Hearing on the Annual Report & Financial Statements for 2010/11 financial year of Department of Health, National Health Laboratory Service & Council for Medical Schemes

Meeting report

The Chairperson, Mr N Godi (APC), welcomed members of the Committee and delegates from the National Health Laboratory Services (NHLS), the Council for Medical Schemes (CMS), the Office of the +, and the Department of Health, including the Minister of Health, Dr Aaron Motsoaledi. The Committee had come a long way in its relationship with the Department, and that marked “tremendous progress” from the past. The Committee was happy with the way that things were proceeding in the Department, and noted that it was continuously making progress. There were always difficult conversations in meetings of the Standing Committee on Public Accounts (SCOPA). The critical issue was for the parties to find each other on certain outstanding issues and to determine how to tie them down so that the Department would be empowered to get over some of its minor issues. The Committee was very appreciative of the work that had been put in by the Department for it to get to its present state, in which it provided a “shining example” for other Departments to emulate. The engagement between SCOPA and the Department was not at a level where the Department’s affairs were in a state of disarray. Engagement was rather about raising the bar, so that people would be able to receive the best health services available.

Minister Motsoaledi thanked the Chairperson for his words of encouragement and promised that the Department would work hard to implement the improvements recommended by the Committee and the Auditor-General. The Minister acknowledged his three “groups of friends” present at the meeting. The Chairperson remarked that even during behind-doors consultation with the Auditor-General, feedback about the Department had been very good.

Hearing on the 2010/11 annual report and financial statements of the Department of Health
Mr D George (DA) stated that he was new to the Committee, but that he had identified a number of areas for concern. The Auditor-General had given a qualified audit regarding movable tangible capital assets as a result of the fact that the asset register had not been properly maintained. He asked what the reason for this was.

The Director-General, Ms Malebona Matsoso, replied that the Department had moved offices from the period between April–October. The relocation plan of the Department included having the asset register completed during that process, but that did not take place, and the Department had to start a completely new asset register from scratch. The new asset register was electronic, which meant that the Department had to complete the electronic register of all units. The reconciliation had been concluded, but there was still a problem with the valuation. The most important part from the perspective of the Auditor-General was the valuation, but that process had involved tracing invoices for every asset purchased from 2005 onwards. There was now a complete and reconciled electronic register of all assets. It had been a complex procedure.

Mr George asked, from a corporate governance angle, whether the difficulties raised by the move had been identified by the internal audit department. Ms Matsoso replied that the internal audit department was a small unit. It was divided into two segments, namely: internal audit and risk management. Within the corporate governance framework, that was one area in which there were definite weaknesses, but improvements were currently being made.

Mr George asked whether the matter had been discussed with the audit committee, to which Ms Matsoso replied that it had not been an effective committee at the time. Three of its members had resigned, with the result that a new committee had to be formed. The internal audit committee’s opinion was that its role was not to consult, but rather, to do internal audits in order to assist the Department to pick up risks in time, thereby helping the Department to respond to those risks. He asked whether all of the members of the audit committee had been paid for their work, and if so, why. Ms Matsoso responded that the matter was “a bit of a dispute”. Ms Tiny Rennie, Deputy Chief Financial Officer, explained further that before the three committee members in question had resigned, they had each missed a number of meetings during the term, and had therefore not been paid. That concern had prompted their respective resignations.

Mr George asked whether the Minister had met with the new audit committee or its chairperson. He also wanted to know why lease commitments had been overlooked. Ms Matsoso replied that there was a contractual arrangement with the Department of Public Works for the lease of the Department of Health’s offices. There was an ongoing disagreement with the Department of Public Works regarding the quality of maintenance services that had been received. Within the newly renovated building, there had been significant flooding. The cost of maintaining the air conditioning system was “quite huge” because it had to be repaired every two weeks. For a building with 28 floors, that worked out to quite a significant cost. The estimated cost of the lease itself was R62 million per annum.

Minister Motsoaledi stepped in to say that instead of constructing a new building afresh, the Department of Public Works had opted to renovate a building at a cost of R1 billion. That served as an example of “what must never happen” in government. The renovation job took six years because there had not been a project committee to guide it. The Department had since taken on an in-house engineer to advise it. The air conditioning system was contracted, and the Department was obligated to pay its owner for the rest of the life of the building. It was a “rip-off” to the people of the country, and he was “bitter” about it. The Department wanted to change those contractual arrangements.

The Chairperson chimed in that politically, the Minister was “on solid ground”, to which Minister Motsoaledi replied that sometimes the law trumped the powers of the Department. He recalled how one day, when he went to work soon after the renovation, the building was in the process of being evacuated. He had complained, because that evacuation was due to the lack of a maintenance plan. The agreement with Public Works had not been an easy one. He had given instructions to “move on” and look for internal maintenance, even if that went against the wishes of the Department of Public Works.

Ms Matsoso said that the Department was trying to negotiate an arrangement with the Department of Public Works whereby a percentage of the R62 million should be retained by the Department of Health to be used for maintenance costs. This was because the Department wanted to have an in-house maintenance team to deal with problems as they arose.

Mr Ian van der Merwe, the Department’s Chief Financial Officer, said that the amount owed to the Department of Public Works for the building was informed by an acknowledgement of debt received from that Department after the renovations had been completed.

Mr George said that the Committee had seen the Department of Public Works the previous week, and that they were “quite dysfunctional”. He personally would be engaging with the Chairperson of SCOPA about the issue with leases that needed to be dealt with.

Minister Motsoaledi said that there had been an announcement by the Minister of Finance before the recent Budget Speech that all of the 3000 leases for government buildings being leased by the Department of Public Works were to be reviewed by the Minister of Public Works and the Minister of Finance. Mr George asked whether the Department of Health had a central database of all the details of the various buildings leased by the Department. Ms Matsoso answered that most of the buildings that were used by the Department were contracted by the Department of Public Works, including their offices and laboratories.

