National Department of Health financial performance, provincial departments' infrastructure delivery processes: Auditor General briefing

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Health

12 October 2011
Chairperson: Mr B Goqwana
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Meeting Summary

The Auditor-General of South Africa (AGSA) gave a presentation on the performance of the Department of Health (DoH) and infrastructure delivery processes of the Provincial Departments of Health. The health sector  was the worst performing government sector, since 80% of the financial audits conducted resulted in qualified or disclaimer audit opinions, and the remaining 20% had unqualified audit opinions with findings. The National Department of Health itself had received a qualified audit. This was attributed to the fact that it had moved premises, that it had only an Acting Chief Financial Officer, and that it had not maintained its monthly asset register. An additional time of three months had been granted to it, and a new Chief Financial Officer was appointed, who had assured AGSA that it would be ready for another interim audit in January 2012.

AGSA pointed out that there was provision for correction of misstatements after they were exposed in the audit, and that inaccuracies were found in all provinces except North West and Western Cape. Capital assets records needed to be corrected in five provinces. Irregular expenditure had increased from R4.1 billion in 2009/10, to R 5.7 billion in 2010/11, and this was found in all provinces, being the highest in Gauteng (where R1.3 billion irregular expenditure was found on compensation of employees) and North West (where R1 billion related to irregular supply chain management procedures). Appointment processes for human resources were inadequate in seven provincial departments, and non-compliance, including unfair procurement processes, were found in seven provinces.

AGSA stressed that in order to see improvements, there would have to be substantially improved leadership by accounting officers and a culture of compliance. The root causes of defective financial statements were lack of accountability and lack of consequences for actions or inaction. Service delivery reports had not met regulatory requirements, and were not reliable. Many senior management staff had not signed performance agreements. Although the Standing Committee on Public Accounts investigated matters, it was a year behind in interrogating reports and two years behind in making resolutions.

AGSA then reported that the infrastructure budget for the provinces increased from R5.6 billion in 2009/10, to R6 billion in 2010/11. The provincial departments were supported in planning, organising, monitoring and control of projects by implementing agents, usually the Department of Public Works (DPW). Rules and performance agreements were in place, but over 40% of procurement and contracting contravened proper procedures. Completion times of the contractors, appointment of staff, availability of equipment and municipal services were not sufficiently synchronised. This ineffective coordination resulted in construction not being optimally effected, changes to projects, and lack of capacity in contractors.  AGSA said that a far more robust procurement system, with transparency and accountability, was required. It had submitted management reports to the respective accounting officers of the DoH, and they did appear to have been taken seriously, with an engineer now being appointed, and stronger support now offered by DoH, including alignment of funding against specific targets. A Provincial Progress Review Committee was established. Service level agreements would be signed with all provincial departments to coordinate the roles of service providers, and standardised designs for health facilities were to be adopted.

AGSA noted that 25% of all irregular spending across all departments had happened at DoH, but the new Director General was strongly driving remedial action and offering clear leadership. Performance agreements for staff were developed and skilled Chief Financial Officer was appointed.

Members questioned whether AGSA had the mandate to do anything other than report, but AGSA confirmed that it could not take action itself, but that the bodies to whom it reported must then determine the steps to be taken. Members asked how people unfit for their posts were being appointed, what action AGSA would take if it identified unqualified employees, or corruption in tenders, and asked also if there was a link between contracts awarded by officials and the companies contracted. They asked if incompetent contractors were blacklisted, and how the contractor’s history would be scrutinised. They asked if this was the first performance audit on infrastructure, questioned if it covered all projects, and noted that the scope of the problem could be worse than reported. Members also asked for clarity on irregular expenditure in Northern Cape and Gauteng, and the total amounts wasted on infrastructure. They also asked if there was compliance with Bureau of Standards requirements, how vandalism at sites impacted on costs. Members also enquired as to whether DoH was audited regularly, what support was offered by AGSA. One Member suggested that perhaps a forensic audit or special investigation audit should be conducted, although the Chairperson thought it might be more urgent to find a solution to the pressing issues, and try to discover the missing information in the meantime.

Meeting report

Auditor-General South Africa (AGSA) briefing on performance of National Department of Health
Ms Corne Myburgh, Business Executive responsible for Health, Auditor-General South Africa, said that in 2010/11, the health sector had been the worst-performing in terms of its financial statements, since 80% of the financial audits had resulted in qualified or disclaimer audit opinions, whilst the other 20% had unqualified audit opinions with findings. The two provinces of Northern Cape and Limpopo received disclaimers, six provinces had qualified audit opinions and two had unqualified audit opinions with findings. No departments of Health were financially unqualified with no other findings.

