Department of Rural Development and Land Reform on the Black Authorities Act Repeal Bill [B9-2010]: Auditor-General Briefing

Meeting report

Briefing by the Auditor General
Ms Macy Nkau, Business Executive, Office of the Auditor-General (AG), briefed the Committee on internal auditing. She said that the Office of the AG had intervened with the Minister and the Director-General of Rural Development and Land Reform. The AG had highlighted what was from an audit perspective the key challenges to the Department, and indicated issues that were the Director-General’s responsibility to monitor and those for which the Minister had to hold the Director-General responsible.

Ms Nkau said that internal control should be spearheaded by management. It started at the top. From an audit perspective, internal controls were processes and procedures that management established to guide the operations of an organisation to ensure good financial management. These policies and procedure had to be developed by management. Previously only financial management had been assessed, but the AG had lately incorporated performance management into the auditing process. This was a critical point for management to appreciate in the auditing process, as it was linked to service delivery.

Ms Nkau defined good internal controls in an organisation. The Committee had to keep in mind that the intention was always to progress towards a clean report or a clean audit opinion. She explained the different possible outcomes of an audit. There was an unqualified audit opinion – a clean audit opinion, the best outcome. Next was an unqualified audit opinion with matters of emphasis or with other matters. Other matters were defined as those matters that were significant and, if not attended to, could eventually result in a qualified opinion. A qualified opinion was given when the financial statements as a whole were fairly presented, but there were one or two components that were unacceptable. If management addressed those issues it could result in an unqualified opinion the next year. An adverse opinion was a bad outcome in which the financial statements did not represent the reality of the situation, in other words a false report. A disclaimer of opinion, the worst outcome, was the situation where the AG could not get hold of the documentation to do the audit and thus could not audit the organisation. This applied to financial as well as performance auditing. There used to be confusion about the difference between an audit of performance information and a performance audit. The audit of performance information was now called an audit of predetermined objectives, because in terms of the strategic plan of the Department these were predetermined objectives.

Good leadership was crucial to create an environment in which good financial and performance management could be implemented. The leadership had to be able to identify the key risks and the key controls needed to address these challenges.

Management needed to be able to assess the skills that was needed to enhance service delivery and performance management, had to evaluate the performance of functionaries and had to make sure that people were effective in their functions.

The second component of sound management was sound financial management. Management had to make sure that the procedures were in place to produce monthly financial and performance statements against the targets set.

This was a drive to motivate management to put procedures in place to be able to produce quality, complete and accurate financial statements in order to limit the amount of audit adjustments during the year.

In terms of the Public Finance Management Act and the Treasury Regulations, departments were required to have audit committees and an internal audit process, and the view of the office of the AG was that if these structures were not functioning properly in the department there would necessarily be problems. The audit committee was seen as an oversight organ over the financial and performance management of the Department. The function of an audit committee was to identify audit deficiencies early so that it could be addressed before the audit at the end of the financial year.

The independence of the Auditor-General South Africa (AGSA) was very critical for the credibility of the reports issued by it. Audits had to be conducted without prejudice. It was important to understand that aspect of the mandate of the AGSA.

 

Ms Nkau went on to explain what the key controls were. These were controls that had to be in place in a department to manage the key risks or challenges of the department. These were oversight foci which the AGSA shared with the Minister and for which the Minister had to hold the Director-General accountable. The AGSA wanted to have the interactions between the Office of the Auditor-General, the Director-General and the Minister on a quarterly basis in order to assess the progress that had been made in terms of the challenges raised during the audit. If not enough progress had been made, the Minister should hold the Director-General accountable for non-performance.

The AGSA commonly found that budgets were not clearly aligned with programmes. The AGSA regarded it as essential that budgets be linked to specific programmes. The lack of this link lead to a situation where a department would get a clean audit opinion on the grounds of its financial report, but receive adverse findings in terms of its performance evaluation and service delivery. The opinion on the financial statements and the opinion on the performance management and service delivery had to be linked.

A budgeted amount had to be linked to a specific item of service delivery or a target so that if there was no performance, the money should not have been spent and there should have been a saving. If there was no saving and no service delivery, there should be auditable reasons why neither happened. This had to be monitored on a monthly basis by the Director-General who must report to the Minister on a quarterly basis.

