Atomic Energy Corporation

Review

(Continued)

5. COMMERCIALISATION POLICY

1. Overview

The previous sections have indicated the extent to which commercialisation of technology is important to the AEC – perhaps more in terms of reducing its dependence on the fiscus rather than of a commitment to transferring technology into the market place. The analysis has also indicated that since 1990, when this policy was embarked on, little progress has been made in terms of generating net income (profits) from the commercialisation of technological competencies and capabilities. Indeed, even in the industrial businesses which have been set up in its Pelindaba Technology Products (PTP) group, few are currently cash positive. This section will analyse in more detail the performance of various commercialisation initiatives, as well as the AEC’s underlying philosophy on technology development, commercialisation and industrialisation.

The AEC’s legal mandate is currently ambivalent and apparently allows it to "commercially utilise the technological expertise in its possession" without any specific reference to curtailing this commercialisation to the field of nuclear energy and related products or by-products. The AEC executive management has taken this task of commercialisation seriously. The question arises as to whether this ambivalent mandate has resulted in the AEC wandering too far from its original purpose, with a resulting lack of focus and, indeed, without the requisite commercial and market skills needed for success.

2. AEC Commercialisation Model

The AEC’s commercialisation strategy is embedded in their Tobotek model which distinguishes between the functions of technology development, business development and commercialisation, and those of routine plant or business operations. Different groups in the AEC are responsible for technology development, business development and business operations. Thus a new technology and/or product is passed from one group to the next on its way to the market. This is shown in the diagram below.

AEC management have already identified the difficulties experienced with "inventor" retention as the project moves through the phases of Tobotek. As products are commercialised, emphasis on market-pull forces is required at the expense of technology-push. While there are good role models for this type of technology development and commercialisation approach (cf. the Fraunhofer Management Group associated with the Fraunhofer Institutes in Germany), it requires strong and interventionist leadership from the market development function. Technology and product development must be undertaken within the context of market conditions.

3. Performance assessment

In the final analysis, the AEC’s commercialisation strategy has to be evaluated against its bottom-line financial performance. The following table indicates the overall performance of the projects in the Radiation, Chemicals and Mechanical portfolios for the past two years, as well as projections for the next ten years. A deficit is projected until 1999, whereafter strong net income growth is anticipated by the AEC. It is clear that after seven years of commercialisation activity, the AEC has been unable to earn significant profits. The AEC remain extremely optimistic concerning future sales and income growth. Yet there is little track record to support confidence in these projections. We believe that should be attached to the forecasts of rapid income growth, especially after year 2000, should be viewed considerable caution. In the tables in sections 5.3 – 5.5, financial figures are expressed in R1000s.

A disaggregated picture is given below for the Chemicals and Radiation programmes.

4. Chemicals

Major projects are grouped in the following programmes: PTFE, Organic Fluorides, Fluorine Technology Products (FTP) and Metox-Zirconia. The projected growth in sales figures requires more in-depth evaluation before they can be accepted. The AEC is also constantly revising these figures, and completely different estimates were given to the team on their last visit to the AEC.

PTFE

Discussions have taken place with Hoechst and 3M in terms of the marketing and distribution of PTFE. Current suppliers are Du Pont (Teflon) and ICI (Fluon) who are likely to resist surrendering any market share. A 400 t/a modular unit was planned for 1999, with further stepwise expansion to 4000 t/a (estimated at 7% of the world market).

The forecast turnover grows from R26,7 million in 1999 generating a net income of R8,4 million, to R61,9 million in 2002 with a net income of R17,8 million

This is a high-risk investment, and coupled with funding constraints, the AEC have now decided to revise and delay investments in production plant.

Organic Fluorides

The major programs in this group are NP0 (Naproxen Precursor) and Triflic Acid. NP0 is a joint venture with Sentrachem. A production plant will be commissioned in 1998 producing 500 t/a, which will increase to 750 t/a in 2000. Costs are expected to be 30% below those of products presently available. Turnover of R43,2 million generating a net income of R12,6 million in 1999 will grow by 15% in 2000 and remain constant thereafter. The programme is projected to be cash-positive from 1999.

The current world market for Triflic Acid is 375 t/a growing at 10 % p.a. to 500 t/a in 2000. The AEC hopes to produce and market 300 t/a to Haldor Topsoe by 2000 generating sales of R43,5 million and a net income of R30,4 million. A detailed techno-economic evaluation was expected by the end of September 1997.

Fluorine Technology Products (FTP)

The production of sulphur hexafluoride (SF₆) and nitrogen trifluoride (NF₃) is planned to generate a turnover of R131,8 million by 2002 (92% of total turnover of FTP).

A ‘take or pay’ arrangement has been agreed with Air Products for the supply of SF₆ amounting to 30% of the 1000 t/a production. Competitiveness is due to a 20% higher cell life and a favourable electricity supply. Turnover jumps from R3,4 million in 1998 to R26,3 million in 1999 and again to R43,8 million in 2002. Net income is 54,3% of turnover through to 2001.

Currently Air Products and Mitsui are the only suppliers of NF₃. The AEC plan to establish a market with 10 t/a and then expand to 100 t/a. Turnovers of R48 million and R88 million in 2000 and 2001 respectively are projected to generate net incomes of R18,2 million and R42,8 million.

Metox - Zirconia

The beneficiation of Zircon mainly to produce 6000 t/a of DPDZ and 5000 t/a as a baddeleyite substitute was planned by the year 2002, generating a turnover of R77 million and a net income of R31,3 million. Beyond 2000, South Africa could produce 35% of the global demand for Zircon. Research and Development was to be finalised in June 1998 and then R100 million CAPEX was envisaged over three years for the production facility. However, the AEC have now revised and delayed these plans.

Within the chemicals portfolio, PTFE could generate the largest return, followed by Zirconia, SF6, and NPO. However, PTFE carries the highest risk and its projected NPV over 10 years is still negative. Short-term returns are most likely with NF3 and Triflic Acid. The largest CAPEX investments are required for Zirkonia, PTFE, SF6, Triflic Acid, NPO and NF3 – in that order.

5. Radiation

Three project groupings and PTP businesses are expected to grow in turnover from R27 million in 1998 to R72 million in 2002, and net income from minus R0,76 million to R29,9 million.

Kangela (Nuclear Instrumentation)

Ongoing improvements to the ash monitor have improved performance and enhanced the range of applicability. This is a potentially viable business generating net income of R1 million in 1998 growing to R3.3 million in 2002.

⁹⁹Mo (Primary Isotopes)

AEC has a joint supply agreement with the second largest producer of ⁹⁹Mo globally. The AEC has the advantage of controlling the entire product cycle. Turnover is expected to grow from R7,2 million in 1998 to R17,6 million in 2002, and from a loss of R2,7 million to a profit of R8,2 million. However, there is insufficient clarity as to the full allocation of costs and the state subsidy to the Safari is not fully taken into account in this calculation. A further question in the future is what happens when the HEU feedstock is exhausted.

Biogam (Food Product Irradiation Services)

The latest food product range is expected to be approved by world health bodies within the next few months. Conflicting reports have been received regarding the market potential. Expansion prospects lie in exports after receiving WHO approval. Turnover is projected to increase steeply over 5 years to R22 million from R1 million. This business should be privatised as an independent entity, taking due account of any structural difficulties.

6. Mechanical and systems

The AEC Board has now accepted that funding for mechanical and systems activities will be rationalised and scaled down from the current R12,9 million (net funding) to less than R 5 million for 1999.

7. Pelindaba Technology Products

Overall, PTP is still experiencing losses and projected profits in future years are modest.

The ongoing businesses of PTP need to be critically evaluated for long-term viability and profitability. In essence: could they survive as stand-alone privatised businesses.

Effectively, this amounts to getting the right product at the right price to the right place more effectively and efficiently than local or international competitors (without any hidden state subsidies).

In many instances AEC commercialisation initiatives have been based on trying to persuade markets that they require the products. Over the years, a large number of products have been eliminated because of lack of support. This is the result of insufficient or disjointed market research and of marketing which is carried out at too great a distance from the business unit. This problem has been recognised and greater emphasis is being placed on sales/marketing intelligence, and the growing use of joint venture partners is a second move.

The business units are analysed in the tables below in terms of sales, profits and cash flow through to 2003, and commented on in the summaries following. For each business an agreed profit and return on investment should be budgeted and achieved, and/or specific strategic objectives identified and monitored to support continuation.

