National Treasury on their Report and Financial Statements for 2010/11 with the Deputy Minister

Meeting report

The Chairperson said the meeting would deal with the annual reports and financial statements of the National Treasury (NT), Corporation for Public Deposits (CPD), and the Ombud Office for Financial Services Providers.

The Annual Report for the NT was encouraging, as it pointed to a transparent budget. When surveyed against 94 other countries, including some of the most powerful economies, South Africa was at the top.

The Auditor General (AG) had requested the Department to shed light on the AG's findings and indicate what it was doing about them.  Other issues NT needed to account for were the vacancy rate, its oversight role on other departments, staff training, consultancy fees and donor grants.
Treasury Presentation
The Deputy Minister of Finance, Mr Nhlanhla Nene, said the Annual Report indicated 2010/11 had been a difficult year. Global economic hardships had affected the performance contained in the report. The new administration had adopted an outcomes-based approach which would make it easier to hold departments accountable. It was the first time that the NT had made presentations to both the National Assembly and the National Council of Provinces.

Mr Lungisa Fuzile, Director General, Treasury, requested that he be allowed to provide direct answers to particular issues raised by the Committee, rather than deliver the prepared presentation, which contained basic information, much of which was already familiar to Members.

Vacancy rate
Dealing with the vacancy rate, Mr Fuzile said the NT was a substantial organisation employing over 1 100 people in 2010/11. The vacancy rate was around 14% for the year.  Treasury had made 199 job offers and 185 of those had been accepted, and140 positions requiring critical skills were filled. However, when vacancies were filled from within the organization, the vacancy rate was not reduced.  This was a challenge facing all government departments and entities.  The turn-around times had been reasonable, with short-listing and appointments being made within the shortest possible time.

Consultancy fees
Mr Fuzile said consultancy fees could be divided into two categories -- those sourced for internal purposes, and those sourced to assist other departments.  There had been a saving on consultancy fees sourced by NT to enhance internal capacity.  There was a Technical Assistance Unit (TAU) within the NT which helped to build an effective and efficient public service. The TAU sourced people with expertise and made them available to other departments, especially in the area of supply chain management. If a certain skill was required, Treasury would source such expertise on behalf of a department.  The benefit of this approach was that it allowed skills which were not recognized in the salary scales of government, to be attracted, and also allowed the NT to hire high-priced experts for shorter periods.  If the contracts were structured appropriately, skills transfers would happen and internal capacity was built.

Audit opinion
Treasury had received an unqualified audit opinion, but with matters of emphasis. There had been an irregular expenditure of about R23,2 million. This was a cumulative amount, where R20,1 million was related to a misinterpretation by the Board of the Special Pensions Act, resulting in payments to beneficiaries who did not qualify.  The R3,1 million involved a service provider who had been appointed to do scoping. Due to the urgency of addressing the challenges in Special Pensions, implementing change management, and the need to avoid the interruption of service provision, the contract had been extended. 

Material losses amounting to R3,6 million had been incurred as a result of losses through criminal conduct within Programme 8 of Special Pensions.  The findings of a Special Investigating Unit (SIU) investigation had indicated that 518 beneficiaries were deceased -of whom 254 were subsequently removed from the system - 284 beneficiaries had schedule 1 convictions (disqualifying them from receiving or continuing to receive a pension), 141 fraud cases (providing falsified information) had been identified; and 752 had been deemed as cases where the Act had been misinterpreted by the Board.

The NT had instituted a process, with the Government Pensions Administration Agency, to stop payments to the accounts of the deceased 518.  The difficulty in cleaning the system of special pensions system related to the misinterpretation of the Act. This had been discussed with the AG, and the NT was looking to resolve the matter in a manner that was acceptable in law.  The Department of Justice had been approached on how best it could fast track the process.

 
Quarterly reports
Mr Fuzile said quarterly reports had been introduced at the NT as a means to update South Africans on the progress of the department.  They had been produced since the introduction of the Section 32 reports. There were no qualms about the financial information; it was the non-financial information that the AG had raised issues about. He said he hoped there would be an improvement in this area during the current year. The report would be progressively sent to the AG so that issues could be raised, but so far there had not been any complaints.

Discussion
Mr M Makhubela (COPE, Limpopo) sought clarity on recruitment of people with disabilities. Could the NT indicate how many people with disabilities it employed, and provide a breakdown in terms of gender?

