Minister on Department of Public Works Qualified Audit Report for 2008/09

Public Works and Infrastructure

12 October 2009
Chairperson: Mr G Oliphant (ANC)
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Meeting Summary

The Minister of Public Works introduced the briefing by admitting that the Auditor-General’s 2008/09 audit report received by the Department had been “a damning one” and acknowledged that there were many problems it faced. He said the Department had already put interventions in place to address these issues and overcome problems. The Acting Director-General discussed the key findings of the qualified audit report:
▪ A lack of complete and accurate asset registers and the consequent inability by the Auditor-General to account for almost R249 million in both movable tangible capital and minor assets;
▪ The lack of or poor verification and valuation of certain immovable assets worth R5.3 billion;
▪ The purchase of and subsequent failure to use a software system to the value of R40.3 million.
The Department had since made significant progress in correcting the situation by, among other things, conducting an asset count, updating the asset register, creating a new structure of an asset management unit and appointing a service provider to assist with comprehensive asset verification within the department.
The DPW’s newly created 2007 entity, the Property Management Trading Entity (PMTE), also received an adverse audit opinion. The interventions taking place to rectify the problems were explained. It was put on record that Department of Public Works senior managers were not going to be awarded bonuses this year.

The Committee were tough in their questioning of the Department and Minister. The lack of timely payment to SMME contractors within thirty days was repeatedly raised. Other questions included overspending on compensation, vacancies, the over-abundance of acting positions, the ironic non-compliance by the Department with GIAMA (the Government-wide Immovable Asset Management Act) and the poor response to the amnesty call for missing government properties.

Meeting report

The Minister of Public Works, Geoff Doidge, began by saying that the previous year’s audit report had been much more favourable because of the exemptions created by the Auditor-General and the Accountant-General. The DPW had been interacting with both of these since December 2008. The Department had anticipated that the present audit report would be less favourable. The challenges in receiving a clean audit were immense. The audit process “was never a happy one” and there were always areas that needed improvement. He conceded that the Auditor-General’s report was “damning” and the current situation “was not a happy one but could not be wished away”. He said he had “made 100% sure that I am familiar with the challenges of the department”. The DPW had to respect the Auditor-General’s report and act on its findings. What was important was to “embrace the findings and clean up (the department’s) act.” In its interactions with the Auditor-General, the Department had made it clear that it was crucial that they get such reports so as to know how to move forward. The Department was “mapping trends” so as to see where it could make interventions to address problem areas.

Acting Director-General presentation on Auditor-General’s Report
Mr Solly Malebye said that prior to the current report, the DPW had enjoyed unqualified audit reports since 2005/06. The following three key findings became the basis for the qualified report:
▪ A lack of complete and accurate asset registers and the consequent inability by the Auditor-General to account for almost R249 million in both movable tangible capital and minor assets;
▪ The lack of or poor verification and valuation of certain immovable assets worth R5.3 billion;
▪ The purchase of and subsequent failure to use a software system to the value of R40.3 million.

Mr Malebye explained what steps had been taken to remedy each of the problems. The discrepancies in the department’s movable asset register were compounded by the flooding of its offices in the Isivuno House building, which forced the Department to seek temporary accommodation. Unfortunately the move to a new building took place while the audit was in progress and the asset register could only be updated after the audit was completed. The Department had since made significant progress in correcting the situation by doing the following:
▪ An asset count had been conducted;
▪ The register had been updated with new locations;
▪ A new structure of an asset management unit had been created;
▪ A service provider had been appointed to assist with a comprehensive asset verification.

Mr Malebye also referred to DPW’s newly created 2007 entity, the Property Management Trading Entity (PMTE), which had received an adverse audit opinion. He explained the basis of the adverse opinion. He outlined the interventions that were taking place to rectify the problems. In conclusion, he reported commitment at all levels to the success of their turnaround strategies.

Discussion
The Chairperson began by saying that the Committee was trying to assist the Department in complying with the law. It was not just a case of “tinkering to appease” the Auditor-General to get a clean audit report. The Committee had a broader mandate because after all, a clean audit report was mandatory. He told the Department that “balancing your books should be a daily matter and reconciling your books must happen every month, so that you don’t come two years later and say that you could not collect rands…”. The Department was “doing well but still had a long way to go”. He said the Department had to assure the Committee that it had systems in place as well as the capacity to deal with the problems. Referring to vacancies, he said it did not know whether this was because Government was trying to save money or because the Department could not find staff. They were almost six months into the new financial year and in the next few weeks the Committee would have to deal with the Annual Report in its detail. The Committee needed to have certainty that the Department was “moving in the direction of a winning situation”. The Chairperson noticed that the Department had also rolled over funds – something that must not be repeated in future because it had to ensure that it used funds in a very prudent manner.