Mr George pointed out that R43 million had been irregularly spent. He asked what that amount had been spent on and why. Ms Matsoso replied that there was an historical irregular expenditure dating back to 2001, which was carried over each year in the annual financial statement. The Department had been attempting to trace it back to its original source, with the strategy of recovering every cent possible. That involved the initiation of a process of collection and recovery of losses and a process for the recovery of irregular expenditure. In cases of irregular expenditure, in which officials had, for example, cancelled meetings at short notice, the Department “made them pay”. There were instances in which the Department looked back at the extent of the irregular expenditure, the seriousness of the irregular expenditure, and whether services had in fact been delivered. A special committee had been established to deal solely with the matter of irregular expenditures. It had its own internal audit, legal department and various experts from within the ranks of Department officials. From that process, the Department had been able to identify irregular expenditures that should be condoned, and those that should be referred to the National Treasury. The Department met regularly with the Treasury to receive guidance. The Department had initiated another process whereby it instigated investigation when it appeared that there had been deliberate wrongdoing by officials, or “outright sloppiness”. In cases where it appeared that there had been intent, investigations were initiated.

Ms Rennie explained the issues of irregular expenditure for travel, amounting to R23 million. The issue emanated from a process whereby the Department had an outstanding contract with a travel agent. That contract had expired on 21 August 2010, after which the Department advertised a tender for a new travel agent. Internally, the Department wanted to do away with travel agents, and to secure its own in-house travel agent in order to save costs. The delay happened because those processes were not in place by the time that the old contract expired. During the interim phase, while waiting to evaluate the new tender, the Department invited quotations from eight service providers, five of which responded. The R23million in question was the amount spent by the Department for travel and accommodation for a period of about six months. That expenditure was split between the three service providers. At any time, when there was a need to travel, the Department asked for quotes from each of the three, and then used the cheapest one available. Management fees had been included in the quotations in cases where Magic Travel was used. At that time, the Department was of the view that it would finish evaluation of the tender before exceeding the threshold as set out by the National Treasury. Unfortunately, it had taken longer. The matter had been referred to the National Treasury, which had indicated that it would respond to the Department before the end of that week.

Mr George referred to procurement and contract management, and remarked with reference to page 145 of the Financial Statement that there seemed to be “sloppy management” of the people’s money in that instance. He asked the Department to comment.

Ms Matsoso replied that historically, the Senior Management Service (SMS) had been unclear on some of its functions. She had introduced a system in which every Chief Director received a formal letter setting out budget and expectations, to be used as their performance contract. Any official at SMS level would be subject to immediate disqualification for consideration for Project Management Professional (PMP) positions if their performance showed an irregular, fruitless or unauthorised expenditure. She was probably one of the “most unpopular people” in the Department because she had denied people bonuses as a method of sending a message. The Department had introduced an electronic performance management system that could be used as a reference to ensure that in cases where a qualified audit was received, no one would receive bonuses. With reference to Mr George’s query, she explained that the Department was tracking awards that had been made to suppliers who had not performed satisfactorily. Six of those suppliers were employed by the Provincial Health Departments, comprising of three in the Western Cape, one in Kwa-Zulu Natal, one in Gauteng, and one in Northwest. The rest were comprised of two from the Department of Basic Education, one from the National Prosecuting Authority, three from the Department of Correctional Services, and one from Cost Recovery in Gauteng. Even though none of those people were employees of the Department, they were all reflected in its audit. The National Treasury had introduced a measure to deal with the problem, but its implementation had been delayed. SMS members all disclosed their interests, but no one else did. There were two committees within the Department that were responsible for procurement. The Department had implemented a system whereby before any tender was awarded, it would go back and check whether any of the employees of the Department were implicated. It would be difficult for the Department to identify if parties outside of the Department were implicated, however. The Department wanted to go to the National Treasury to see whether its plan for assistance was going to be introduced.

Mr George remarked that it was pleasing to see that the Department was taking action on the matter. With reference to the accounting officer referred to in paragraphs 29 and 31, he asked whether the same consequences that Ms Matsoso had referred to earlier also applied to the accounting officer.

Ms Matsoso answered that she did not think she deserved a bonus, because she had received a qualified report, and that was fair. Mr George commended her stance. He pointed out that the Auditor-General had found that the validity, accuracy, and completeness of performance information was lacking. As a result, the Committee was unsure whether the programme performance as reported was correct. There had been instances in which delivery of healthcare services to the people had failed. He asked, in light of the imminent implementation of National Health Insurance (NHI), how sure the Department was that they knew where the problems existed, and whether those problems could in fact be fixed. Ms Matsoso replied that there were 4 200 facilities in the healthcare sector. The Department had put together a team to audit every single facility. In that auditing process, the Department looked at every aspect of a particular facility, including issues of quality of services, human resources, finances, services that were rendered, contracts, and security services. They had completed 3 370 audits to date, and she hoped that by the end of April, all of the audits would be completed. She had personally run workshops with the office of the Auditor-General. In her experience working at the World Health Organisation, she had learned how to develop indicators and how to organise those indicators into three categories: structural indicators, process indicators and outcome indicators. She had tried to explain to the office of the Auditor-General that the indicator with which the performance of the Department should be measured was the “outcome indicator” of whether South Africans were getting healthier. That was the value that she wanted to insert into the performance evaluation system. It was for that reason that the Department had developed a data repository system could be used to assess performance in a particular facility. The Minister was very passionate about that recent development.

Mr George thanked the Minister and the Director-General, and echoed the sentiments of the Chairperson by congratulating the Department on its progress. The Chairperson opened the floor to follow-up questions, and made particular reference to Mr B Goqwana (ANC), as the Chairperson of the Portfolio Committee on Health.

