Auditor-General's Office on the financial performance of the Department of International Relations and Cooperation; Department of International Relations and Cooperation briefing on their 2011

Meeting report

Opening Remarks
The Chairperson began by asking Members to desist from discussing the issue of the Dalai Lama’s visa. The Committee needed to engage with this matter robustly in future, but during this meeting the focus would be on the Department’s 2010/2011 Annual Report. The Chairperson proposed that the Committee find the time in its programme to engage robustly with this issue.

On the day prior to the meeting there were statements by Israeli Prime Minister Netanyahu and representatives from Hamas announcing the release of the Israeli soldier, Gilad Shalit, who was captured 5 years ago. The release would be part of a prisoner exchange, where an estimated 1 027 Palestinians would be exchanged for Mr Shalit. The Chairperson congratulated the parties for taking such a forward-looking step, but reminded the Committee that 5 000 Palestinians were still languishing in Israeli prisons, and over 200 were being detained without charge. The Chairperson gave a special word of appreciation to the Egyptian authorities, who brokered the deal.

The Chairperson updated the Committee on the loan to Swaziland. According to the National Treasury, the Swazi authorities had not yet signed the loan agreement as a result of the tough loan conditions imposed by South Africa. The Chairperson stated that this was a matter that the International Relations Committee, as well as the Finance Committee should find time to engage on.

The Chairperson noted with concern the escalation of fighting in Somalia between the African Union (AU) peacekeeping forces and the Somali military and al-Shabaab. The Committee hoped that ultimately, there would be a peaceful resolution to the conflict afflicting the Horn of Africa.

Mr M Booi (ANC) stated that the Committee should also find the time in its programme to discuss Libya and the impact that continuing violence would have for South Africa.

M K Mubu (DA) stated that the Committee should also find the time in its programme discuss the elections in Zambia and the implications for the region and Africa as a whole.

The Chairperson noted the suggestions and stated the Committee would have the opportunity to add these issues to its programme next week.

The Chairperson introduced the Auditor General office to present the briefing.

Briefing by the Auditor-General’s Office on the financial performance of the Department of International Relations and Cooperation (DIRCO)
Mr Vusi Msibi, Business Executive for the Auditor General of South Africa (AGSA) stated that the mission of the AGSA was to build confidence by enabling oversight, accountability and governance in the public sector. There had been a reduction in financially unqualified audit reports from 4 to 3 in the National Departments and a reduction in clean reports in Public Entities from 110 to 88 from the 2009/10 to 2010/11 financial years. These results reflected a regression in audit outcomes, There was a focus on certain compliance findings, particularly, supply chain management. The AGSA also reported on material adjustments in the financial statements. If the financials that were submitted for audits were not qualitative enough there was the potential that they might result in audit qualification. Qualified opinions had reduced from 12 to nine for National Departments. The Department of Public Works was disclaimed in terms of its result. Public Entities had a reduction of qualified opinions from 17 to 12. Adverse opinions had a slight reduction from three to two and disclaimer of opinions had a reduction from five to four.

The Department had achieved a clean audit opinion last year but had received a qualified report with findings on compliance with laws and regulations. The African Renaissance Fund (ARF) also had a clean audit opinion in 2009/10 and received a financially qualified report with findings on predetermined objectives and compliance with laws and regulations. The Department did not meet its strategic objectives in terms of usefulness. Its objectives were not measurable or time bound, as a result the information could not be audited. The AGSA audited supply chain management issues such as procurement and irregular expenditure and contract management in terms of evaluating the bid documentation and tax clearance certificates. Material adjustments were picked up during the process and led to findings on compliance issues. The adjustments were corrected in the annual financial statements, which was the reason that the audit opinion was unqualified. The review process should have been adequate and robust before the financials were submitted for audit. The Department had regressed in terms of the audit outcomes for the 2010/11 financial year. The ARF had similar issues in terms of principles because pre-determined objective were not met and were not useful in terms of measurability.

