Youth Development Agency 2009/10 Annual Report: Auditor-General and Agency briefings

Women, Youth and Persons with Disabilities

02 November 2010
Chairperson: Ms D Ramodibe (ANC), Ms B Mabe (ANC, Gauteng)
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Meeting Summary

The Portfolio and Select Committees, sitting jointly, were briefed by the Auditor-General South Africa on the first six months financial statements of the National Youth Development Agency (NYDA), which was formed in September 2009 from the merger of the former Umsobomvu Youth Fund and the National Youth Commission. Although the NYDA had achieved an unqualified audit opinion, there were a number of matters of emphasis. It had irregular expenditure of R11 million, due to having adopted systems used by the Umsobomvu Youth Fund for supply chain management that were not in compliance with the regulations,. In addition, there was non-compliance with the Public Finance Management Act (PFMA) and National Treasury regulations, both in respect of late submission of the financial statements, and because NYDA had borrowed without obtaining prior authorisation from National Treasury. Proper policies and procedures were not yet in place to ensure that all adequate steps were taken to recover loans before writing them off. Performance information could not be verified, and quarterly reports were not consistent with the performance objectives, measures and targets set out in the strategic plan of the entity. Proper systems must be put in place to record jobs created. A framework also needed to be agreed with the executive authority. Internal controls were not effective enough, and the accounting officer was not exercising sufficient oversight responsibility over reporting and compliance with laws. Members asked for clarity on the R11 million irregular expenditure, queried whether the jobs had not been created and what the impact was of this on the NYDA’s financial statements, and asked for confirmation as to what structures were in place and where internal controls were lacking. Members noted that there did not seem to be too much cause for concern about the running of the entity at this stage, and noted that the forensic audit on the National Youth Commission was unlikely to have an effect on the NYDA. Members also enquired how the Auditor-General would assist the entity to rectify the problem areas, and what evidence would be regarded as acceptable.

The National Youth Development Agency then briefed the Committee on the Annual Report. The total income had been R296 million and expenditure was R275 million, of which more than 50% comprised funding to direct businesses through its projects. By year end, the NYDA’s loan repayments had exceeded its loans disbursed. All of the matters of emphasis were receiving attention and progress on resolution of issues was being reported quarterly to the board. An audit committee had been established. The internal and external challenges were highlighted, including the fact that the merger process had taken longer than anticipated and there were problems in aligning systems. The NYDA did not have enough resources at present
to establish provincial and local structures. Targets were set out and described, most of which had been met, but some were not met because of lack of funding. Members asked whether volunteer positions were included under the title of jobs created, enquired how NYDA managed the risks that loans may not be repaid, and what criteria were to be met before loans were granted, and noted that at the moment it was focusing more on group lending than individual lending. Members asked how NYDA would establish contact with the youth. They enquired about the restricted investments. They were concerned that targets for assisting young people with disabilities, youth in rural and peri-urban areas and young women were not met. They enquired whether there were records of the numbers of jobs created and if there was any tracking of the success. Members were critical of the high cost of producing the Annual Report, and of the high salaries paid, and said that they believed the structure to be overly top-heavy. Members asked why the NYDA was asking for more funding when it had not achieved some targets. The NYDA was urged to address measurement of targets, compliance with legislation and more emphasis on rural areas.

Meeting report

Chairperson’s opening remarks
The Acting Chairperson of the Portfolio Committee, Ms D Ramodibe (ANC) noted the Committee’s congratulations on the appointment of the former Portfolio Committee Chairperson, Ms B Thompson (ANC), as Deputy Minister of the Department of Energy.

National Youth Development Agency 2009/10 Audit Report: Auditor-General South Africa (AGSA) briefing
Mr Lourens Van Vuuren, Business Executive, Auditor-General South Africa (AGSA), outlined the findings of the AGSA in respect of the National Youth Development Agency (NYDA) financial statements for 2009/10. He explained that the NYDA was a new agency established from the merger of the former Umsobomvu Youth Fund and the National Youth Commission. The audit report dealt with the first six months of operation of the NYDA. Although the NYDA received an unqualified audit opinion, the Auditor-General (AG) did raise two emphases of matters, relating to irregular expenditure and material impairments of the NYDA.