Mr S Masango (DA) thanked the Department for its commitment. But he asked why the DPW always pointed a finger at the Auditor-General when all it had to do was to comply with GIAMA (the Government-wide Immovable Asset Management Act). GIAMA had after all been initiated by the Department itself and yet it was unable to comply with it.

Mr Malebye replied that it was incorrect to say that the Department was not complying with GIAMA. It was being complied with and the Department had systems in place to ensure this.

Mr Masango asked why the Department was always complaining about capacity constraints. Was this because skilled people were resigning from the Department and those that replaced them lacked the requisite skills?

Mr Malebye replied that capacity challenges arose every time a new system was put in place. This placed current staff under strain, while others resigned or left for greener pastures.

Mr Masango asked about the adjustment to the balance of intangible assets because of the purchase of software to the value of R40.3 million (paid for in advance during the 2005/06 financial year). Up to the completion of this audit report, the software had still not been utilised. How did the Acting DG intend to address this and implement it?

Mr Malebye replied that with regard to intangible assets, he could confirm that the software was in the possession of the DPW. There was a business plan as well as an implementation charter to ensure that what it told the Committee was a true reflection of the situation.

Mr Masango noted that the Minister had said that he started working in the Department about this time last year and the Acting DG also often referred to the previous administration. He pointed out that in the soccer world, if a new coach did not perform in his first month, he would be fired. Anyway the Acting DG had himself been in the previous administration, he pointed out. Yet the DPW always seemed to point fingers at and blame previous administrations for its woes.

Mr Malebye replied that he and his management staff were not shifting blame but were merely highlighting the fact that they had accepted and took responsibility voetstoots.

Mr Masango asked why the Department waited for a year to reconcile its books, when it should have been issuing invoices monthly.

Mr Malebye admitted that in an ideal situation, reconciling books would be done every week, but that was a goal towards which the Department was moving and it was presently reconciling them monthly.

With regard to leased property, Mr Masango said that surely this was leased as a whole. Why then did the Department lease a property and then come and tell the Committee that certain areas were not occupied?

Mr Malebye replied that in the course of normal business one could lease partially of wholly. The Department could rent a property and subsequently find they needed less or more space, as the case might be.

Finally in response to Mr Masango asking if the Isivuno building belonged to the DPW or not, Mr Malebye said that the building was privately owned.

Minister Doidge repeated that his Department had embraced the findings of the Auditor-General, whether they liked them or not. When one became a minister, there was a quip about “a dead man’s shoes”. This meant that a new minister had to “step into the shoes (of his predecessors) and walk” and he was doing just that. The Auditor-General’s findings did not come as a surprise because the Department had been making themselves aware of the possible challenges throughout the year.

The Chairperson said the Committee would have to return to the matter of the implementation of GIAMA. Turning to the issue of intangible assets and the purchase of the software, he noted that a lot of money in terms of assets seemed to be lying around and remained unaccounted for. He did not want the Department to “leave today with the impression that the matter has been settled.” They were merely highlighting these issues today and would deal with them exhaustively at a later stage.

Mr Masango asked about the reference in the report to the department’s breaches of contract. Why did they not honour their contracts? He also asked why many staff members had failed to disclose their interests.

The Chairperson said the Committee did not want to deal with the annual report piecemeal but at one time and comprehensively. Today’s objective was to deal only with the Auditor-General’s report.

Mr C Kekana (ANC) said he was aware that owing to discrepancies and anomalies inherited from the apartheid government, there was often confusion about the ownership of land. He asked whether there was a system in place whereby the Department could recover property which belonged to Government.

Mr Malebye replied that there was indeed an amnesty call to recover properties. The Department accepted that the response to the amnesty call had not given adequate results in recovering government assets that were missing. It would put in place an amnesty toll-free line to facilitate reporting on these assets. In collaboration with the Departments of Rural Development and Land Reform, it was conducting a process to identify land and property both nationally and in provinces so that they could have a perspective on immovable assets.

Ms N Ngcengwane (ANC) said it was unfortunate that when the GIAMA Bill had been passed, it was not implemented at local level. The communities knew about these assets and she suggested that there be an amnesty toll-free line to enable anyone who knew about premises being occupied to report the matter. Such occupiers would then enjoy an amnesty. She asked if there was an asset register for properties outside South Africa.

Mr Malebye replied that there was an asset register of properties outside the country and the Department of International Relations and Co-operation occupied the majority of these properties in the form of embassies.

Ms Ngcengwane also asked whether there were internal controls or a risk management team for dealing with fraudulent activities within the department, because “everyone knows that the Department has been very unpopular”. She asked about the overspending of R8.8 million and the wasteful expenditure of R30.7 million.

Mr Malebye replied that there was a risk management strategy and plan in terms of the Risk Management Charter and this was being implemented. He would ask the CFO to address the matter of fruitless expenditure.