A problem that the AGSA encountered with the Department of Rural Development and Land Reform was that the AG could not find documentation to support the reported performance information. Ms Nkau sited as an example a situation where the Department claimed that it had bought ten farms. It had to produce the title deeds and it had to be able to go and show the AG where these farms were situated. Information such as this could not be obtained from the Department.

The Department had a budgeted amount and a target. If it overachieved, it had done more than was planned with the same amount of money. In this case it had to be able to explain what it had done in order to overachieve. This kind of information was also not forthcoming from the Department.

The Department had set itself a target to be achieved by 2014. In order to reach that target there had to be constant monitoring to see how far the Department had progressed towards its target. It had to identify the challenges that it faced in achieving its target and had to stipulate what it was doing in order to reach its target.

Another area that the AG examined when auditing a department was compliance. The AG did not report on compliance per se, but reported on findings in terms of compliance. Over the years the AG found instances of non-compliance with the PFMA, and with Treasury Regulations within the practices of the Department. The AG prioritised three of the non-financial operational acts, which it reviewed and rotated on a yearly basis to check to which degree the department complied with it. Any instances of non-compliance were brought to the attention of the DG and the Minister.

The two issues that caused the qualifications in the audit report of the previous year were revenue and receivables. The Department did not have a database of land owned by the state that was available for leasing. It also did not have a complete record of all signed leases. Some leases had expired and were not renewed. There was a lack of proper control and record keeping. The AG recommended that the Director-General report to the Minister on progress in this regard on a monthly basis. The solution to this problem would be the adoption of an administrative system that encompassed routine inventory checks on all assets of the Department.

The other issue was with immovable assets where there were challenges regarding surveying and investing. The Department was exempted from being audited in this area, thus it did not have a qualification in this area, but the exemption by National Treasury had expired. Treasury expressed the view that the Department did not put enough effort into rectifying the problems in this area, and thus the request for an exemption was not justified. The AG then requested that the Department put an action plan in place for financial as well as human resources to catch up on the work that needed to be done in this regard. The Department had to put milestones or targets in place and obtain National Treasury’s agreement. That part of the process was completed. The Department had yet to present the plan to the AG to see whether it was achievable. If found to be achievable, the AG would start a process of evaluating progress in terms of the action plan.

This was a long term process, as surveying took time and resources and it would take time for the Department to complete this process. The quarterly meetings with the Director-General and Minister also increased the visibility of the AGSA.  Ms Nkau extended an invitation to the Committee to contact the Office of the AG at any time it needed assistance.

Ms Nkau introduced the presentation on The Performance Audit of Consultants by explaining the difference between an Audit of Pre-determined Objectives, previously called Performance Information Audit, and Performance Audit. An Audit of Pre-determined Objectives was done and reported on by the AGSA on a yearly basis. The AG had decided to express an opinion on the 2009/10 financial year, but the decision had since changed and the AG would not express an opinion during this audit cycle on Pre-determined Objectives. The AG would continue to report factual findings on Performance Information. However, based on the findings, the AG would indicate in the Management Report what the opinion would have been in the event that it would have been expressed.

The Department drew up a Strategic Plan on a yearly basis. In this strategic plan the Department had pre-determined objectives that were set for a financial year. These objectives were audited and the AG looked at whether they had been achieved and whether the Department had documentation to support the claim that they had been achieved. An auditor could not carry out his or her audit and express an opinion without supporting documentation or physical verification that something existed.

The Performance Information Audit related to the effectiveness, efficiency and economy of procurement and use of resources within an organisation. This was not done on a yearly basis. A focus area was identified, discussed and agreed upon with management. It was a process of putting a certain area under a magnifying glass and looking at the detail of the performance information in this area. This audit was mandated by the Constitution in terms of the Public Audit Act as well as the directive of the AG.

The concept that Performance Audit covered in terms of procurement would be to obtain resources of the right quality in the right quantity at the right time at the lowest possible price. The auditing process would also look at whether the optimum relationship between the output goods or results and the resources used to procure them was achieved. The audit would also look at whether the procurement process served effectively to achieve policy objectives, operational goals and other intended effects. There had to be policies in place in the Department to make sure that procurement was done with optimal efficiency.

