE accreditation, to advance the NTP B-BBEE strategy. There was no loss from a price perspective. The AG said that the challenge was that the notification of this requirement was not up front and not explicitly stated.

The Chairperson remarked that it would be important to look into the strategic plan that would be submitted at the end of April 2019. He asked if the AG findings were being addressed.

Dr Adam replied that there was ongoing interaction with the AG. NECSA did not argue with the AG report and accepted the management letter. He thanked the Portfolio Committee for pointing out the way forward. NECSA could henceforth return within a shorter time frame. It was not yet possible to come up with solutions beyond what was offered today. NECSA was committed to the prosperity of the country.

The Chairperson concluded that challenges with a board had to be considered carefully, as it could destroy a public institution.

The Chairperson adjourned the meeting.