Section 100(1)(b) Limpopo provincial interventions, Public entity boards: National Treasury briefings

Public Accounts (SCOPA)

12 June 2012
Chairperson: Mr T Godi (APC)
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Meeting Summary

National Treasury updated the Committee on the interventions into Limpopo, initiated in December 2011 in terms of section 100(1)(b) of the Constitution. The interventions were in respect of the provincial Departments of Provincial Treasury, Education, Health, Public Works and Roads and Transport. In the 2011/12 financial year, the Limpopo Provincial Government had accumulated unauthorised expenditure of R2.7 billion, and by October 2011 it was in a dire financial position, having exhausted its overdrafts with both the commercial and Reserve banks. Despite warnings from National Treasury, the Provincial Treasury did not address the situation. The specific problems in each of the departments under administration were outlined. Three of the departments had received qualified audits, the Department of Health had a disclaimer and Provincial Treasury received an unqualified financial audit but had severe performance problems. Human resources problems were apparent, particularly in the Department of Education where excess and “ghost” teachers were costing around R1 billion a year. Accruals were high because the departments had insufficient cash flow and financial systems. All showed violation of supply chain management procedures, irregular expenditure in goods and services, and lack of internal controls. This was compounded by the failure of Provincial Treasury to manage banking and cash properly, as well as to monitor expenditure, budgets and infrastructure. Various key posts were vacant and existing staff were not always capable.

National Treasury had effectively taken over oversight from Provincial Treasury, in respect of all departments, not only those under administration. Various systems were put in place, which were fully described, and the improvements in each department were set out. The negative financial position of November had been reversed and the province was basically solvent. Payments to suppliers had been verified and made, and there was sufficient cash to meet commitments. Credible budgets had been drawn for the next financial year, and recruitment was under way to fill posts, with integrated support and handover plans also being drawn. Funds had been set aside to clear the accumulated unauthorised expenditure over the next three to four years. It was stressed that the first stage of the process had been to stabilise the position and to develop fiscal improvement plans and systems for all departments. Invoices were verified and paid. Investigations were also done into the situation and disciplinary steps had been instituted, as well as some criminal charges laid, whilst an exit strategy would be formulated to hand over and monitor.

Members asked to whom warnings were given, when this had happened, and asked if anyone was held to account. On hearing that some investigations had commenced, Members asked whether the investigations were across the board, and clarified that 31 matters had been assigned case numbers, with another 4 in the process. Two Members were particularly vehement in expressing concerns about the length of time taken before National Treasury stepped in to take control. They further expressed the view that the situation had not been brought under control, since hospitals lacked food and other essential supplies, and urged that the public needed to see that positive steps had been taken to hold officials responsible. Members agreed that it was necessary to look at the value chain, and what oversight mechanisms could and should be employed to give early warnings of problems, and urged that investigations had to be done into whether value for money had been achieved. They asked if National Treasury had ready capacity for interventions, how interaction with provinces took place, whether audits were being done, and noted the limitations, as well as the assumptions in respect of audit certificates, and the fact that performance audits might have isolated the problems sooner. Members asked about the binding effect of regulations and guidelines, filling of vacancies, wondered if there were responsibilities to ensure delivery of services as well as accounting, and pondered whether the lines of responsibility between national and provincial spheres may contribute to the problems, and the oversight functions of the legislatures had to be debated. 

Another presentation was given on the functioning of boards in public entities, with particular reference to the provisions of the Public Finance Management Act. It was explained that public entities may take a number of different forms, from regulatory through to advisory, and that public entities should be listed. Any Accounting Officer wishing to set up or de-list a public entity must follow approved procedures. Boards were set up at the entities, but may differ according to the type of the entity. However, there were certain common principles, and the responsibilities of the Accounting Authority (be it a Board or Chief Executive Officer) were outlined, with an indication of particular responsibilities around accounts, budgets and disciplinary matters, and an explanation of delegation of functions. Good governance was essential and the codes of good governance ensured separation between ownership and control. The elements of good corporate governance frameworks, and the types of questions that oversight bodies should ask, were set out, together with an explanation of the role of the board. Five suggestions were provided for improvement by boards, emphasising a comprehensive code of conduct with ethical leadership from the top, the necessity for whistleblower arrangements, clarity on the roles of the Board and CEO, clarity on delegation and proper controls for internal control and risk management, as well as attention being paid to succession planning. Although there was not time to interrogate the presentation, Members noted that it provided much useful information that would form the basis of future engagements. Audit committees and templates for reporting would also need to be debated.