The area that would be examined would be the use of consultants in the departments. The view of the AG was that consultants should not be permanent within an organisation. If there was continual use of consultants, there was no proper accountability. The audit would evaluate the sustainability of the use of these consultants and what the Department was doing to ensure that there was transfer of skills. Ms Nkau stipulated the detail on which the audit would focus.

Discussion
Mr M Swathe (DA) asked what the skill levels were of the people appointed to do the internal audit in the Department as they failed to pick up problems at an early stage.

Mr S Ntapane (UDM) asked whether the AG experienced any problem in terms of governance in internal controls.

Ms Nkau replied that the AG reported in the Audit Report in 2009 that Internal Audit could not execute the work planned for the year due to capacity constraints. The Department had made available financial resources to capacitate internal audit staff. There was a problem recruiting staff as they were being poached by other departments, but the necessary staff could be recruited. Internal Audit would now be able to carry out its mandate. She said that for every qualification the AG indicated the root cause of the qualification.  In this case the root causes were deficiencies in internal controls. If the Department addressed the root causes it would address the qualification. There were problems with internal controls as indicated under the governance structure. The problems were with the revenue leases and immovable property.

Mr Ntapane referred to the fact that Ms Nkau said that the AG was unable to see a link between the Department’s budget and specific programmes. The Department had a strategic plan. What caused this problem?

Ms P Ngwenya-Mabila ( ANC) asked for clarification on the use of the strategic plan and the annual performance plan. According to her understanding the strategic plan was a five year plan that was not specific. It was complemented by the annual performance plan which would indicate what would happen within that financial year. If the AG used the strategic plan without the more detailed annual performance plan, it could be confusing.

Ms Nkau replied that the challenge in most departments was that while there was a strategic plan and a budget per programme, the operational plan for the year was often vague and targets were not specific and not measurable. Often there was no link between the operational plan and the strategic plan.  In some cases there was a link between the budget and a target, but not a programme as a whole. With the Department of Rural Development and land Reform she did not recall having a problem linking the budget to a specific programme. The Department should aim to link the budget with a specific target.

Ms Nkau said that when she alluded to the strategic plan in her presentation, she indicated that there would be a three year plan and a five year plan and specific targets that related to a financial period, starting 1 April and ending 31 March of the next year. This would be articulated in the annual performance plan, which was the operational plan. So, she said, even when she was referring to the strategic plan, she looked specifically at those objectives which were in the annual performance plan. The AG did not look at the targets for the three or the five years. The Department had a target to transfer 30% of the land to previously disadvantaged people by 2014.That was an overall target that still had to be monitored, but the AG specifically looked at the current financial year’s pre-determined objectives when it compiled its audit report.

Mr Ntapane said that it was not the first time that the absent lease agreements were referred to by the AG. He asked why the Department had not attended to them.

Ms Nkau said that the Department did not have a complete accurate database of state owned land available for lease. There was no proper system to monitor and control this information. A week ago the Department had informed the AG that the database might still be a problem, but the majority of processes had been put in place to make this information available. The AG still had to assess and audit the information it had received. The answer to the question why it was not been attended to would best be supplied by the Director-General. The explanation the Auditor-General had received previously was that that it was due to a lack of financial and human resources and skills.

Mr Ntapane asked exactly what problems the auditor found in procurement.

Ms Nkau said that the Performance Audit on the procurement of consultants was still underway. She had not seen the findings yet. Once the findings had been analysed and discussed with the Director-General and tabled accordingly, they would be presented to the Committee. The focus of the Performance Audit would be to determine whether the procurement of the consultants was done as efficiently and economically as possible, and whether the best quality of consultant was sourced at the lowest possible price.

Mr Ntapane asked whether the consultants really transferred their skills to the staff in the Department, as it should be.

Nkosi Z Mandela (ANC) whether it was not better for the Department to employ and capacitate its own staff, rather than use consultants.

Prince B Zulu (ANC) expressed his concern about the use of consultants in cases where simple common sense would have sufficed. In his opinion, they were a drain on the resources of the state and they rarely left skills behind in the Departments where they were employed.