Mr Van Vuuren firstly dealt with the irregular expenditure of R11 million. The reason for this was that the NYDA, as part of the merger process, took over the supply chain management and delegations policies of the Umsobomvu Youth Fund. Some of these policies were not completely aligned with supply chain management regulations, causing the actions from using those policies to be classed as irregular expenditure. Mr Van Vuuren stated that the policies would need to be adjusted and aligned with supply chain management regulations, to ensure that the NYDA did not incur irregular expenditure in future.

Mr van Vuuren then dealt with the material impairment, as set out on page 108 of the NYDA Annual Report. This related to the NYDA making loans. There was a risk associated with this, as at times, money loaned out may not be repaid, so the loans would then need to be written off. Mr Van Vuuren stated that the NYDA would, in the future, need to have proper policies and procedures in place to ensure that adequate steps were taken to recover loans before they were actually written off. He explained that if it wrote off too many loans, it would have a negative impact on its financial position.

Mr van Vuuren then drew Members’ attention to other important findings, listed on pages 72 and 73 of the Annual Report. In respect of performance information, he explained that the quarterly reports of the NYDA were not consistent with the performance objectives, measures and targets set out in the strategic plan of the entity. There were also comments on the reliability of the reported performance information. The reports on the NYDA’s job creation and business consultancy services targets were found to be invalid and inaccurate, when compared to source information, based on the criteria that the AG set for validity, accuracy and completeness criteria. Information could not be obtained to confirm that the NYDA had created 14 000 jobs through micro-finance and 5 300 jobs through business consultancy services. The AG said that a proper system needed to be in place to record jobs created, so that the information could be verified by the independent auditors.

There had been non-compliance with the Public Finance Management Act (PFMA) and National Treasury legislation, since the NYDA borrowed without obtaining prior authorisation, but by year end this situation was resolved. There was also late submission of annual financial statements, as NYDA did not submit the statements, as required by the PFMA, by 31 May 2010.

The AG further reported that there was no set and agreed-upon framework with the executive authority. This was not in compliance with National Treasury regulation 28.3.1, and in future this framework would need to be put in place and agreed upon by the executive authority.

The AG also found that internal controls of the NYDA were lacking and would need to be more effective. Greater emphasis on leadership was needed, as the accounting officer of the NYDA was found not to exercise oversight responsibility over reporting and compliance with laws, regulations and internal control. Also there was a need for pertinent information of the entity to be identified and captured in supporting documentation.

Mr D Worth (DA, Free State) referred to page 77 of the Annual Report, at point 6.2.7, and asked for clarity on the R11 million irregular expenditure.

Mr Van Vuuren explained that the irregular expenditure covered the period from the establishment of the NYDA up until 31 March 2010. Because of the time lapse between the start of the new financial year, and the audit of the 2009/10 financial year, it was possible that there was still some irregular expenditure in the 2010/11 financial year, but this information could not be quantified until the audit for the 2010/11 financial year was done.

Mr Worth enquired about the NYDA’s reported achievements against targets. He noted that the NYDA had claimed that 14 000 jobs were created through micro-financing, and asked whether, if these were to be considered invalid, the NYDA would experience substantial financial losses.

Mr van Vuuren clarified that the AG was not stating categorically that 14 000 jobs had not been created, but was rather noting that at the time of the audit, there was not enough information produced to verify that the jobs were created. This meant that the NYDA needed to put a good system in place to enable auditors, in the future, to verify information such as job creation. The Auditor-General could not express a view on whether the NYDA experienced any financial losses due to jobs not possibly having been created.

Miss P Duncan (DA) asked for confirmation whether the accounting authority of the NYDA was exercising oversight responsibility, and, if this was the case, asked why the AG did not discuss this further in the report.

Mr Van Vuuren responded that the basic governance structures of the NYDA were in place (such as an Audit Committee, Board, and Internal Audit) but there were problems with leadership’s internal control. The leadership of the NYDA did not exercise oversight responsibility over reporting and compliance with laws and regulations. He stated that this would need to be rectified and the NYDA would need to put into place policies, processes and oversight mechanisms that would focus on compliance with the PFMA and National Treasury Regulations. He also mentioned the need for the NYDA to have a proper system in place which enabled it to substantiate the jobs created.