Mr M Manana (ANC) said the Committee welcomed the department’s interventions but said that when the Acting DG mentioned non-compliance with the Public Finance Management Act (PFMA) it should “desist from making excuses”. The Department was under an obligation to comply and to pay contractors within thirty days, that was a mandatory requirement. He said he was very passionate about this matter of late payment because it was killing Small, Medium and Micro Enterprises (SMMEs). If it was a case of lack of capacity, then the supply chain process had to be given capacity.

Mr Malebye replied that the Department would ensure that it complied with the PFMA and pay service providers in time.

The Department’s CFO, Ms Cathy Motsisi, said that the R48 million overspending under Compensation was attributable to salary adjustments in September and the bringing on board of Cubans so as to improve capacity as well as the addition of interns and learnerships. All of this led to overspending on compensation.
She hastened to say that over the years the Compensation line item in the Department had “never been congruent with” capital expenditure. It had been decreasing over the years and the funding from these vacancies had been used for initiatives to improve skills and capacity. When it came to filling these positions, it soon became clear that the budget was overstretched. The fruitless expenditure of R30 million related to the leasing issues alluded to by the Acting DG. There was a case in Mmabatho where one of the departments had vacated the property without informing the Department on time. The Department had engaged the Auditor-General on this matter, and he had agreed that whenever such problems arose, the Department needed to revert to the Department concerned so that steps could be taken.

The Chairperson said that the feedback was useful but that at the next engagement, the Committee might require more details about the payment of service providers. The Committee could not allow the situation where government was “undermining” SMMEs. The Department had still not satisfied the Committee on the matter of amnesties. He pointed out that the Department had a very good external team in the form of the Office of the Auditor-General but the Committee wanted to ensure that the Department had the internal capacity and an internal audit Committee that was strong and operational. He wanted the assurance that the Department was moving in that direction. With regard to properties outside the country he asked if there were any difficulties the Committee ought to look into, so as to have certainty on the matter.

Mr Kekana said he felt that he needed to repeat that contractors working for the Department depended on getting paid. If the Department failed to pay, contractors would have to lay off staff and the Department was failing not only the SMMEs but the whole community. It was destabilising the whole community and the gravity of the situation was such that the Committee intended to monitor it very carefully in future.

Ms N November (ANC) also asked about the late payments. Was national government able to monitor the provinces to ensure that they paid timeously?

Mr P Nguni (COPE) said the explanations given by the Department seemed to try to justify its ineptitude and asked why these matters had not been resolved between the Auditor-General and the Department before they were brought to Parliament.

The Chairperson said that the Acting DG should be frank with the Committee about the difficulties the Department faced in meeting its responsibilities in terms of the law so the Committee could assist it.
Otherwise it would return to Parliament a year later with none of these issues resolved. He noted that the Committee was recording everything said today. Parliament found it strange that each year it engaged with the annual reports and found that there had been negligence on the part of department officials and yet the minister “kisses and hugs” those same people.

Mr Malebye said that the Department did accept the Auditor-General’s findings and acknowledged the need to work more efficiently to address the concerns. He added that what the Department was doing was indeed “correct” yet might not be considered adequate by the Auditor-General.

The Minister repeated that audit reports were “never happy situations” but that the Department had to own and engage with it because they respected the findings of the Auditor-General. He wanted to give the Committee the assurance that what was in the report would be acted on. With regard to payment to contractors within 30 days, the Ministry was concerned about what the public understood in terms of Public Works not paying them”. They had therefore engaged with a professional council called Master Builders. They had told them that because it had a large membership of builders: small, big and emerging contactors, it and the CIDB should look at the issue of payment and tell the Department what its members “were finding”. Master Builders had done the survey and the Department would furnish the Committee with a copy. What the survey made evident was that there was a misunderstanding of the mandate of Public Works. It was different to other concurrent departments like Housing and Education, where the Director General received money from Treasury, which money was disbursed to the nine provinces. That was not the case in Public Works. The provinces were stand-alone entities. The Department provided them with the framework in terms of legislation, but they reported to their own treasuries and ministers of finance in their legislatures. If contractors for building a school were not paid, it was “most likely not going to be” the national Department of Public Works but the provincial department. The Department had invited Master Builders to present their findings at MINMEC and this had highlighted where the problems lay and also which provinces had retrogressed.

The Minister said that the Department fully supported the “Operation Re Ya Patala” (We Pay), established by the CFO and which was aimed to see service providers paid within 30 days and to clear the backlog. It would assist if Members of Parliament could report issues of concern like this to the Minister so that the Department could investigate the cause of the problem. The Department would talk to the relevant entities because its ultimate concern was the contractor and it did not want to see people, especially previously disadvantaged people being disadvantaged and having to close shop because of non-payment.

