2010/11 Auditor-General's opinion: Minister & Department of Public Works on remedial actions

Meeting report

Auditor-General's opinion: Department of Public Works on remedial actions

Ms Cathy Motsisi, Chief Financial Officer (CFO), Department of Public Works, presented the Property Management Trading Entity (PMTE) Management Action Plan on the Audit Report for the year ending March 2011.

 

 Ms Motsisi noted that the presentation she was to present was the same as the one she had presented to the Standing Committee on Public Accounts (SCOPA) the previous week. She then made an initial reference to the issue of irregular expenditure as noted in the audit findings. The Auditor-General had found that the entity did not have an adequate system for identifying and recognising all irregular expenditure and that there were also no satisfactory alternative procedures that could be performed to obtain reasonable assurance that all irregular expenditure had been properly recorded. This was said to be attributed to the inadequate preparation of audit working files and inadequate records keeping. To counter this problem the Department sought to review the checklists used for reporting on irregular expenditure. She also noted that there had  been a serious lack of capacity, particularly within the regions, with improper segregation of duties, which was revealed by the Department’s internal audit process. She then alluded to a bigger project taking place within the Department to curb these problems, noting that the Auditor-General requiring the Department to review all the transactions that the Department had been involved in. She then noted the lack of regional capacity to retain lease contracts, identifying instances where such contracts were missing.

Ms Motsisi then noted an instance of payments amounting to R291 668 886 that had been made in contravention of the supply chain management requirements and cited the lack of supporting documentation as being the main cause for the failure of the Department to track these paid amounts.

 

 The Chairperson then interjected and urged Ms Motsisi to provide proof of the statements she was making before the Committee.

Ms A Dreyer (DA) sought clarity as to the remedial action that was to be taken against the negligent members of the Department who had contributed to the current unfavourable situation.

Ms Motsisi responded by stating that three of the regions had received warning letters for their conduct and that, in the coming week, disciplinary action would then be taken against them as soon as all the relevant information had been collected.

The Chairperson required copies of these warning letters that had been allegedly given out.

Ms Motsisi then continued by noting that the main reason behind the high figures for fruitless expenditure had been the flawed nature of the contracts entered into by the Department. This had brought about instances of clients vacating properties before the expiry of the lease agreements that they had entered into, meaning that the Department found itself in a situation where it was forced to continue to pay the landlords as it was bound by the agreements that it had with these said landlords. She went further to speak to the problem of capacity within the Department with regard to the lack of skills processed by individuals occupying key positions, especially in the area of finance. She noted that there were regions that had been identified as being the main regions that were entering into these flawed contracts. The Department had noted a disparity in the financial information that it had been receiving from various regions, and, as a result, had tasked itself with revisiting these regions for the purposes of verifying said information. She noted that the visits revealed that some of the regions had failed to implement the required controls in compiling their financial statements. There had been policy that had been developed that clearly spelled out what was necessary when compiling financial statements. The Department had also committed itself to training its finance employees in the requisite accounting principles to better equip them in fulfilling their function. She highlighted the importance of having the right people who applied Generally Accepted Accounting Principles (GAAP) principles appropriately within the Department.

Ms Motsisi noted initially that the PMTE had been originally formed with no systems, processes or structure, but was now in a position where it could better collect information, which showed an improvement. She noted the difficulty that now arose in collecting the relevant documents due to past errors, and assured the Committee that the Department was exhausting all means available to acquire the lost documentation, including engaging with the Treasury. The Department now did monthly reconciliations to counter past problems and noted that the process was now ongoing. The billing process for private places had been changed from estimate to actual which had created confusion in the past.

The issue of outstanding balances remained prevalent and the Department was continuing to engage with clients on a one-on-one basis where such a situation existed, in the hopes of attaining these funds.

Ms Motsisi made reference further to the intrinsic instability of the entity that existed in inception that the Department continued to try and rectify as the entity played an important part in the carrying out of the Department’s functions. She asserted that this was a point worth noting and was by no means an attempt by the Department to shift the blame with regard to the current Departmental situation.

Ms Motsisi went further to note the need for the fast tracking of the iEWorks system to enable improved information management. The system was still at testing phase and data were still being migrated to this system. The implementation of the system was expected to occur in May 2012.