Ms T Chiloane (ANC) asked, with reference to the Staff Establishment Table 3.1 on page 247 of the Annual Report, whether it was difficult for the Department to work with such a low percentage.

Ms Matsoso replied that the vacancy rate that was recorded was based on the old instructions of the Department. The Minister had seen to it that based on the negotiated service delivery agreement that had been signed by the President, the Department had to make sure that its structure spoke to the functions. The Department had since restructured, and new people had been appointed in terms of the new structure, which had been approved by the Department of Public Administration in November. Previously, the Department of Health had been “top-heavy”, with too many managers. Minister Motsoaledi said that long before the Director-General came, he personally had been the one who instructed that posts not be filled. The former Minister of Health had been faced with the problem of running out of ARVs in the Free State. She had appointed an investigation that led to other problems being uncovered in other areas, especially with regard to management. That was why there had been so many accruals. The Department of Health had been filling staff in management posts, and management had been increased by a large percentage, whereas the numbers of new doctors and nurses was very small in comparison. Health was very expensive because of the compensation of employees. He had asked the MECs to impose a moratorium on hiring new managers, with the exception of ones who were “extraordinarily essential”, such as engineers and financial managers. In Cabinet, there had been a decision that if government was to set an example by creating employment, it should ensure that there were no vacancies. The Minister felt that if all the vacancies in the Health Department were to be filled, it would “destroy the system.” In 2004, the Department had 24 directors, but in 2009, the number had risen to 208. That needed to change. The vacancy rate was not an accident, as it would be retrogressive to fill all of the vacancies.

Ms M Mangena (ANC) said that while people in the Department were required to pay for irregular expenditure made on their watch, it was usual that when a person was required to pay money back, they usually resigned. She asked how the Department was dealing with that issue. Ms Matsoso replied that the Department was currently exploring what methods were open to them in those cases. The Department had asked office of the Accountant–General to help with the investigation of four matters, almost all of which were concluded. One involved people who were no longer in the employ of the Department.

Mr P Rabie (DA) praised the performance of the Department, and the “exemplary” work of the Director-General, which made him proud to be a South African. He referred to page 146 of the report, which showed that there was an investigation into misconduct regarding a senior member that had travelled overseas. He asked whether the investigation had been completed, and how much money was involved. He had read in the NHLS report that in a number of instances, the Department had not been paid for services rendered in the laboratories. He asked how many provinces had failed to comply with the regulations, and what measures were in place to force them to settle their accounts.

Another member of the Committee said that the rate of unemployment, poverty and inequality was very high, and that the vacancy rate in the Department was now about 7%. That was still a significant percentage, especially when viewed along with the vacancy rates in other departments. He wanted to know whether there were plans to decrease the percentage of vacancies.

Mr Goqwana, the Chairperson of the Portfolio Committee on Health, relayed apologies for arriving late. He said that the Department’s leadership gave hope that the Department was moving in the right direction. He pointed out that “outcomes” were being referred to in the context of the National Department of Health, but that most of the service delivery actually took place at the level of the provinces. In some cases, there was a feeling that the leadership in provinces failed to understand what it was that they were doing. There were major problems on a provincial level. An example of this was that one of the former Heads of Department in the Eastern Cape had just been taken to court.

Ms Matsoso replied that the official who had travelled internationally without approval had been dismissed and was unsuccessful in a subsequent appeal. There had been an allegation of fraudulent transactions involving a travel agent, and after instituting an investigation, the Department had been able to recover R500 000 of the missing R800 000, and a criminal case had been opened with the police. The investigation was ongoing, and the Department was hopeful that there would be arrests. With regard to unemployment and inequalities, the problem was that in the normal employment setting, it was always difficult to have 100 percent employment. The Department was currently planning ahead to fill vacancies left by people who were preparing to retire. The Department had also started an internship programme in partnership with SETA, to recruit graduates to use as extra hands to assist Department officials who were sent to the provinces and help fix problems there. The Minister had just announced the establishment of Facility Improvement Teams (FIT) for the purposes of assisting to make the provinces “fit”. They would send time in four districts involving 218 healthcare facilities, and would move district-by-district to fix problems in the provinces. The profile of a given district was informed by its performance and facilities, and this profile served as an indicator for the purposes of monitoring.