Ms Nkau replied that the Performance Audit was evaluating whether and to what extent skills transfer from the consultants to the staff members were effectively happening. There was a situation where basic work was given to consultants which could have been done by staff members. It was necessary to look at the core mandate of a department and then to decide which was the more cost effective option - to have fulltime employees or to have consultants to perform certain tasks in the Department.

Ms P Ngwenya-Mabila (ANC) asked whether shared audit committees, according to the AG’s view, worked.

Ms Nkau replied that she had never encountered it. She knew about instances where the chairperson or members were members of a number of audit committees. It worked. However, a member could not be part of too many audit committees, otherwise they became ineffective. When Departments appointed members of audit committees, they had to investigate and find out how many other audit committees the member was part of, and in the light of that finding they had to decide whether the members would be able to contribute effectively as a member of the audit committee.

Nkosi Mandela said that it was important for the Committee that the Department established exactly what it owned. He asked how the challenge of the incomplete land survey could be resolved, before it entered into new purchasing agreements.

Ms Nkau mentioned the action plan that the Department had developed to which the AG had requested access to in order to monitor and evaluate whether the milestones had been reached. The Action Plan had been discussed with National Treasury and was in the process of being signed off. National Treasury felt that the Department had not done anything about the surveying situation since 1994 and thus it did not deserve an exemption. The exemption had become an excuse not to address the issue. The exemption had been lifted and the Department would be called to account in this regard. The Director-General and the AG would inform the Committee about the progress made.

The pilot programmes for rural development were a new and exiting area in the Department, and quite challenging. She appreciated the fact that the Committee had site visits. She discussed with her team that it should do more site visits than before. In terms of the mandate to promote public accountability, the AG reported the issues that it had picked up during the audit. The AG did not audit every transaction. It audited on a sample basis. The issues that the Chairperson had raised needed to be ring fenced and highlighted and identified as critical risks. Once identified it would be brought under the attention of the Director-General and Minister. The AGSA did not have the power to act. The Committee had an oversight mandate to make sure that the Department addressed the issues. Ms Nkau made notes of the cases that the Chairperson mentioned. She committed to addressing it during the audit, and to include it in the audit report.

The cut-off date for surveying would be driven by the realities of the resources that the Department had as well as the milestones in the action plan. Once Ms Nkau had seen the action plan she would be able to make an informed decision.

The Chairperson said that the Committee was compiling a report on an oversight visit in KwaZulu-Natal and the Eastern Cape. It visited sites of pilot programmes run by the Department to initiate rural development. Of the projects visited, two stood out as a result of the glaring omission on the part of management to monitor projects.

The Deputy President was planning to visit the area of Qumbu in the Eastern Cape. The Department of Human Settlements and the Department of Agriculture decided to build a house for an old lady who lived alone and had no relatives. The decision to build was taken in August 2009. When the Committee visited the site in April 2010, it found only a concrete slab and a pile of building material. There was clearly no urgency in building the house. The house was supposed to cost R80 000. The material that was found there was worth around R20 000. It was done for the benefit of the visit if the Deputy President. When the plans changed and the Deputy President visited another area, the project was abandoned. It showed up a total lack of monitoring and management. The case was reported to officials from the Department that was present on the visit. The Committee was planning to follow up and find out what happened there. Not only was the private company that was supposed to build the house cheating, but also the manager who was supposed to monitor the project.

The second project was in Eshowe, KwaZulu-Natal. It was a huge agricultural project with more than 2000 hectares under sugarcane and citrus and other crops. It was a partnership. The project itself offered no training. A joint venture arrangement should have had a contract to monitor the performance of the joint venture against the expenditure of state funds. There should have been a training programme and an audit trail to see whether everything was implemented. None of these was available. The AG could not be everywhere all the time. Somebody had to account for this state of affairs. The strategic plan produced the operational plan and the operational plan processes produced the organogram. If this Committee did not have access to those documents, how would it verify whether any of those processes happened?

The Chairperson referred to the Surveyor General and the surveying of land. He believed that there was a cut-off date by which the process of land surveying had to be completed. He knew that the Department of Land Affairs had a constitutional obligation to do this work, although it had to be assisted by the Department of Public Works and the Treasury. He asked what the cut-off date was.