Mr Stadi Mngomezulu, Deputy Director General, Corporate Services, NT, replied that only one person with a disability had been employed by the Department in the past year. He said it was a challenge for people employed to disclose disabilities, as there was a stigma attached.  Non-governmental organisations (NGOs) that worked with disabled people had been engaged.  Treasury had enhanced its employment equity committee and this had resulted in an increase to 15 disabled staff members.  Gender ratio was 45% male to 55% female.  He could not give a breakdown on job levels, but said that this detail could be provided to the Committee.

Mr Makhubela asked the Department to clarify the issue of the 85 fraud cases which the report had identified as “stopped.”.

Mr T Chaane (ANC North West) wanted to know if the 185 people who had accepted job offers, according to the presentation, were included in the 140 critical skills posts filled.

Mr Freeman Nomvalo, Accountant, General Treasury, said there were certain critical skills positions that related to the core functions of a treasury, and others related to support functions. The approach had been to immediately fill vacancies at the core function departments. The 140 positions related to the core functions, and the remainder to support functions at Treasury.

Mr Chaane asked for the specific misinterpretation of the Special Pensions Act. What had the Board misinterpreted?  Was this as a result of a legal opinion obtained, or was it merely because the Board had acted without seeking legal opinion.

Mr Fuzile replied that the Board had misinterpreted a lot of clauses. It had been discovered, when the SIU went through each of the files,  that many people did not deserve to benefit.  He could not break down the details of each transgression, but the most common was the Schedule One offences. Other misinterpretations had related to age, as people of certain ages should not have qualified.

Mr Chaane wanted to know if those people from municipalities and provinces who received training from the NT became employed, or if they remained interns at municipalities.

Mr Fuzile replied that the interns trained were offered jobs at many of the departments and municipalities. The NT employed 71% of its interns, and other departments engaged some before they could finish internships. He said he was not sure about the retention rate at municipalities, but this could be checked and the information provided to the Committee.

Mr Chaane said he accepted the unqualified audit opinion, but the “matters of emphasis” was unacceptable considering that Treasury was supposed to be benchmarking departments.  At provinces, this was understandable, as provincial treasuries were weak, and still lacked the required capacity to attain satisfactory audit opinions.

Mr Fuzile said the difficulty was that National Treasury could not run away from the pensions scandal. He and his predecessor had not appointed the board, and yet the NT could not disown the scandal, as he still had the overall responsibility to ensure stability.  Other than the issues of special pensions, the NT did not set a bad example in financial management.  The NT managed a budget of over R1 billion, in addition to other large money transfers to departments, without error.

Mr  A Lees (DA , KZN) said there was a need for clarity on whether the incorrectly paid pensions amounted to criminality. The use of the word “cases” was confusing.

Mr Fuzile conceded the word “instances” could have been used.  There were 141 fraud cases and another 518 cases that had already been dealt with. The only area where the Department was struggling was with the 752 “instances” where the Board had awarded benefits to people who should never have received them.

Mr Lees said he needed to understand if the TAU assisted everybody, right down to municipalities.

Mr Fuzile replied that for the TAU, it was very rare for the NT to accede to requests from municipalities. The Unit was used mainly for the national government.

The Chairperson said the delivery of workbook materials in the Northern Cape was very different to how it was portrayed in the Annual Report.  He said it was “scary” when he visited schools in his constituency.  The books were not received on time, which impacted on the programme of the schools. He said in the engagement he had had with the MEC for Education in the Northern Cape, it was indicated that the books were ordered from a central point, which accounted for the delays.

The Chairperson wanted to know the lessons learnt from the allocation of infrastructure grants, as well as the impact of the Local Government Financial Management Grant in improving the financial management capacity at municipalities. He asked what strategy the NT used on interns.

Mr Fuzile replied that the NT had been running the Infrastructure Delivery Improvement Programme for seven years. This was where Treasury hired experts in fields like project management and engineering and made them available to four categories of provincial departments - treasuries, public works, health, and education.  The success of the programme had been mixed, with the success rate dependent on the willingness of provinces to be assisted.  Treasury could not impose on other departments.  He said departments took long to accept assistance until they foresaw under-spending or huge losses.  The programme was ongoing, and provinces were encouraged to hire the skilled people on their own.

He said R2 billion from the Infrastructure Grant was stopped from going to provinces last year in anticipation of major under-spending.

Mr Nomvalo added that there were 17 non-delegated municipalities to which the NT provided direct support. The rest of the municipalities received support through the provinces. The Financial Management Grant had grown substantially since 2009.  About 500 interns participated in the programme and some got permanent employment, but it was difficult to track the figures.

One obstacle to employing interns permanently was those chief financial officers who wanted to do things according to the statute book.  Retaining such skills was a very difficult process sometimes, but there had been a significant number of interns who had been retained and some had moved to various municipalities.