The Chairperson said that in the previous year, there had been a problematic performance audit, and asked what progress had been made to ensure that money was being used effectively. The Auditor-General had expressed concerns about how the Department had responded to problems by way of monitoring and compliance. However, the engagement that had just ensued between the Committee and the Department had reaffirmed his opening statements. The Department had not used the issue of people resigning as an excuse. There were definitely issues that needed to be addressed in respect of the audit committee, and the fact that the Minister had already met with the chair of that committee was a very positive sign. Other Departments should follow the example being set by the Department of Health. The Department’s approach towards bidding and tenders exemplified the approach that the Committee was seeking to see. The Committee was heartened by its interaction with the Department that day, and it was a different experience from the way that the Committee usually interacted with other Departments. Minister Motsoaledi had been confident in his approach to answering questions, not only on political issues, but also on financial and administrative issues ones. Minister Motsoaledi could not be labeled as an “absentee Minister” and for this, he should to be praised and held up as a standard. The Chairperson’s personal stress levels regarding the imminent institution of NHI would “reach zero” because he knew that it was in capable hands. Minister Motsoaledi said that the question of non-payment of bills to the NHLS was a very big problem and should not be hidden. There had been several meetings on that matter to date. Whenever there were problems, he personally accepted responsibility. The progress being made regarding the provinces and NHLS trying to find each other had been “very slow”. At the present moment, the problem was concentrated in two provinces. There was an ongoing crisis in Gauteng, which needed to be put under Section 100 of the Constitution. Most of the NHLS accounts were based in Gauteng, because that was where the biggest hospitals were located. The Department was trying to solve the problem, but the question was whether they were doing so fast enough. The second major problematic province was Kwa-Zulu Natal, which had not been placed under Section 100, because they had not yet run out of money. Shortage of funds was not the reason that the province had failed to pay NHLS. Rather, there was a “serious” technical legal dispute between the Gauteng Department of Health and NHLS. He had personally tried to mediate, and had failed. The Department had then appointed a retired judge to mediate the dispute, in terms of the National Health Laboratory Services Act, 2000 (Act No. 37 of 2000), and that mediation/arbitration was currently ongoing. The major issue at stake was how much the province had to pay to NHLS. Minister Motsoaledi was currently waiting on the report from the judge. Other provinces had their own complaints. Minister Motsoaledi could not speak for them, but some of the complaints included billing systems and the manner in which provinces were being charged. The Department had asked the Auditor-General to step in to help identify the problems. It was essential that all accounts were paid while the problems were being dealt with. The problem did not exist in the Western Cape because in that province, all of the facilities were online and connected to each other. That technological advantage did not exist in the rural areas. The report from the Auditor-General, when completed, would help to clear up some of the complaints from the provinces relating to billing. The implementation of electronic systems would also help to ease the problem. The issue of infrastructure was also a problematic one within the Department. On the issue of cleanliness, the Department had not done well. Some facilities were not properly maintained, and that made it difficult to keep them clean. Problems with infrastructure and capacity had been identified with the result that the Department had concluded that it needed to build its own internal capacity by hiring engineers. Previously, there had been a misconception that the Department of Health did not need its own engineers. Now the Department had five engineers working for it. Within the next three financial years, the situation should have stabilised, with the help of the in-house engineers. On the issue of the National Department’s interactions with the provinces, Minister Motsoaledi said that the Constitution put a heavy responsibility on the Minister without giving the Minister all of the corresponding powers needed to uphold that responsibility. There were a number of areas in which the provinces were granted exclusive powers in terms of the Constitution, and the Minister was not allowed to intervene in those areas. In relation to the issue of payment, Minister Motsoaledi had personally approached the Minister of Finance because he perceived that there were problems with the Division of Revenue Act, 2011 (Act No. 6 of 2011). There were problems with the Department of Finance granting requests for money, and that money subsequently disappearing.

With the shortage of doctors in the country, the country could not afford to have 1000 training vacancies unfilled. In cases where would-be students wanted to study medicine, they could only do so where the relevant province had created a job vacancy register in order to allow the universities to take in new medical students. If the province did not create the job opportunity, the university could not accept the application to study. The Department had approached the Minister of Finance with that anomaly, and the Minister had duly granted R600million to deal with the problem. In terms of the Division of Revenue Act, however, the money went to the provinces instead of the National Department of Health. Five months later, the Department learned that only four of the provinces had allocated the money to the purpose for which it was received. There were issues in the other five provinces, which claimed that the money had been allocated according to the priorities as identified by the provinces. Minister Motsoaledi then approached the Minister of Finance in a bid to solve the problem, and suggested that the Minister of Health could draw up a list of “non-negotiables” in order to guide provincial spending. Examples of those non-negotiable items would include NHLS, pharmaceuticals and vaccines, for example. Once the provinces paid for those items, it would be free to use its discretion to determine how to allocate the remaining amount. That system would involve the Department making a template for the budgets of the provinces, and the Department was currently in the process of doing that. Both SCOPA and the Department of Finance needed to interact on that topic. The National Treasury was taking a good step by stipulating that if the provinces failed to spend the money that was given as conditional grants, the Director-General would be entitled to hold that money. She had accordingly done so, but was unable to use the money that she was holding because the Department had to cooperate with the provinces. It was possible that the country needed to take another look at the Division of Revenue Act and the current rules governing financial management and financial control.

The Chairperson said that his understanding had been that money allocated in terms of the Division of Revenue Act had to be approved on the basis of business plans and the like before it could be released to the provinces. The problem arose when the money went to the provinces, and the provinces used it for other purposes than those for which it had been allocated. There should be “single priorities” in government, from the national level right down to municipalities. It was a “worrisome disjuncture” that needed to be addressed. He wondered how that situation came into being, and asked if it was because there were people in charge who did not have a sense of the work they must do for the good people in the provinces where they were working.



Ms Matsoso replied that the Minister did not engage directly in the processes mandated by the Division of Revenue Act. Since the Department had last presented to the Committee, the Department had received responsibility for two grants, namely the health infrastructure grant and the hospital revitalisation grant. The Department had set up systems for monitoring. Now, instead of relying on reports from provinces, the Department physically visited the provinces to check on progress. With the health infrastructure grant, every project in every province was Gazetted. The Department made use of the project whereby it audited healthcare facilities to check whether the provinces had in fact done what they said they were going to do with the health infrastructure grant. The Department had done an analysis of payments made by the provinces for pharmaceuticals and supplies, for example. The Department wanted the provinces to pay their accounts within 30 days so they did not run out of supplies.

The Chairperson said that the issues around the Division of Revenue Act that had been raised would need to be discussed further. There were still some gaps that needed to be closed, and problems that needed to be resolved. He thanked the Minister and the Director-General for their contributions.

Hearing on the annual report and financial statements of the National Health Laboratory Services (NHLS) for 2010/11 financial year
The Chairperson called on Adv Sesi Baloyi, the Chairperson of the NHLS Board, to field questions. The Chairperson said that it was important for NHLS to give the Committee a comprehensive sense of the challenges they faced. He remarked that there need to be an appreciation that funds were being used to benefit the people, and not just the entity itself. The Committee was happy that the Auditor-General had indicated that the NHLS report had improved from previous years.

