Budgetary Review and Recommendation Report: Training by Parliamentary Committee Section; Auditor-General briefing on 2010/11 Annual Report of the Department of Energy

Meeting Summary

The Unit Manager of the Committee Section of Parliament briefed the Committee on the compilation of the Budgetary Review and Recommendation Reports required in terms of Section 77 (3) of the Constitution and Section 5 of the Money Bills Amendment Procedure and Related Matters Act.  Committees were required to assess the performance of all national departments and table the reports in the National Assembly by the end of October each year.  The content of the report was prescribed and the report had to be compiled in a specific format.  The Committee Section of Parliament had published a guide on the compilation of the reports.

Members welcomed the publication of the guide.  Questions were asked about the inclusion of timeframes in the recommendations made by the Committee, the consideration of confidential information, the failure of departments to submit annual reports on time and the consideration of unauthorised but valid emergency expenditure.

Senior officials from the Office of the Auditor-General of South Africa briefed the Committee on the role played by the Auditor-General in achieving the national objective for clean

Training on the Budgetary Review and Recommendation Report (BRRR)
Mr Mkhethwa Mkhize, Unit Manager: Committee Section, Parliament had compiled a guide for Parliamentary Committees on the compilation of the Budgetary Review and Recommendation Reports required in accordance with Section 77 (3) of the Constitution and Section 5 of the Money Bills Amendment Procedure and Related Matters Act.

Parliamentary Committees were required to assess the performance of all national departments and to table the BRRR in the National Assembly on an annual basis.  The report had to be submitted to the Minister of Finance and the relevant Cabinet Minister.  The content of the report was prescribed in the Act and a template had been designed to assist Committees to compile the report in a specific format.

The report included an introduction; the strategic priorities and objectives of the department; an analysis of the strategic and operational plans; an analysis of the annual report and financial statements of the department; consideration of the reports of the Select Committee on public Accounts (SCOPA); consideration of other information; a conclusion and the recommendations of the Committee.

The BRRR cycle comprised five phases and Committees were required to complete the process by the end of October each year.  The challenge for the Committee was to complete the report by the deadline as departments had until 30 September to submit the annual report for the prior fiscal year.

Discussion
Ms N Mathibela (ANC) was concerned that the inclusion of deadlines in the recommendations of the Committee could be construed as an instruction by the Committee to the department.

Mr J Selau (ANC) complemented Mr Mkhize on the guide, which had been outstanding for some time.  The Spending Trend Analyses (STA’s) published by the National Treasury were confidential and not intended for public consumption.  However, the Committee’s proceedings were open to the public and he was concerned that the consideration of the STA’s would compromise confidentiality.

Mr S Radebe (ANC) wanted to know what action could be taken by the Committee if the department failed to submit the annual report by the end of September.  The performance of the department needed to be aligned to the economic impact of service delivery.  He asked how the Committee should consider unauthorised, emergency spending that was intended to enhance service delivery.  Members had a mandate from their constituents and occasionally needed to approach the Minister to resolve issues.

Mr Mkhize advised that the rules of Parliament made provision for confidential matters to be discussed by Committees in closed sessions.  Committees were responsible for conducting oversight over departments and needed to consider the STA’s issued by the National Treasury.  Departments that failed to issue annual reports by 30 September contravened the Public Finance Management Act (PFMA).  He suggested that Committees requested departments to provide an explanation for the late submission of reports, in the spirit of cooperative governance.

Mr Mkhize drew a distinction between unforeseen, valid expenditure and fruitless and wasteful expenditure.  The latter was expenditure that resulted in no result.  Examples of unforeseen expenditure were expenses incurred in dealing with natural disasters, such as floods.  Departments were accountable to Parliament and Members of Parliament had to ensure that the necessary questions were asked.  Committees needed to analyse the departments’ use of resources and ascertain whether the department delivered value for money.

In response to Ms Mathibela’s question, Mr Mkhize explained the principle of the separation of powers enshrined in the Constitution.  Parliament was independent of the executive but the entities needed to work together in the spirit of cooperative governance.  The inclusion of deadlines in the recommendations of the Committee was an indication of the urgency of the matter.  Committees provided guidance and advice but recommendations should be phrased in a manner that avoided interpretation as orders or instructions from the Committee.

Briefing by the Auditor-General of South Africa (AGSA) on the 2010/11 Annual Report of the Department of Energy
Mr Naveen Mooloo, Senior Manager, AGSA briefed the Committee on the contribution of the Auditor-General to clean administration.  A clean audit report was achieved if there were no material misstatements on financial statements (i.e. qualifications), no adverse findings on reported achievements of pre-determined objectives and no adverse findings on compliance to laws and regulations.  Adverse findings indicated internal control deficiencies in the areas of leadership, financial performance and governance.  In particular, AGSA considered the simplicity, clarity and relevance of messages, the visibility of leadership and the effectiveness of governance structures.