The Department had misstatements in capital assets. For the Department adjustments were made around certain disclosure items in the financial statements. There were wasteful expenditure issues around supply chain management and contract management. The AGSA audited predetermined objectives according to the criteria of non-compliance with legislation and usefulness. There needed to be intervention in these two areas. The AGSA quantified the Departments irregular expenditure as R526 000. There was no irregular expenditure incurred for the ARF. Regarding supply chain management issues, 62% of National Departments had issues; The AGSA found that DIRCO had issues with inadequate contract management and inadequate controls. There were no supply chain issues around the ARF. There were four issues that the AGSA flagged: strategic planning and performance management, material adjustments in the annual financial statements and annual report, procurement issues and expenditure management. Regarding human resource management, the AGSA identified weaknesses in controls on management of vacancies, performance management issues where senior. Managers did not have performance contracts. The AGSA audit on IT controls found that there were issues around IT governance, security management, user access management, service continuity and programme change management.

The AGSA found that the Department made progress in terms of implementing key controls under governance. However, the Department needed to have intervention in key areas under financial performance management, particularly under predetermined objectives. (see attached presentation for more information)

Discussion
The Chairperson opened the floor to discussion.

Mr S Mokgalapa (DA) thanked the AGSA for presenting such technical information in a simple manner. He asked in terms of compliance with the law, what would be the cost of these things? On the issue of capital assets and asset management in terms of foreign missions, the Committee had been asking where the problem resided. Was supply chain management more of a problem from the Department side?

Ms C Dudley (ACDP) asked for clarity on the supply chain management data.

Mr S Ngonyama (COPE) reiterated Ms Dudley’s question on clarity.  What was the distinction between ‘predetermined objectives’ and ‘smart principles’? He asked for clarity on the presentation layout comparing overall National performance and DIRCO’s performance.

Mr Mubu stated that on the issue of international transfers, the Department, had fluctuations, which had an impact on the reporting in the Department. What penalties did the Department suffer for having senior management who did not have performance contracts in place?

Mr Msibi apologised for any lack of clarity in the presentation in the comparison between the 2010/11 financial year and the 2009/10 financial year. He explained the layout and the colours distribution in the presentation.

On the issue of supply chain management the 62% referred to the percentage of National Departments that had issues with inadequate contract management and inadequate. When the Portfolio was stated as 100%, it meant that there was a finding for the Department.

On the question of compliance issue findings, the Department had issues when the accounting officer did not report the outcome of a disciplinary proceeding relating to financial misconduct as required by Treasury regulations 4.3.1. Under annual financial statements, the Public Finance Management Act (PFMA) stated that the financial statements should be prepared in line with the accounting framework to the fullest extent. If no adjustments were affected, the audit opinion would have been unqualified. The same standard applied to strategic planning and performance management. The AGSA had quarterly progress reports in terms of achieving measurable objectives and this was in line with Treasury regulation 5.3.1.

The distinction between pre-determined objectives and smart principles was that pre-determined objectives were supported by the budget and needed to be reported on. Smart principles meant that those pre-determined objectives needed to be specific, achievable, realistic and time-bound.

Capital assets processes were related to foreign missions. If assets were picked up from the asset register, they needed to be verified. When assets were purchased, the asset register needed to be updated. There were weaknesses in the controls around this.

On the question of supply chain management, the process needed to be transparent and enable the government to achieve economic efficiency under performance. There was an issue around awards that were made to close family members. From the audit perspective, if the relevant documentation was unavailable the AGSA could not say that the awards were fair and transparent.

The Chairperson asked for clarity on the awards issue; was there insufficient information, or was the information just not highlighted?

Mr Msibi responded that this was part of the AGSA’s horizontal audit and that it was not an issue for DIRCO but apart of an audit that was done on a wider scale. Awards were made, but the AGSA could not say whether the documentation was a result of insufficient information, or was the information that was not highlighted. This was why it was highlighted. If there were no performance agreements for senior management, it became difficult to test the authority for payment that flow in the way of a bonus. If this happened it would be irregular. The AGSA did not find any problems with bonus payments, the AGSA just could not find the specific signed contracts but there was sufficient audit evidence to support all the payments to the officials.

The Chairperson asked if it was not a contradiction for performance bonuses to be paid without contracts.

Mr Msibi responded that the Department was able to give the support of alternative information and confirmation that the employees were doing what they were supposed to do and that they did qualify for the bonuses.

