The South African Diamond and Precious metals Regulator (SADPMR) briefed the Committee on its responses to the Auditor-General’s findings in the 2008/09 audit report. It noted that ten issues had been raised and attempted to state what had been done. However, the Chief Executive Officer noted that he had inherited these issues when he took office in February 2010. The Strategic Plan and Budget for 2010-2013, were then presented. It was noted that certain matters were not included in the initial Strategic Plan before it had been tabled, and were now included in the briefing document, including comments and figures in relation to industry transformation, sustainable development, numbers of licences issued, and mentoring. Compliance inspections were now stated in figures instead of percentages, in order to allow for better tracking of outcomes. There was a commitment within the SADPMR to minimise the adverse audit findings and qualifications. Members asked for clarity on some aspects of the comments on the Auditor-General’s findings, but also commented that in general they found the remarks imprecise and that they tended to reiterate remarks made when the findings were first published. The Committee had not approved this organisation’s Annual Report. Several errors were now pointed out, and the Committee commented that accuracy was of the utmost importance, especially since the entity was to appear before the Standing Committee on Public Accounts. The spending, not having been approved by National Treasury, was still regarded as irregular. Members questioned why the newly appointed Chief Executive Officer was burdened with answering all questions, since surely officials who were in office in 2008/09 could have answered. They asked that the Chief Financial Officer must also appear at the next meeting with the entity. Members asked for a final report explaining all actions in detail. They were concerned whether the SADPMR was properly running in terms of its mandate, and was properly capacitated, and highlighted the issues of beneficiation, asking whether SADPMR could host discussions with the industry. Members questioned what “fair market value” meant and how it was assessed. They asked for the percentage of black shareholders in the industry, how far the implementation of the Diamond Export and Exchange Centre (DEEC) was, and how the regulator could ensure its independence, especially in the light of the pressures on the industry due to the recession. Further questions were asked on the level of access to non South African entities and the number of licences issued. Members said that their further discussions on the Strategic Plan would be linked to the report back on the Annual Report.
The State Diamond Trader noted that its Strategic Plan was being redrawn, in the light of National Treasury’s refusal to grant more funding. This entity also presented comments on the Auditor-General’s findings on its 2008/09 audit. It detailed the steps that had been taken to address compliance with Generally Accepted Accounting Practices, approval of the new risk and fraud prevention policies, non payment of VAT, registration for income tax and quarterly reports on strategic objectives. It was noted that performance measures were now time-bound. Members were concerned about the SDT not being funded by Government, and asked how long the revolving credit facility could run, and what would be the ideal amount that would allow the entity to perform properly. Members, noting that staff were seconded from De Beers, also asked if this arrangement could be continued. Members realised that the recession had affected the performance of the SDT. Members enquired about the changes planned to the operational mandate, and asked that this be presented at the end of May, together with the new funding model and Strategic Plans.
Chairperson’s opening remarks
The Chairperson stated that the South African Diamond and Precious Metals Regulator (SADPMR or the Regulator) and the State Diamond Trader (SDT) had been asked to brief the Committee on the progress each had made in implementing interventions following the problems reported upon, for each entity, by the Auditor-General for the 2008/09 financial year.
South African Diamond and Precious Metals Regulator (SADPMR)
Mr Levy Rapoo, Chief Executive Officer, SADPMR, stated that as he had just started in his post in February 2010, he had inherited a number of outstanding issues from his predecessor and thus would focus on the ten issues raised.
He tabled the document on the findings of the Auditor General (see attached presentation). He noted that in regard to Finding 1, a letter requesting the ratification of irregular expenditure was sent to National Treasury on 29 April 2010. In regard to Findings 2 and 3, he noted that the SADPMR no longer received donations on behalf of the Department of Mineral Resources (DMR) and had therefore closed the account which it had been using to receive such funding. Whatever funds were still in that account had been paid in to the relevant revenue fund. He commented that the Audit Committee Charter was amended, and it was now ensured that all audit committee meetings held in subsequent financial years had met quorum requirements. Risk assessments had now been prepared and were provided to the Audit Committee. With effect from December 2009, a Procurement Officer was appointed, and supply chain processes were now followed in order to address the Auditor-General’s report on the lack of a supply chain function unit in the previous financial year. The Committee and Board members had now declared their interests for 2008/09 and would continue to do so in future years.
Mr Rapoo noted that the Strategic Plan and Budget for 2010-2013 were submitted on 30 September 2009 and were approved by the Minister of Mineral Resources on 6 April 2010.
Mr Rapoo then took Members through that Strategic Plan. He noted that before his appointment, in January 2010, he had been tasked with reviewing the document. Despite some points with which he had some difficulty, the document was talking to government objectives. He stated that he would focus on objective outcomes. As this Strategic Plan was approved before he came into office, areas of concern or those where greater detail was needed were added to the briefing document, as the actual Strategic Plan could not be changed after being approved.