The National Department of Health (DoH) had received a qualified audit. This was ascribed to the fact that it had moved premises, that it had only an Acting Chief Financial Officer, and that it had not maintained its monthly asset register. Additional consultants were brought in and an additional time of three months was allocated for it to improve its financial position. The new Chief Financial Officer (CFO) had promised that by January 2012, with the new premises and an improved asset register, the DoH would be ready for another interim audit by the Auditor-General (AGSA).

AGSA provided for misstatements to be corrected after they were exposed in the audit. A big concern was that the records were not accurate for disclosure items in all provinces, except for North West and Western Cape. Capital assets records also had to be corrected in five provinces – Eastern Cape, Gauteng, KwaZulu Natal (KZN), Mpumalanga and North West provinces. Irregular expenditure had increased from R4.1 billion in 2009/10, to R5.7 billion in 2010/11. The figure for 2010/11 had been amended from R3.4 billion to R5.7 billion after the audit, when an additional R 2.4 billion was discovered.

Irregular expenditure was recorded in all provinces. It was excessive in Gauteng, with R1.3 billion attributed to compensation of employees, and in the North West province, where almost R1 billion was related to irregular supply chain management expenditure. On a more positive note, in Mpumalanga only R1.4 million in irregular expenditure was disclosed, and this was attributed to tight hands-on control by the Chief Financial Officer. In the Free State, the improved financial records were attributed to the fact that the CFO was a chartered accountant.

According to AGSA, improved leadership by accounting officers and a culture of compliance were important to achieve improvement in the audit results. The root causes of defective financial statements were lack of accountability and lack of consequences for actions or inaction. Factors contributing to this were the low skills of staff, and the slow rate of filling vacancies. The DoH had had an acting CFO for more than two years. There were poor financial reporting systems and poor IT governance and IT system controls where user access was not secure. There was inadequate internal audit reporting, and ineffective review by the audit committee. Key control monitoring at leadership level was poor. The Portfolio Committee needed to do more to monitor the action plans and to take steps against non-specific action plans without fixed time frames. It was also noted that the Standing Committee on Public Accounts (SCOPA) was more than a year behind in interrogating and reviewing annual reports of departments, and it was two years behind in tabling resolutions regarding corrective action. Defective service delivery reports did not meet regulatory requirements and therefore were not useful, nor reliable. In some cases, senior management had not signed performance agreements.

Non-compliance was found on procurement processes and supply chain management (see page 15). Uncompetitive or unfair procurement processes were found to exist in all provinces except in Mpumalanga, and inadequate contract management was found in all provinces except Mpumalanga and the Western Cape. Appointment processes for human resources were inadequate in seven provincial departments.

Performance audit on the infrastructure delivery process
Mr Corrie Pretorius, Senior Manager: Performance Audit Expert, AGSA, said that the infrastructure budget for the provincial health departments increased from R5.6 billion in 2009/10 to R6 billion in 2010/11. The provincial departments were supported by implementing agents, usually the Department of Public Works (DPW), which played an important role in the planning, organising, monitoring and control of the infrastructure projects.

While the rules and performance agreements were in place, the performance audit had found that over 40% of procurement and contracting in the provincial health departments had contravened proper procedures.

Role players were not properly engaged during the planning of the projects and needs determination, and planning and prioritising was ineffective. The completion times of the contractors, appointment of staff, availability of equipment and municipal services were not sufficiently synchronised, and insufficient coordination and liaison between officials across departments and implementing agents resulted in construction not being optimally used at the time of commissioning. Service delivery was negatively affected when projects were delayed due to scope changes, and where multiple contracts were awarded to the same contractor. In many cases, construction was not completed. The Construction Industry Development Board (CIDB) had the important function of rating contractors according to contractor capacity. Furthermore, the project manager did not always inspect the facilities at completion before the final account was settled.

A far more robust procurement system, with transparency and accountability, was required. Management reports were submitted by AGSA to the respective accounting officers of the DoH and these summarised reports appeared to have been taken seriously by the DoH. An engineer had been appointed to oversee all aspects of infrastructure, including the Hospital Revitalisation Grant. The National Health Council had approved appointment of residential engineers at each provincial department, and support to the provincial departments by the national department was strengthened. An integrated approach to address health technology and infrastructure had been implemented to ensure better planning and efficiency. Funding was now was being aligned with milestones and phases of infrastructure plans, including maintenance and efficient management of professional fees per project. In addition, expenditure per project was being monitored on a monthly basis. Consultation with the provinces was being improved through the newly established Provincial Progress Review Committee meetings, chaired by the DoH.  

AGSA stressed that effective project management was needed to supervise and monitor projects and achieve the required time frames and desired level of quality for the cost involved. As part of the strengthening of capacity and monitoring of projects, service level agreements would be signed with all the provincial departments of Health and Public Works to clearly define and coordinate the roles of the various service providers. The National DoH also intended to develop standard and uniform designs for health facilities, to reduce the professional fees and standardise the format of consultant appointments.