Mr Makhubela wanted to know if it was legal for a pensioner to have her grant stopped because her husband had become a Member of a Provincial Legislature.

The Deputy Minister said this was an extraordinary case and needed to be attended to separately.  He requested that the Member provide details of the pensioner so the matter could be followed up.

Mr Chaane wanted to know why the Treasury wanted to employ more people, as the report indicated a vacancy number of 179, whilst the Department wanted to employ 199. If the assumption was that the 179 were funded posts; what was the situation with the other 20. There were other departments who would hire more people than required and then argue that the NT also did the same.

Mr Fuzile replied that the year had started with a 179 vacancy rate. Treasury had wanted to employ 199, but the internal movement of staff and promotions had influenced this. Letters of employment had been sent to 199 applicants, and 185 of them had accepted.

Mr Chaane complained that reports should be written in simple and understandable language for MPs.  He asked that the 185 be unbundled.  Whether there had been internal movements or not, Treasury would still have had to get people from outside in order to fill the 179 vacancies.

Mr Chaane sought clarity on the legal opinion received from the SIU.  He asked if the legal opinion indicated whether the Special Pensions Act prohibited the board from correcting its decisions. Could this not be corrected by a resolution?  It appeared that it was so difficult that the NT had had to resort to the courts.  

Mr Lees said the problem was that the presentation had referred to the mistaken board decision as a misinterpretation, when the findings of the SIU suggested that this was an error. He asked what would happen to the R220 million paid to the 752 beneficiaries last year, going forward. He said he would be happy to receive a written reply if the answer were not immediately available.

The Deputy Minister replied that special pensions were the result of a political dispensation. This dispensation had its challenges at the beginning. He said when the board had been constituted, political parties had submitted names of people whose credentials could not be verified.  People deployed to serve on the board had not been appropriately suited to the function.  As a result, some of the misinterpretations were through lack of knowledge on governance and legislation issues.  Errors might have occurred as a result of the board acting out of sympathy, but the difficulty was entitlement, because a decision to terminate could have been challenged in court because the expectation of a certain recipient might have been raised.  In legal language, the person would have had a reasonable expectation to benefit, because the board in its wisdom had ruled that such a person qualified.  He said if the matter was challenged, it could cause problems, and until there was a court ruling on these 752, then the Department would not have legal grounds to terminate those pensions.

Mr Fuzile said the curious thing about the Special Pensions Act was that it had a clause that said the board’s powers were unfettered, and its decisions could not be changed. The explanation provided by the Deputy Minister pointed to difficulties in arriving at decisions, given how the board was constituted.  The Department could not unilaterally stop the pensions.  The amount was cumulative - it could increase and then stop once the people died or came out of the system.

The Chairperson said government departments were allocated a lot of money. There would have to be engagements between the NT and other government departments. The meetings would have to address the issue of irregular expenditure. Criminal charges should be laid against those who abused public funds. The Committee was serious about that.

Corporation for Public Deposits presentation
Mr Daniel Mminele, Deputy Governor South African Reserve Bank (SARB), said it was the first time  the CPD had appeared at an NCOP Committee. The CPD had been established in terms of its own Act and was wholly owned by the SARB. The Corporation accepted public deposits and invested the funds in short-term money market instruments, special Treasury bills, and also placed its funds on call with the SARB.  All the funds invested were repayable on demand.

The CPD had a board of directors that assumed ultimate management for the Corporation and was chaired by the Deputy Governor of SARB.  The Board was appointed by the Minister of Finance and comprised staff from the NT and the Bank. There had been changes recently with regards to the Board.

The Financial Services Department (FSD) of the Bank performed the CPD’s administration and accounting. The investment was managed by the Financial Markets Department of the Bank and the head was a director. Investments were in accordance with the guidelines approved by the Board. The guidelines were reviewed and approved at every first meeting of the Board around February.

Mr Mminele said profits were transferred to government after accounting for dividends and allocation to reserves, as the Board deemed necessary. The Board was required to meet four times a year. The Board had elected not to appoint any Board committees but rather to use the risk management unit, internal audit and audit committees of the Bank.

He said the internal auditors of the Bank evaluated and monitored the internal controls of the Bank, including the subsidiaries. CPD had received unqualified audit opinions and the auditors could not find any control weaknesses. He said it had been confirmed that the Corporation complied with international accounting standards.

Ms Nomwelase Skenjana, Assistant General Manager, CPD, said the net interest income had increased by R15.4 million.  She said the asset base had decreased by R5 billion compared to the previous year. This had been as a result of government and other state-owned entities’ significant cash requirements towards the year-end. This did not mean that deposits were low during the year, rather a case of large withdrawals.