Meeting report

Section 100(1)(b) interventions in Limpopo: National Treasury briefing
Mr Kenneth Brown, Deputy Director General: Intergovernmental Relations, National Treasury, tendered the apologies of the Minister and Deputy Minister

Mr Ndoda Biyela, Administrator: Assets and Liabilities Management, National Treasury, outlined the background to the intervention, which was done in terms of section 100(1)(b) of the Constitution, in respect of five departments in Limpopo - namely Provincial Treasury, Education, Health, Public Works and Roads and Transport. This was a direct intervention by the national executive into operational matters, and Heads of Departments (HODs) had surrendered their accounting officer functions. In 2011/12 the Limpopo Provincial Government had accumulated unauthorised expenditure of R2.7 billion. By 31 October 2011 the province had exhausted its overdraft limits with its commercial banker, of R500 million and the South African Reserve Bank overdraft of R757 million. The situation was not addressed despite numerous warnings from National Treasury. The Department of Public Works was unable to provide basic management services for infrastructure contract and property management.

Mr Biyela described the specific problems in each of the departments under administration. The Department of Education had received a qualified audit in 2010/11, and its biggest problem was with the management of the human resources functions. There were 2 400 excess teachers, at least another 200 teachers who were registered but unable to be accounted for physically, costing R1 billion a year, and accumulated unauthorised expenditure was R2.2 billion. Accruals were at R189 million and the Department projected overspending.

The Department of Health had an audit disclaimer in 2010/11, because of insufficient audit evidence for commitments of R2.9 billion. It had R400 million of irregular expenditure of goods and services, contraventions of supply chain regulations, R138.2 million unpaid accruals and problems with assets. It had accumulated unauthorised expenditure of R340 million in March 2011. It had spent 59.2% of budget by October but was projecting to overspend.

The Department of Public Works had a qualified audit for 2010/11, because of problems with asset management, inability to verify assets, and numerous violations of supply chain regulations, including awarding tenders without the proper bid processes, modification of existing contracts to increase tender values and awarding tenders without checking the interest of the bidders.

The Department of Roads and Transport also had a qualified audit for 2010/11, because it had no contract management systems in place, was unable to verify commitments of R84.5 million and the internal control systems were lacking, with the accounting officer failing, in particular, to exercise sufficient oversight over the Limpopo Roads Agency. There was accumulated unauthorised expenditure of R67 million by the end of he March 2011.

Limpopo Provincial Treasury, although it received an unqualified audit, had not performed its functions adequately, in numerous respects, including banking and cash management, and its dysfunctional public finance functions led to poor expenditure monitoring, budget planning, and infrastructure monitoring. Various key positions had not been filled, and even when staff were in place, they had capacity challenges. Exco had endorsed illegal procurement processes and there was evidence of illegal payments and irregular lease agreements. There was no risk management function.

Mr Biyela noted that in the normal course of events, a provincial treasury (PT) had oversight over all departments, but because of the nature of the intervention, National Treasury (NT) had assumed oversight of all departments, not only those under administration. By 31 March 2012 the position at provincial treasury had improved, and the negative financial position of November 2011 had been reversed, by end March 2012, to a positive R231 million, so the liquidity crisis was now resolved. Payments to suppliers were normalising.  Although there were still payments that had to be made, there was sufficient cash to meet the commitments, and all suppliers had been asked, through public advertisements, to submit invoices for verification and settlement. In future, there would be alignment between payment intervals to the province and receipts of national government. A credible budget was drafted for the following year, and revenue enhancement strategies were being finalised. Recruitment processes were under way, to fill essential posts, and integrated support plans were being put in place for the departments. National Treasury was also busy improving the quality of data, improving contracts, maintenance of plants and other equipment in the Department of Health. Funds had been set aside to clear accumulated unauthorised expenditure over a period of the next three to four years, especially for the Departments of Education and Health.

The financial status for the Department of Education, as at 31 March, was tabled, showing a positive cash balance. Although in 2012 there had been substantial problems in providing learner support material, this was now resolved and there were steps in place to ensure that books for the coming academic year would be available by December 2012. There were also attempts to clean up the PERSAL systems, and the finance and budgeting personnel structures were being improved. There were also attempts to improve management and supply chain management. In the Department of Health, the accruals amounted to R440 million, which accounted for the under expenditure on goods and services and capex. Similar corrective measures had to be taken, in respect of asset management, supply chain management, verification of payments, and record management. For the Department of Public Works, the under-expenditure was a reflection of late disbursements of cash, rather than non-delivery of services and here too there was a need to improve the controls. There was also an urgent need to address irregularities in the lease and asset management. The intervention team was reviewing all rental agreements. The Department of Roads and Transport low expenditure resulted from attempts to improve the quality of spending, to cut out waste and corruption activities. There had been lack of contract management and this was now being addressed, to try to eliminate frivolous spending and support critical service delivery. Sustainable transport policies would be implemented, with proper monitoring over public entities.

