Minister & DMRE on restructuring and reviewal of its entities: update

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Mineral Resources and Energy

18 August 2020
Chairperson: Mr S Luzipo (ANC)
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Meeting Summary

Video: Portfolio Committee on Mineral Resources and Energy, 18 August 2020

The Department of Mineral Resources and Energy briefed the Committee on the ongoing restructuring and reviewal of several entities for which the Department is responsible.

First, the Committee was briefed on the merger of three CEF Group entities: PetroSA, iGas and the Strategic Fuel Fund to establish a National Petroleum Company. The Central Energy Fund had appointed three external implementation partners, Kearney, Bayajula and Mazars, to assist with the merger process.

Members asked about the external implementation partners. Had they been appointed competitively? How much would they cost? Why were they necessary? They questioned the Department’s non-publication of an Integrated Energy Plan for several years (although this is required by law), the rationale for the restructuring and its impact on jobs and finances in the entities, and diesel shortages.

Second, the Committee was briefed on the merger of the Nuclear Energy Corporation of South Africa, Pelchem and NTP Radioisotopes. The position of NECSA Group Chief Executive Officer had just been advertised and a common board of directors for the three entities had been established, as well as a subCommittee of the board to manage the restructuring of the organisation. Terms of reference for an external service provider to oversee the restructuring had been approved and an appointment was imminent.

Members were generally positive about the presentation, although concerns were raised about the lack of a roadmap for the restructuring. Members asked about the impact of the merger on jobs and finances in the entities, sanitiser production by Pelchem and Mintek, and whether candidates for the group chief executive officer position would be vetted.

The Committee was also briefed on the transfer of the carbon capture, utilisation and storage project from the South African National Energy Development Institute to the Council for Geoscience.

Members asked about the status of the World Bank funding for this project, what would happen to the people currently working on it when the project ended, and whether it was expected to be completed within the projected time-frame.

Meeting report

The Chairperson welcomed Minister of Mineral Resources and Energy, Mr Gwede Mantashe, and asked the meeting to observe a moment of silence to remember those who had lost their lives to COVID-19, as well as the former CEF Group chairperson Dr Monde Mnyande, who passed away earlier in the month.

Minister Mantashe acknowledged the contribution of Dr Mnyande, and also emphasised that COVID-19 was real and brutal, and citizens should observe health protocols at all times. He noted that CEF was battling to pull PetroSA out of its financial hole, among other challenges, and the Nuclear Energy Corporation of South Africa (NECSA) was also facing challenges, particularly with Pelchem.

Mr Jacky Mashapu, Group Manager: Corporate Affairs and Communications, CEF, recalled that the Department had outlined its challenges to the Committee in May. These had included the commercial sustainability of entities and in particular the poor performance of PetroSA. The Department of Mineral Resources and Energy (DMRE) would report on the progress that had been made with some of the initiatives to address the issues that had been raised. Notably, the CEF had appointed a permanent chief executive officer (CEO) for the first time since 2014. PetroSA and the Strategic Fuel Fund (SFF) had also appointed permanent CEOs. The presentation would look at the merger of PetroSA, iGas and the SFF and provide assurance that the merger would yield the intended outcomes. He warned that it may be necessary to take some unpopular decisions to ensure long-term sustainability, and the Committee’s support would be required. He also acknowledged the contribution of Dr Mnyande.

CEF Group Presentation
Dr Ishmael Poolo, CEO, CEF, gave some background on the mandate and structure of the CEF. The presentation would look at the PetroSA-iGas-SFF merger in the context of stabilising the whole CEF group. He outlined the CEF Group’s strategic trajectory and long-term renewal approach and the key objectives of the restructuring programme. He noted that chief operating officers (COOs) had been appointed throughout the group and capacitation of key managerial roles was continuing. The CEF had appointed three external implementation partners, Kearney, Bayajula and Mazars, to assist with the merger process. The process would be carried out in two phases lasting six months and twelve months respectively. The proposed organisation structure was based on best practice and would have many benefits, including better coordination, accountability and efficiency.

Mr David Nicholls, board chairperson, NECSA, said that the position of NECSA Group CEO had just been advertised and a common board of directors for NECSA, Pelchem and NTP Radioisotopes had been established, as well as a subCommittee of the board to manage the restructuring of the organisation. Terms of reference for an external service provider to oversee the restructuring had been approved and an appointment was imminent. He noted that Pelchem was producing sanitisers in response to COVID-19, and that Ketlaphela Pharmaceuticals was working toward the production of anti-retroviral medication.