The comments on each business unit are not based on in-depth financial evaluation but on their contribution to each division, probable resource demands and critical milestones. The PTP evaluation criteria in Appendix A of their Strategic Plan (Feb 97) should be applied strictly to each business.

NTP Division

Lumitec generates relatively small revenues and the question arises as to whether it is worthwhile for the AEC to be in this business.

Greater emphasis should be placed on the restructuring of AEC-Amersham so as to divide and better utilise the resources, particularly in view of the DuPont threat.

Pelchem Division

Critical milestones are too far into the future. The two businesses together are budgeted to break even only in 2000 and to generate a 4% return on sales in 2002. The cash flow from 1999 is modest.

Pelmech

It is very difficult to position these business units within the AEC’s strategic environment and considering a loss is forecast for 1998, which significantly exceeds the budget, it seems appropriate that alternative options should be evaluated, i.e. sell-off, closure.

Pelrad

The objectives of Pelrad are well defined and although growth outside the AEC is limited, the role within the AEC is essential. But should this operation fall within PTP?

PTS

TST has been closed down, AMS is "on notice" to be closed down, both Fabritech and Flosep are projected to make losses through to 2002 and Apogee generates a small return on sales. Again, options to close down or sell off should be investigated.

Management should not be spending resources - which are already stretched - on businesses which cannot pay their way. As previously mentioned, it is also no coincidence that the majority of unprofitable business units fall outside the AEC’s specific field of nuclear energy and related products. Again, experience overseas has shown that these types of small businesses are typically set up in the early stages of diversification at a government site in a hunt for contract funding. As the larger ventures become successful, the smaller and less focused units are weeded out.

8. AEC Subsidiaries

HTP Marketing and Manufacturing (Pty) Ltd was set up as the holding company for the industrial group outside the AEC, mainly for strategic and security reasons. The commercialisation process has had the effect that the AEC now needs to become involved in private companies based on good business principles as opposed to the strategic political considerations of the past. At present HTP has an assessed loss of R26 million.

AEC Amersham (Pty) Ltd.

This is a joint venture with Amersham U.K. It has potential for vertical integration in expanding marketing opportunities and developing manufacturing facilities.

Fluoro Pack (Pty) Ltd.

A minority external shareholder provides marketing expertise in the field of the surface modification of polyolifens. The future development of ‘on site’ facilities and potential expansion of markets will be the responsibility of the AEC. An arrangement with a more substantial partner (in terms of ‘size’ compatibility) should be evaluated.

Semcon

Stock is valued at R1 million and the company is currently not operating.

Fluoropharm

The company has been created with Syntheta, a subsidiary of Sentrachem, as a partner to develop and market NP0 which is a feed material for an alternative to Voltaren.

Peltek Inc, Flosep Inc, Pelcast (Pty) Ltd

These companies are dormant. Peltek is used as a vehicle for patent registration and Pelcast has an assessed loss of R1 million.

9. Unfair competition

As far as the Review Team is aware, no protests have been lodged with the Competition Board regarding unfair competition by the AEC (in contrast to the claims made against the CSIR). The main reason is probably that the AEC operates in a specialised technology and product area where the barriers to entry are substantial.

10. Commercialisation performance related to the AEC 2000 Plus Plan

The AEC’s track record in commercialisation since 1990 does not seem very impressive. PTP continues to be rationalised on the basis of products and/or services which are not always viable. The frequency of failure is too high. Application of the TOBOTEK model should mean that businesses which have come through the development phase, and which are regarded as commercially mature (viable), are then transferred to PTP for routine production and business operation. They should not be failing at this stage.

Actual revenues exceeded budget over the past two years, but are anticipated to be below budget this year. However, forecasts are extremely optimistic despite management’s declared conservatism. The history of forecasts and actual revenues are detailed below in real rand values. Actual revenues achieved two and three years later have been 25-30% lower than the forecast in two cases. The average revenues are about 5% below the forecast made two years earlier, and about 13% below forecasts made three years earlier.

Sales revenue: two-year evaluation:

Sales revenue: three-year evaluation:

11. Summary

The AEC executive management’s scientific training has resulted in a thorough understanding and implementation of the core competence model (following Hamel and Prahalad). However, their approach, in practice, appears to have been characterised by "technology push" rather than "market pull". In other words, scientists and engineers are developing technologies and products because they have the competencies and capabilities, rather than because of a thorough analysis and understanding of potential markets and competitive pricing and hence cost structures. In addition, the pressure to reduce government funding by generating revenue has resulted in the AEC developing products - too many products - into markets which are not related to their main business of nuclear energy and related fields. This has distracted and diluted focus from the main business of the AEC. Again, this is a common observation in the performance of government facilities moving towards commercial operations.

Sole reliance on text book business principles is clearly inadequate and the lack in the AEC of seasoned professionals with business experience has become a problem which could result in extremely costly consequences as the corporation begins to launch major projects into the commercial environment.

Hamel and Prahalad have published a new book entitled "Competing for the Future". The following quote encapsulates the challenges now facing the AEC:

"After a decade of restructuring and re-engineering, big companies have become smaller, leaner, simpler and faster than ever before. They have survived the perils of the past, but how will they fare in the competitive wars of the future?

Downsizing and core process redesign have more to do with shoring up today’s businesses than creating tomorrow’s industries. Neither is a substitute for imagining and creating the future.

It is not enough for a company to streamline and downsize, as important as these tasks may be; a company must also be capable of fundamentally reconceiving itself, of regenerating its core strategies and reinventing its industry."

The AEC has downsized. It now has to re-conceive itself. Its latest Strategic Plan begins to point to a new model: two distinct but interdependent divisions, one that will fulfil identified institutional responsibilities on behalf of the state, the other a publicly listed company. However, this does not go far enough. The major challenge is now to move to a position where its technology can be fully exposed to a commercial environment where it will survive only to the extent that it is competitive. This is not to say that there should be no government contracts (including contracts for technology development).

It is evident that a high premium has been placed on sales growth in achieving profitability. It has already been seen that marketing is not a specific strength of the AEC, hence the urgency to secure partners in the form of joint ventures, marketing arrangements or other associations to ensure that sales growth projections can be achieved. External partners could also assist with technical or financial contributions. The total restructuring of the AEC is probably essential to cater for strategic equity partners and for the decision-making process to be unencumbered by government bureaucracy. This cannot be achieved simply by creating different divisions in the AEC. A new organisation with new management will be required to apply the discipline of financial viability and market competitiveness in order to succeed in the private sector.

South Africa probably cannot afford another national technology development institution. The AEC no longer has any special status. It’s nuclear technology base has been severely eroded through the closure of its nuclear fuels operations and because this a skills base is not being reproduced. The future of the AEC’s radiation services is linked to the fate of the Safari. And although the AEC possess machinery and skills in mechanical and engineering systems, this is an area of business which can be entered and developed by competitors. It is also, significantly, the area of AEC business where most units have been closed down or are "on notice". The remaining potential is in the fluorine chemicals area. If the technology of the AEC has any potential – then this has to be tested in the market place in the same way as any other chemicals industry in South Africa. Some limited state support might still be justified for technology development, but only if business plans are subjected to careful independent scrutiny.

6. ASSESSMENT BY END-USERS

In excess of twenty interviews were conducted with persons outside the AEC, of which the majority could be described as end-users i.e. users of products or services supplied by the AEC. Much of the information and perspectives obtained from the interviews has been integrated into the relevant sections within the report. The following additional points emerged:

• The quality of the product or service supplied by the AEC was described as excellent, and in some instances criticism of over-engineering was emphasized. A concern was expressed that considerable skills were lost in downsizing the organisation and that remaining skills are mostly vested in personnel over the age of 45 which will also be lost within the next 10 - 15 years without adequate succession planning.

• Although impressions of secrecy and authoritarianism still remained, the relationships with end-users were good.

• There was a view that the AEC had little experience in commercialisation and that joint ventures, marketing arrangements and partnerships were entered into to address these shortcomings. The lack of urgency or momentum in pursuing market opportunities and in obtaining decisions - often not directly related to the AEC Executive - was regarded as a potential problem, if allowed to continue.

• The synergy of the associations was regarded as mutually beneficial. Many of the markets the AEC intends entering are highly competitive and will be difficult to penetrate. Forecasts of obtainable sales by the AEC were seen to be generally optimistic. The AEC’s diversification has over-extended the organisation resulting in a lack of, or diluted, focus in critical areas. The vision is too broad.