Mr Eugene Zungo, Corporate Executive, AGSA, replied to the question on international transfers to the 124 missions. The budget accounted for fluctuations in the exchange rates. And the losses and gains were accounted for in the year-end balance. If it were a loss the Department would have to carry the expenditure and was a gain, the surplus would go to Treasury.

Mr Ngonyama asked whether areas of material misstatements fell under the explanation given to the Committee on the asset register. He asked for clarity on unauthorised, irregular, wasteful and fruitless expenditure as they related to the financial statements as an item that was not disclosed?

The Chairperson elaborated on Mr Ngonyama’s question and asked for a breakdown of the R526 000 in irregular expenditure that was referred to.

Mr Msibi stated that if the Department incurred irregular or fruitless expenditure, it was a requirement of the accounting framework that the irregular expenditure needed to be disclosed. The AGSA covered material adjustments that were done in the financial statements as a result of the audit process.

Mr Ngonyama asked for clarity on who did the adjustments.

Mr Zungo explained that at the end of May, the Department gave the AGSA a set of financial statements, with a view that the audit would be wrapped up by the end of July and be in the position to express an opinion. During this time, the AGSA could make an audit assessment and identify gaps.

The breakdown of the irregular expenditure incurred by the Department was: R227 000 related to supply chain management issues, R58 000 for no tax clearing certificate and there was no point scoring evaluation document to the amount of R240 000. This made up the R526 000 in irregular expenditure.

Mr Msibi added that it was a normal process that there should be adjustments during the audit process.

Mr Msibi closed by stating that on the issue of ARF disbursement, there were no disbursements made by ARF because none were recorded in 2010/11.

The Chairperson thanked the AGSA delegation for the briefing and stated that the Committee would have further engagement with the reports and closer scrutiny of the Department.

Briefing by the Department of International Relations and Cooperation on their Annual Report 2010/11
Mr Jerry Mmatjila, Director-General, DIRCO, presented the Department’s Annual Report. From an economic context, there was growing trade between South Africa and Asia. Advances in trade presupposed an opening up of South African trade. Trade with China had increased from 13% to 28% from 1990 to 2011 and trade with Europe decreased from 51% to 30 %. There was an increase in Foreign Direct Investment (FDI) in sub-Saharan Africa and the composition of private capital flows had increased. Part of DIRCO’s objectives was to attract investment, to open up markets and also to promote tourism. South Africa outperformed global tourism growth, which grew by 6.7% worldwide in 2010 and tourist arrivals to South Africa grew by 15%. This was as a result of inflows from the World Cup. Europe had remained a major source of tourism for South Africa; there had been an increase in tourist numbers from Central, America, South America and Asia. South Africa had worked hard to consolidate its footprint in Latin America and Asia. Neighbouring SADC countries continued to be the major source market for tourism and migration in and out if South Africa. With time, South Africa will see more arrivals from India, China and Asian countries.

Regarding the Africa Multilateral Branch, South Africa was elected to a non-permanent seat on the UN Security Council. This provided a unique opportunity for South Africa to advance the cause of global peace. President Jacob Zuma co-chaired a high-level panel on global sustainability with President Taria Halonen of Finland. South Africa co-chaired the G20 development working group with France and South Korea. South Africa also provided humanitarian assistance and support to Benin, Niger, Chad, Haiti, Chile, Cuba, Haiti and Japan. Challenges faced by DIRCO’s multilateral branch included Cabinet decisions that remained inconsistent across Departments on coordination of certain issues that were engaged with internationally. As of 2010, there were 47 missions in Africa and hopefully this was a movement towards having a mission in every African country. The value of such a footprint around the continent was that Africa was where most of South Africa’s parastatal investments were and where most of DIRCO resources were deployed in terms of peace and security and post-conflict programmes. South Africa played a role in finalising the NEPAD Planning and Coordinating Agency’s (NPCA) integration into the structures and processes of the African Union. South Africa participated in technical assessment missions to Seychelles, Mozambique and Tanzania in support of developing a SADC Plan of Action on Maritime Piracy

The AU endorsed the plan to deploy resources in the Indian Ocean. DIRCO had taken part in elections observing in Mauritius, Tanzania and Guinea. South Africa continued to support peace in the Democratic Republic of Congo and Sudan and hoped to send troops to Somalia to assist in resolving that conflict. The Africa multilateral branch faced challenges related to under-representation in the African Union and NEPAD structures, ccoordination and communication amongst stakeholders, shortage of resources for implementation of NEPAD programmes and projects, slow integration of the African Peer Review Mechanism into the structures, processes of the African Union and capacity constraints to the
SADC Secretariat.

