SALGA: Interrogation of Financial Statements 2008/09 with Deputy Minister

Public Accounts (SCOPA)

12 April 2010
Chairperson: Mr T Godi (APC)
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Meeting Summary

The Deputy Minister of Cooperative Governance and Traditional Affairs, as well as representatives from South African Local Government Association (SALGA) and the Kwanaloga Local Government were present at the meeting.

The Committee firstly asked questions of SALGA arising from the Annual Report of 2008/09. The Auditor-General had given a disclaimer in respect of this financial year. Committee Members questioned the
irregular, fruitless and wasteful expenditure within SALGA. Incidents of fraud, corruption and maladministration were identified as one of the reasons which led to the disclaimers. Members were severely critical of the fact that action was not taken against those individuals identified as responsible, because they had resigned and SALGA felt that there was no point in pursuing the actions. The Chairperson commented that this was not the first occasion on which this had happened, and Members suggested that some process should be put in place to blacklist such officials from ever again being employed in the public service. SALGA was taken to task by the Committee for not abiding by the National Treasury regulations and the Public Finance Management Act (PFMA) requirements. Officials from SALGA told the Committee that some of the decisions which had been done in violation of certain procedures and protocols, such decisions were later ratified by authorities concerned. Once again, Members were critical that decisions to go ahead with certain actions were taken in the first place.

The issue of KwaZulu Natal – Kwanaloga local government decision to break-away from the formal SALGA unitary structure was harshly criticised by the Committee as that decision caused it to fail to account for public money. The Auditor-General was also denied access to the books of account. Members asked both SALGA and the Kwanaloga representative to describe the sequence of events that led to the withdrawal, and pointed out that the Auditor-General had effectively been denied access to the books of account. The decision of Kwanaloga to withdraw from SALGA was also identified as the major reason for the AG’s finding of SALGA’s net loss of R8.4 million and liabilities of R10.4 million. It was suggested to Kwanaloga that its decision to withdraw from SALGA despite not having enough capacity to manage its finances and account for public money was illegal, and that SALGA had erred by not taking Kwanaloga to court. After discussion, the representatives of both institutions undertook to try to resolve the issues, and the Deputy Minister suggested that the parties be asked to report back on progress within a certain time.

Meeting report

South African Local Government Association (SALGA) Financial Statements 2008/09
Mr Yunus Carrim, Deputy Minister of Co-operative Governance and Traditional Affairs, welcomed the invitation and told the Committee that he was present to monitor the interaction between SALGA and the Committee. He reminded the Committee that SALGA had a pivotal role to play in assisting municipalities to deliver better services for the people of South Africa. SALGA, as an autonomous body belonging to a different sphere of government, remained a key partner of the Ministry which needed to be engaged without compromising its autonomy as a separate entity.

The Chairperson of the Committee agreed with the Minister and went on to say that the Committee felt agitated by the report of the Auditor General, which suggested that SALGA was struggling to execute its mandate.

Mr M Mbili (ANC) asked what actions had been taken against certain individuals who were charged with corruption, which subsequently led to irregular, fruitless and wasteful expenditure. He also wanted to know why certain spending was done without the necessary consent of the National Treasury (NT). He pointed out that although condonation from the Treasury was later obtained, it was quite another issue to take a bold decision to flout the regulations that made it plain that consent had to be obtained before any spending was done.

Mr Xolile George, Chief Executive Officer, SALGA, said that once irregularities had been detected, an investigation took place and certain individuals were charged and disciplinary proceedings were set in motion. However, one employee resigned immediately after being charged, before the process unfolded and the other resigned on the eve of the verdict. Since both of those individuals were no longer employees of SALGA, the matter was laid to rest.

The Chairperson of the Committee took issue with the response that after the resignations of both employees, SALGA simply decided not to pursue the matter any further.