• In some areas it was essential that the AEC also acquire technical and financial partners to optimise the development of projects. Downsizing has promoted a defensive approach which is contrary to the inventive culture required of the organisation.

• It is believed that the AEC has an important role to play in the dissemination of information in Africa. There could be considerable political advantages to this.

• Unfair competition was not seen as an issue by the larger companies. Smaller companies were concerned and expressed the view that the AEC was only competitive because of government funding.

• The AEC carries a legacy from the other side of the political spectrum and it will take time to gain credibility in the broader community. A participatory management style is not evident and the implementation of affirmative action policies or training schemes is extremely slow. However, there has been significant movement away from discrimination. Language is sometimes a problem, particularly the dominance of Afrikaans. Often a more humane approach is required instead of playing it by the book.

7. MANAGEMENT OF THE INSTITUTION

The Review Team were asked to benchmark the quality of AEC management and management systems against criteria of efficiency, economy, effectiveness, capacity to provide leadership and capacity to employ strategic management concepts to the programmes of the AEC.

Two difficulties limit the effective benchmarking of the AEC in this way.

First, the five categories are not completely independent. There is some overlap between the first three - efficiency, economy and effectiveness; these three will contribute in part to the fifth - strategic management; and all four will reflect on the leadership capacity. Within these constraints the following discussion will cover the five criteria listed, together with a quality criterion, and the status of the internal benchmarking undertaken by the AEC.

The second difficulty is the choice of benchmarks. For very specific issues it should be possible to identify suitable institutions in South Africa. However, the key issue is how to benchmark a nuclear company which has reduced its nuclear staff level by a factor of four while also attempting to change its programme from nuclear work for State security and self-sufficiency to commercial work for profit and for the benefit of the economy. A brief review of the international position is given in the annex. This points to AEA Technology, UK, as the most appropriate benchmark.

Given the short period of the review, the Team has had to rely on existing and available comparative studies and also on internal management reporting systems. The following performance management, control and audit systems exist within the AEC:

• Quarterly reporting against business plan objectives to the Management Board, AEC 2000 Forum and, in a summarised format, to the Board of Directors.
• Internal audit to assess all business plans and performance against the business plan objectives and goals annually.
• External audit of all management unit plans in terms of its effective compliance with the corporate objectives, and efficiency of performance against the stated objectives, as required by the Reporting by Public Entities Act.

An internal Prodit function (Productivity Audit) is established within the CEO's office. This function is responsible for:

• Formal financial and systems internal auditing;
• formal productivity audits at the various management levels against accepted business plans; and
• measurement of the corporate productivity audit against 12 corporate attributes and a measurement of value addition.

Reports from Prodit are submitted to Management Board meetings and the Board's External Audit Committee.

1. Efficiency and Effectiveness

BMI-Insight, a company which specialises in customer satisfaction studies, reported on a survey of suppliers of high technology and atomic energy products in November 1993. 148 respondents were interviewed from the mining, manufacturing, chemical, power and other industries. The suppliers were rated on product and service attributes in terms of performance as seen by all current clients. 18 attributes were examined as follows:

1. Delivery of what is promised
2. Meeting deadlines
3. Cost-effective service
4. Effective after sales support services
5. Standard of communication during service
6. Commitment to developing an ongoing client-supplier relationship
7. Understanding of industry needs and problems
8. Ease of access to appropriate personnel
9. Confidentiality of service
10. Immediate solutions to industry needs
11. Business skills
12. Integrated product and service package
13. A supplier with a sound environmental policy
14. Meeting ISO 9002 specification
15. Effective promotion of products and services
16. Wide range of high-technology products
17. Provision of multidisciplinary skills
18. Willingness to participate in joint ventures

Ratings in order of importance ranged from 97% for item 1, through 86% for item 9 to 70% for item 18.
The suppliers were divided into six groups: AEC; CSIR/Mintek; Universities/Technicons; Local Suppliers; Overseas Suppliers; and Denel. The position based on the average place marking and average rating as a percentage of ideal for all 18 attributes was:

According to this analysis, overseas suppliers have a small lead, but there is little overall difference between the perceptions on performance for AEC, CSIR and Local Suppliers.

The BMI-Insight study can also be used to benchmark the AEC against the CSIR. The average ratings are very similar (AEC, 69,4%; CSIR, 69,1%) However, for the more important first ten attributes the AEC were first or equal. Average ratings for entries 11-18 were AEC, 68,9%; CSIR, 71,1%.

A repeat performance measure for 10 of the attributes shows average ratings for the AEC of 68,8% (November 1993) and 72,1% (November 1994). Direct comparisons are not strictly valid as the sample composition may have changed. Small changes in ratings of 2-3% are therefore ignored. The larger changes are in respect of item 4, which increased from 65% to 70%; item 6, from 65% to 74%; item7, from 68% to 73%; item 11, from 60% to 66%; and item 15, from 46% to 59%, indicating a significant improvement at the client/business end of the commercial chain.

In the 1995 update of the BMI-Insight study, the average response for the top 10 attributes associated with AEC (in that year) had risen to about 79%, but in this case the sample composition was certainly different. However, the results indicate that the majority of the perceptions of the AEC by current clients were favourable.

2. Economy

A reasonable benchmark for "economy" can come only from a South African organisation. The CSIR seems the most appropriate as it as about evenly funded between parliamentary grant and external contracts, and is similar in size. It differs in history, with no rapid run-down in staff. There are similarities in approach to research and development programmes, but the AEC goes further towards production and is more experienced in the construction and use of pilot plants.

It is difficult to make a direct comparison on the basis of figures supplied – but it appears that overhead, indirect and corporate costs are similar.

In 1996, the AEC Finance and Commercial Services Department, including the decentralised functions, formed part of a study in which the accounting function was benchmarked against 40 other South African participants in a survey by Arthur Andersen. The Accounting function was divided into total cost and costs of various subdivisions for each of the following-

• total cost of finance function (as a percentage of sales)
• administration of accounts received
• billing
• administration of accounts payable
• payroll
• treasury
• inventory and stock
• general ledger
• internal audit
• budget

For the AEC in general the costs or time taken per finance function were below the medians. The exception was the Treasury function, which is less relevant for the AEC. Areas noted that could be improved on were primarily in the electronic transfer area: for payment of creditors, electronic invoicing, electronic collection of cash, etc. but this is not a major priority for the AEC given the limited number of transactions involved. The AEC was complimented on preparing more information than purely accounting reports, and so adding value as a management tool.

3. Quality Assurance

This factor is not in the terms of reference but is worth discussion. Quality Assurance (QA) systems are in place for some AEC departments , and in some cases with accreditation. Initially AEC were working to system standards such as SABS00157, but these have now been superseded by the ISO 9000 - ISO 9002 series. There was clearly a very comprehensive system for the nuclear fuel manufacturing plant, with a legarcy of useful experience: and a complimentary audit report on the conversion plant was submitted by Urenco on 30 April, 1997. In the BMI-Insight survey, AEC and CSIR were both marked at 84% in meeting the ISO 9002 specification, only slightly behind overseas suppliers (88%), and well ahead of other South African suppliers (average 67%). The AEC should consider extension of the QA scheme to cover the whole organisation. Note that AEA Technology in the UK is accredited for QA as a complete organisation by Lloyds Register (the range includes QA procedures on research, marketing etc.), and is so marked as a footnote to all official correspondence. QA accreditation can be very important when aiming at overseas markets.

4. AEC benchmarking

At the end of 1990 the Management Board approved seven criteria as indicators of AEC performance:

• Quality of working life
• Quality of products and services
• Productivity
• Efficiency
• Independence of state funds
• Innovation
• Effectiveness

Results are reported to the AEC 2000 Forum, the Management Board and the Board of Directors as quarterly reports.

Twelve internationally accepted attributes of effectiveness (including economy, efficiency and appropriateness of application of resources at AEC) have been organised against the above seven headings. These twelve attributes were developed by the Canadian Government in liaison with the Canadian Chartered Accountants Institute. They are internationally accepted, especially in South Africa where they were included in the requirements of the Reporting by Public Entities Act (Act 93 of 1992). Performance results are reported in the Directors Report part of the AEC annual report. The internal auditing function at the AEC is performed by the Productivity Audit (Prodit) Department, which reports directly to the CEO. The external auditor is Coopers & Lybrand. The Auditor-General also receives a copy of the annual report; the Auditor-General’s Office monitors the AEC’s compliance with Act 93 of 1992.