Dr Humphrey Mathe, Chairperson, Council for Geoscience (CGS), looked at the re-alignment of functions within the South African National Energy Development Institute (SANEDI) and CGS, in particular the carbon capture, utilisation and storage (CCUS) project, which was being migrated to CGS. The migration was expected to be complete by 1 September 2020.

Questions (CEF)
Mr M Mahlaule (ANC) observed that restructuring always entailed change, and this meant that some people would benefit and others would suffer. What plans were in place to avoid mass retrenchments, especially at PetroSA?

Mr K Mileham (DA) was concerned that the presentation lacked detail. He was surprised that the presentation did not say anything about the overlap in the roles of the Petroleum Agency of South Africa (PASA), PetroSA and the National Energy Regulator of South Africa (NERSA) which the Committee had observed in 2019. A lot would depend on legislation and he called for the prioritisation of the [Draft Upstream] Petroleum Resources Development Bill. He asked what procurement process had been followed in the appointment of the three external implementation partners and what their services were expected to cost. He noted that section 6(1) of the National Energy Act required the Minister to publish an integrated energy plan (IEP) every year. This had not been done for many years. Could the Minister tell the Committee what the status of the IEP was, when he next intended to publish it, why he was not complying with the Act and when the Committee would consider the amendments?

Ms N Hlonyana (EFF) agreed with Mr Mahlaule that restructuring would lead to job losses. What was the plan to prevent people from losing their livelihoods? She also wanted to know what the cost of the external implementation partners would be, and whether the CEF had looked to hire a South African company.

Ms V Malinga (ANC) had wanted to hear the Department comment on diesel shortages and what it was doing to mitigate their effects. She asked if SANEDI employees involved in the CCUS project would move to the CGS for this project only, and would they lose their jobs when it was complete? Would the PetroSA-iGas-SFF merger assist PetroSA to address its feedstock problems? She observed that Pelchem was producing sanitisers in addition to Mintek and wondered how this fitted with the rationale for restructuring, which was to reduce overlaps. Did it make financial sense? She asked about the status of labour relations at NECSA. Were management and labour on good terms?

Mr V Zungula (ATM) questioned the rationale for merging three diverse loss-making subsidiaries of CEF. How would it address issues raised in the 2005 Morane investigation into fuel shortages? Could CEF provide assurance that PetroSA’s gas-to-liquid technology was stored in a secure environment? There were reports that it had fallen into the wrong hands and was going to be sold to a multinational company. He also wanted to know what the cost of the external implementation partners would be.

Mr M Wolmarans (ANC) observed that presentation gave time-frames for the merger but why did it not mention dates?

Mr D Mthenjane (EFF) said that the Minister’s non-attendance at Portfolio Committee meetings showed that he did not take the Committee seriously. He did not find the presentation convincing. As usual the Department just acknowledged that it had problems and described unconvincing plans to address them. He also noted that the presentation did not indicate that CEF was going to reduce the money it was wasting on office rent. It did not need more than one office. The next time CEF presented to the Committee, it should provide precise dates for when certain outcomes would be achieved. What would happen to workers who would lose their jobs as a result of the restructuring?

Ms C Phillips (DA) was also concerned about the presentation’s lack of detail. She asked what the financial effect of the restructuring would be, when it would be completed, how many employees in the various entities were on suspension and how their cases would be handled going forward after the restructuring.

Responses (CEF)
Dr Poolo said that CEF management had started discussions with labour on retrenchments, with the intention of minimising job losses. The external implementation partners were appointed through a competitive process and would cost R65m. Refurbishing the refinery to be able to use liquid feedstock was part of the restructuring process. CEF was also exploring its options for either selling or finding a partner to assist with the commercialisation of PetroSA’s gas-to-liquid unit. The restructuring process would start in earnest on 1 September. He could not yet give a figure for the savings that the restructuring would realise, but CEF would return to the Committee in a few months and would be able to demonstrate the savings then.

Mr Tseliso Maqubela, Deputy Director-General: Petroleum and Petroleum Products Regulation, DMRE, said that the main cause of the diesel shortages was theft from the pipeline. This matter was receiving attention from the South African Police Service (SAPS) and Transnet. Some arrests had already been made in the Rustenberg area, but there were still problems in Mpumalanga and the North West Province. COVID-19 had also affected the diesel supply. There had been a COVID-19 outbreak at the East London port which had prevented cargo from being unloaded. The diesel supply had also been impacted by unplanned shutdowns at PetroSA. The diesel supply situation had normalised but the theft seemed to be quite an organised operation.