Mr George answered that indeed the cases against the individuals charged were abandoned because SALGA no longer had any jurisdiction over them. The matter could have been pursued further by laying criminal charges against them, but SALGA felt it did not have a prima facie case against them that would secure a conviction in court as opposed to a disciplinary conviction.

Mr Mbili asked whether there were any payments or benefits afforded to those two former employees after they had resigned, in a deliberate attempt to circumvent the process.

Mr George replied that nothing was paid to the individuals concerned as they were not owed anything by the time their resignations came through.

The Chairperson asked under what circumstances were the resignations accepted, considering that both seemed to have been short notice resignations which may not have been in line with the 30 days notice provided for in the protocols and regulations. He questioned why SALGA did not refuse to accept those resignations, especially the one which was filled on the eve of the verdict.

Deputy Minister Carrim said it was distressing to hear that people resigned, in order to deliberately stifle due process against them for gross irregularities, and SALGA simply accepted that n without pursuing them through all possible avenues. What was even more worrying was that individuals such as these often would find other jobs back in the public service, working for another department. There should be some mechanism for blacklisting such officials so that they never set foot in the public sector or even in the private sector employment.

Mr Mbili asked the Committee to refuse to accept the explanation given for SALGA’s failure to pursue the matter further after the resignations. He suggested that the CEO of SALGA needed to be made aware in no uncertain terms that his failure to pursue the matter further amounted to failure to do his job properly.

The Chairperson said it was not the first time the Committee had learned that people misbehaved in the public sector and chose to resign in order to avoid the consequences of their actions. 

Ms Zoleka Capa, Executive Mayor of OR Tambo District, said there were no provisions in the regulations on how to deal with matters where a person was charged and had decided to resign before disciplinary proceedings were concluded. One other possible course which could be pursued would be to institute criminal charges in court, but that needed a prima facie (winnable) case to be established before any court could entertain such a matter.

Mr Mbili said the issue of violation of Treasury regulations was tantamount to breaking the law, and as such should have been enough to give rise to a prima facie case to be tried in Court. It was inconceivable that someone could break the law with impunity. The response as to why the matter was not pursued further was “unfortunate”.

Mr M Steele (DA) agreed with Mr Mbili that someone from SALGA had to take responsibility for not pursuing the matter further to bring to justice the individuals who resigned.

Mr George said the Committee needed to bear in mind that certain transactions which were deemed irregular, including those involving the leasing of property, were contracts concluded before the Treasury regulations had been formulated.

Mr N Singh (IFP) said if his understanding was correct, there were two forms of resignation that could be used: the standard 30 day notice and or the 24 hours notice, which could only be effective if agreed upon by the other party. His question therefore was who from SALGA consented to the 24 hour resignation notice given by the individual who resigned on the eve of the verdict. That person should not have accepted the resignation.

Ms A Muthambi (ANC) concurred with Mr Singh, asking by whom and why were the resignations accepted before disciplinary proceedings had been concluded.

Mr George replied that SALGA took legal advice and the opinion was that it would be best to accept the resignations.

Mr R Ainslie (ANC) asked someone to explain to him how breaching National Treasury regulations and the Public Finance Management Act (PFMA) could not be a serious violation of the law, which was actionable in a court of law. The Auditor-General’s (AG’s) report further pointed to poor and unreliable financial reporting. He asked what could be the reason for that and what effect that could have on the work of the organisation as a whole.

The Chief Financial Officer of SALGA responded that proper financial reporting policies and guidelines had been put in place as of December 2009. Prior to that there was no policy and that may have been the cause. Moving forward, SALGA would now do its reporting promptly and adequately.

Mr Ainslie then questioned the accuracy of information contained in the Annual Report, saying it was bound to be misleading considering that the report incorporated 2008 information, when there was no policy on reporting in place.

Mr Steele pointed out that the set performance targets measured against actual achievements reflected a 70% failure rate to achieve the targets set. He asked what was the point of SALGA setting unachievable targets if it knew that it did not have the capacity to meet them.