Co-Chairperson Ms Mabe stated that the overall impression was that the state of the NYDA was not too bad, but she enquired whether there was any real cause for concern. She also asked what implications the outcomes of the National Youth Commission forensic audit could have on the NYDA.

Mr Van Vuuren explained that the three main problem areas of the NYDA were the supply chain management policies and procedure that led to irregular expenditure, impairment of loans, and non-compliance with laws and regulations. At the time of the audit there was nothing else materially affecting the financial statements of the NYDA which would have meant that an unqualified opinion could not be given. The Auditor-General was of the opinion that the outcome of the forensic audit of the National Youth Commission would not have any material impact on the NYDA.

Mr G Mokgoro (ANC, Northern Cape) stated that he was concerned about the disparity between the targets and achievements of the NYDA. He asked what the Auditor-General expected the NYDA to do as a follow up to rectify its problem areas.

Mr Van Vuuren reiterated that the achievements of the NYDA could not be considered completely invalid. Rather, they could not be verified, because of a lack of adequate information to support the statements about the achievements. The Auditor-General believed that the NYDA would need to put into place systems, policies and procedures relating to performance information, and manage this on a daily basis. This would result in information being available, reliable and verifiable when audits were done in future. All entities should also have an internal audit section which should review the systems throughout the financial year. Such a system could be computerised, or manual, as long as it allowed information to be verified before the independent auditors checked the information.

Mr Worth referred to page 100 of the Annual Report and asked how successful the NYDA had been in the past in getting its loans repaid, and how much of the loans had been written off.

Mr van Vuuren stressed that in the past the loans were made by the Umsobomvu Youth Fund, and the Auditor-General had not in the past conducted its audits, as these were done by private auditors. AGSA had only started to attend to the audits of the merged institutions into the NYDA. For this reason, the
Auditor-General was not in a position to give more details regarding the loans.

Mr D Kekana (ANC) asked the Auditor-General to elaborate on what evidence would be regarded as acceptable in order to verify information. He asked what type of guidance the Auditor-General provided to institutions in this regard, and how it would assist them to try to avoid recurrent negative reporting.

Mr Van Vuuren responded that during the audit process the Auditor-General did engage with management,  made recommendations and also had Steering Committees that debated the various audit findings. He stated that management was also encouraged to compile action plans on how to address audit findings, and the Auditor-General would normally review these action plans. If the Auditor-General felt that the plans would not achieve the desired result, this would be communicated to management. The Auditor-General would try to guide management in dealing with the situation and would try to avoid any negative reporting. Ultimately, implementation was management’s responsibility.

At this point Co-Chairperson Ramodibe stated that the meeting would be closed to the public until 11:00 am.

A Committee Member, and representatives from the media stated that they were not happy with this, believing that the committees needed to have open meetings, in the interest of transparency. However, the Chairpersons ruled that this would not happen, and the meeting would only be open to the public again at 11:00.

National Youth Development Agency: 2009/10 Annual Report briefing
On resumption of the open portion of the Committees’ meeting, the Chairpersons requested the National Youth Development Agency (NYDA) to brief the Members on its annual report.

Mr Andile Lungisa, Chairperson, National Youth Development Agency, stated that issues pertaining to Provincial Advisory Boards would not be discussed, as these were not currently within the NYDA, only due to assume their duties in December 2010.

Mr Michael Mashinini, Acting Chief Financial Officer, NYDA, outlined that NYDA was established through a merger between the Umsobomvu Youth Fund and the National Youth Council, which were consolidated into the NYDA after 30 September 2009. This merger resulted in the assets, liabilities and obligations of the entities being transferred to the NYDA. He then tabled an overview of the financial performance, noting that the total income was R296 million and expenditure was R275 million, of which more than 50% comprised funding to direct businesses through its projects. He also noted that at the year end the NYDA’s loan repayments had exceeded its loans disbursed.

Mr Mashinini confirmed that the Auditor-General (AG) had given the NYDA an unqualified audit opinion, but had raised seven emphases of matters. These included non-compliance with laws and regulations, and irregular expenditure amounting to R11 million. He explained that currently all the matters raised were receiving management’s attention and the progress on resolution of the issues was being reported to the Board on a quarterly basis.