With regard to the issue of capital expenditure that consistently reported at R2 billion year-on-year, Ms Motsisi noted that this would continue to be a problem until such time the Department was able to understand the core of the PMTE. Discussions were under-way with the National Treasury in an attempt to come to an agreement as to how this entity was to be constituted. She suggested that this large amount was  largely a symptom of the lack of an effective recapitalisation policy, which was currently being finalised in the hope to curb this problem in the future. She then noted new controls that would be affected in the Department’s suspense account as the funds in this account were available to all the regions as well. This was to ensure that claims made to the account were made with the requisite and appropriate documentation for the purposes of effective reconciliation.

With regard to leases, there was policy being developed that would hopefully streamline the leasing process; however, the policy would fail to do the work if information continued to be corrupted. On the issue of operating expenditures, an accounting policy had been developed that would assure a review of the financial statements. The interim results showed that the Department would require additional capacity to ensure adequate review of the financial statements moving forward. On the matter of the bank overdraft that had existed for many years, Ms Motsisi stated that this issue was unlikely to go away until the mistakes of the past were properly rectified, making it harder to clear overdrafts as clients continued to fail to effect payments timeously. This issue could only be resolved through interaction with Treasury. Legal services were also being streamlined and regulated to counter the payment issues as well as to effectively deal with instances where landlords were owed money arising from contractual obligation. A lot of these problems, especially at regional level, Ms Motsisi attributed to ineffective data collection mechanisms that made the data received corrupt in nature. GAAP principles compliance had affected the Department’s ability to effectively report in the past.

Proper accounting systems were now being created through draft policies that were now under review to ensure that accounting officers were submitting financial statements for auditing, ensuring that they were now being prepared in all material aspects in accordance with South African (SA) statements of GAAP, as was the requirement under Section 40(1)(a) and (b) of the Public Finance Management Act (No. 1 of 1999) (PFMA). Overdrafts in the main bank account were attributed to the existence of very poor billing systems as well as revenue collection and management in previous years. Policy had been developed subsequently to counter this effect, as well the development of a Service Level Agreement that would specifically outline roles and responsibilities of client departments on the payment of invoices. She noted that these problems could be countered through the continued interaction with clients.

Ms Mandisa Fatyela-Lindie, Acting Director-General, Department of Public Works, then provided a brief history with regard to the PMTE for the purposes of clarity, noting that human capital issues within the entity had arisen even at time of the proposal to establish the entity, which was a problem that had been inherited by the entity. Questions had also arisen as to whether or not the entity was to exist independently or within the Department. In the instance where the entity was to be independent, then the Department of Public Works would have to outsource its core business to this entity.

Discussion
The Chairperson pleaded with the Acting Director-General to ensure that the Committee always received correct responses. She also made reference to a Departmental workshop that was to occur in March.

 

 The Chairperson sought clarity as to the 1 363 posts that the Department had reported in the 2010/11 annual report as being vacant. She wanted to know that the 80% of vacant posts that were now filled referred to the 1 363 posts that the Department had reported vacant only months ago.

Ms Motsisi clarified by saying that the posts to which she referred (that were 80% filled) were those of the PMTE entity, and not the Department of Public Works as a whole.

Mr K Sithole (IFP) raised issues of concern with regard to the leadership in the Department and asked whether the Department was confident in its human capital capacity in the regions. He also wanted to know why the Department had not been taken over by the administrator.

Mr M Swathe (DA) sought clarity on the issue of the flawed contracts. He wanted to know when these contracts were in fact discovered and what the action taken in this regard was. He also wanted to know whether the new methods being proposed by the CFO were in fact methods that had been tried and tested previously. He then wanted to know what had happened to the old employees of the Department when new officials were hired, as well as what qualifications and experience were in fact possessed by these new people. Why was there still also a lack of clarity as to the best function of the entity?