On the Africa Bilateral Branch tourism figures, Angolans were among the biggest spenders in South Africa, as were tourist from DR Congo, Mozambique and Zimbabwe. The Africa Bilateral Branch contributed to the peace process in Madagascar. South Africa was still playing a role in South Sudan with the reconstruction and outstanding issues in the creation of a new state.

The Asia and Middle East Branch had established a declaration with Beijing to have a strategic partnership with China. BRICS countries would reshape the global economy and trade had almost doubled with BRICS countries. South Africa currently exported more to the other BRICS countries than it imported, hopefully in a few years South Africa would balance the trade. There was lots of work being done with Russia and India on value added. Tourist arrivals from Saudi Arabia had increased as trade with the Gulf States had increased. The Asia and Middle East Branch established a business forum with Syria. The challenges in the Asia and Middle East Branch Budget were concerned with budgeting. Also, there was not a significant inflow of FDI from the Gulf States.

The America’s Branch had 17 missions in the Americas. Michelle Obama’s visit to South Africa was a success as it changed perceptions of South Africa. Indications were that African Growth and Opportunity Act (AGOA) would be extended beyond 2015, when it was due to expire.

There were challenges with the America’s Branch as Official Development Assistance could be coming under renewed scrutiny. And the new Canadian government had invested less in Africa and taken a more supportive approach towards Israel.

The Europe Branch had 28 missions across Europe and was moving to open more missions in Eastern Europe and do more work in Russia as both countries had similar strategic goals, especially related to minerals. Turkey was becoming an increasingly important country in that region. There was a slow down in trade and investment with Europe and this was related to the state of the global economy.

The Diplomatic Training, Research and Development Branch had an international diplomatic training programme in the DR Congo and the Sudan. The hope was that these trainees could be future ambassadors in the DR Congo. The public diplomacy unit had grown because the vacant director positions needed to be filled and the Department had managed to appoint all vacant director positions. According to the Human Resources Branch, DIRCO had over 2 000 posts and had a low turnover rate because the Department encouraged promotion from within as it was crucial to encourage locally recruited personnel (LRP). 

In regards to Appropriations, DIRCO spent 93.7% of its annual budget allocation of R 4 715 818 billion. The Department achieved an Unqualified Audit Report with other matters reported. There was no unauthorised expenditure reported. Irregular expenditure of R526 000.00 reported.  (see attach presentation for more information)

Discussion
The Chairperson opened the floor to questions

Mr Mubu raised the concern about South Africa grappling with AU functions despite the fact that it contributed significantly to these structures. What interventions was the Department undertaking to circumvent this? With the establishment of the SADC customs union, what impact did it have on SACU and the EPA on some of the countries in the region?

Ms Dudley referred back to the AGSA audit report and asked about the increase in irregular expenditures. How much of an issue was procurement and non-compliance, and what was being done by the Department? What were we importing from Saudi and Iran?

Ms R Magau (ANC) stated South Africa was hosting the Pan African Parliament. How far along was this process? When would the South African Council on International Relations be established?

Ms C September (ANC) asked what challenges DIRCO faced in meeting its objectives related to finances. Should DRICO be boxed in to this process?

Mr Ngonyama asked for the DIRCO delegation to engage with issues raised in the AGSA briefing, specifically related to the asset register update, supply chain management issues and financial misstatements.

Mr B Skosana (IFP) stated that the trade gap between African countries was concerning. How did DIRCO reconcile trade within the continent on the question of national interest? On the issue of Locally Recruited Personnel, he commented that it was difficult for South Africa to define a foreign policy in this context and this needed to be changed.

Mr E Sulliman (ANC) asked about the reasons for the emphasis of matters on the unqualified audit report. Regarding the manpower problem, did the Department conduct any exit interviews? What were some of the underlying reason for the staff to leave the Department?

Mr Mokgalapa asked for clarification on the overall status of mission assets. The AGSA briefing referred to a disciplinary hearing for non-compliance with regards to irregular expenditure that was not fully explained, could this be clarified? Was there a new policy being implemented regarding the issue of awards for close family members? What was the status quo?

