CAUGHT BETWEEN A ROCK AND ZWANE
Facing insolvency, the Central Energy Fund is being dogged by a dodgy fuel deal and uncertainty over the role of the resources minister
The Central Energy Fund (CEF) is facing two threats as a dodgy fuel deal from 2015 comes back to haunt it and as Mineral Resources Minister Mosebenzi Zwane apparently tries to seize its last good asset. This is in addition to the elephant in its portfolio, PetroSA, which the Auditor-General this week said was on the brink of failure and required assistance from the CEF.
Almost every eventuality leads to insolvency for the CEF. A new board took over in December and inherited a financial time bomb.
PetroSA generates 75% of the CEF’s revenue, but made a loss of R1.6 billion in the year to 31 March. The state oil company also has a R7.4 billion hole in its rehabilitation fund for oil operations that it is obliged to fill by 2019.
It is inconceivable that it will generate that kind of cash on its own, and the CEF has “committed to assist PetroSA, through various support and oversight mechanisms, in closing the funding gap”, notes the Auditor-General in his report on the CEF group’s financials presented in Parliament this week.
IT GETS WORSE
One of the CEF’s other subsidiaries is also on the brink of becoming a toxic liability.
The Strategic Fuel Fund will probably pay a hefty price for the irregular sale of South Africa’s strategic fuel reserves in December 2015.
The reserves were sold for R3.9 billion and the Strategic Fuel Fund may have to repay not only this amount, but also interest, as well as almost R1 billion in storage fees it has charged those who bought the oil.
The liability could be anything between R5 billion and R8 billion, said a source with knowledge of the matter, adding that the moment it goes to court, this amount would become a contingent liability.
Reversing the sale will wipe out most, if not all, of the Strategic Fuel Fund’s R7 billion cash balance and eradicate the rental income the deal generated.
City Press understands the company will meet Cabinet about the crisis later this month.
The scandal revolves around the supposed “rotation” of fuel stocks. To charge them rental fees for keeping the oil inside the Strategic Fuel Fund facilities in Saldanha, 10 million barrels were sold to trading companies when oil cost $28 a barrel. Oil now trades at $56 a barrel.
Earlier this year, a review by external legal advisers concluded the deal was “invalid and void for various reasons”, not least because Treasury’s approval was not sought.
The Strategic Fuel Fund is now “required by law to seek a declaratory order from the courts on the invalidity of the contracts”, according to the CEF group financials.
“The revenue of R3.9 billion … and the storage revenue, interest earned on proceeds from sale and accrual for the insurance since the transaction date might have to be reversed,” it says.
THEN IT GETS WEIRD
In August, Zwane declared himself the “executive leader” of the only other valuable CEF subsidiary, the African Exploration, Mining and Finance Corporation (AEMFC). The CEF falls under the department of energy.
In a letter to AEMFC CEO Sizwe Madondo on August 24, Zwane’s director-general, Advocate Thabo Mokoena, said the “AEMFC now falls under the executive leadership of the Honourable Mr MJ Zwane (MP), and I am looking forward to a healthy working relationship with you”.
The letter appears to be another bizarre overstep by Zwane and apparently has no legal effect. Asked if Zwane now led the company, the department of energy said “no”.
Asked if the department of energy was aware of Zwane’s instruction, it said it was aware of a 2010 Cabinet decision to eventually “hive off” the AEMFC to the department of mineral resources.
In the letter, Zwane relies on this 2010 decision made during the then heated debate on nationalising mines. Cabinet resolved that the AEMFC would become the foundation of a larger state-owned mining group under the department of mineral resources.
Since then, the company has been modestly expanding its coal mining footprint and now sells coal to Eskom worth almost R400 million a year, with two new mines scheduled to open within the next two years.
Unlike the rest of the CEF, the AEMFC makes a profit that is set to increase in future and faces no sudden financial burdens.
A source with knowledge of the situation said the CEF board could not agree to the hive-off because it would undermine the CEF’s already shaky solvency prospects.
The department of energy told City Press the process of transferring the AEMFC was “very advanced” and the aim was to do it by the end of this financial year. The source admitted that this would require the CEF board to pass a resolution and cannot be done by ministerial command. The AEMFC also denies it has a new boss.
“We report to the CEF and the department of energy,” Madondo said last week.
“There has been a view that we should report to them [the department of mineral resources]. What I see is that the department wants to fast-track the process,” he said when asked about Zwane’s instruction. The decision to hive off lies with the CEF as the shareholder, Madondo said.
However, the department of energy denied the AEMFC was especially important to the CEF’s finances.
“We have a number of entities that are doing particularly well,” it said, adding that the transfer would be done in a manner “that will not effect the sustainability of the CEF”.
The department of mineral resources did not respond to questions sent to it last week.