Benchmarking is already taking place within this system on a limited scale. Mainly against past performance. It is planned to expand benchmarking during 1998/99 to include measurements against national and internationally comparable organisations, mainly with the objective of implementing best practices.

The following comments are based on the Quarterly Report to the AEC 2000 Forum, June 1997.

Quality of working life: measured by the incidence of personnel turnover per year (for Management, Technical and Professional streams); and of grievances, interviews on social problems, and sick leave per month - in each case against AEC standards.
Quality of products and services: a system for ensuring both the understanding of and compliance with client requirements.
Productivity: measured as increase in efficiency, defined as the ratio of income to expenditure; has increased by 16% per year over the last ten years
Efficiency: reports and targets on various aspects of labour costs, and materials, capital and running costs, all expressed as trends of the income/cost ratio over time.
Independence of state funds: reduction of core activity funds required from the state; performance plotted against time, noting a standard of 6% reduction per year.
Innovation: benchmarking to be defined by AEC.
Effectiveness: measured at Management Unit level, initially of compliance with budget; performance audits carried out by Prodit are being modified to reflect real achievement of objectives. The methodology will be simplified when a more rigorous milestone monitoring system is introduced. (See note in Annex.)
Other issues: notes are included on inventory, productivity in financial control/commercial services and corporate accounting. This shows that numerical targets have been set for various factors in the supply and demand chains, and that performance is close to or exceeds targets in most cases; stock volumes and values are being optimised; costs of orders, receipts, invoices are under close control; and there is a fair policy on payment of creditors.

5. Strategic management

International comparison

The International Institute for Management Development, Lausanne (IMD) has developed a summary of international practice. The preferred practice is outlined, in tabular form, against 30 areas arranged under seven main headings as follows:

• favoured organisational philosophy and commercialisation of technology
• structure and implementation of strategy
• R & D structure
• manufacturing
• reward and recognition systems
• post-project reviews

A 12-page table gives a comparison of AEC practice with international opinion as summarised by IMD. In nearly all areas (total of 30) the AEC has a structure or practice in place which closely mirrors or is in parallel to the IMD recommended procedure. These are not discussed further, and this review will simply note the exceptions, essentially in five areas.

• Under commercialisation of technology, there is a weakness in boundary milestones where the need is recognised but measures not always rigorously implemented.
• Under implementation of strategy the ‘informed downstream input" is weak. This is noted elsewhere as a need for more market intelligence and clear delivery channels and customer contact systems. In practice, in more recent commercial work this need is being met by joint ventures and strategic alliances with companies which already have appropriate links with the market place.
• Under structure there is a need for matrix thinking, staff rotations, and attention to insular problems with early product champions. The AEC is already addressing this by giving greater attention to staff and career development.
• Reward and recognition systems. The AEC has had some difficulty in establishing a corporation-wide reward and recognition system which is seen by all to be equitable. This is a common problem when trying to award bonuses for sales performance, and it is too early to introduce these into the AEC on an equitable basis. Informal functions on achievement of significant milestones, as practised by the AEC, seems to be the better approach for the moment, particularly if the milestone system is strengthened.
• Post-project reviews. This refers to the need to learn from each step in the technology-commercialisation process, particularly in order to avoid repeating errors in communication with customers, to improve customer liaison during the work, as well as technology transfer, etc. Questionnaires can be used for small service projects, but major projects need a more personal approach. General studies of customer satisfaction have already been addressed by the BMI-Insight studies reported above.

The final section of the comparison with the IMD summary lists five threats to the integrity of the technology-commercialisation process. Two are particularly relevant: "conversation problems resulting from differences in culture"; and "excessive changes of personnel during and between process phases".

Management of changes in income pattern

With some exclusions, over the period 1990/91-1997/98 the state funding was reduced by a factor of over four to about 23% of the 1990/91 value.

In 1989/90 AEC had essentially one main external customer – Eskom. Over 1992-98, the Eskom income fell away to zero, but this was more than offset by the growth of other products and markets. External sales income has more than trebled over this same period.

Overall, in managing the changes of staff levels and of income streams, an unsubstantiated expression of opinion was ventured to the effect that the AEC has probably performed better than AEA Technology (in the UK), during comparable periods of restructuring, and under rather more difficult circumstances. The strategic management system has been successful in redeploying staff into new industrial areas, where the output could be significant sales of South African materials with considerable added value. The achievement of breaking even and making a profit is a skill still to be demonstrated.

Strategic – but how strategic

The current management team were given a Presidential instruction in 1990 to transform the AEC from essentially a national security institution to a commercial producer of technology products with little drain on the fiscus. In some respects the AEC has demonstrated impressive strategic management skills. Its documents (including the AEC 2000 Plus Plan) incorporate a lot of detailed and sound management planning. And, as has already been mentioned, much has been achieved – mainly in closing down uneconomic operations, laying-off staff, reducing state subsidies and growing external sales income. But how much of this has been pretty obvious? Although many decisions have no doubt been tough – it is clear that many have had to be taken and their effects have been crudely evident.

It is less obvious whether the AEC has begun to take the more difficult decision of redefining its role in South Africa’s energy sector and in the national system of innovation. Management decisions have been characterised by defensiveness, rather than a culture of openness to radical restructuring: the evident intent has been to keep the AEC as intact as possible, and the strategy has been to retain its support from the DME at as high a level as possible. Indeed, the AEC’s budget from the DME, although attracting the inevitable and predictable comments in Parliament, has escaped serious independent scrutiny, and hence re-structuring.

The management team of the AEC has undergone remarkably little change over the past 7 years. And it is striking that the authors of the AEC 2000 Plus Plan in 1991 are the same as those of the current version. In many ways the AEC and its management have been remarkably lucky. Until recently, they still enjoyed political patronage in their line Ministry. Little independent oversight was provided, and hence little pressure was applied to strictly meet performance goals strictly, particularly with regard to commercialisation.

One striking thing about the AEC’s strategic management (and its strategic planning documents), is that there is almost no explicit recognition that the political (and hence economic and social) environment has fundamentally altered since the installation of democratic government in 1994 (bar its reference to GEAR macro-economic targets). Some of these changes were of course anticipated in 1990 – but nothing much seems to have changed since 1994. This situation is unlikely to continue much longer. The political leadership of the DME has changed – and with the change comes a new pressure to clarify the mandate of the AEC and to subject its performance to closer scrutiny. The Review Team sees little evidence that the current management have responded or are responding strategically to these changes, or that they are willing to fundamentally re-examine the appropriateness of the remaining AEC activities in the light of current South African priorities. On the contrary, the Team has observed an alarming divide between the management team, its Board and Government – a distance which has translated into a malaise and deep insecurity. In part, Government and the Board bear responsibility for not being more directive and for not providing a new vision of transformation for the AEC. However, it is also an issue of leadership – a management attribute examined in more detail below.

6. Capacity to provide leadership

Some of the problems faced by management can be summarised as follows:
Speed of change: the major programmes on enrichment and fuel manufacturing for defence and independence reasons have been closed down and replaced by commercially driven programmes in a relatively short time, 1990-1997, although, it has been argued, some of the decisions to close uneconomic plants could have been taken earlier.
Degree of change: staff numbers have been reduced by a factor of about 4, with losses of key technical skills, and inevitably with staff morale difficulties.
Culture and outlook: the switch from national interest programmes to commercial work requires major changes in culture and outlook. The urgent need for an effective Equity and Redress programme simply adds to the challenge.

There is no international parallel for such a major reduction in numbers (except, perhaps, in Russia), which was carried out while also changing the programme from defence/security work to commercially driven projects, and in such a short time. It is difficult to imagine how this could have been achieved without effective leadership.

Nevertheless, the analysis from the previous section is pertinent. It is the Review Team’s view that the current management is demonstrating insufficient leadership with regard to the following issues:

• Developing an effective relationship with its Board and with Government.
• Developing an adequate understanding of, and identification with, changes in democratic government and new national political, economic and social goals.
• A willingness to re-examine the fundamental mandate of the AEC, particularly with regard to its various activities in nuclear energy and technology development.
• A willingness to examine the fundamental restructuring of its operations to best reflect a clearer mandate.
• Realistic understanding of market potential and successful commercialisation of technology.
• Effective progress in Equity and Redress in respect of staffing and management (see next section).