The Chairperson raised the issue of concern surrounding LRPs, because in Ethiopia there were many LRPs and there were critical points of intelligence gathering for countries.

Mr Asogan Moodley, Chief Financial Officer, DIRCO, responded that all the matters raised by the AGSA were correct and last year when a clean audit report was received, the standards had increased. One matter was material adjustments for commercial banks. The cash available at missions abroad had resulted in a R77 million surplus because of the stronger Rand. For this year DIRCO ensured that there were no material adjustments in any part of the financial statements. With regards to capital assets a difference arose between head office and the missions was a result of a timing nature. Missions purchased the assets, then advised the head office and then the asset register was updated. This fluid nature means that changes to the asset register were not always reflected during the time of the audit. The process had been improved for the asset register to be update on a real-time basis rather than a monthly basis.

In regards to the R526 000 in irregular expenditure, the Department had a difference in view from the AGSA. The amount of R240 000 was because the Department did not receive free quotations; DIRCO had requested seven quotations and only two were received. There was an ICT expenditure for toner cartridges and the point scoring sheet could not be located, however with this particular service the lowest quotation was accepted but the AGSA disagreed with the process. Also a payment of R58 000 was made to the Non-Governmental Organization ACCORD and the finding was that there was no tax clearance certificate. ACCORD required a tax exemption form from DIRCO, which was provided to the AGSA. However the view of the AGSA was that the Department needed to provide a tax clearance certificate. DIRCO would have to engage with the court to find out whether a tax exemption form was equivalent to a tax clearance certificate. Six payment to various service providers totalled R183 000, DIRCO could not produce evidence that three quotations were received. These payments were approved by the various structures by the actual quotations received and in a number of them; the three quotations could not be received.  The view of the AGSA was that if there was no quotation, then it was considered irregular expenditure. Eight payments amounted to a total of R43 000, where three quotations were not requested because of the unreasonable time effect nature of the services acquired, the Department wrote to the Director General about deviation. The Director General gave the deviation in seven out of the eight cases but the AGSA concluded that the reasons given were not justified and recorded it as an irregular expenditure. With all of the cases involved in the entire R526 000 there was not one instance did the Department realize a loss. The expenditures were for service rendered and the goods and services were received. The question that arose was in the processes that the Department followed to acquire those goods and services. Having had these conversations with the AGSA, DIRCO had tightened up its performance.

Mr Moodley was not aware of the awarding of a tender to family members. He stated that he would engage with AGSA to get that information and revert back to the Committee.

Ambassador Kudjoe, Deputy Director General for Africa Multilateral responded that with regards to the predetermined objectives relating to the ARF, unlike other business units, it was difficult at the beginning of the financial year to state the objectives of what it set out to do. This was because the Fund was regulated by an act of Parliament and had clearly stated objective for it should be used. The projects that were largely funded by the ARF were projects that would have resulted from commitments made by political principles. This was why the ARF could not have predetermined objectives at the beginning of the financial year. Also, most of implementation happened outside of South Africa borders and the accounting structures were outside of the control of the Department.

On the question of the Pan-African Parliament (PAP), there was an initial budget of R800 million that would be needed to construct the PAP. As of right now PAP was constituted of 250 members however once it was converted into a legislative body the number would rise to 500. The architectural drawings were for a Parliament that would seat 250, but the building would also serve as an AU precinct. A site was identified in Midrand and R50 million was spent on a foundation. After the foundation was laid, the Department of Environmental Affairs said that the site was a protected area and construction could not continue. Later on, the Ministers of Finance, Public Works and Environment came together and decided that it was in South Africa’s best interest to continue with structure as it stood. In DIRCO’s interaction with Treasury, it had transpired that the R800 million that was set aside was insufficient. The Department of Public Works and Treasury would revert to DIRCO with the exact figures that would be needed.

The Chairperson made a requested for a written report from Mr Moodley on the investigation of the awards given to family members. The Chairperson thanked the DIRCO delegation for the annual report and congratulated the Department on an unqualified audit opinion. The Committee continued to expect improvements regarding the matters of emphasis.

The Chairperson closed the meeting.