On the way forward, Minister Doidge said that the previous week the Department had had a presentation by SIMECA (sp?), a wholly-owned BEE company, which had done work for various departments in Government. The Department had asked them to present a plan of support to its finance branch. SIMECA intended to second senior staff to head office and to regions to assist with financial, training of existing staff in ensuring skills transfer, clearing auditor-general queries and ensuring that the Department was no longer given a qualified audit, designing new policies, procedures and controls for the department, specifically in relation to its trading account – PMTE, clearing of the suspense account, updating the fixed asset register, looking at fruitless and wasteful expenses and performing reconciliation. It would assist with revenue collection, creditors’ reconciliation, assisting with the implementation of financial policies, the department’s compliance with the PFMA and other budgeting issues. The Department had decided to appoint SIMECA as of 15 October and had given it a deadline of 31 March 2010. It was doing this because it did not have time to waste and did not want to live under a cloud for the next five years. SIMECA had asked for a five-year contract but the Minister had made it clear that the deadline had to be 31 March 2010.

A forensic investigation would concentrate on building and construction costs, the procurements of goods and services, lease and rental agreements, prestige portfolio procurement processes and proper governance processes. They took this very seriously as there was reason to believe that some of their procurement policies had not been followed and the Department wanted to “clean up the process”. There would be due diligence checks done throughout the supply chain management ensuring compliance and both these teams would give advice, especially on skills and capacity transfer.

On the matter of the Property Management Trading Entity (PMTE), the Minister said that this had come under serious audit attention. When the treasury decision was taken in 2006, certain things ought to have been decided on, which did not happen. They were now faced with a situation two years down the line where they had to deal with a negative audit. The Department had decided to structure the PMTE according to treasury guidelines and expectations and as a separate, autonomous entity within the department. It would have its own leadership and capacity and would produce its own financial statements and accounting policies and like any other entity, it would be accountable to the Portfolio Committee and to the Minister. It would be set up with immediate effect and the Department would tap into the expertise and experience of the two professional consultant companies. The Department hoped to be able to make some announcements about the structure of the PMTE within the next two weeks. He said that the Department wanted to make issues such as R419 million rand (owed by national departments) and asset registers of R3.5 million history and was determined to do so.

The Minister said that they had set very short time frames to show that they meant business and to get a clean audit report. He wanted to assure members that he had met with all senior management and there was a total commitment and buy-in to the process and to the interventions. The Department had clarified exactly what was expected and time frames and management would have to work overtime, to provide information and to report back. Also the two companies appointed as consultants would also report to the Minister weekly. The Minister thanked the Committee for its feedback and said that the Department did “not misinterpret the friendliness of the Committee to mean that all was well”. Both the Department and he did not want to have to return next year and make excuses for the fact that things had not happened.

Mr M Rabotapi (DA) said that the Department had far too many acting positions and asked when it would correct this and make full-time appointments.

The Minister replied that they were already in the process of doing so and had already appointed two Deputy DGs. When the Department did not have a DG, it had decided it was better to have an Acting DG rather than none at all. When it appointed a DG, this would eliminate the other acting positions.

Mr Kekana said that he had to do a lot of traveling and the state of the country’s roads was very poor. Payment of contracts also affected timeous delivery of contracts such as those for road building services. Late payment had a huge impact.

Mr Malebye pointed out that for the record, the Executive Committee of the Department of Public Works had taken a decision that they were not going to award bonuses for senior managers this year.

The Minister said that it was necessary to understand what the department’s mandate was. But he would convey the concern about the state of roads to the Minister of Transport.

The Chairperson congratulated the Department on SIMECA but reminded them about the pitfalls of other departments who had used consultants to perform the duties of staff members. When the former had left, they had gone back to square one. When they next engaged the department, the Committee would want the Department to show it how well it had performed for the last six months.

He asked to have the Master Builders report before the next meeting. The Committee had not canvassed the issue of the creation of half a million jobs but would ask the Department for a progress report and details of where and how those jobs had been created. The Committee were aware of how pervasive unemployment was in their own communities and wanted to have some understanding of where the bottlenecks were in local government.

The Committee would want clarity on all the issues raised today – GIAMA, the software, the register of assets and the breaches of contract. Another important matter was that of the disclosure of interests because such matters lent themselves to fraudulent activities and corruption. The Committee would return to the issues of 30-day payment, properties outside the country and amnesty. Finally it would want to engage the Department on the PMTE. He said the Committee insisted that outstanding queries about difficulties faced in meeting objectives and the filling of vacancies be answered at the following meeting. He thanked the Department “for the frank manner in which they had addressed the issues. The Committee wanted the country’s Public Service to be fully staffed and working properly in the next few years.

The Chairperson then closed the meeting.

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