The average investments and deposits held were higher than the previous year, and contributed to the increase in interest earned on investments and interest paid. The interest income had increased due to a decision the Board had taken to change the interest rate structure, especially for inter-governmental cash coordination.  The deposit book had increased from 137 to 145 depositors in March 2011.

The asset base had increased to R11 billion. The shift at year-end from call deposits to money market instruments wais merely driven by the projected cash requirements of government, and was done in order to maximise profitability.

CPD would make funds available, depending on whether government had an urgent need that required funding. The CPD accepted funding from the neighboring states, but subject to ministerial approval.

Discussion
Mr Lees said he was intrigued by the interest income.  What were the investments that the CPD had made to generate that income. There had been opportunities for government and state-owned enterprises to invest in the CPD.  He wanted to know if the interest was better at the Bank than at commercial banks. Otherwise, it would not be a good decision to do business with the Bank.

Mr Mminele said the CPD offered short-term instruments. He said 60% of investments made by the CPD had a life span of three months, and it did not invest in anything that would last longer than three years. CPD invested in Special Treasury Bills, Land Bank Bills, negotiable certificates of deposits, bridging bonds, and repurchase agreements.  These were typical money markets instruments that were available, and were of the highest quality.

The interest rates were market related.  Treasury encouraged state enterprises to use the CPD by providing incentives, but could not force them to do so.  Significant amounts moved back and forth between the bank and commercial banks. The funds that the CPD handled were so large that the commercial banks were just not in competition with the Bank.

Mr Lees said the draw down at the end of the year was understandable. He asked if this was a permanent draw down.

Mr Mminele replied that the end of year balance was just reflective of a situation, and was not indicative of a general draw down. This was as a result of a cash request by one of the state-owned enterprises just a day before the financial year ended, and was not indicative of a general draw down or reduction in deposit levels. There had been deposit growth after the request had been handled.

Mr Makhubela asked for an explanation of the strategy used by the CPD to mitigate risk. He wanted to know how often the Bank reviewed its risk management strategy.

Mr Mminele replied that the risk management strategy was continually reviewed. An internal audit committee continually checked controls at the Bank. The Bank's internal audit and risk committee looked at the CPD internal controls. External auditors were also used and they had indicated that they had found no weaknesses with the controls. The risk management framework was reviewed from different angles.

Mr Makhubela wanted to know the causes of the overdraft, as it appeared in the presentation. He wanted to know the status of the current assets of the CPD, and asked which sectors contributed to that.

Mr Mminele replied the overdraft situation was just to assist Treasury when there were mismatches. This facility was very short-term; it was just for a day or two when used.

Financial Advisory and Intermediary Services (FAIS) presentation
Ms Noluntu Bam, Ombud for Financial Services Providers, said the entity started functioning in 2003.  The main objectives were to resolve complaints in terms of the FAIS Act. The organisation had obtained clean audits. The staff complement was 41, and dealt with almost 8 000 cases. There had been an annual 14% increase in complaints since 2006.  Not all complaints could be resolved by the FAIS office. Often the public did not know where to report complaints, but the office helped direct people to the relevant offices.

There were two goals that the FAIS wanted to achieve - an improvement in complaints handling and operational effectiveness. The plan was to achieve quicker turnaround times and a cost effective service. The goals also focused on strengthening organisational capacity to deliver on the FAIS mandate.

Ms Bam said 70% of work on the operational plan had been achieved. The entity had resolved  93% of cases in nine months against a target of  60%. The quality control plan had been completed and approved in May 2010, and the automated contact handling process had been integrated into the 2011-12 IT plan.  This had been expected to integrate the whole process of handling complaints.

Ms Xoliswa Mhlongo, Financial Manager, Ombud Office, said the audit opinion for the year under review was unqualified.  There were no significant deficiencies with the internal controls. Non-current assets, including office equipment, machinery and computer software, had increased by 70%.

The bulk of the current assets were accounts receivable, and amounted to R5 million. Of this amount, 94% was Financial Services Board allowances. The net trade receivables, or case fees, amounted to R104 000. This indicated an increase of 2%. Fees were charged in terms of the FAIS Act.

Ms Mhlongo said funds and liabilities amounted to R6,9 million, of which R5,7 million represented an accumulated surplus.

The Ombud’s office had made only R255, 600 from case fees last year. Total expenses had amounted to R22.4 million.  There would be an operating deficit, but that would be funded from the FSB.

The FAIS Ombud had very limited exposure to financial risks. The Ombud’s office requested funds from the FSB on monthly basis. The exposure was limited because the money was kept at a bank. The FAIS Ombud maintained sufficient liquid resources to settle debt as it became due, and it complied with the written principles for overall risk management.