Ms Mangena said that from listening to the Director-General, it seemed certain that the Department of Health was moving forward, and that there were only a few problems remaining. Compliance with the laws and regulations of National Treasury was one of the only outstanding problems. Some of the questions she had prepared were no longer applicable in the light of the interaction that had just occurred with the Department of Health. She did not have any “difficult questions”, because she had relaxed when she learned about the action the Department was taking, and how hands-on it was. The capacity within the Department was impressive. The Minister and the Director-General had just dealt with most of the questions she had wanted to ask. Ms Mangena asked why NHLS was not paying its creditors on time according to the requirements of Section 38 of the Public Finance Management Act, 1999 (Act No. 1 of 1999). Adv Baloyi replied that the problem of making payments was closely related to the fact that NHLS was, in a number of instances, still waiting on receipt of payment for services it had rendered. The NHLS was wholly dependent on payment from its own creditors. That problem had been worsened by the inability on the part of the NHLS to collect payment due to it. There were detailed rules in the National Health Laboratory Services Act about the procedures and processes for collections. The prescribed legislative process was an elaborate one, but had not been effective, especially with regard to the two “problem provinces” discussed earlier, Gauteng and Kwa-Zulu Natal. Gauteng, over a period of time, had had close interactions with NHLS. The province had made promises that were never fulfilled, and when it was time to pay NHLS, the province said that it had “run out of money”. The NHLS had tried to control that account, so their exposure to risk was lessened. There were processes in place to allow NHLS to interact very closely with provinces in seeking to find a resolution to the problem, and to assist Gauteng. Through the intervention of the Minister and the Director-General, some payments had been received from Gauteng. The NHLS had received undertakings from that province that the full debt would be settled by the end of June 2012. If that happened, it would improve the cash flow situation of NHLS dramatically. As a result of the recent payments that had been received, NHLS was enabled to pay enough to its creditors for those creditors to agree to continue to supply to NHLS. The amount that had been paid to creditors was, however, but a small portion of the overall debt.

The Chairperson asked how it was possible that there were disputes around billing, given the fact that there were detailed legislative processes in place. He asked what the problems were in the other provinces, and how much was currently owed by the two “problem provinces”. Mr Sagie Pillay, Chief Executive Officer of NHLS said that the current debt owed to NHLS was R2.1billion, and the “problem provinces” owed R1.7billion of that amount. Gauteng had acknowledged their debt and were prepared to pay it, but did not have all of the funds available to do so. There was therefore no real dispute as to payment with that province. In Kwa-Zulu Natal, however, there was a dispute, and that was the reason for the unfolding arbitration, which, it was hoped, would be finalised by 15 March 2012. A lot rested on the finding of the judge. In Kwa-Zulu Natal, the source of the dispute could be traced to several issues. Kwa-Zulu Natal had been given time to be integrated into NHLS. During that period, the NHLS had to implement its billing system in the province. The NHLS had allowed for a period of between three and four years for the implementation of the billing system. There had been an agreement that payment would be on a cost recovery basis. From 2010 onwards, the billing system was fully functional, and the agreement was that Kwa-Zulu Natal would then come on board. Kwa-Zulu Natal argued that they had not been consulted. The national annual tariffs were determined by the NHLS as the result of a process in which the NHLS determined its budget, inclusive of a tariff for the new year. That budget was then presented to the Board and the Finance Committee for validation. Once the Board approved, the budget would then be presented to the Minister for consideration. That was where the responsibilities of the NHLS ended. The NHLS had therefore fulfilled its obligations. When the new tariffs were determined for the 2010/11 financial year, the NHLS made it clear that the tariffs were premised on the understanding that Kwa-Zulu Natal would come on board on a fee-for-service basis. There had been a meeting of the NHLS that was attended by the Minister of Health and Kwa-Zulu Natal’s MEC of Health. Any billing systems would always raise issues. One thing that was expected of the provinces was that they would do reconciliations on a monthly basis. For this reason, NHLS had developed tools for the provinces to help make their monthly reconciliations easier. It was a user-friendly tool that could be used by provinces to zero in on issues and to help them determine what was going wrong. If the required reconciliations were not being conducted, however, it made it difficult to trace the spending of the provinces, and harder to ask targeted questions. Some of the complaints raised by Kwa-Zulu Natal were based on emotion. All NHLS price increases for priority tests over the past five years had been kept below the inflation rate. That was a result of Kwa-Zulu Natal coming on board on a fee-for-service basis. In this financial year, there was a 0.1 percent price increase. The increased billing of provinces could be attributed to two factors: firstly, increased demand, and seconding, a change in the types of medical cases being presented to healthcare providers. It seemed that the Department was seeing “much sicker patients”. The Auditor-General had reviewed the billing problems, and he seemed to have accepted the issues as raised by NHLS. At Chris Hani Baragwanath Hospital, there had been problems with billing that had been adequately addressed by the cash reconciliation process. NHLS was committed to passing a credit to its debtors in cases where a problem had been specifically identified, for example, if there had been a double-charge for the same health intervention.

Ms Mangena asked whether NHLS billed the Chris Hani Baragwanath Hospital for services that the hospital had not received. Dr Pillay replied that inevitably, there were going to be human errors, and that was why reconciliations were critical. Bills needed to be scrutinized before being sent out by NHLS. It was important to remember that there were not labs in every hospital, which meant that when work came in from referral labs, there was more potential for mistakes. Again, duly completely reconciliations would assist in minimising those errors. He could not guarantee the Committee that there would not be any billing errors, as that a problem that would always occur in the real world.