 
Ms Nkau said in her presentation that the leadership of an organisation created the environment for the staff of that department to support the mandate of the organisation. She agreed with the chairperson by remarking that in the areas where the Department received a qualification, the structure in terms of human resources in those departments did not support the mandate of the Department. She agreed that the organogram and the structure were critical to achieve the mandate of the Department. This related to the new mandate of the Department, that of rural development. It was new and under resourced and it showed up as an area where there were problems. The Director-General would have to explain the situation during the audit process.

The Chairperson presented the Director-General, Mr Thozi Gwanya, with a list of matters arising from the session with AGSA.

Matters arising from the session with AGSA
Internal audit: according to the AG resources were now adequate for the Department’s internal audit committee to function properly.

Projects needing monitoring: there were two examples of projects needing monitoring and evaluation, but there were many projects that he felt needed to be audited, by the internal audit function. The Committee would provide a list.

Other matters were the absent lease agreements on immovable assets; the business plan and operational Plan; performance audit on consultants; skills transfer - the Committee wanted a copy of the organogram of the Department; the cut-off date for land surveying - the Director-General  had to supply the action plan as well as the cut-off date for the surveying of land to the Committee; and quarterly financial reports – the Committee required copies of the financial reports that the Department was submitting to the Standing Committee on Appropriations Committee.

Discussion on the Black Authorities Act Repeal Bill [B 9—2010]
Mr Thozi Gwanya, Director-General, Department of Rural Development and Land Affairs, introduced Dr Rinaldi Bester, Office of the Director-General. Dr Bester was a legal drafter in the Department.

Dr Bester said that the Black Authorities Act Repeal Bill was to repeal the Black Authorities Act 1951. This Act was a cornerstone of apartheid legislation and it had been used to structure and engineer rural communities. It had established regional and tribal/traditional authorities in the rural areas. Its effects were prominent in the homeland areas where there were traditional communities.

The Law Commission had done a review to check which pieces of apartheid legislation still remained on the statute books of South Africa and it had discovered this piece of legislation. The principle was not to retain any legislation that related to the apartheid era in a democratic state and it had to be repealed. The law was flexible in the sense that parts of it could be applied according to what was needed from the apartheid perspective in the different homeland areas. All the provinces had repealed this legislation except two, KwaZulu-Natal and Limpopo.  There was the Nhlapo Commission where a number of Traditional Authorities had questioned whether the repeal of this law would not take away their right to be established as Traditional Authorities. Some of them were established as traditional leaders through this Act, and if the Act was repealed, they thought that they would loose their status as traditional leaders. The Traditional Leaders Governance Act Framework was promulgated in 2003. It covered many of the aspects that the Black Authorities Act dealt with. This Framework protected the rights and status of all traditional leaders in the absence of the Black Authorities Act.

The province of KwaZulu-Natal had expressed its support for the Bill in writing to the Department. The Provincial government also had a draft bill to repeal similar legislation in KwaZulu-Natal.
The Department had set a deadline for this Bill to be signed into law. The date was 31 December 2010.

The House of Traditional Leaders, Limpopo had been briefed and consulted and had expressed its support for the Bill, but not in writing yet. The Department had asked for a letter of support, but had not yet received it.

The National House of Traditional Leaders had been briefed and consulted on the Bill and it expressed its support in writing as well.

Mr Swathe, who was from Limpopo, asked what the Department was doing to persuade the province to write the letter supporting the Bill.

A Member asked what the implications were of Limpopo not being on board. She asked whether the Committee could do anything to ensure that Limpopo was on board.

Dr Bester replied that the Department had consulted with the Premier’s office in Limpopo which had verbally indicated support in 2008. In June 2008 a letter was sent to say that if the Limpopo Province did not respond in writing by 13 June 2008, the Department would assume that the Province did not have an objection to the repeal. It would then be assumed that there would be no unintended consequences or legislative gaps as a result of the repeal of the Act. The Department did not receive a reply, other that by telephone. In the telephone conversations the Province agreed that there would be no unintended consequences or legislative gaps and supported the Bill.

The Director-General read through the Bill. It was self-explanatory.