Corporate governance was informed by the King process and was reviewed on a yearly basis. In terms of legal services and compliance, the SADMPR’s duty was to issue licenses in a way that contributed to government objectives. He noted that, with regard to Point 6.3 on the Strategic Plan, the items highlighted in red (see attached presentation) were additions to the outcomes, relating to industry transformation and sustainable development. The measures had been changed to reflect the actual number of licenses issued.
He noted that under ‘key activities’ the green text indicated issues that should have been added to the Strategic Plan, but were not originally included.
There was a need to mentor, and so measures were put in place to address the number historically disadvantaged individuals assisted, with actual numerical targets. Compliance inspections were also numerically targeted. The change to numerical targets from percentage targets was done in order to allow proper target tracking of outcomes. In terms of internal audits, there was a commitment to minimise the adverse audit findings and qualifications.
Mr M Sonto (ANC) asked for clarity on slide 5, point 5.2, referring to the possibility that an existing staff member may be delegated to perform supply chain functions.
Mr Rapoo replied that because the appointment of the necessary person to deal with such issues took time, the Auditor-General had recommended that someone oversaw the process in the interim.
Mr C Gololo (ANC) asked whether the declaration of interests was just for 2008/09, or if it would be an ongoing process.
Mr Rapoo replied that this would occur at the beginning of every financial year.
Mr E Lucas (IFP) asked when the donation on behalf of the DMR had been received.
Mr Rapoo replied that it was during 2009.
Mr Lucas replied that this was rather confusing, pointing out that the DMR did not exist when the donation was received.
Mr Rapoo apologised for his error. Although he had incorrectly referred to it as the “DMR”, it was in fact received on behalf of the formerly-named Department of Minerals and Energy (DME).
The Chairperson asked what the response from National Treasury was to the letter sent on 29 April, and if National Treasury still regarded this spending as irregular. He also asked why the sending of a letter requesting approval was left so late.
Mr Rapoo replied that the SADPMR had not received a response yet, so their spending was still regarded as irregular.
The Chairperson stated that at the last meeting between the Committee and the SADPMR, the Committee had not voted to approve the Annual Report. He said it seemed that the letter to the National Treasury may have been prompted by the SADPMR having to appear before the Committee. It was impossible to speculate as to what National Treasury’s response could be, and its response was needed.
Mr Rapoo replied that he would not make excuses. When he took office, he found that these matters were still outstanding and had therefore attempted to deal with them.
The Chairperson asked whether this meant that before Mr Rapoo was appointed there were no accounting officers, and that the institution was reliant solely on one person. He questioned the role of the other people involved.
Mr Simon Skhosana, General Manager, SADPMR, stated that the Auditor-General found that the entity had relied too heavily on its Chief Executive Officer. In the past year there had been an expression of opinion that these issues could be dealt with by the board. The SADPMR had gone to the DMR but was told that it would have to approach National Treasury. Since the board only met in March, the process was delayed.
Mr Sonto stated that it seemed that the actions presented before the Committee, and that seemingly were supposed to address the issues raised by the Auditor-General, or mitigate the findings, were exactly the same as the actions taken when the irregularities were first discovered. The presentation seemed to be about intentions, and not actual outcomes. For instance, all that was said in relation to Findings 2 and 3 was that the account was closed, and in respect of Finding 5, there was simply a remark that the risk assessment was sent to the board.
Mr Rapoo replied that in respect of Findings 2 and 3, the process followed was that the donation was removed from the account, and was put into the revenue account. With regard to Finding 5, a risk register was established and this process was ongoing. Previously there was no risk register.
Ms J Ngele (ANC) asked for clarity on whether any actions had been taken up to the time that the Board had met in March.
Mr Rapoo relied that this had been the first board meeting that he had attended, and that he took the responsibility to approach National Treasury.
Ms Ngele said that she did not understand why there had been no presentation from any other official, such as the Chef Financial Officer, and why the blame and responsibility seemed to be shifted to Mr Rapoo. She asked where were the other people who should be answering.
Mr Rapoo replied that Chief Financial Officer was unable to be present, as his presence was required at the offices for the audit.
The Chairperson stated that with reference to Finding 4, the Auditor-General said that the SADPMR did not meet quorum requirements for board meetings. However, the presentation had stated that these quorum requirements were met.
Mr Rapoo replied that this was not clearly stated; he had meant that the quorum was met after the 2008/09 financial year.
The Chairperson stated that SADPMR they needed to be accurate and give proper answers, as it had to go before the Standing Committee on Public Accounts (SCOPA). He added that this indicated shoddy work and that if the presentation had been accurate then there would not be a waste of time.