Ms Ntokozo Ngcwabe, Deputy Director General: Mineral Policy and Promotions, DMRE, recalled that the Draft Upstream Petroleum Resources Development Bill had been gazetted for comment in December 2019 until February 2020. Comments had been received from 42 stakeholders, from oil companies to non-governmental organisations, although there were concerns about the lack of community consultation. The reason was that communities did not always have access to electronic platforms such as Zoom. There would be community consultation during the parliamentary process. The Department expected to be ready to table the Bill to Cabinet by the end of August. The crux of the Bill was to constitute PetroSA as the national oil company, to unlock the upstream petroleum economy while maximising its socio-economic benefits, and to realise the Integrated Resource Plan (IRP).

Mr Thabo Mokoena, Director-General, DMRE, noted that of the three entities involved in the merger, only PetroSA was making losses. Both iGas and the SFF were financially stable.

Minister Mantashe said that during his recent visit to PetroSA, all three of the labour unions that were working there acknowledged that the staff numbers were bloated. Furthermore only one out of three plants was operational, and there had not been a CEO for five years. All these issues were being taken into account as part of the restructuring. The Department would provide more detail on the restructuring process as it proceeded. He confirmed that iGas and the SFF were financially stable. He acknowledged that the IRP had not been published for many years but noted that it had been published in October 2019. He said that there would be retrenchments during the restructuring process, but the Department hoped that once it was complete, many more jobs would be created. Mintek and Pelchem were working together on sanitiser mass production. There had been improvements in labour relations at NECSA. He denied the claim that he did not take the Committee seriously. When there was a clash between the Portfolio Committee and a Cabinet meeting, for instance, he always sent an apology and made sure that a high-ranking team from the Department attended the Committee meeting. The Department was looking into CEF’s office usage, in particular, the possibility of reducing the Cape Town office. However, selling PetroSA was not being considered. Entities of the state would not be sold piecemeal, they needed to be made commercially sustainable.

Questions (NECSA)
Mr Wolmarans recalled that he had raised concerns at an earlier meeting about Mintek and Pelchem competing in sanitiser production and noted that the Minister had explained that they were cooperating.

Ms Phillips asked what the financial effect of the restructuring would be, when it would be completed, how many employees in the various entities were on suspension and how their cases would be handled going forward after the restructuring.

Mr Mthenjane said that the restructuring at NECSA was long overdue but welcome nevertheless. South Africa should be able to produce the products it needed itself. It could not import vital supplies such as testing kits, allowing other countries to gain those manufacturing jobs. He appreciated the time-frames provided and was satisfied with the presentation.

Mr Zungula was also satisfied with the presentation.

Ms Malinga welcomed the advertisement of the position of permanent group CEO.

Ms Hlonyana was generally satisfied with the presentation but asked what the status of the funding from the World Bank for the CCUS project was. Was it a loan or a grant?

Mr Mileham said that he had not received a reply to his question about the overlap of the roles of PASA and PetroSA. He clarified that his question had been referring to the IEP, not the IRP. He stressed that the IEP was a statutory obligation that was not being met, and was concerned that the restructuring was going ahead without a roadmap, which was irresponsible. What was the status of the current IEP and when would the next IEP be published? Why was the Department not complying with the requirement to publish the IEP annually? He also asked what the anticipated benefits of the NECSA restructuring were. What was going to be done differently to return it to profitability?

Mr Mahlaule also commended the Department for its work with NECSA. It had been facing challenges for several years but it seemed that things were turning around. He was also encouraged by the support that was being given to Ketlaphela Pharmaceuticals.

The Chairperson appreciated the efforts that had been made to achieve proper governance and stability at NECSA. He observed that the turnaround plan still needed to get the Minister’s approval. He recalled that there had been a protracted legal “to-and-fro” between the NECSA board and CEO and asked what the status of that relationship was now. He asked for clarity on the status of the CEOs of Pelchem and NTP Radioisotopes after the NECSA board had taken over those entities’ boards, as the chairs of those boards had been mentioned in connection with the position of the new NECSA group CEO. Would one week be enough to find a proper candidate for this position? He was concerned about the fact that vetting did not seem to be a requirement for the position.

Responses
Minister Mantashe explained that vetting was standard practice for all government positions.

Ms Ngcwabe explained that whereas PASA was a repository of geotechnical and seismic data, which it sold, PetroSA operated as a state-owned oil company. Their commercial activities were different. The publication of the IEP was included in the Department’s Annual Performance Plan (APP) and it would be finalised before the end of 2020-21.