Mr Ainslie went on to suggest that the dismal failure to achieve targets may be directly or indirectly linked to service delivery protests that had characterised municipalities recently.

Mr Amos Masondo, Chairperson of SALGA, said the suggestion that the failures of SALGA may have led to service delivery protests was entirely not true, but he would want to have that debate on another day if the Committee wanted to entertain that debate. He asked the Committee to bear in mind that SALGA was not a municipality and therefore could not be linked to service delivery protests.

Mr Ainslie reiterated that his diagnosis still stood that even if not directly linked, SALGA failures were at the very least indirectly linked with the protests, because of the critical support which it was supposed to render to municipalities.

The Chairperson agreed with the statement made by Mr Ainslie, saying it could be argued that if SALGA had performed and met its targets, perhaps the service delivery protests could have been avoided. 

Mr Steele said he was worried whether SALGA understood what was expected of it in relation to compliance with PFMA and Treasury regulations. He pointed out that this organisation did not even comply with its own constitution, so it was not surprising that it would not comply with rules set by another separate body.

Mr P Pretorius (DA) remarked that SALGA was a Schedule 3 public entity, and in terms of the PFMA, it needed permission from the minister before issuing guarantees. He asked why that did not happen, and why no one was put to task for such failures.

Mr George said the decision to issue guarantees was later ratified by the Minister in 2008.

The Chairperson asked which individual processed the guarantee that was later ratified.

Mr George said it was his predecessor who processed the guarantees without prior permission from the Minister.

Mr Steele said Treasury regulations were plain, stating that credit card repayment needed to be done within 30 days after usage. He asked what the SALGA policies were with regard to credit card management and specifically why debts were not paid within 30 days. He asked what SALGA would implement in the future, to immediately address the situation, which he described as a “ticking bomb”.

The Chief Financial Officer said the credit card which had been referred to in the report was the credit card used for travelling and that was payable 30 days after the statement date. There were further cash flow problems within SALGA that made it impossible to comply with the 30-day deadline.

Mr George added that the SALGA funding arrangements needed to be improved as they rendered the institution vulnerable. 
Mr Steele went on to ask what SALGA was going to do to address the internal control and capacity constraints identified on page 129 of the report, which led to the completion of only six out of the thirteen focus areas that were identified and approved in the annual internal audit plan.

Mr Temba Zakuza, Chairperson of the Audit Committee, SALGA, said the issue which had been raised was an ongoing problem which had, on numerous occasions, also been raised with the top management structure of SALGA. It was also true that the problem was impeding on the effective service delivery mandate given to SALGA but nevertheless there had been some positive interventions which had seen the hiring of two additional internal auditors to increase capacity shortages. There were further plans in place to use the services of external auditors.

Ms T Chiloane (ANC) pointed out that the financial performance report indicated some grave concerns. It reflected a net loss of R8.4million in the year 2008/09, noted that current liabilities exceeded current assets by R10.4million and showed the apparent over-reliance on a single source of revenue by the institution. She asked what steps SALGA had taken to address those problems.

The Chairperson sought clarity from SALGA delegation on whether the R8.4 million net loss and the liabilities of R10.4 million had been as a result of KwaZulu Natal (KZN) challenges, which were yet to be discussed as the last item of the meeting agenda.

Mr George confirmed that they were linked. The withdrawal of KZN-Kwanaloga severely destabilised the balance sheets of SALGA, to the extent that the net losses recorded became inevitable.

Ms Chiloane noted that the impact of the KZN withdrawal would have had a huge destabilising effect, considering that it contributed approximately R19 million (17%) of the total revenue received. The question therefore would be whether the institution had considered tightening its belt or even embarking on other cost-cutting operations.

The Chairperson asked Mr Masondo to give a brief account of what led to KZN-Kwanaloga pulling out from SALGA.