The report of the Auditor-General included the opinion of the financial statements, the report on pre-determined objectives, compliance with applicable laws and regulations and the correction of any material misstatements.

The briefing included a summary of the audit outcomes of the Department of Energy (DOE) and its subsidiary entities the National Energy Regulator of South Africa (NERSA), Electricity Distribution Industry Holdings (EDIH), National Nuclear Regulator (NNR), Nuclear Energy Corporation of South Africa (NECSA), Strategic Fuel Fund (SFF) and CEF (Pty) Ltd.  The legislative requirements for pre-determined objectives were listed and the audit criteria applied by AGSA were summarised.  The relationship between planning concepts and the applicable audit considerations were illustrated.

The financial year 2010/11 was the first year of operations of the DOE after it was established as a separate department from the Department of Mineral Resources.  The findings of the Auditor-General in the report on pre-determined objectives resulted from inconsistencies in the reporting of achievements versus the strategic objectives of the department.  38% of the objectives were not measurable.  There were instances of non-compliance with the PFMA and the Division of Revenue Act (DORA).  Errors in the financial reports as at 31 May 2011 were identified through the audit process and subsequently corrected.

The Petroleum Agency of South Africa (PASA) was a subsidiary of CEF (Pty) Ltd and the material misstatements in the PASA financial statements had a significant impact on the consolidated statements of CEF (Pty) Ltd).

Discussion
Mr Radebe asked if an unmodified audit opinion differed from an unqualified audit opinion.  He asked for more information of the finding concerning PASA and CEF (Pty) Ltd.  He asked for details of the findings of non-compliance with the PFMA of SFF, EDIH, NNR and CEF (Pty) Ltd.

Mr Selau observed that the findings concerning pre-determined objectives applied to the DOE, EDIH, NNR and SFF.  There appeared to be a trend and he wondered if the officials of the Department were providing incorrect advise to the subsidiaries.  He asked if the Auditor-General advised in the corrective action that needed to be taken.  He said that certain suppliers provided goods and services to Government entities at vastly inflated prices, which he considered to be a corrupt practice.  He asked if the Auditor-General reported on under-expenditure.  In certain cases, under-expenditure was the result of savings and good financial performance but in other cases, under-expenditure indicated a lack of performance or over-budgeting.

Ms Mathibela pointed out that the DOE transferred significant amounts to municipalities but many local government authorities lacked the capacity to spend the transferred funds effectively.  She asked if the municipality or the DOE was held responsible for such under-spending.  She wanted to know what happened to unspent funds.

Mr Kevish Lachman, Business Executive, AGSA explained that unmodified and unqualified audit opinions had the same meaning.  The finding concerning the non-compliance with the PFMA referred to the material errors in the financial statements and reports of the entities concerned.  The PFMA required the Accounting Officer of the relevant entity to ensure that there were no errors.  It was essential that the internal audit function operated effectively and that the governance structures of entities focused on resolving the areas of concern indicated in the audit reports.  The Committee was urged to include the effective operation of internal audit structures in its oversight activities.

Mr Lachman said that the ideal scenario was for Government entities to deliver the promised services at a cost that was less than the budgeted amount.  In general, the budget supported the delivery of the strategic plan.  There were many reasons for under-spending but under-spending was a matter of concern when there was a failure to deliver services included in the strategic plans.  The Department transferred funds to local government authorities in accordance with approved project plans.  The municipality was held accountable if it failed to spend the transferred funds.  However, the Department was responsible for monitoring the application of funds transferred to the municipalities.  Entities could apply to the National Treasury to roll-over unspent funds to the following financial year but must provide adequate justification.  If the application to roll over funding was not made or not approved, the funds must be returned to the National Treasury.

Mr Mooloo explained that CEF (Pty) Ltd submitted a consolidated financial statement and any material misstatements on the statements of its subsidiary entities would impact on the CEF statements.  PASA was a very large organisation and had a significant financial impact on CEF.  Only NERSA and NECSA did not require the correction of material misstatements.  In the case of the DOE, there were audit findings concerning irregular and unauthorised expenditure as well.  The Department and each subsidiary entity had its own Accounting Officer.  The split of the Departments of Energy and Mineral Resources (DMR) did not favour the DOE as most of the experienced finance and internal audit personnel were transferred to the Department of Mineral Resources.