Mr H Schmidt (DA) stated that the SADPMR, as the Regulator, should be setting an example and that this situation was not good enough. It was stated that money had to be paid to the DMR, but it was not said whether this had happened.
Mr Sonto asked how long it would be before Members could expect to hear that all issues were addressed.
Mr Rapoo replied that he understood the Members’ concerns. He reiterated that he was waiting on a response from National Treasury. He hoped that after 60 days he would be able to report fully, as the internal issues would take little time.
Mr Gololo said that the actions taken needed to be explained in detail; a brief sentence would not suffice.
The Chairperson asked whether it could be understood that the SADPMR was properly established as a juristic person, with the functionaries required to run the institution. The Diamond Act of 1986, and its amendments, required that the SADPMR undertake certain functions. He asked whether the SADPMR was indeed a fully functional institution.
Mr Rapoo replied that in terms of the mandate, SADPMR had a fully fledged board and committees. The current Strategic Plan was approved, but it was submitted before government’s key priority objectives were submitted, and as such did not talk to the objectives. Issues were flagged in the Strategic Plan and elaborated on, by stating what actions would be taken in order to align them with key objectives. As the Strategic Plan could not be changed, it would be presented with an addendum of key focus areas.
Mr Lucas stated that Members expected much more from a regulator. He asked what could be done with the document.
The Chairperson stated that the Committee could not just accept anything that came its way. He suggested that the Committee link its deliberation to the responses offered by the SADPMR to the Strategic Plan. Members needed to see if the Annual Report hearing raised any issues in regard to the Strategic Plan. Whilst Members understood that the Strategic Plan document could not be changed by Mr Rapoo, the Committee had the power to make alterations. Those issues that need further responses or clarification must be sent in writing to Parliament. The issue of beneficiation was highlighted, as the SADPMR needed to assist the State Diamond Trader (SDT) to achieve this.
Mr Schmidt said that he saw no framework for entities such as the SADPMR, the SDT and some companies, and that it seemed that everyone was looking to cover their own liability. The impression was that these entities were not being fully frank when informing the Minister where the industry was headed. The SADPMR could not keep quiet, as it had a job to do.
Mr W Magagula (ANC) said that the Chief Financial Officer needed to be present at the next meeting, and that the SADPMR needed to start working properly.
The Chairperson stated that the Members’ sentiments seemed to be quite clear.
Mr Rapoo replied that some of the issues articulated had been identified by the entity, but there were two sides to these issues, as there was the question of whether industry was engaging with government priorities.
The Chairperson asked whether the idea of a discussion with the industry appealed to the SADPMR, and if it had the capacity to host such a discussion.
Mr Rapoo replied that this had already occurred and that the SDT was involved, but that there was scope and capacity for further discussions.
The Chairperson stated he sensed that a new approach of engagement was emerging from the SADPMR.
Mr Schmidt asked what the term ‘fair market value’ under point 6.5 of the Strategic plan meant. Market value was determined by supply and demand. A determination of ‘fair market value’ by the SADPMR or the SDT would mean interference with the market, and brought up the problem of who determined what was ‘fair’. The issue of beneficiation in the industry was very important, thus necessitating the need for a beneficiation policy workshop with the public.
Mr Rapoo replied that Mr Schmidt’s remarks on beneficiation were acknowledged and that the beneficiation process was still ongoing. ‘Fair market value’, in the SADPMR’s view, was determined by the global average price. If prices were not in line with the global average then they were deemed unfair.
Mr Skhosana added that ‘fair market value’ was determined by the buyers.
Ms N Mathibela (ANC) asked how far the implementation of the Diamond Export and Exchange Centre (DEEC) had gone.
Mr Rapoo replied that the DEEC already existed, but that there was a desire to grow it, as it was not large enough.
Mr Gololo asked what the percentage of black shareholders in the industry was.
Mr Lucas stated that the market determined the industry and that due to the recession the diamond industry took a ‘knock’, as it diamonds were not considered essential commodities. He asked how the SADPMR was going to ensure its independence, in order to prevent a conflict of interest. The beneficiation issue needed to be pursued vigorously, as currently India was importing unpolished South African diamonds, polishing them and then exporting them back to South Africa.
Mr Magagula stated that he was happy that the SADPMR’s targets were vouched in terms of actual numerical targets as opposed to percentages. He added that companies in the diamond industry were retrenching people, and asked what the DMR was doing to prevent this.
Mr Rapoo replied that the SADPMR would do whatever it could under the ambit of the law to prevent retrenchments.
Mr Sonto asked about the level of access to the industry afforded to non South African entities and asked what the SADPMR intended to do about non-compliant stakeholders. He added that a new licensing regime was being discussed, and asked if the old system was bad, since if this was so, then the question of how the new one would be revamped was particularly important.