KZN-Kwanaloga withdrawal report
The Chairperson of SALGA said that a national conference had taken a resolution to amalgamate SALGA into a unitary entity, and that was the root cause of the problem. Even though the KZN faction was not opposed to the decision to form a unitary entity, it felt that it needed more time to adapt to the new structure which had been formed. As time went by, tensions arose on matters, which were linked to the fear of loss of sovereignty by individual entities. There were also concerns that if the KZN matter was not addressed with much sensitivity, it was going to have a domino effect on some other provinces such as Free State. The tensions with KZN continued and this provincial faction began implementing contrary decisions, which were not in line with the national conference resolutions. Political intervention was sought to try and manage the situation with utmost sensitivity. The situation was now at a point where all parties had realised that mistakes were made and the situation could have been managed better.

KZN Kwanaloga’s version of events
Mr Patrick Khoza, Mayor of Sisonke District, representing Kwanaloga, said problems emerged when the KZN had asked for money to implement its training projects for capacity enhancements. The process of securing the funding from SALGA national office became a nightmare, even to the extent that this began to jeopardise the arrangements and plans that Kwanaloga had already committed itself to, even prior to the decision being made to form a unitary entity. It the end, Kwanaloga took a decision that perhaps it had been too quick to agree with the plan of centralisation. This was the reason why it resolved to ask for temporary exclusion from the newly formed unitary structure of SALGA, in order to implement its commitments. The decision was informed by the undertaking that Kwanaloga would re-join the entity in 2011.

Ms Chiloane asked whether or not Kwanaloga had obtained permission from the provincial Treasury to set up its own separate account. Further, she asked why Kwanaloga did not allow the Office of the Auditor-General (AG) to inspect its books.

Mr Sandile Cele, Chief Executive Officer, Kwanaloga, said Kwanaloga as an entity had been in existence even before the formation of SALGA, and had been recognised as a legitimate local government entity by the Provincial Treasury, so that the issue of permission never arose.

Ms Chiloane said the Committee had a keen interest in guarding public funds and wanted to know why the AG was not allowed to inspect the financial records of Kwanaloga.

Mr Kishore Harie, former Chief Executive Officer of Kwanaloga (prior to appointment of Mr Cele) responded that when the AG sought to inspect the records of Kwanaloga, the tensions between Kwanaloga and SALGA national office had been so high that Kwanaloga could not get cooperation from SALGA to get the information that was necessary for Kwanaloga to prepare its documents. As a result, there was not much that the AG could have examined, for the purposes of an audit.

Mr Mbili asked how then did Kwanaloga expected to account for public money if it had refused to allow the AG access to its books. It was clear that the decision to pull out from SALGA was taken despite clear indications that Kwanaloga did not have the capacity to handle its own finances.

Mr Khoza said it was not true that Kwanaloga did not have the capacity to handle its finances because it had been in existence for many years prior to this, and had been running its financial accounts properly. The problem was the information which was needed from SALGA, and which SALGA was not willing to give, due to standoffs.

Mr Steele said the information which was coming out was most disturbing to hear. He asked why SALGA had allowed the breakaway to happen, and why it had not contested this in court.

Mr Singh echoed Mr Steele’s question, saying the matter could have been quickly resolved by court and a qualification by the AG could have been avoided.

The Chairperson asked if Kwanaloga had the annual report in question ready for the AG to look at now.

Mr Khoza said the report was not ready yet as Kwanaloga was still waiting for information from SALGA, in order that it could be completed.

Mr Masondo said although the legal route could have been another option, a decision was made, rightly or wrongly, to pursue diplomatic avenues to resolve the tensions and only when all these avenues were exhausted would a legal route have been considered. The hope at the time was that following a legal route could be avoided.

Ms Muthambi said the explanation as to why the AG was not given access was not convincing at all.