Ms Mangena said that the accounting officer had not submitted the NHLS strategic plan to the executive authority for approval in time to meet its deadline, in contravention of the Treasury Regulations. She asked what led to NHLS missing the deadline. Adv Baloyi responded that one of the positive consequences of the actions of the Minister and the Director-General had been the regularisation of accounting and submission processes. The history of NHLS had been informed by its own programme, in which it would submit its plans to the Department within its own timetable. The Chairperson asked why NHLS would do things according to their own timeframe if there were regulations in place. Adv Baloyi answered that previously, there had not been a close plan of action with the Department of Health, and agreed that there had been a somewhat laissez-faire approach to deadlines and timeframes. The Chairperson stressed the importance of following the law, to which Adv Baloyi responded that NHLS had since regularised their reporting processes. Ms Mangena asked whether late submission would be an issue when the next report fell due, to which Adv Baloyi responded that it should not be an issue.

Ms Mangena said that NHLS did not currently have a fully constituted Board of Directors, in contravention of the requirements of Section 7 of the NHLS Act. She asked what the current composition of the Board was, and why it was not compliant with Section 7. Adv Baloyi said that the Act required a complete Board of 22 people and set out the legislative requirements for the composition of the Board. All of those were appointments made by the Minister, but the Minister depended on the provinces to nominate people for the Board. The NHLS had given the provinces sufficient time to submit nominations, but the process had gotten stuck in cases where the provinces had failed to act in time to submit nominations to the Minister. That was the reason for the vacancies. Presently, there were 15 board members. While the situation was not satisfactory, it had significantly improved. In the past, there had been instances in which the number had been as low as ten. The Chairperson said that the situation was untenable, and requested NHLS to send the Committee the list of Board members and the constituencies they represented, as well as the positions that were currently vacant. Adv Baloyi affirmed that they would do so. Ms Mangena wanted to know why there still the same problem as had existed the previous year, to which the Chairperson responded that the requested list would indicate which provinces had failed to nominate people. The seven vacancies on the Board were the result of the relevant constituencies failing to nominate people. It was important for the Committee to know which departments had failed in their responsibilities.

Ms Mangena moved on to financial and performance management, and stated that auditors had noticed that there were material amendments in the NHLS financial statements. She asked what the reasons were for those material amendments. Mr Ronald Moyo, Chair of the NHLS Finance Committee, said that NHLS had experienced challenges in terms of its reporting frameworks emanating from the past. They had tried to ensure that moving forward, their reporting frameworks complied with the requirements as set out in the Public Finance Management Act. They had reconfigured the system, and key policies and procedures had been documented. He did not expect the same auditing issue to be raised again in future.

Ms Mangena asked how NHLS would ensure their performance report would be useful, according to SMART principles. Mr Moyo replied that the Board had redefined its performance objectives, and performance reporting guidelines to ensure compliance. NHLS had to ensure that its governing bodies met on a monthly basis to ensure that the information they submitted was error-free and gave substantive evidence regarding the fulfillment of performance objectives. Ms Mangena said that she didn’t think that SCOPA would be seeing NHLS again the following year, because it had done well, and all signs pointed towards even greater improvement in the year to come.

Ms R Nyalungu (ANC) wanted to know if NHLS had considered ways to bring down the costs of its laboratory services for the benefit of provinces. She asked for more detail about the cost structure, especially with regard to training and research. She referred to page 78 of the Annual Report, which stated the ownership of land and buildings had not yet been transferred into the name of the NHLS, and asked why that was the case. Dr Pillay replied that on the issue of cost containment, NHLS knew that affordability was an issue for the provinces, based on their current allocations. NHLS was working with the provinces to figure out ways to reduce costs without compromising its functions. An integrated IT system would go a long way to assisting in this. If there was a unique patient identifier, a specific patient could be traced, and observations would not have to be repeated over and over just because the patients might go to different facilities. Firstly, however, consensus needed to be reached on what form that patient identifier would take. Part of the reason for the success of the private health industry was the availability of patient identifiers to private healthcare providers. NHLS was mandated to provide laboratory services, to produce the next generation of pathologists for the country, and to train technologists, technicians and scientists. NHLS had to raise enough money to pay for all of these, as well as to support the three national registers it was responsible for running. If NHLS receive a conditional grant for teaching and research, they could probably reduce their prices by roughly ten percent.

The Chief Financial Officer (CFO) of NHLS said that at the inception of the NHLS Act in 2001, all of the properties that had been used by its predecessor were occupied by the NHLS. However, they had not been able to have those properties transferred into the name of the NHLS. NHLS had referred the matter to the Department of Public Works for assistance, but it had become stagnant there and no further progress had been made. The Chairperson asked whether it would be correct to say that the transfers of property could be completed by 2012. The CFO responded that the delayed transfers were not due to any fault on the part of the NHLS. Adv Baloyi added that NHLS had not yet raised the issue of the outstanding transfers with the Minister, but that they were now at a point where they would take the matter to the Minister for his intercession. The Chairperson wondered how bad things could possibly be if it took over ten years to transfer property.

Mr Goqwana asked why NHLS was formed and whether it was motivated by profit or by the need to help people. He asked whether there was a need to re-look at the empowering legislation. With regard to gatekeeping, the Portfolio Committee on Health had received a presentation by Kwa-Zulu Natal, during which it was revealed that the province thought that NHLS was more expensive than its alternatives. He asked whether there was proper communication given about what tests needed to be conducted on a given sample. It seemed that NHLS was conducting – and charging for – superfluous tests. It made a difference whether NHLS existed for profit or to help people. He also asked whether the quality of our health professionals was up to a standard where they could understand the issues he was raising.