Mr Biyela gave some general comments on the steps to be taken in future. The urgent financial stabilisation measures were implemented as a first step. The administrators had developed fiscal improvement plans to try to improve all departments, and these would be approved. Many of the audit issues would take more time to address, requiring a combination of capacity building, systems implementation, process re-engineering and systematic enforcements of discipline and new organisational culture. An exit strategy would have to address change management and skills transfer.

The Chairperson appreciated the fact that the presentation had gone quite deeply into several of the issues.

Dr D George (DA) questioned the background to the intervention, asking to whom the warnings had been given. He noted the reference to irregular supply chain practices, and he wondered if anyone had been held to account.

Mr Brown responded that there had been discussions between National and Provincial Treasury in June, and it was the Head of Provincial Treasury who was notified of the problems. There were further follow-ups in July and September. The Budget Council process normally allowed for interaction to highlight risks and suggest how they might be addressed.

Mr Freeman Nomvalo, Accountant General, added that there were two processes under way. Firstly, there had been investigations to identify who was accountable for the misdemeanours, and administrators in the different departments had identified those who were to be disciplined. The South African Police Service (SAPS) was also investigating instances where there may be criminality.

The Chairperson thought that the question went broader than specific disciplinary cases.

Mr Nomvalo assured the Committee that the disciplinary process would not merely try to identify the “foot soldiers” but that a broad and thorough investigative process into individuals and systems was adopted. In an intervention of this nature, the HOD's responsibility as Accounting Officer was a given fact, since it was defined in the Public Service Act, although it fell outside of the Public Finance Management Act (PFMA).  As he understood the position, everyone would be investigated as part of the disciplinary process.

Mr N Singh (IFP) noted that there were interventions also in other provinces. He requested what kind of systems were in place at National Treasury (NT) to give early warnings when provinces were running into problems or whether it was possible that matters may worsen for some time, perhaps only brought to light through media reporting.

Mr Brown said it was necessary to look at the value chain, and who was the first line of defence when it came to checking the budget. NT looked to the legislature to be able to drive and help it identify the challenges, since it was essentially the legislature who approved the budget. The second line of defence were the provincial Excos, who were empowered to prepare and implement the budgets. The third line of defence was NT. The key question was why the first two had failed before NT became involved.

Mr Singh asked whether additional capacity was required by NT in order to send people to intervene, or whether it was already found at NT.

Mr Brown said that NT had sufficient capacity to be able to respond, and so it could, for instance, dispatch engineers to Free State, or source skills in Limpopo where needed. NT might place people temporarily from another province that was doing well, or isolate those who could support specific interventions. Ideally, NT hoped the system would work, so it had not organised itself with a specific dedicated support unit for interventions.

Mr A Ainslie (ANC) was not sure he agreed with the lines of defence as stated by Mr Brown, and suggested that they were, respectively, the portfolio committees, then the provincial SCOPAs, then NT. Questions had to be asked about the executive function also at some stage. Individual departments' reports showed massive over-expenditure on goods and services across all departments. He wondered if NT had been able to ascertain if services were indeed delivered, and if there was value for money.

Mr Brown indicated that in Limpopo there was actually underspending on goods and services. He added that NT would, twice a year, visit provinces as well as conducting random site visits to check whether value for money was achieved. There was an infrastructure unit to interact with provinces on a daily basis. In respect of goods and services, it might be difficult to say whether one computer was bought, but, it was quite possible, for instance, to verify invoices against delivery of learner support material. The problem was that PT had not been capacitated and had not carried out the checks efficiently, and that had to be addressed.

Mr Ainslie asked if anyone was reporting back on issues, and asked if an audit was being done as part of the exercise.

The Chairperson said that he agreed with the necessity to check value for money. He had recently driven on a road that he knew had cost R35 million and it was in appalling condition, and certainly did not justify the money spent.

Mr Nomvalo said that, although he did not wish to make this sound as an excuse, the starting point was an assumption that when an Annual Report was presented, it would be truthful. Government was structured to have internal bodies who were supposed to check that the reports made sense. At the moment, although some performance information was presented, the Auditor-General (AG) was not issuing an opinion on performance, though this would change in future. That opinion would confirm that what had been presented in the Report was a correct reflection of the work that had been done.