Mr Mbili agreed with Ms Muthambi, saying the matter needed to be thoroughly investigated and that strong action needed to be taken to reprimand whoever responsible. He emphasised that the Standing Committee on Public Accounts (SCOPA) treated a disclaimer from the AG as an extremely serious matter. If this standoff was not resolved urgently, the Committee would even consider giving an instruction to the Minister to withhold the money that was due to be allocated to entities concerned.

The Chairperson said what needed to be understood very clearly, and in no uncertain terms, was that what Kwanaloga did in pulling out was illegal and should never be allowed to happen in the country. SALGA on the other hand did not do enough to take measures to address this, especially when it discarded the legal route.

Mr Masondo said that, in retrospect, SALGA accepted that perhaps it had acted incorrectly, by not taking Kwanaloga to court, but at the time when the decision was made, SALGA was convinced that the diplomatic option of resolving the tensions was the most viable option.

Ms Chiloane asked the Chief Financial Officer to explain what led to a R12 million increase on money paid to consultants. She also wanted to know why the salary of the Chief Executive Officer (CEO) had been increased from R1.1 million per annum to R2.0 million.

The Chairperson said, in relation to the salary increase for the CEO, he was surprised firstly that this was almost a 100% increase, and was even more surprising in light of the disclaimer from the AG.

The Chief Financial Officer said the consultant fees increases were necessitated by the restructuring and expansion programmes initiated by SALGA. In relation to the salary, he pointed out that the salary of the CEO of R1.1 million was in respect of a nine-month period only, whereas the larger salary reflected the full twelve months, so could not be compared.

Mr Masondo added that SALGA salaries were not a “runaway train” as SALGA was guided by what other similar entities paid their employees. The desire of SALGA to recruit and retain individuals with cutting edge expertise and skills was necessary for taking SALGA towards achieving its objectives, and necessitated highly competitive salary packages for its top management.

Mr Steele said he found it astounding that the CEO of the SALGA was paid more than the Director General of the Department. He added that why performance bonuses were paid to individuals who failed to discharge their duties was mind boggling to say the least!

Mr Masondo said the issues of performance and remuneration were highly divisive and needed to be managed very carefully. Perhaps there needed to be an independent entity that would recommend to SALGA National Executive Committee certain guidelines which would then be objectively assessed, to reach a fair decision.

The Chairperson said that there was little time remaining, and said that the critical question was where the Committee must go from here, and must know exactly what would be done, and by whom, to urgently address the challenges identified.  

Mr Masondo said that SALGA wanted to assure the Committee that it would continue to interact with Kwanaloga with the aim of finding a harmonious resolution, so that the two entities could abide by the resolution taken by the National Executive Council. After the interaction with the Committee there seemed to be no need to embark on the legal option and hard-line stance but this would be strongly considered if further standoffs continued. An undertaking was made to provide Kwanaloga with information it needed to prepare its 2008/09 financial report.

Mr Khoza said the message was loud and clear to his delegation that the matter needed to be quickly resolved and that errors were committed on their side. He promised to work closely with SALGA to diffuse the tensions that had emanated.

The Deputy Minister thanked the Committee for bringing the parties together and said he hoped that after the discussions, both parties had realised that the continued tensions were causing lack of effective service delivery to the South African public. He said that the Minister of Cooperative Governance and Traditional Affairs, Mr Sicelo Shiceka, was acutely aware of the situation and had been concerned about the slow progress to reach resolution. The Minister, the Deputy Minister, and the KZN Local Government MEC, Ms Nomusa Dube, had met several times to discuss the problems affecting KZN local government. The Committee was asked to write to the Minister and inform him what needed to be done at executive level and to set a specific timeframe where there should be accounting by the relevant people, perhaps all those present today, to come back and account for the progress made after this meeting.

The Chairperson gave the Deputy Minister an assurance that indeed the Committee would write to the Minister to inform him of the strategy that the Committee felt could be effective in avoiding a future disclaimer from the Auditor-General.

The meeting was adjourned.


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