Dr Pillay responded that according to the NHLS Act, the entity was not for profit. In terms of the Public Finance Management Act, it was a public entity, and defined as a “non-business”. The fact that NHLS had “small surpluses” did not make it a for-profit entity. Rather, it could ensure that the lives of all South Africans were bettered. The comparison of the costs charged by NHLS to those of their counterparts in the private sector was one that NHLS was constantly reviewing comparisons for the prices charged for tests. When considering such comparisons, it was key to look at the prices for all tests, instead of just a selection of the few tests that were more expensive at NHLS. NHLS had done comparisons on the prices of all tests. The last comparison they did showed that NHLS charged 30-40 percent less than the costs leveled by its closest competitor, which included the costs of training and research. NHLS could provide some evidence that their prices were lower than the private sector when it came to the overall “basket of tests”, in contrast to the occasional individual test. On the question of gatekeeping and whether NHLS kept in close enough contact with the Department, it was important to remember that a lot of personnel at health facilities were relatively junior. Because of this, there was a tendency for them to request laboratory tests for more than one thing, to be on the safe side. The question of supervision was currently being addressed by NHLS. Test request forms were being re-designed in order to limit the number of clinicians who could request certain tests. The new list would include the price of the test, which would hopefully make clinicians think twice before ordering a test. Again, this was an area that would be greatly assisted by an integrated IT system. In response to the question of whether the law governing NHLS should be changed, Adv Baloyi said that NHLS would take guidance by the Department, as that matter was out of the control of the NHLS.

Ms Chiloane asked what the reason was for the resignation of board members. She made reference to unaudited financial statements that were mentioned in the report, and asked why those amounts had not been subjected to the auditing process. Adv Baloyi responded that main reason for why the board was not completely constituted was that there were always times when members resigned or left before the end of their term, and that people retired before their time on the board was over. What was recorded as “resignation” almost always referred to those people whose time had come to an end and who were not re-instated. Mr Moyo referred Ms Chiloane to pages 90–94 of the financial statement, and explained that everything had been audited. The content that she had referred to did not need to be audited in terms of the Public Finance Management Act.

The Chairperson asked whether the internal audit function was staffed from people from within or without the Department, to which Mr Moyo replied that external staff were taken on for that purpose. The Board had determined the question of whether internal auditors should be out-sourced, and its decision had been motivated by the need for an unbiased and objectively independent audit, which may not have taken place from an in-house team. The Chairperson remarked that this was the first time he was hearing such a sentiment being expressed by a Department. The internal audit fees had amounted to R5million, and he wondered whether that was cost effective. The Committee had the approach of wanting to build the capacity of the state. It might therefore be necessary for NHLS to review their perspective. Internal audits and audit committees were there to assist Departments. It was not correct or acceptable for the Department to have a completely out-sourced internal audit committee. Government was currently in the process of doing an overhaul of all of the consultants working for government. Consulting and professional fees were being brought down, and the Committee wanted to see a continuation of that trend. Fees spent on auditing must be minimised, and the state must have capacity to fulfill its mandate. The Committee would pursue this issue. He asked when was the contract with the internal auditors ended. Mr Moyo replied that it was expected to end before the end of the calendar year, and that before it came to an end, the leadership of the NHLS would meet to review the position. The Chairperson advised NHLS to take care of the problem now instead of delaying and risk ending up in a situation where the contract had to be extended. The Committee would provide assistance in this regard. The Chairperson thanked the presenters, and hoped that some of the challenges they had discussed would be sorted out. The provinces depended on the services of NHLS. Adv Baloyi said that she had confidence that NHLS would find resolutions to the outstanding issues. She said that NHLS would do away entirely with the outsourcing of the internal audit system, or at the very least, minimise it to what was “absolutely necessary”. The Chairperson said that the outsourcing of the internal audit system should be done away with entirely.

Hearing on annual report and financial statements of the Council for Medical Schemes for 2010/11
The Chairperson said that there had been many media reports about the problems that existed within the realm of private medical schemes. The Committee was not dealing with an entity that was “waist-high in mud”. Although there were some challenges, the industry regulator was in its place so that it could take care of selected issues in the interests of the public. Ms Nyalungu referred to compliance with laws and regulations, and pointed out that according to the report, CMS’s strategic plan covered a one-year period as opposed to the three-year period required in terms of the regulations. She asked who had made the decision and what had happened to the official who did not do his or her job properly.

Mr Kariem Hoosain, Chairperson of the Financial Committee and Council Board Member, thanked the Chairperson for his introductory comments and expressed his personal disappointment that CMS had been called to appear before SCOPA to answer questions for the first time in its existence. CMS has had clean audit reports for each of the 11 years since it was established. He said that CMS did not have a three-year strategic plan but rather, a five-year plan. They had a one-year operational plan and budget. He had recognised, upon joining CMS, that the policy was a contravention of the requirements of the Public Management Finances Act. However, moving forward, CMS would ensure that there was a three-year strategic plan in place. The Chairperson wondered how the contravention with the regulations had been allowed to happen, and noted that it raised issues of effective management and monitoring. Mr Hoosain replied that there had been a change in management, and that the shortcoming was the result of an oversight committed during the time of the previous management. There had been no separate Finance Committee at that time to deal with finance issues.

Mr Daniel Lehutjo, Chief Financial Officer, added that CMS officials had thought that the five-year plan was sufficient for the purposes of forming the one-year operational plan. The situation had since been corrected. Because there had been collective responsibility for the oversight, no one individual had to be punished.

Ms Nyalungu asked whether there was now a specific person tasked with dealing with the strategic plan. Mr Lehutjo replied that a strategist and manager responsible for risk management had been appointed to deal with that area. Ms Nyalungu asked why the applicable policies and processes had not been implemented. Mr Hoosain answered that it had been the result of an oversight on the part of CMS. Now, however, CMS had accessed the services of the National Treasury, which was using the templates developed together with CMS. Mr Lehutjo added that at the time in question, CMS did not have adequate capacity, and did not actually know how to form a strategic plan in line with the SMART principles.