Mr Mashinini also noted that the Audit Committee of the NYDA was established in line with PFMA regulations. The NYDA had adopted appropriate terms, in line with National Treasury Regulations. The NYDA had also adopted its own supply chain management policy, process and procedure, which were now in line with PFMA regulations.

Ms Teboho Sejane, Business Strategist, NYDA, spoke about the non-financial performance of the NYDA. She made mention of the external and internal challenges faced by the NYDA in the year under review. She noted that, although the NYDA had resulted from the merger of the Umsobomvu Youth Fund and the National Youth Council, there were some challenges. The merger took longer than expected, and there were problems with aligning the systems and processes of both entities to ensure efficient operations of the new NYDA.

She also outlined that NYDA had taken over the systems and processes of the Umsobomvu Youth Fund, and that this, because of the different scheduling of the different entities, had presented challenges. Some of the systems and processes which had been suitable for the Umsobomvu Youth Fund were not found to work for the NYDA. Another problem was that there was insufficient funding to enable the NYDA to respond adequately on all aspects of its mandate. The NYDA currently did not have enough resources to establish provincial and local structures but was engaging with Premiers for access to provincial budgets in order to set up provincial and local structures, and thus achieve a larger roll out of its programmes.

Ms Sejane then outlined the NYDA’s key performance areas, and targets. These included targets for economic participation, education and skills development, National Youth Service projects participation, and achieving social cohesion, including youth dialogue sessions and meetings held with municipalities and schools. NYDA also had targets for providing information and communications, for drawing policies, and lobbying and activism, for research, monitoring and evaluation and for effective and efficient resource management. Most of these targets had been met and some were exceeded (see attached presentation for details). However, where targets had not been met, this was ascribed to lack of funding in the entity.

Mr D Kekana (ANC) asked for an explanation on how the NYDA classified job creation, asking whether volunteers were considered a part of “job creation” and if so, in what way. He also asked how the NYDA managed the high risk of working with youth who may be inexperienced and thus could not pay back loans.

Ms Sejane said that the NYDA used a voucher system which meant that a young person would be assisted by a consultant in the development of a business plan. Once this was created, the young person could get access to funding to start his or her business. It was hoped that a young person who had established a business would then employ other young people in his or her business. This would not be counted as a volunteer activity. Volunteers were recorded strictly as such, and volunteer activities were not included in the tally of jobs created. Jobs were only recorded as a part of service delivery when the jobs had actually been created. Ms Sejane also explained that, in an effort to manage the high-risk target market, the NYDA would provide a list of resources to young people starting businesses, such as financial management skills, business support, and mentorship. This assistance would help to counter the high risk. Funds were also dispersed to youth on a needs-basis only, month by month, according to what the business needed, and the NYDA also received quarterly reports from its service providers to help it to manage the businesses.

Ms Sejane conceded that the NYDA was, to some extent, struggling to recoup loans given to youth. The NYDA therefore focused more on the group lending model, rather than individual lending, which created better accountability and collective responsibility.

Mr Mokgoro asked how the NYDA established contact with the youth. He also asked for a further explanation of the restricted investments which were co-managed by the NYDA and the bank, and asked what this money was used for. He further enquired about the criteria before the NYDA granted loans.

Ms Sejane responded that the NYDA used various methods to establish contact with the youth, such establishing Youth Access points at municipalities and Further Education and Training (FET) colleges, where the youth was able to access a wide range of information. The NYDA currently had more than 121 offices countrywide. Mobile youth access points were also used to help reach the youth in rural areas. NYDA also used advertising or programming on local radio stations. Most contact sessions with youth were based on campaigns which the NYDA rolls out widely. Loans were given to youth between the ages of 14 and 35 years. In order to access loans, a business plan was needed, and the applicant must show that the business could make a profit. Should the NYDA be satisfied with the business plan, then the young applicant would be provided with the necessary support. For young people who do not have collateral, the NYDA sometimes went into partnerships with different organisations which aided the NYDA in its lending activities. Currently the NYDA was in talks with the National Treasury for more funding.