Ms P Ngwenya-Mabila (ANC) raised concern as to the nonchalant nature in which officials carried out their functions. She noted issues of officials not taking their jobs seriously, stating that this was tantamount to serious misconduct. She also sought clarity as to who was being tasked with monitoring the regions, which appeared to have a lot of power being devolved to them. She also wanted to know the reason for the late  municipal payments that were adding to the fruitless expenditure. She then asked that the CFO unpack the existence of flawed contracts and sought clarity as to the reasons the Department had been paying estimates, and had not agreed upon figures. What happened when offices were vacated before lease periods ended - did the Department then have to pay for both the old and new leases simultaneously? She then noted that the Committee had an obligation to assist the Department in receiving payments on time and stated that the Committee had the right to call on various departments to appear before it at any time and account.

Ms Motsisi addressed the issue of discipline by suggesting that the duty to affect disciplinary action rested within regional managers, and not in the office of the CFO.

Ms Ngwenya-Mabila highlighted the fact that the issue at hand was one of discipline, and now who was to affect the discipline. She then asked whether or not the CFO received reports back with regard to recommendations she made on disciplinary issues.

Ms Fatyela-Lindie responded on this issue of power being devolved to the regions by saying that there appeared to be an erosion of qualifications at that level, but such structures had to exist at his level so as to provide services at regional level. The issue of missing files could be attributed to levels of corruption that existed but also spoke to a mix of various reasons as well. Leases issue showed signs of a bigger more concerning issue of certain officials seeking to eliminate paper trails. With regard to municipal payments, the Department was not obliged to fulfil this function, but it did so to assist the municipality.

Ms Dreyer noted that the Department had presented a long list of shortcomings and that in order for these to be countered, there needed to be the right people in the Department to do the job. She wanted to know what the Department was doing differently in this regard (acquiring the right human capital).

Mr P Mnguni (COPE) sough clarity as to the previous situation in the Department with regard to officials. He wanted to know whether or not the positions had previously been filled by unqualified people, as well as what was being done differently now.

Mr N Magubane (ANC) stated his surprise to hear of there being vacancies at the headquarters of the Department and was unsatisfied as to the reasons why. He wondered how a Department was able to function without having these vacancies be filled.

Ms C Madlopha (ANC) noted the importance of a commitment made being a commitment kept, alluding to the commitments made by the Department when it presented its annual report. She alluded to the report of there being improved internal financial controls, as well as a reduction in the irregular/unauthorised/fruitless expenditure, whereas there seemed to be no indication of that at the current time. She voiced her concern that it appeared that the Department would continue to be stuck in a state of transition. She then called for there to be a skills audit within the Department to ensure that the skills present were equal to the challenge that existed.

Ms N Ngcengwane (ANC) suggested that honesty in the previous instance would have prevented the problems that the Department faced now. She sought clarity as to how flawed officials were employed in the first lace and why they continued to be retained. She wondered as to why such problems were only being identified now. She then raised a question with regard to payments and asked why these were only being made after 90 days. She then sought clarity as to the training process that ensued within the Department, subsequent to the implementation of GAAP principles, wondering if any training did in fact take place.

Ms N Madlala (ANC) took the opportunity to echo the issues surrounding hiring. She then stated that the CFO should be supplying the Committee with a list of the leases that were said to have discrepancies for the purposes of these being classified.

The Chairperson then posed a question to the Minister on the issue of capacity within the Department, asking if there were provisions in place to counter the gaps created when officials (occupying crucial positions) vacated their positions for various reasons, i.e. retirement. She also sought clarity as to the high resignation rate in the Department.

Ms Fatyela-Lindie responded by conceding that the environment within the Department had in fact become not conducive for people to stay and that the high turnover of people in high positions had added to the lack of confidence within the Department. She then spoke of a programme whereby outside personnel were to be brought in to assist, especially in the area of finance. She then noted that the failure of the Department to retain engineers and artisans was as a result of the failure of the Human Resource structure of the Department, which she noted as being a technical issue where there was an inability to plan around problems. She also noted that the Department also could not bring in artisans to work in what she termed as dysfunctional workshops.

Mr L Gaehler (UDM) voiced his concern and surprise as to the iEWorks system having problems after it had been suggested that this was the best system. On the issue of the suspense accounts, he asked what happened to the interest on the suspense accounts, suggesting that this was when corruption occurred. He voiced his concern with the assertion that leases are aid with estimates. He then went on to urge the Department to build its own skills by targeting young graduates, as opposed to relying on retired officials.