Mr Mosa Mabuza, CEO, CGS, added that PASA was principally a legislative authority for petroleum resources, whereas PetroSA undertook petroleum resource development and commercialisation.

Mr Nicholls said that the former chairs of Pelchem and NTP Radioisotopes were members of the NECSA board and the restructuring subCommittee. The savings were expected to come from the removal of corporate overhead in the entities. The organisational structure was intended to support the corporate plan that had been submitted to the Minister a few weeks earlier. Losses of R239m in 2020-21 had been projected before restructuring and COVID-19. After restructuring and COVID-19 (which had cost the company an estimated R400m) NECSA now expected to lose R331m in 2020-21 and to return to profitability in 2021-22. He said the sanitiser market was large enough that even if Pelchem and Mintek worked independently, they would not impact each other. The issues with the former CEO had been resolved.

Mr Ayanda Myoli, acting CEO, NECSA, said that the anticipated benefits of the restructuring would include strengthening the business focus, eliminating duplication, finding synergies, rationalisation of functions, obtaining the right skill set for long-term strategy, and reducing the salary bill. Significant savings were expected but he could not yet give a precise figure. All staff suspensions had been resolved and he was not aware of any staff members currently on suspension.

Mr Mabuza said that the World Bank funding of $23m for the CCUS project was a grant, not a loan. The country itself was contributing $15m to the project. There had been delays in implementation, and so the project was being moved from SANEDI to CGS and a one-year extension was being requested from the World Bank, which would give CGS two years to complete it. To date, a site near to the major sources of carbon emissions had been identified. The project would support the just carbon transition policy position. From 1 September the project would be run wholly by CGS and it was expected that seven out of the nine employees involved would continue on the project at CGS, and SANEDI would preferably find roles for the remaining two. The transfer of the project was at an advanced stage and CGS was making good progress on all aspects.

Minister Mantashe said that separate boards for NECSA, Pelchem and NTP Radioisotopes was simply too many. The Department was beginning to see the results of regularising governance at the entities.

Questions (follow-up)
Mr Mileham was still concerned about a lack of long-term planning for the energy sector. DMRE needed to take responsibility for the non-publication of the IEP, but welcomed its inclusion in the 2020-21 APP. He looked forward to the entities becoming more functional and profitable in the future.

Ms Hlonyana asked what return was expected from the R65m being spent on the external implementation partners.

Ms Malinga asked for confirmation that the CCUS project would be completed within the projected time-frame. She also wanted an explanation of the “best practices” which were being followed in the restructuring process.

Mr Mthenjane also wanted confirmation about the time-frame of the CCUS project. He asked what the terms of the $23m World Bank grant were. What return did the World Bank stand to get from the project?

Ms Phillips asked where and when the contract for the external implementation partners had been advertised.

Mr Wolmarans asked for the Department to report on the impact on labour of all the restructuring in their next submission to the Committee. What would the job losses be and how would they be minimised?

The Chairperson asked if any inter-entity restructuring was being considered in addition to the intra-entity restructuring that was already happening. He worried that the external implementation partners were being paid to do the work of the Committee and the Department. He wanted a breakdown of the R65m cost and asked for a compelling argument for the necessity of engaging external partners. It should be looked at not only from the point of view of “best practices” but also from the point of view of its contribution to building productive state entities.

Responses
Dr Poolo said that the external implementation partners had been appointed through the National Treasury system and there had been an open, competitive bid process. He could not give a precise figure for the return on the R65m investment, but noted that there was a clear case for restructuring. For example, there was a lot of duplication within the CEF group. CEF would be able to return to the Committee at a later date to quantify the benefits of the restructuring. The reason for appointing external implementation partners was that internal teams had been unable to be objective and “self-amputate” where necessary.

Mr Mabuza was reasonably confident that two years would be enough to complete the CCUS project. A lot of groundwork had been done when the project was being overseen by SANEDI. The project had a great potential return on investment: if it was successful, South Africa would be able to continue using its abundant coal reserves without continuing to contribute to climate change. There was no guarantee that a scientific solution would be found, but he asked that the project be given a chance.

Mr Mokoena confirmed that the restructuring would realise savings by reducing the number of boards.

Minister Mantashe committed to publishing an IEP before the end of 2020-21. He said that inter-entity restructuring was on the table. In fact, there was an ongoing debate as to whether mining and energy should remain in a single portfolio. He confirmed that an external implementation partner for the restructuring was normal and necessary to provide objectivity. There was also a Committee within the entities overseeing the process. The Department was working hard to return these entities to profitability.

The meeting was adjourned.


 

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