Ms Nyalungu moved on to financial and performance management and remarked that the internal controls in place had proved to be insufficient for the purposes of preventing irregular expenditure. She asked why this was the case. Mr Lehutjo replied that in relation to irregular expenditure, CMS had not sustained any losses. In 2005, a one-year tender had been awarded to a contractor for the purposes of providing maintenance to the CMS, and that was where the irregular expenditure had arisen. There had also been irregular expenditure in relation to the acquisition of new computers. CMS did not engage in a tender process, and the Council had in fact taken a resolution to eschew the tender process.

Mr Monwabisi Gantsho, Registrar and Chief Executive Officer, tried to explain the reason for the resolution on the part of the Council. When considering the necessary replacement of existing computer equipment, CMS had found that Dell computers had proved much more reliable in comparison to “unknown brands”. The Chairperson asked what basis there had been for buying non-brand machines in the first place. He pointed out that the quality of decisions taken at an early stage affected the outcomes at a later stage. Mr Hoosain answered that CMS was trying to move from having different types of machines to having a single standard. CMS did sent out tenders to at least three computer suppliers. There had bee a subsequent renewal of the agreement with Dell without the original tender process being revisited. At that stage, CMS did not have a tender committee, but it did. Improvements in controls had been made, and CMS would ensure that full tender processes were followed in the future.

Ms Nyalungu asked what had been different from previous years, and what CMS was doing to improve its performance in the financial year to come. Mr Gantsho said that moving forward, the regulations pertaining to planning would be adhered to, and the advice and guidance received from the Treasury Advisory Unit would be fully implemented. CMS was well positioned to deal with the upcoming roll-out of NHI. The CMS committee met with the Minister and the Director-General on a regular basis regarding planning for the NHI. He felt, as Registrar, that it augured well for NHI implementation going forward. The CMS, working together with the Departments of Health and of Finance, was in a position to provide very good protection to members of medical schemes, which was their primary mandate.

The Chairperson referred to the fact that legal fees year on year had almost doubled, and asked why that was the case. Mr Hoosain replied that the matter had been raised as a concern within both the Council and the Ministry. CMS had become more regulatory, and almost every regulatory act they took was faced with a legal challenge. Almost every case had been won by CMS, but even that came at a cost. CMS had recently received R3million back in legal fees. Mr Gantsho added that the appeal process took anywhere between two to three years. Once a successful appeal had been concluded, the money that was spent on legal fees would come back to CMS coffers. That process could take up to five years. Recovering all of their outstanding costs would take a period of years, but CMS was comfortable with that approach.

Ms Z Balindlela (COPE) asked whether CMS subscribed to the Public Finance Management Act, and if so, why its financial statements did not comply with Sections 40 and 41 of the Act. Mr Lehutjo replied that CMS was indeed a Public Finance Management Act entity, but that there had been a difference in interpretation of the legislation as between CMS and the Auditor-General. The Chairperson said that the opinion of the Auditor-General was final, and with that in mind, he would have expected Mr Lehutjo, as CFO, to admit that CMS had gotten it wrong. Mr Hoosain added that CMS had interpreted the financial statement in a certain way, but that had since been corrected.

Ms Balindlela asked how far CMS had progressed with regard to traditional medicine. Ms Mangena wanted to know who was responsible for regulating fees. Mr Goqwana had a concern that was linked to the high legal fees referred to earlier. Some people in the industry had complained about over-regulation, and felt that they were being “pushed” towards NHI. He asked whether there was any substance in allegations of over-regulation, and whether there was any way that disputes could be mediated before they were taken to court. Mr Hoosain said that one the question of whether there was over-regulation, it was important to keep in mind that CMS was still relatively young. When CMS became more focused in applying the regulations, it started to have more success. They now expected medical aid schemes to play their role. Court cases came about when decisions that were made at the level of dispute resolution processes went against medical aid schemes, which then took CMS to court. Medical aid schemes were becoming increasingly sophisticated in their approach to legal battles. The Chairperson remarked that it appeared that the medical aid schemes would rather be unregulated and left to their own devices. In large measure, this approach would always be to the detriment of the people who contributed to them on a monthly basis. He asked whether CMS had interventions in place that were geared towards addressing those issues. In the field of medical aid schemes, benefits for members were decreasing, while charges were increasing. CMS should be assisting people to get the most for their money.

Mr Gantsho said that in the current climate, medical aid schemes had to be regulated, and there was good legislation in place to allow CMS to do so. Before the Medical Schemes Act... had been implemented 11 years before, there had been more of a “wild west” scenario. CMS now knew that the various medical aid schemes would continue to exist side-by-side with the NHI as it was implemented. CMS needed to be allowed to fulfill its mandate by protecting the customers of the medical aid schemes. He agreed that there was a pattern in which fees were rising while services were diminishing. There was currently no mechanism in law to control those rising costs. CMS had been working hard to get the Reference Price Listing (RPL) system up and running. It needed to be completely worked out and approved by the Minister of Health before it could be implemented. CMS had recently joined forces with the Competition Commission in order to advise the Ministry on matters of this nature. Traditional medicine fell outside of the focus area of CMS. When the medical aid schemes registered their agreement of benefits with members with CMS, such agreement could contain access to traditional medicine. The number of traditional practitioners in South Africa was currently 250 000. That amounted to a lot of people who could lay claim to resources from the medical aid schemes.

The Chairperson said that it should not be considered an unusual achievement to receive an unqualified audit, since that was what people were paid to do. Unqualified audits must become the norm. The Committee was “less stressed” today because of the positive reports they had received. He thanked all of the presenters and expressed hope that the issues that had been raised would be addressed. From the responses the Committee had received, it seemed quite clear that the problems that had been encountered would soon be a thing of the past. The Committee wished that all of the other government departments would be able to give such positive reports. He extended thanks to the Office of the Auditor-General for being present and available “just in case”.

The meeting was adjourned.