Ms Mhlongo said the office struggled to attract the skills it needed and had decided to put sustainable measures in place.  Last year, it had started attracting law graduates into its graduate internship programme. The first batch of graduates had joined the office in January 2011. The programme had lasted for 12 months and there were opportunities for graduates to find full time employment at the office. The second batch had already been enrolled and would finish in December.

Discussion
Mr Lees wanted to know the kind of cases that the Ombud dealt with.

Ms Bam said the office was set up to deal with cases of rendering financial services, including insurance, investments and unit trust investments. The interaction between the members of the public and the provider would be the rendering a financial service.  Previously members of the public had struggled to resolve issues with providers.  Their only recourse had been through the courts, but this was costly and time consuming.
The office did not get involved in contractual matters - only when problems arose during the rendering of a financial service.  When complaints were received they were acknowledged and directed to the right offices if they were outside the jurisdiction of the Ombud’s office.  Ms Bam said the FSOS Act statute was set up to ensure there were no complaints that could not be addressed through the Ombud institutions in South Africa.

 
Mr Lees sought clarity on the case fees. Could someone who could not afford a fee come and lay a complaint with the Ombud?

Ms Bam replied that not all cases attracted a fee. The Act stipulated that only when a case was heading for an investigation could a case fee be charged. The cases came on a daily basis. The office needed to notify the provider of the complaint. There was a six-week grace period during which the provider was allowed to resolve a complaint with a member of the public without outside intervention. Once there was proof that the provider had been approached, and was evasive, the period was reduced to seven days in terms of the law. If the provider failed to resolve the matter, it was only then that the Ombud’s office intervened, and by law it was allowed to demand a case fee of R1 000.  This was not charged to members of the public, but to providers.

Mr Lees said the registered cases were expressed as percentages, and wanted to know if those could be provided as figures.

Ms Bam replied that the 60% that the Ombud’s office quoted on the presentation, was 60% of the 7 944 complaints it received in 2011. She said the office wanted to resolve the complaints within nine months. The nine-month period was decided upon, with all the factors that could influence a speedy resolution of a complaint in mind. She said although the office had decided on 60%, last year 93% of the 7 944 complaints had been resolved within the prescribed time.

Mr Lees also asked about the staff complement.

Ms Bam replied that there were 41 employees at the Ombud’s office.

Mr Makhubela asked for clarity on the cases of Naidoo, Van Zyl and Dudley, who were pensioners who had been robbed while trying to invest money. He asked if there were any lessons learnt in the process.

Ms Bam said the three complaints related to the three gentlemen investing, and losing substantial amounts of money on public profit syndication schemes. They had not been told the investment was high risk. The three had registered complaints with the office once their capital was lost. The Ombud had then approached the providers for further clarity.  In all three cases, there were issues of governance in the scheme where money was lost because people were paying themselves out of investors’ money.  The Ombud had found against the providers, who were asked to pay back the three gentlemen.

Ms Bam said the lesson was that members of the public and the providers needed to be cautious with schemes that promised substantial amounts.  Also, the experience had been that some brokers did not know the products they were selling and therefore ought not to sell them. These were not the only cases arising from the property syndication schemes.

Mr Makhubela asked if there were any collaborative programmes that were done with the National Consumer Commission, especially as the roles appeared to be that of protecting the consumer. He asked that if there were any programmes, what the impact was.

Ms Bam replied that whenever the Ombud’s office found an opportunity to address members of the public, it went there. There was a need to educate the masses.  She said the office had collaborated with Treasury and the Consumer Education Initiative. The office needed to be accessible to the public.

Mr Makhubela asked for an explanation on the reasons for deviation from the original budget, and what had been done to reverse that.

Ms Mhlongo replied that the work of the Ombuds was specialised. If a certain position was not filled, it would have an effect on the budget.  Most of the deviations were the result of personnel costs. In the strategic plan there was a succession plan.  Critical positions had been identified, as well as potential candidates within the organisation. Training programmes this year were focused on bridging the vacancies.

Mr Makhubela wanted to know why there was a concentration of reported cases from Gauteng.

Ms Bam said she could not say with certainty why a large volume of complaints came from Gauteng. She said the Ombuds office was accessible to all corners of the Republic.

Closing remarks
The Chairperson paid tribute to the prominence of women at the institution. She said that the Committee had always appreciated the consistency of the Minister of Finance and his Deputy in attending Parliamentary meetings.

He notified Members of a strategic planning meeting on the 14 & 15 May which would be held jointly with the Standing Committee on Finance.

The meeting was adjourned.