8. EQUITY AND REDRESS

The team was asked to assess the adequacy of the design, resourcing and implementation of AEC’s initiatives to promote equity and redress within its staffing patterns in the light of Government’s commitments on these matters.

The AEC’s Employment Equity Programme is summarised in Annexure 5(b)-item 5, of the AEC's Information Document No. HUB900/01.

Prior to 1990 the AEC staff complement of 8200 did not include any Blacks. Some 531 black personnel were employed through a company called Paynetra. In 1990 Paynetra was de-registered and all the black employees were integrated into the AEC. This process coincided with the downsizing of the AEC workforce.

To address the question of affirmative action in its employment policy an affirmative action programme was developed during 1991 and 1992. The AEC’s Affirmative Action stance was formally adopted in March 1994, and specific targets for the year 2000 were set per job category by each management unit.

The competing values of Affirmative Action/Redress on the one hand and the downsizing of the (White) staff complement on the other have generated tensions between white and black staff . The Mineworkers Union has signed an agreement with Management that no White staff would be retrenched because of affirmative action. The Chemical Workers Union are also concerned about retrenchment. Job insecurity has considerably affected staff morale.

Some steps have been put in place recently to address staff discontent, as well as Equity and Redress:

Union recognition
Recognition agreements with four workers unions exist, viz. the Chemical Workers Union (an affiliate of COSATU), the Mineworkers Union, the Staff Association and the Black Professionals Union. All unions are members of the Central Labour Forum.

Compliance with Labour Law requirements
A senior manager for industrial relations and social services has been appointed. Grievance procedures, disciplinary procedures and retrenchment procedures are all in line with the requirements of Labour Law, and are explained to all staff on appointment.

Monitoring Progress
A standing monitoring committee consisting of Personnel Managers under the guidance of the Manager of the Human Resource Recruitment Department has been set up to monitor-

• recruitment and appointments
• promotions
• human resource statistics
• employee development
• social investment and bursaries

Mentorship Programme
To reduce tension between staff a mentorship programme has recently been instituted in some departments aimed at getting White and Black staff to get to know each other and each other’s backgrounds. Details of the programme were not spelled out to the Review Team.

1. Current situation

Despite the initiatives implemented to date the present situation is that out of the current staff complement of 2434 ( which includes 470 contract staff) only 567 (23,3%) are black, and 436 (17,9%) are women. However, an analysis by category of employment (see the table below) shows that of the 567 black staff 479 (84,5%) are employed on the lowest rung (semi-skilled/other category) of the employment ladder.

AEC staff - 1997

Some further observations:

• There is little evidence of any provision for a planned upward mobility of black staff.
• A Skills Institute with excellent facilities exists on site at Pelindaba. While the facilities are used for skills training of students from technikons in the RSA, they are, however, not used to provide unskilled black AEC staff with additional training so as to qualify them for employment at higher levels.
• The turn-around of qualified black staff is high, many leaving after two years of working for the AEC.
• While present employment policy is that internal candidates get priority on any vacancy, the imposition of requirements of 5 to 10 years of relevant experience for appointments at higher levels precludes internal black staff from consideration.
• Communication between supervisors and workers is a problem, invariably being conducted in Afrikaans or English. The workers would like the use of Afrikaans to be discontinued.
• Serious conflict was evident between the most senior black manager and the AEC executive during the Team’s Review – culminating in the suspension of the manager.

Corporate affirmative action targets should be monitored and achieved.

2. Summary

New initiatives on Employment Equity and Redress are currently under discussion and await the approval of the Board of Directors. The implementation to date of current initiatives is clearly inadequate and lacking in vision. Procedures need to be put in place as a matter of urgency, to:

• Change the whole organisational culture and ethos of the AEC;
• create the space for the promotion of black staff;
• identify staff with potential and provide the training and support for appointment at higher levels;
• ensure that no artificial barriers exist for the upward mobility of black staff to senior appointments;
• retain skilled black staff; and
• provide training for unskilled staff.

There is a potential for SETI’s requiring similar qualifications for appointments and promotions, e.g. the AEC and CSIR, to discuss and coordinate their programmes and implementation strategies. This may result in a common approach with timetables for achievement. Also, common staff training programmes can be implemented, for example, at the AEC’s Skills Institute.

9. ENERGY SECTOR SPECIFIC ISSUES

1. Policy shifts in the Energy Sector

The draft White Paper on Energy Policy sets out a very different set of policy goals to those of the past. Gone are the almost exclusive concerns of energy security and self-sufficiency (which drove much of the AEC programme). Instead, energy policy is now geared towards:

• Increasing access to affordable energy services.
• Improving energy sector governance.
• Stimulating economic development.
• Managing energy-related environmental impacts.
• Securing supply through diversity.

This policy environment inevitably means different resource allocation decisions for the AEC, which still accounts for 59% of the DME’s budget. Increasingly the AEC’s dependence on DME funding will be evaluated against its capacity to contribute to the above goals.

2. The role of nuclear energy

South Africa has not formulated a national policy on nuclear energy. Instead, the draft Energy White Paper says that government will ensure that decisions to construct new nuclear power stations are taken within the context of an integrated energy policy planning process, and are subject to a full public debate.

If this policy is adhered to, then it is difficult to envisage nuclear power plants being built in the short to medium term. Eskom’s excess generation capacity will be taken up early in the next century, depending on which electricity growth scenario is fulfilled. A number of alternative generation sources exist – including large hydro-electric schemes in the region. A number of feasibility studies are well advanced – and the indications are that power can be supplied much more cheaply than by a new coal-fired station with environmental controls, and more cheaply than by Eskom’s most expensive unit, the nuclear power station, Koeberg. Possibilities also exist for gas-fired stations based on natural gas supplies from Namibia and Mozambique.

Given the commitment to integrated energy planning (where the full costs of pollution control, waste disposal and D&D will have to be factored in); the alternative (and cheaper) supply sources in the region; and the uncertainty regarding electricity demand growth (which will require changing and short-lead time investments) – it is highly unlikely that any large-scale nuclear plants will be built in the foreseeable future. Eskom does not expect to build another light water nuclear reactor in the next 30 years. And the AEC itself has abandoned its forecasts of a nuclear future for South Africa.

It is of interest to note that most authoritative forecasts (such as the US EIA) suggest that global nuclear power capacity will remain fairly static (at around 350 GW) over the next 20 years (till 2015). While capacity in the Far East (China, Japan, Korea and Taiwan) will double, that in the USA will fall substantially, and in Europe it may fall slightly.

Another possibility is the Pebble-bed High-temperature Gas cooled Reactor which is being investigated by Eskom (with German collaborators, mainly Siemens). Pre-feasibility studies are being undertaken on the possible construction of a 100MW unit. Eskom spent R9 million on this project in 1997. R35 million is budgeted for 1998 of which R10 million has been approved. It is envisaged that the pilot plant will cost about R475 million.

This technology utilises about 20% U-235 enriched oxide fuel in the form of small particles contained in vitrified spheres coated with carbon (known as "coated particle fuel") and the reactor uses helium as a heat transfer medium. No commercially operated units of the HTGR type reactor have been built, although test reactors were built in the UK (Dragon, 1965-1976), the USA (Peach Bottom, 1967-74) and Germany (AVR, 1967-1988). Prototype reactors were built in the USA (1976-1989) and Germany (THRT-300, 1983-1988). All work in this area in Germany has now been cancelled, including the HTR-500, HTR-100 and HTR-Module projects. HTGR activities currently occur only in Japan (30MW test reactor, where progress seems to be very slow) and in China, which has a 5-10MW reactor (progress unknown). Although HTGRs up to 200MW provide potentially superior safety features compared to conventional LWR technology, there is still insufficient theoretical and practical proof of their efficiency under operating conditions. Because work on this technology has been terminated in the USA and in Europe, any residual scientific and technical capability is fast disappearing and no industrial capacity exists anymore for HTGR fuel element manufacturing.

The Review Team is concerned about the high risks of South African involvement in a new and unproven nuclear power technology whose development costs will be enormous. We are further concerned that Eskom is proceeding with this project without close involvement of South Africa’s national nuclear authority, and largely on the basis of unscrutinised use of public resources. It is envisaged that the AEC might be involved only in helium turbine technology development work – and in the future possibly in fuel manufacture. The AEC has stated that it will only undertake work on this project on a contract basis.