Ms Ngele asked how many licences the SADPMR currently issued per annum.
Mr Rapoo replied that he did not know about past figures for licences, but that current targets were at 500 per annum. There was a need to convert old licences to new licences, which spoke to skills opportunities and Broad Based Black Economic Empowerment (BBBEE). He added that in terms of pursuing the BBBEE agenda, the Mineral and Petroleum Resources Development Act (MPRDA) of 2002 supported BBBEE. However in the Diamond Act there also was a Charter on BBBEE. There had been a commitment from licence applicants to aim for a 20% black shareholding. He added that if there was a gross violation of compliance amongst licensees, their licences would be suspended, but that all engagements would follow the context of the law.
Mr Skhosana added that over the past two years 1 700 licences had been issued, putting the average at 850 per annum.
State Diamond Trader (SDT)
Ms Linda Makatini, Chairperson, SDT, apologised to the Committee for being unable to present the strategic plan of the SDT, as it was still in draft format and had not yet been approved by the Minister. This was due to a request to National Treasury for more funding, which was turned down, and which led to the necessity to redraw the strategic plan in line with the actual amount of funding that SDT would be receiving. The new strategic plan would be available by the end of May.
Ms Futhi Zikalala, Acting Chief Executive Officer, SDT, went through the presentation on the Auditor-General’s findings and the SDT’s responses. He pointed out that the shortcomings in the financial matters were reported upon by the Auditor-General and were presented in the Annual Report for 2008/09. He noted that the progress made by management included redoing the annual financial statements in accordance with Generally Accepted Accounting Practices (GAAP). With regard to the non-compliance with the Public Finance Management Act (PFMA), he noted that Risk Management and Fraud Prevention policies had since been approved by the board, in May 2009. The non payment of VAT in January of 2009 was caused by insufficient funds being available, and the incurring of financial penalties for non payment. The SDT was now registered for income tax with South African Revenue Services (SARS) performing an assessment for 2007/08 and 2008/09. Tax was paid in April of this year. Quarterly reports now included progress reports on strategic objectives. Performance measures were now time-bound .Internal polices and procedure relating to performance would be commented on by the Auditor-General during the next audit. He noted, however, that the board had approved and implemented a performance policy.
Mr Schmidt asked how long R50 million would ‘carry’ the SDT. He also noted there was an error in the presentation document as it said that the Committee had not accepted the Auditor-General’s report, when in fact the report in question was the SDT’s Annual Report.
Ms Zikalala apologized for the error. She said that the R50 million available to the SDT was a revolving credit facility with the Industrial Development Corporation (IDC), which could be revolved as often as needed.
Mr Schmidt asked what the current funding was, and what the ideal amount would be in order that the SDT could function effectively.
Ms Makatini replied that the SDT was not funded by government at all, which required it to put a mark-up on diamonds sold. Currently, its staff did not have to be paid, due to them being on secondment from De Beers and the DMR. However, SDT would like funding for operational costs.
Ms Zikalala stated that original figures needed to run the SDT were based on this entity purchasing 10% of all diamonds produced, which would have put the budget at billions of rand. However, the recession caused diamond production to drop by 50%. Operational costs would amount to R10 million per annum.
Mr Lucas said that the worst thing that one could do was to under-fund an institution and that it led to failure, and so he was sympathetic towards the SDT. He added that this aspect needed to be seriously examined, as the SDT had the potential to transform the industry.
Mr Sonto stated that the mandate of the SDT was not spelt out in the presentation, although it had spoken about changing its operational mandate. He asked what the SDT was now advocating.
Ms Makatini replied that there were problems with the Auditor-General. There were changes to the funding model, with the SDT putting a premium on goods in order to survive. It would be better if this was not the case. The SDT had tried not to compromise its mandate of moving goods despite these issues.
Mr Schmidt asked if there was any chance of De Beers extending its co-operative agreement with the SDT, noting that this was supposed to end in October.
Ms Makatini replied that De Beers did allow for extensions, and they had already informally agreed to an extension, in principle.
Ms Zikalala stated that it was a daily struggle to run the SDT, but this entity could and did still work, despite experiencing capitalisation problems.
The Chairperson understood that the SDT would be ready by the end of May with a refocused mandate and funding model. The Committee would, in the interim, look at what the Diamond Act of 1986 and amendments expected of the SDT, as the Committee needed to determine whether the SDT was meeting its objectives. The challenges facing the SDT would be borne into mind. He agreed that it was extremely worrying that the SDT was unfunded. Therefore the Committee would wait for the SDT to come back with the redrawn and finalised strategic plans.
The meeting was adjourned.
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