A Member asked whether, since the Bill was gazetted, there had been an attempt to communicate with Limpopo Province regarding the Bill. Before the publishing of the Bill the previous time, there had been regular interaction.

The Director-General said that there had been no interaction since 16 April 2010, when the 2009 date was extended to December 2010.

The Chairperson asked the legal adviser, Ms Refilwe Mathabane, why the Bill had to be referred to the House of Traditional Leaders and not the NCOP.

Ms Mathabane said that in terms of the Traditional Leaders and Governance Framework Act, an Act that might have an influence on traditional leaders had to be referred to the House of Traditional Leaders which had to send its comment to the National Assembly, before the national Assembly could adopt or pass the Bill. This Bill had been introduced in the National Assembly (NA). It had not been referred to the NCOP yet. It had to be processed and passed in the National Assembly from where it would go to the NCOP where it would have to be processed and referred to the provincial legislatures. From there it had to return to the NCOP from where it would return to the NA for the NA to consider the comments of the NCOP. The Committee had to report to the NA through the Committee Report. There had to be a process of public participation before the Bill could be adopted by the Committee. The Committee could not adopt or make a decision on the Bill until the 30 day period had expired in which the House of Traditional Leaders had time to give the NA its comments, unless it replied before the end of the 30 day period.

Prince Zulu asked why, while the Bill was a Section 76 Bill, the NA had to refer the Bill to the NCOP only for it to be referred back.

Ms Mathabane replied that the Minister had in terms of the Constitution the option to introduce the Bill in the NA or the NCOP. The difference was the process that took place in the NCOP with a Section 76 Bill as opposed to a Section 75 Bill. A Section 76 Bill affected provinces, and there was a requirement that the Bill be referred to provincial legislatures which were expected to have public participation before referring it back to the NCOP for the NCOP to make its decision. If it was introduced in the NCOP, it would have been referred to the NA. In this case it was introduced in the NA. The difference between a Section 76 and a Section 75 bill was the amount of work that was done in the NCOP and the provinces. There had to be agreement between the NA and the NCOP about what went into the Act.

The Director-General said that the Department had discussed with the Minister and he had made the Department aware of the logistical processes. A Section 76 Bill should start in the NCOP, but the rules did not specify it as such. He asked whether there was a way to shorten the process.

Ms Mathebane said that where it was introduced did not change the requirements.

The Chairperson said that there was a material difference. He said that Section 249, Subsection 2, said that the Committee may publish an advertisement and invite comments from the public. The period could be different and the engagement materially could be different.

Ms Mathebane said that she had looked only at the NA procedures.

The Chairperson said that materially the quality of the public participation could be different. He suggested that the Committee publish an invitation for public comment.  

Ms Mathebane said she did not see the difference in time that it would make.

The Chairperson decided, after consulting with Ms Mathabane, that two weeks was a reasonable time to allow for public participation.

The Chairperson concluded by saying that he was going to follow the procedure he had suggested.  

Prince Zulu asked what would happen if the provinces rejected the Bill.

A Member said that when a Bill had been referred to the relevant NCOP Select Committee, it considered the Bill and then the permanent delegates were mandated to go back to their different provinces to go and brief the provincial committees on the processes to follow for public hearings. The end results of the public hearings made it possible for a province to make a decision on the Bill. In the NCOP, if five provinces agreed on a Bill, it was taken as agreed to.

The Chairperson instructed the secretary to place advertisements in the press in the different local languages to call for comment from the public.

Committee Report on the oversight visits to Pilot Projects of the Comprehensive Rural Development Programme
The Content Adviser, Mr T Manenzhe, read the report.

The Members asked the secretaries to correct the mistakes in the report to make it more coherent and in some cases restructure it by excluding some of the detail in favour of summaries and highlights.

The Chairperson suggested, as a result of what the Committee had encountered on the visit, that the Pilot Projects should be re-conceptualized and restarted. He suggested that new projects started with a business plan that could be monitored and evaluated closely, in order to measure the success or failure accurately, in order to learn from them. Existing projects were in a shambles. There was no business plan, no direction, and no recordkeeping. It was impossible to study them scientifically and draw conclusions.

The meeting was adjourned