Eskom is currently looking for a majority equity partner for proceeding with this work. The Review Team questions the chances of a pebble-bed reactor actually being built in South Africa.

On the basis of the above, the Review Team is of the opinion that policy decisions governing the AEC can, and should, be taken on the assumption that nuclear power capacity will not be expanded in South Africa in the foreseeable future. Indeed the 1997/8 AEC 2000 plus plan confirms this view by stating explicitly that the AEC’s nuclear fuel cycle programme "is not dependent on Koeberg or any further nuclear power programme in South Africa."

3. The AEC’s Nuclear Fuel Chain

The nuclear fuel chain comprises the mining of uranium are and the production of uranium oxide (U₃O₈); its conversion to UF₆; enrichment of the ²³⁵U isotope from 0,7% to between 3%and 4,5%; the manufacture of fuel pellets, rods and assemblies; their use in nuclear power reactors; the removal of spent fuel to on-site interim storage; possible reprocessing; or final waste disposal. The Chamber of Mines, at its Nufcor plant, produces U₃O₈. The AEC has so far been involved in conversion, enrichment, and fuel manufacture. Eskom operates Africa’s only nuclear power station at Koeberg. Finally, the AEC manages the Vaalputs radioactive waste site – which so far handles only low- and medium-level radioactive waste.

The AEC’s ambitions of becoming a fully integrated (one-stop) supplier of nuclear fuels and waste management have evaporated with the closure of its uneconomic Y and Z enrichment and BEVA fuel manufacture plants, and the announcement that its conversion plant will also be closed down. Koeberg sources its fuel from international markets.

Most recently, the AEC has aimed to be a commercially driven enriched uranium product (EUP) supplier – but the decision to close its MLIS programme effectively means that the AEC is now out of the nuclear fuels business.

4. The Conversion Plant

The Conversion Plant started operation in 1986 and produced distilled uranium hexafluoride as from 1987/8. It was built to supply the AEC’s enrichment plant (Z), which became operational in 1988. The conversion plant’s capacity exceeded the feed rate required for the Z plant, and conversion services have also been exported. Since the closure of the Z plant, the entire output of UF₆ has been exported, apart from sales to Eskom, which have now also ceased. The hydrofluoric acid (HF) that is needed for conversion is supplied by an adjacent plant that is operated by PTP. Approximately 25% of the HF produced by PTP is used for conversion. Output of UF₆ was 560 tonnes uranium in1994/5, which increased to 860 tU in 1995/6 and to 890 tU in 1996/7.

The nameplate capacity of the AEC plant is 1200 tU per annum. This compares with the following capacities: Minatom/Russia – 22 000; Comurhex/France – 14 000; Converdyn/USA – 12 600; Cameco/Canada – 10  500; and BNFL/UK – 6000.

Although conversion prices have been fairly strong since 1992 when a major company in the USA was shut down, new capacity might be added relatively easily and quickly as long as prices are expected to be sufficient to cover capital expenditure. The AEC’s plant is very small by world standards and incurs high fixed costs per unit of output. Uranium production in South Africa is declining. Recent figures indicate a reduced annual production of 900 t/a.

Details of conversion plants vary, but no new technologies are likely to make significant impacts on the industry. The AEC’s conversion plant is based on French technology.

The Nuclear Fuel Cycle Initiative Report of March 1996 contained a conditional decision to keep the conversion plant running: the AEC argued that it should be kept running, the rest of the industry thought it should close. This decision was dependent on Eskom buying 200tU/a at the then inflated contract price, and the plant’s throughput being increased to 1200 tU/a. Neither of these conditions has been met. As from 1997 Eskom has ceased purchasing from the AEC and total production for 1996/7 was lower than planned at 892 tU – up just 2,7% from the previous year. The result has been a net funding requirement of R21,3 million in 1996/7 and a budgeted shortfall of R15,7 million in 1997/8 (previously budgeted at R9 million). This compares with an anticipated annual state funding requirement of R3,9 million (NFCI calculation) or R2million (AEC calculation). The AEC’s projections continued to be optimistic. They aimed to increase throughput to 1500 tU/a in 1997/8 and 1800 tU/a in 1998/9 with a contract of $5.5/kgU from Nufcor. A positive cash flow was to be achieved by no later than 1 April 1998. However, it was anticipated that only 1000 tU/a would actually be attained in 1997/8. The AEC nevertheless planned to break even by 1999/2000.

The NFCI Report recommended that the AEC Board should monitor progress against relevant agreed to milestones, and that the future of the plant should be reviewed within 24 months. That time has now clearly come.

On the available evidence, the Review Team concluded that there is no basis for keeping the conversion plant operating and that it should be shut down as soon as is possible. During a subsequent visit to the AEC, management indicated that they had recommended to their Board that the plant be closed down and that their recommendation had been accepted.

Closure of the conversion plant will not impact adversely on other AEC fluorine-based industrial projects such as SF6.

5. Enrichment and MLIS

Global installed capacity in nuclear power is likely to remain static over the next 20 years and the total demand for enrichment services is estimated by the USA EIA to be between 32 and 37 million SWU. Installed enrichment capacity is approximately 49 million SWU. Significant amounts of enriched uranium are being released from surplus inventories in the USA and Russia, including surplus defence stocks of HEU. Over the next 20 years, spot market prices will probably remain within 10% of today’s prices. Given a static market and the existing surplus enrichment capacity, the entry of new uranium enrichers to the market will not be easy and will only be possible if based on competitive technology.

World enrichment technology is dominated by ageing gaseous diffusion technology (USA and France) and by centrifuge technology in Russia and Urenco. Technological and economic imperatives are pointing to enrichment technologies with improved energy efficiencies and lower capital and operating costs. Urenco operates advanced centrifuge enrichment plants and a development programme which has yielded a series of performance improvements. The USA and France are experimenting with AVLIS. South Africa and Australia have looked at MLIS and Japan is exploring all three technologies.

At the beginning of the review, the AEC claimed molecular laser isotope separation as one of their three core competencies. Three months later, they decided to terminate all their activities in this area. Now, the closure of the MLIS programme effectively means that the AEC will no longer be involved in enrichment technology.

6. Closure of the Beva Fuel Manufacturing Plant

Despite the AEC’s mandate to secure an indigenous nuclear fuel source for Koeberg, it supplied less than half of the plant’s requirements; Eskom was always able to secure fuel from abroad at lower costs. BEVA production started in 1988 and average production has been about 25 tonnes of contained uranium per annum. The 1995/6 deficit was R32 million and this fell to R15 million in 1996/7. Even at an equilibrium rate of 32 tonnes per annum, which is the nominal Koeberg demand when the 2 reactors are operating on 18 month cycles, the annual operating deficit of BEVA was projected to be a minimum of R6 million. (It is generally accepted that an economic indigenous fuel manufacturing facility is at best only likely to break even for a generating capacity of 6 GW.)

Closure of the uneconomic Beva plant was recommended in the NFCI report and the DME finally informed the AEC in February 1997 that fuel production for Koeberg should be stopped (the last Koeberg reload was shipped in October 1996). Associated skills are still required for the production of fuel elements for Safari, plates for ⁹⁹Mo production, and shielding material for isotope containers from depleted uranium metal.

The allocation of funds for closure, a decision on Eskom’s contribution towards closure costs and a decision on how D&D is to be managed are still awaited. The AEC claim they have not seen a copy of the full Cabinet decision and have not yet received permission to retrench the 100-odd workers. Government and the AEC Board should resolve these issues as soon as possible.

7. Decommissioning and Decontamination

The D&D costs of the Y and Z plants are substantial and D&D costs will increase further as the Beva plant is decommissioned. Special budget line items have been requested from the DME. R109 million has been received thus far for the Z plant and a further R45 million is budgeted for the next 3 years. Budgeted items for the closure of the Beva plant are estimated at R24,5 million in 1998, R44 million in 1999 and R41 million in 2000.

In other countries such D&D costs are normally funded by the department that originally commissioned the work, for example in the UK the Ministry of Defence or the Department of Energy/Department of Trade and Industry. There will be further decommissioning costs in the near future for the MLIS conversion plant, and in due course when the Safari Reactor is closed.