Mr Mooloo said that the strategic plans of the subsidiary entities had to be amended in accordance with a set procedure.  The changes were made but the correct procedure was not followed by the entities concerned, hence the audit finding.  Each entity had a Board and the senior leadership of the organisation had to ensure that the required responsibilities were carried out.  Funds were transferred to local government authorities in accordance with delivery agreements.  The recipient municipality had to ensure that the necessary capacity and systems were in place before the funds were transferred.  Funds can only be rolled over for one year.  The finding concerning the unauthorised expenditure of the DOE related to the failure to transfer the last payment of the prior fiscal year on time.

Ms Mathibela said that the DOE had explained that the funds could not be transferred to the municipalities on time because the Department’s year-end was 30 April but the end of the financial year for local government authorities was 30 June.

Mr Radebe asked if AGSA engaged with the Chief Financial Officer on the audit findings and provided advice on corrective measures.  He noted that the total amount of irregular expenditure exceeded R112 million (see note 25 on page 142 of the annual report).  He asked if the irregularities arose because of the failure to adhere to regulations concerning obtaining a certain number of quotations or a person exceeding the approval limit.

The Chairperson asked if PASA submitted separate audited financial statements.  During oversight visits, the Committee had found that the regional offices of the DOE were not in an acceptable state.  The DOE complained that the DMR received more than 70% of the resources when the two departments were split.  He asked if AGSA took the inequitable division of resources into consideration and if the DOE had a valid argument that it was operating from a very low basis.

Mr Mooloo agreed that the disparity in the year end dates was problematic but should not affect service delivery.  Monthly targets needed to be in place and quarterly reports had to be submitted.  He thought that Government departments should be required to submit quarterly financial reports as were required from State-owned entities.  The auditor did engage with the senior management of the department.  Most of the engagement with the CFO concerned aspects of financial management but the issues related to compliance, performance and service delivery affected all members of management.  Many discussions were held with the CFO of the DOE.

Mr Mooloo explained that the irregular expenditure item totaling R110.9 million referred to an instance where the person authorising the transfer did not have the necessary authority to approve such a large amount.  The responsibility should have been delegated to a more senior official and the necessary procedure was not in place.  Another incident referred to a payment of R1.43 million to a service provider.  In this case, the criteria to evaluate the bid were expanded after the bid was received and could have resulted in legal action being taken against the Department.  The DOE needed to have the necessary systems and resources in place to avoid failures to comply with procurement procedures.

Mr Mooloo confirmed that PASA submitted separate financial statements, which were included in the consolidated CEF statements.  He agreed that the DOE lacked sufficient resources in its regional offices and suggested that the Department reviewed the need for services provided by its regional offices and the resources that was required.  The DOE received insufficient administration support resources from the split.  The DOE was mostly project-oriented and retained its operational capacity.

The Chairperson said that the Committee needed accurate information from the DOE on the resources that was required.  The Committee wished to support the DOE in ensuring that it had adequate resources to achieve the objectives of its projects, for example the generation of renewable energy had become more important.  The intention of the Department was to deliver services through its regional offices and not only through the head office.  However, the Department lacked sufficient funding to appoint staff for the regional operations.  Government’s objective was for all State entities to have clean audit reports by 2014.  He wanted to know if the DOE was on track to achieve this objective.

Ms Mathibela asked why the DMR was mentioned in the 2010/11 annual report as the two departments had split in 2009.

Mr Lachman suggested that the question was referred to the DOE.  AGSA had engaged with the leadership of the two departments at the time of the split in order to ensure that both parties received their fair share of the assets and resources.  Both parties had agreed to the terms of the split.  If the department subsequently experienced difficulties as a result of the split, AGSA considered what controls had been put in place to deal with the consequences and what processes were followed in order to obtain the necessary resources.  The responsibility of AGSA was limited to auditing and the leadership of the Department was held accountable for the management of the entity.

The Chairperson remarked that more demands were placed on the Committee and it had become necessary for Members to develop additional skills.  The Committee might require more information and assistance from AGSA in future.  He suggested that the representatives of the DOE present at the meeting noted the issues that had been raised during the proceedings.  He asked if the Auditor-General considered the impact of the services delivered by the Department.

Mr Lachman advised that a more comprehensive briefing on the analysis of annual reports and the performance of departments could be presented to the Committee if required.

The meeting was adjourned.

Members asked questions to obtain clarity on unmodified and unqualified opinions on financial statements, the findings on pre-determined objectives, compliance with legislation and regulations and the correction of material errors in financial reports.  Members asked for details of the audit findings for the Department of Energy.  Other questions concerned the role of accounting officers of the Department in advising subsidiary entities, the engagement of the Auditor-General with departmental officials, the consideration of under-expenditure, the responsibility for the under-spending of funds transferred by the Department to municipalities and the rolling over of unspent funds.