Ms Motsisi noted that the problems experienced with suspense accounts were in fact systematic and spoke to the greater need for the CFO's office to provide policies and procedures to counter this issue.

Ms Dreyer then wondered as to whether the issue of vacancies was not being further aggravated by the Employment Equity Act (No. 55 of 1998) and its requirements, perhaps causing a rift. She then asked whether the Department’s employment practices were conducive to the most qualified people being employed, or whether the people that were hired were the ones that best fit the requirements of the Act.

Ms Fatyela-Lindie assured the Committee that the Department did in fact have a Young Professionals Management Programme, but there was difficulty in retaining the young professionals that were trained. External pressures had also led to this problem. This issue had had an adverse effect on retaining artisans and engineers as well. On the issue of the trading entity, the issue had become a technical policy issue upon which officials might not pronounce, unfortunately.

Mr Thembelani Nxesi, Minister of Public Works, took the opportunity to note that many of the questions asked could not be answered at this stage. He wanted the Department and the Committee to collectively focus on a turnaround strategy for the Department and evaluate that instead, to see if such a strategy could in fact provide answers to some of these problems and help the Department to move forward. He noted that the Department had, of its own accord, sought the assistance of the Treasury in various ways, meaning that  it was under administration in a way. Though this, the Department had been able to call upon consultants to assist in strengthening the skills of the Department.

The Minister noted lack of accountability as an entrenched culture that existed within the Department. He also noted the special need to strengthen the office of the CFO with the requisite expertise. He characterised the current period as a stabilisation period for the Department, and that the Department was going to accept as much help as possible in this time. He urged the Committee to demand a turnaround strategy for its own scrutiny and to call on the Department to report on a monthly basis on progress. He then spoke to the credibility of the information being received by the Department, highlighting the danger of such information leading to the Department to work on incorrect assumptions. He placed great importance on the strengthening of the Department’s internal auditing structures, and called for the Office of the Auditor-General to be consistently present to assist the Department in rectifying past errors.

The Minister then highlighted the importance of leadership within the Department and noted how important it was for the Department to cultivate effective leadership as the starting point on a path to success. He then called for a systematic review of each and every unit within the Departmental structure to ensure that the right people were employed in the right positions so as to best facilitate good leadership.

The Minister also spoke to the need emphasise accountability within the Department and have this as an over-arching principle. He also spoke to the corrective measures that were to be adopted in identified instances of misconduct.

The Chairperson echoed the sentiments of the Minister and reaffirmed the commitment of the Committee to avail itself to the Department in whichever way possible. She also urged the Acting Director-General to conduct workshops with officials to ensure that their hearts, minds and souls were transformed in order to ensure that they functioned effectively.

Ms Madlopha emphasised the need for the Department to acknowledge the gaps that existed in the Department. She noted the need for the Department to bear these in mind when presenting its turnaround strategy to the Committee and re-iterated the willingness to engage with the Department further on the issues, after the strategy was presented.

In response, Ms Motsisi took the time to emphasise the fact that the policies were already in existence; the problem arose when officials opted to now adhere to the provisions of these policies. Early warning systems were there to ensure that the Department did not over-spend its budget, and not to identify irregular expenditure. Irregular expenditure would not go away if the supply chain was not over-hauled in order to ensure that a decentralised system worked effectively. It was important for the Department to define its role in terms of property management, so as to ensure that problems did not persist.

The Committee collectively decided to abandon the second presentation, noting that the same issues would arise in the second presentation as did on the first presentation.

Mr Swathe sought clarity on the issue of personnel, drawing concern from the fact that the CFO had stated that the problem was implementation of policy at the human capital level, and not the policy. He wanted to know what would happen then with the personnel that the Department employed now, with regard to their ability to carry out policy. He voiced his belief that the policy itself would not ensure the Department’s success.

Mr Sithole sought clarity with regard to the missing invoices. He wanted to know what was going to be done about them and wondered if they would be simply forgotten.

Mr Laurens van Vuuren, Business Executive, Office of the Auditor-General, stated that it was clear to his office that the Department understood the challenges that it faced currently and that there needed to be a strategic approach, as had been suggested, to counter this problem. He described this approach as a “Double-Barrel” approach that would take time to fully implement.

The meeting was adjourned.