Mr Mashinini responded on the restricted funds, noting that these were linked to deals with First National Bank (FNB), MTN and Free State Development. Before loans were disbursed, consent from the NYDA was required. Before investment activities were considered, the whole loan book prospectus was examined. The franchise fund was for loans specific to franchises. Investment associates mentioned were also the business partners of the NYDA.

Ms P Maduna (ANC) asked for further elaboration on the R11 million which was generated from activities. She also asked why, according to the report, the NYDA could not meet the set targets for assisting young people with disabilities, young people in rural and peri-urban areas, and young women. She enquired how many of the 43 303 jobs created by the NYDA were paid jobs and how many were volunteer-based.

Mr Worth noted that the Annual Report had stated that R34, 56 million was outstanding in loans guaranteed through third parties). He asked how much of these outstanding loans would, on average, be recovered. He also asked whether the NYDA had records of the jobs it had created, and how many of these jobs created were part of the Expanded Public Works Programme (EPWP).

Ms Sejane noted that some of the jobs were created in conjunction with the EPWP and Department of Home Affairs programmes.

Miss D Robinson (DA, Western Cape) enquired about the cost of producing the high-colour Annual Report documents, saying that she believed that more cost-effective reporting could have been done.

Mr Andile Lungisa, Chairperson, NYDA stated that an exact cost of the report could not be given, but noted that there were only forty of these reports printed, and that the NYDA had examined all the options and had chosen the cheapest. He also suggested that perhaps in future Members should be sent electronic copies of the presentation to save funds.

Ms Robinson asked why, on the one hand, the NYDA was complaining of limited funding, yet, on the other hand, was able to pay enormous salaries to its executives. She noted that the Chief Executive Officer was getting R130 000 a month, but did not attend most of the meetings, and wondered how this could be justified.

Mr Lungisa said that the Chief Executive Officer was being paid the same amount as the Chief Executive Officer of the Umsobomvu Youth Fund had been paid.

Ms Robinson asked for further information on donor funding income and disbursement of funds. Referring to page 94 of the audit report she asked whether any of the associates in whom the NYDA invested had any links, direct or indirect, to the NYDA. She lastly asked how the NYDA reached the youth of South Africa, and whether the report represented a fair and equal distribution of opportunities.

Mr Lungisa noted that the next report of the NYDA would follow the recommendations of the Auditor-General and that the highest standards would continue to be in place.

Mr T Mashamaite (ANC, Limpopo) asked how the NYDA could ask for more funding given the fact that it could not meet some of its intended targets and did not comply with the legislation that governed its operations. He also asked for an explanation for the non-compliance with laws and regulations, including the  contraventions of the PFMA.

Ms Sejane explained that the reason why the Auditor-General could not verify its targets was because the merging process of the Umsobomvu Youth Fund and the National Youth Council took longer than expected. The NYDA had trouble with harmonising the processes and procedures of the entities in a period of six months. The merger of some of these processes and procedures was also the reason why there had been some contravention of laws and regulations.

Co-Chairperson Ms Ramodibe
asked whether there were any mechanisms in place which enabled the NYDA to establish whether the jobs being created were sustainable. She also enquired if the NYDA was reaching all sectors, in particular women, and people with disabilities.

Ms Sejane
explained that there was currently no longitudinal study that could establish the sustainability of jobs created. The NYDA was still planning to do this.

Co-Chairperson Ms
Mabe expressed concern about the top heavy structure of the NYDA, saying that she believed that more people were needed to do field work. She asked for an explanation of the NYDA employee compensation structure.

Ms Sejane stated that the NYDA was currently being restructured, and the current structure was not a representation of the NYDA final structure. The due diligence report issues raised by the Auditor-General as matters of emphasis had been looked into. The NYDA had subsequently adopted the necessary policies, and this has been explained to the National Treasury and the Presidency. Because of the lending needs, the NYDA approached National Treasury for funding, but had been unable to secure funding as yet.

Co-Chairperson Ms Mabe noted that the NYDA seemed to have begun well, but appealed to it to ensure that systems were put in place to measure targets, that there should be compliance with the PFMA, and that the NYDA should place greater emphasis, in planning and budgeting, on the youth in rural areas

The meeting was adjourned.

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