Given these enormous costs, some form of independent audit and review should be commissioned by the DME to assess the integrity and effectiveness of these operations.

Further decommissioning costs will be incurred for the Conversion Plant and for MLIS.

If it is decided that the Safari Reactor should be closed down, D&D costs will escalate even further.

8. Radioactive Waste Management

All parties agree on the urgency of developing a national policy on radioactive waste management. There has been an extensive process of consultation and discussion resulting in the drafting of a new Nuclear Safety Bill by the Council for Nuclear Safety, which is currently being reviewed by the DME. It is beyond the remit of this Review Team to comment extensively on radio-active waste management policy, but we wish to emphasize that it is imperative that this matter be finalised as soon as possible so that the role and responsibilities of the AEC ( and other bodies) in this respect can be clarified.

Currently the Nuclear Energy Act (No. 131 of 1993) assigns responsibility to the AEC for operating waste disposal facilities for radio-active waste and irradiated fuel. The AEC runs two sites: one at Thabana Hill at Pelindaba for the storage of Safari spent fuel and AEC waste as well as that from medical and industrial users; and the Vaalputs site in the Northern Cape which the AEC bought in 1984 and which is licensed by the CNS for low and intermediate level waste. By the end of 1994, 915 and 1800 cubic meters respectively of each had been received in drums which are placed in open trenches 7 metres deep and covered with a 2 metre clay cap. Investigations into the possibility of storing high-level waste have been stopped pending the finalisation of a national radioactive waste management policy. A decision is also awaited (from the CNS) on how to deal with uranium wastes arising from gold mines, sulphuric acid plants and activities at Pelindaba.

The Review Team are concerned that waste management practices at the Thabana Hill and Vaalputs sites have not been beyond reproach – but is satisfied that the Council for Nuclear Safety (CNS) is maintaining close regulatory oversight. The culture of the AEC and CNS appear to be quite different when it comes to waste management, which requires due diligence, follow-up and a continually questioning attitude. The roles of policy-making (government), regulation and monitoring (CNS) and operations (AEC) in radio-active waste management should be clearly distinguished. It is the Team’s view that it probably does not make economic or management sense to set up a separate radioactive waste management authority and that given the level of nuclear technology and materials-related expertise within the AEC, it should continue to be responsible for the public ownership, operations and management of the Thabana Hill and Vaalputs sites, subject, of course, to close regulatory oversight by the CNS within the parameters of government-directed policy.

The general principle of the generator of radioactive waste material (e.g. Eskom’s Koeberg plant) being responsible for the economic cost of managing the waste at Vaalputs should be upheld and full cost-recovery should be sought.

9. IAEA Relationships

South Africa is one of the 125 member states of the UN International Atomic Energy Agency and occupies one of the 13 permanent seats on the Board of Governors. AEC staff also sit on many of the AEC advisory committees. The AEC is responsible for South Africa’s annual membership fee of about $500 000 and a voluntary contribution of about $220 000 to the Technical Cooperation Fund. The AEC has signed a Memorandum of Understanding with the IAEA to provide technical experts for training purposes in foreign countries and for administering scientific visits and IAEA fellowship training of foreign nationals in South Africa. Since 1995, 60 foreign nationals have been trained in South Africa, about half of these by universities and technikons. South Africa is also a member of the African Regional Cooperative Agreement for Research, Development and Training related to nuclear science and technology (AFRA) and plays an important part in sharing its expertise with other African countries.

Following the IAEA, the AEC is involved in both promotional and regulatory nuclear activities. Whether this is appropriate at the national level is questionable, as the discussion below reveals.

10. Administration of Safeguards (and imports/exports)

At present, the AEC has positioned itself as South Africa’s "National Nuclear Authority", assuming responsibility for administering the requirements of the Nuclear Non-Proliferation Treaty (NPT), and the IAEA Comprehensive Safeguards and Import/Export Controls (as prescribed by the Zangger Committee and Nuclear Suppliers Group).

The Safeguards Agreement requires a National System for the Accounting and Control (SSAC) of nuclear material. The AEC has the responsibility to submit prescribed design information on all nuclear facilities and to report all modifications to the IAEA. It has to negotiate and conclude Subsidiary Arrangements including a Facility Attachment for each facility; to declare the total inventory of nuclear material and report all subsequent changes thereto; to report operational programmes and keep prescribed records; and to facilitate IAEA verifications. The rights of the IAEA include visits and inspections, access to nuclear material, the taking and analysis of samples, the verification of measurements and calibrations, the examination of records and clarifications.

Comprehensive Safeguards have recently been strengthened by the adoption of a Protocol granting the IAEA significantly more access to information and nuclear-related activities. The present Nuclear Energy Act (No. 131 of 1993) divides the functions of safeguards implementation and import and export controls between the AEC and the Minister of Minerals and Energy. The protocol requires the merging of safeguards with import and export controls.

The Non-Proliferation Council (NPC), operating in the Department of Trade and Industry under the Non-Proliferation of Weapons of Mass Destruction Act (No. 87 of 1993), already controls materials and equipment relating to: chemical weapons, biological weapons, nuclear weapons (only dual-use items) and missile delivery systems. (South Africa is also a signatory to the Chemical Weapons Convention, the Comprehensive Test Ban Treaty, the Pelindaba Treaty for an African Nuclear Weapons-free Zone, the Missile Technology Control Regime and the Conference on Disarmament). It would be logical and consistent with the purposes of the Non-Proliferation Act to transfer the legal responsibility for the implementation of strengthened safeguards from the AEC (traditional safeguards) and the Minister (import and export control) to the NPC.

The remaining question is which agency should administer (subject to NPC oversight) strengthened safeguards implementation? This is a specialised function and the DTI does not have the required expertise or experience.

The AEC clearly values its relationship with the IAEA very highly. However, the IAEA can recognise more than one national nuclear authority (and indeed does so in a number of countries). The CNS has accreditation for its regulatory functions and it could make sense for them to take on the administration of Safeguards and Import/Export controls as an agency function, but still reporting (in this matter) to the NPC.

Arguments have been presented to the Review Team that economies of operation could be attained if the CNS took over these functions as it would overlap with some of their existing monitoring work. The counter argument is that the main expertise resides within the AEC and should remain there. The local members of the Review Team are not persuaded by the latter argument (an argument which was also previously made to keep CNS functions within the AEC). Neither are we persuaded by the argument that because the CNS is concerned mainly with radiological health and safety, it should not be occupied with nuclear weapons-related issues (and we are alarmed by the implicit assumption by the AEC that somehow it is more appropriate that they should be involved in weapons-related controls).

The Review Team therefore recommends the transfer of the relevant staff to the CNS. (The International Member of the Review Team points out that some countries, such as the UK, have been happy to retain Safeguards within the government nuclear authority). The proposed change would require an amendment to the Nuclear Energy Act of 1993. The implications are not huge in terms of staff or budgets (about nine staff and R2 million per annum). This does not mean that the AEC cannot maintain other important linkages with the IAEA, particularly with regard to technology and information activities and in its AFRA initiatives.

10. GOVERNANCE, OWNERSHIP AND INSTITUTIONAL FRAMEWORKS

The above discussion on nuclear safety, radio-active waste management, safeguards and import/export controls, highlights the importance of clarifying the policy, mandate, legal, ownership, governance, regulatory, structural, institutional and operational framework for the AEC. Previous questions about the AEC’s role in the development of nuclear and non-nuclear technology and its commercialisation activities, further highlight the need to clarify these issues.

1. AEC Mandate

The present mandate of the AEC is defined by the Nuclear Energy Act (No. 131 of 1993), section 5:

"The objects of the AEC are to -

1. develop technology and expertise in the field of nuclear energy, and to undertake the production of nuclear energy for peaceful purposes;
2. develop, and promote the development of, nuclear related technology and related expertise, and to make these generally available;
3. process source material, special nuclear material and restricted material and to reprocess and enrich source material and special nuclear material;
4. commercially utilise the technological expertise in its possession;
5. exercise control over the discarding of radioactive waste and storing of irradiated nuclear fuel;
6. undertake and promote research in the field of nuclear energy and nuclear related technology;
7. act as national authority for the implementation of the Safeguards Agreement and other similar agreements with other institutions and governments; and
8. co-operate with any person, institution, government or administration in matters falling within the said objectives, and promote co-operation between the republic and other countries."

Many of the above statutory objectives now no longer seem appropriate. For example, Eskom is responsible for the production of nuclear energy.