Ms Alice Miller, Corporate Executive, AGSA, added that the spending by DoH constituted 25% of irregular spending of all the departments in the country. The new Director General of DoH was driving the remedial action, and was offering clear leadership. Internally, performance agreements were being developed for all staff. The DoH had also taken full ownership of the urgent corrective action required as a result of the infrastructure audit. DoH had also now appointed a skilled Chief Financial Officer, who had a good track record, and who was addressing strengthening assistance across the provinces.

The Chairperson said that the problem appeared to be that South Africa had a quasi-federal system with little connection between provincial legislature and national oversight. Although it was distressing that DoH had the worst audit of all departments, there appeared to be hope that the problems could be overcome.

Discussion
Mr M Hoosen (ID) said that he would pose most of his questions to the DoH when they would meet the following week. He noted that the 72-page audit report read “like a horror movie” and he was distressed to see that this had been going on for years. The appointment of a new Director-General and the steps taken had been encouraging, although he feared that if people were not made accountable, the performance contracts would amount to nothing. “Lack of capacity” was a polite way of describing “incompetence”. He said that even after expensive investigations were conducted, many of the previous findings appeared to be been ignored, and some contractors were simply continuing to be paid. He appealed to Members to speak out strongly on the issues, with a unified voice. He noted that people were dying for lack of care, whilst DoH appeared to be wasting money.

Mr Hoosen asked if AGSA only reported its findings, or if it had the power to take any other action.

Ms Miller replied that AGSA’s legislative mandate was to audit and report to structures that would take action. The audit was compiled into a general Public Finance Management Act (PFMA) report, which was then presented to oversight structures in the National Assembly. For the Department of Health, an additional management report was also generated. AGSA was the enabling mechanism. Even when AGSA conducted a special investigation, its task was limited to delivering a report. It was then up to the DoH to initiate action. AGSA endeavored to discuss its findings with administrative and political leadership, including the Portfolio Committees, the Standing Committee on Public Accounts (SCOPA), the National Health Council and any other interested forum.

Mr Hoosen asked if a previous infrastructure audit had been conducted and, if so, when it had been conducted and what progress had been made.

Mr Pretorius replied that in AGSA the majority of staff were employed to do the irregularity audits, and less than a hundred staff members were employed to do the performance audits. This was the first performance audit on infrastructure for the DoH. Corrective measures had not been effective in addressing the issues, and AGSA was implementing further audits to correct the actions. The performance auditors were coordinating with colleagues who were performing the irregularity audit so that, on an annual basis, there would be follow-up on the same issues to ensure that corrective action was put in place and situations were resolved over time. The infrastructure audit had commenced in 2008/09, and involved an in-depth retrospective root-cause analysis of completed projects. One of the deep-seated issues for AGSA in the past had been procurement and the relationship between contractors and employees of DoH. Despite AGSA’s recommendations, the problem had not been dealt with sufficiently. However, any links that may exist were not made apparent nor available to AGSA when it conducted the performance audits of the infrastructure delivery process.

Mr Hoosen asked if the infrastructure audit was performed on only a selection of projects, or whether it extended to all projects.

Mr Pretorius replied that 133 infrastructure projects were audited, but that some information on those projects was not available. The report was therefore not a comprehensive picture on every ground level problem.

The Chairperson asked if the full picture was possibly worse than what was presented to the Committee.

Mr Pretorius replied that unfortunately that it was true that the situation was worse than what was presented to the Committee.

Ms E More (DA) asked if the contractor’s history was scrutinised or if reference-checks were done before contractors would be chosen for a project.

Mr Pretorius replied that contractors had, by law, to be registered by the CIDB, which operated a public register. However, a number of contractors audited were not registered, or might have been registered for smaller projects than those allocated to them. Since the legislation had been maturing, the situation was improving. Contractors would now also be registered by CIDB after having received a public contract. Currently the only information acquired was on the Bid Document, on which the contractor indicated his/her current or previous work.

Mr M Waters (DA) asked how people were being employed in the Health sector when they were not fit for the post. He also asked what action AGSA took when it identified unqualified employees in posts, as well as what action it would take when finding that tenders were awarded through irregular procedures and blatant corruption. He also asked if there was a link between family members receiving contracts and officials in the DoH, and, if so, what was the extent of this problem.

Ms Miller replied that indeed deficiencies had been found in the process of appointment of employees. Failure in the appointment process resulted in required staff skills not being met. The HR process had been a concern for AGSA over the past few years. He pointed out that not every deficiency resulted in irregular expenditure.

Ms More commented that an effective Hospital Board would perhaps be instrumental in preventing some of the issues highlighted in the audit report.

Mr Pretorius said that he had made a note to include interaction with the Hospital Boards in future.

Mr Waters asked for the total amount of money that was wasted on the infrastructure projects.

Mr Pretorius replied that AGSA had not attempted to calculate the total amount of money wasted in the current audit. The PFMA placed the onus of financial mismanagement on the Accounting Officer, who was expected to take action. The Committee could ask for feedback from the Accounting Officer as to whether money had been recovered. He noted that until such time as the appropriate technical skills were acquired for projects, money would continue to be wasted. This was a critical issue for the departments and implementing agents.

Mr Waters asked AGSA to elaborate on what was meant by ‘other irregular expenditure’, pointing out that Northern Cape had accumulated R660 million and Gauteng R404 million in irregular expenditure.

Ms Jolene Pillay, Senior Manager responsible for the irregularity audit of the DoH, as well as for collation and analysis of the audit report on the provincial departments, AGSA,  clarified that most irregular expenditure was found in supply chain management and compensation to employees. These types of expenditure were classified separately. In the Northern Cape, there was no correct delegation of authority in place. This meant that all payments by that department should have been approved through the Head of Department, in terms of the PFMA. Since the Head of Department did not approve all of the payments, they were deemed as irregular expenditure. In Gauteng, irregularities in the manner in which the transfer payments were made resulted in the payments being deemed as irregular expenditure.

Ms L Makhubele-Mashele (ANC) asked if incompetent contractors were blacklisted.

Mr Pretorius replied that before a contractor could be blacklisted by National Treasury, he/she had to be convicted or found incompetent in a court of law. This list was short. However, the requirements for blacklisting by the CIDB would be less onerous. He pointed out that it was quite an easy procedure to start a new company, to receive South African Revenue Services (SARS) clearance and to register this new company with CIDB, with a clear track record.

Ms More asked if the DoH was audited on a regular basis, if irregularities were tracked over time, and if support was given.

Ms M Segale-Diswai (ANC) asked if AGSA only met with the DoH at the time of the annual report and what the next step would be if it had repeatedly making recommendations to the DoH which were not heeded.

Ms Miller replied that entities in all provinces were visited on a quarterly basis to assess their leadership, financial performance and governance structures. Quarterly feedback was given to all departments. Findings were also shared with the Minister and the National Health Council. The staff of AGSA shared the frustration of the Committee regarding the lack of action taken following repeated quarterly recommendations by AGSA. Action was simply not being taken fast enough.

Mr Pretorius added that the management report pinpointed various areas of concern for the Accounting Officer, so that specific situations could be cleared. It was a huge load for the Accounting Officer to implement all procurement laws and regulations. In addition, with follow-up irregularity checks by AGSA, it would be possible to track whether recommendations were having an effect.

Ms Segale-Diswai suggested that DPW should meet with the Committee also to account for the infrastructure audit, as this department was the implementing agent and supposed expert on infrastructure, and was performing better than DoH.

Ms Miller explained that since DPW was an implementing agent responsible for construction on behalf of other departments, it did not use its own money and therefore it was able to maintain better financial results. Irregular spending arising from the contracts would instead by reported by the other departments for whom it was doing the implementation work.

Mr Pretorius added that DPW was not a concurrent function and provided accommodation to other departments and did not have the same policy making functions as for the DoH.

Ms B Ngcobe (ANC) suggested that the provincial and national departments of Health should be invited to meet with the Committee to respond on the audit report.

Ms Miller replied that AGSA met with the DoH weekly to guide and assist this Department. However,  AGSA could not fix problems for DoH.

Ms Ngcobe asked if the completed constructions were compliant with South African Bureau of Standards (SABS) requirements.

Mr Pretorius replied that SABS specifications were well set out and there was constant reference to SABS for parts for construction. However, the problem lay in the execution of the construction.

Ms Ngcobe asked if vandalism impacted on the cost of infrastructure.

Mr Pretorius replied that vandalism delayed construction, and vandalism was rife when a contractor had abandoned a site and there was no security oversight.

The Chairperson commented that infrastructure played a large part in growth of the country. He asked how those who had been historically disadvantaged could be skilled to perform the jobs required. It was a government problem, but was an important one, and perhaps 14 years was too short a time for the change to become apparent.

Mr Waters said that while he appreciated the information given by AGSA, the actual extent of the problem was not known. He questioned whether the Committee should call for a forensic audit or special investigation audit, as the problems had a direct impact on the quality of health care in the country.

The Chairperson said that the Committee would need to discuss the issue. While the Committee was aware that there was a serious problem in the DoH, it was an expensive exercise to try to see exactly what the extent of that problem was. The more pressing question was how to correct the problems which had persisted for many years, particularly when information that was required was unavailable and unreliable. The Committee would address the issues with the DoH and would contact AGSA for briefings prior to meeting the departments in the provinces.

The meeting was adjourned.



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