Not well defined is the term "nuclear-related technology" and it is a moot point whether the "technical expertise in its possession", which the AEC aims to commercialise, is indeed all nuclear-related. Clearly, this term can be interpreted in a broad or in a narrow sense. The AEC estimates that 90% of its technological development activities and its commercially directed project portfolio fall into the "nuclear" mandate. Within this definition, they include all the work undertaken in the core competency areas of radiation, fluorination of surfaces and chemicals and laser isotope separation. They consider the remaining 10% of their activities, i.e. their key capability of "mechanical and systems" work, "nuclear-related".

The Review Team cannot agree with this broadly defined existing mandate for the future and believes that the foregoing analysis raises fundamental questions about the AEC’s future national role.

Firstly, we believe that there should be a clearer divide between nuclear and non-nuclear activities. The first set of activities comprise nuclear waste management, Safeguards and IAEA relations, and perhaps the Safari operation. The technology development and commercialisation activities in the fluorine chemicals and mechanical systems areas are essentially different in nature and require different skills – in particular, they require the discipline of the market as a test for viability and competitiveness.

With regard to the nuclear area, the AEC no longer has a role in nuclear fuel production, except in the production of fuel for the Safari research reactor. The safeguard functions could be transferred to the CNS and NPT. However, the existence of long-life radio-active material requires long-term management, and the AEC, on behalf of the state, will have to retain responsibility for its safe disposal. There are also long-term obligations in terms of decommissioning and decontamination. The continued operation of Safari is dependent on the State’s willingness to subsidise what is essentially a loss-making commercial enterprise with limited national scientific spin-offs. It is therefore possible that the AEC’s nuclear activities could be reduced to radioactive waste management and D&D.

With regard to the technology development activities of the AEC, the state has to decide whether it wants, or can afford, another CSIR – and, if not, whether this aspect of the AEC should not be commercialised, and in due course, privatised - perhaps under the direction of the Industrial Development Corporation. The technology of the AEC does not have any special or strategic status and thus any requests for state support should compete on an equal basis with other funds for innovation, technology development and industrialisation. The Review Team is not fully convinced that the AEC has sufficient management skills and experience to successfully commercialise and industrialise AEC technology.

The Review Team recommends that the future mandate of the AEC be clarified – and that core AEC functions be focused more narrowly on nuclear activities such as radioactive waste management and D&D. Industrialisation activities need to be grouped into a different entity.

2. The Corporate Board

In terms of section 8(1) of the Nuclear Energy Act, 1993, the affairs of the AEC must be managed by a Board of Directors, appointed by the Minister of Minerals and Energy, which, subject to the provisions of the Act, must determine the policy and goals of the AEC and generally exercise control over the performance of its functions and the exercise of its powers. The Act also stipulates the composition of the Board.

The Board of Directors, with the concurrence of the Minister of Minerals and Energy, appoints the Chief Executive Officer, and also establishes the management board.

In terms of section 11(2), the AEC's Chief Executive Officer is, subject to section 6(3), responsible, in co-operation with the management board, for the management and for the performance of the functions of the AEC by virtue of the Act and such functions as may be assigned to him by the Minister of Minerals and Energy or the Board of Directors.

Section 12 provides for the establishment (by the Board of Directors) of a Management Board to assist the Chief Executive Officer in the execution of his managerial functions, subject to the directives and control of the Board of Directors. The Chief Executive Officer of the AEC is the only Executive Director on the Board of Directors.

The Review Team is much concerned about the inadequate communication between Government and the Board of the AEC, where the Board (in the words of its Chairman) has received little guidance on its vision or policy or a renewed mandate for the organisation.

DME have not yet published their draft Energy Policy White Paper which maps out its broad policy for the nuclear sector. And in the meantime the AEC is being subjected to a number of apparently uncoordinated reviews – including the DACST review, the NFA process and, indeed, a new review initiated by the AEC Board.

3. Reporting to government

The AEC management reports directly to the Board of Directors, who in turn report to the AEC's governing line Minister (Minerals and Energy). The AEC’s government funds come through the Department of Minerals and Energy’s parliamentary vote. The AEC is also obliged to report to the following bodies:

• The Council on Nuclear Safety (CNS) is empowered by the Nuclear Energy Act of 1993 and the Nuclear Safety Act as to matters of safety and radioactive waste matters affecting the AEC.
• Various other government departments (including the Departments of Environmental Affairs, Water Affairs, Health, etc), through the issuing of permits, policies, standards and guidelines which govern specific areas pertaining to the commercial exploitation of the AEC's core competence clusters.
• The Auditor-General
• The external auditors (Coopers and Lybrand)
• The IAEA, regarding safeguard management.

Although the AEC is heavily engaged in technology development, it has no budget linkages or reporting responsibilities to DACST.

The previous analysis has demonstrated that there is an urgent need not only to clarify the mandate of the AEC, but also to separate budget and reporting lines to appropriate government departments. Clarification of its mandate might logically imply an unbundling of its activities into separate organisations. It is clearly illogical (and probably unsustainable) for the full government budget for the AEC to come from DME when its net contribution to South Africa’s energy sector is practically zero. Government should spell out what it expects from the AEC, decide which activities potentially warrant funding, and then source these funds competitively from appropriate departments.

4. Governance systems at the core competence cluster level

Strategic governance of the clusters of core competencies of the AEC is carried out by the Board of Directors. Internally to the AEC, core competence clusters are collectively managed by an AEC Management Board, chaired by the CEO. At the micro-level, each core competence cluster is managed by a multidisciplinary steering committee which comprises functional expertise on technology development, industrialisation, marketing and routine production. These Steering Committees report to the AEC Management Board according to defined terms of reference. At this level governance is further supported by planning and control systems which periodically assess the technology, market and financial risks of a portfolio of core competency-based projects. The forming of joint venture partners at the level of competency-based projects also serves as a benchmark which governs the competitive status and level of technologies deployed within the clusters of core competencies.

Evaluative comments have already been made in previous sections on the competitiveness of claimed core competencies and, by implication, the quality of governance and management of these operations.

5. Ownership of Assets

The urgency and effectiveness of the AEC commercialisation and diversification drive makes it imperative that external partners be brought on board wherever this could benefit either the technology or the marketing of products or where the partner makes a financial contribution to the establishment of production facilities. Several agreements of this nature are already in place, including equity participation, and many more will be considered in the future with regard to production for commercial exploitation.

A register of fixed assets is held at the AEC. Formal inventory control of current assets is performed by the AEC's external auditors. In the case of joint ventures, this control is performed by the external auditors of either the AEC or the other party, depending on the contractual agreement.

Formal audits of the fixed asset register of the AEC are performed annually at year-end by the internal as well as external auditors. Current assets are audited twice a year according to a schedule by internal as well as external auditors. The external auditors are usually responsible for ownership and value auditing, while the Internal auditors are responsible to verify the existence of the assets.

6. Legislation on subsidiaries and operations beyond the borders of SA

Section 6(1) of the Nuclear Energy Act, 1993, permits the AEC to create subsidiaries for the purpose of developing or exploiting in any manner any invention or technological expertise, subject to the approval of the Minister of Minerals and Energy, granted with the concurrence of the Minister of State Expenditure.

AEC subsidiaries enjoy the normal legal status afforded to companies by the Companies Act, 1973 and are, therefore, taxable.

AEC subsidiaries may only be created for the purpose of commercially developing or exploiting in any manner any invention or technological expertise [section 6(1)(a)(i) of the Nuclear Energy Act, 1993].

The AEC may at the request of or with the prior approval of the Minister of Minerals and Energy, undertake the development, transfer or exploitation of nuclear or nuclear-related technology on behalf of or in collaboration with any person, institution, government or administration, in any country or territory outside the Republic [section 7(1)].

Legislative barriers which hinder or prevent the AEC from entering into alliances are to be found essentially in the fact that approval authority vests at a higher level than the AEC's Board of Directors (viz. in the Minister of Minerals and Energy and the Minister of State Expenditure). In practice, this brings about unnecessary hold-ups which in turn sometimes result in the AEC missing out on promising opportunities. Appropriate delegation by the Minister (with the concurrence of the Minister of State Expenditure) to the Board is, however, possible even under the current Nuclear Energy Act [section 14]. However, if technology development and commercialisation activities were to be removed from the AEC, then these powers would need to be reviewed.

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