Mr Ainslie noted that the PFMA was primary legislation that was enforceable, but NT and PT also issued guidelines on supply chain management, as well as regulations, and he enquired whether these also had legal force. He was particularly interested in this point, given the recent workshop on municipalities as well as problems around local government tenders and processes in Cape Town.

Mr Nomvalo explained that regulations, framed under section 76 of the PFMA, were regarded as secondary legislation with full legal effect. However, guidelines were merely intended to explain what was in the regulations. Guidelines were merely supposed to be for clarity and they never introduced anything that was not already in law. The Western Cape matter recently reported related to the issuing of instruction notes (formerly called practice notes). If an instruction or practice note was issued under section 76 of the PFMA, then, to the extent that it might amplify a provision of the regulations, it would carry weight and had to be followed. He suggested that NT could engage further with the Committee on this point, although he personally did not think there were legal challenges.

Kgoshi S Thobejane (ANC) asked if NT could, together with other departments, say with confidence that whatever had been needed had indeed been done. It was not really possible to separate out issues where there was an overall problem. People must be held accountable and fully responsible. The question was whether, in Limpopo, the interventions had actually improved the lives of the people over the last eight months. He believed that the public would assert that there had been a steady deterioration over time. He was very critical of the fact that none of the monitoring systems, at any sphere, had been able to detect this and suggested that it was symptomatic of insufficient responsibility being exercised. He thought that NT would have done more at an earlier stage. Every department had qualified audits, except for the Department of Health, which had a disclaimer and that in itself was cause for concern. The province could not be allowed, after the intervention, to return to the way it had worked before. The public had a right to expect that matters would be sorted out and that those guilty would be held to account. Eight months had now passed, there was no evidence that people had been brought to book and, in his constituency, he had received reports that patients in the hospitals were given no food because suppliers were apparently not delivering.

Mr Brown responded that the position would have been far worse if national government did not intervene, since the province would not have had the money to meet obligations. The first phase of the intervention had ensured that systems were put in place to deal with matters. Many departments did not even know what was in their bank accounts. Some had simply not attended to matters on time - such as making provision for learner support material. There had been failures to check invoices against deliveries; for the support materials an invoice was given for R600 million but the books were only worth R200 million. The problems around missing funds were being followed up now as the second phase of the intervention.

Mr Nomvalo added that it was important to understand that throughout the process of this intervention, NT tried to ensure that all resources deployed to province of Limpopo were used for service delivery. He agreed that a discrepancy of R400 million was discovered in respect of learner support material, shared the disquiet of Mr Thobejane around the instances that he had cited and was sure that he would be equally shocked by these figures. Mr Biyela had said that all valid invoices had been paid, and it was necessary to stress the word "valid". It was possible that, although NT had tried to notify all suppliers to come forward, some invoices may have been missed, and he urged Members to notify NT if they were aware of suppliers who had not been paid and were therefore not prepared to deliver. However, he also stressed that NT, as administrators, had to ensure that it only made payments that were due, as Parliament would the first institution to take NT to task, and rightly so, if it did not follow the correct procedures. He again said that although this may not be the full picture, NT had paid the invoices as it had been able to verify to date.

Mr Brown said that NT had, in the local newspapers and local radio stations, notified suppliers to make their claims. The R1.1 billion still reflected as a commitment may not in fact be a commitment, as there had been some attempts to claim fraudulently.

Mr Thobejane said that his concerns must be understood in context, and he was particularly concerned that nobody had seemingly been arrested and charged, particularly in relation to matters like the missing R400 million. He urged that the consequences of the wrongdoing must be seen.

Mr Nomvalo repeated that all cases where criminality was identified were handed over to the police. SAPS would arrest when it was ready to do so, and it was not for NT to make that call as it must respect the function lines.

The Chairperson asked how many cases were referred to SAPS.

Mr Nomvalo responded that 31 matters had already been assigned case numbers and there were another four enquiries.

Dr P Rabie (DA) asked how many times PT had been informed about the problems, and who was informed about the precarious position of the finances. Clearly, there was no option but to intervene, but he also wondered if, particularly given the poverty in the province, NT should not have done so earlier, and he asked why the situation had been allowed to deteriorate.

Mr Brown reiterated that the Head of PT was informed of the position in June, July and September. Beyond that there was other interaction. NT's interactions with PT had to be based on a degree of trust, and if PT, for instance, issued a circular, it was difficult for NT to monitor exactly what was being done; many things would come to light only on enquiries.

Dr Rabie asked if the vacancies had been finalised, whether there were mentors, and whether key posts had been filled, particularly those for budget planning and monitoring, and the Senior Manager for Infrastructure. The incumbents must be given guidance by NT.

Mr Brown confirmed that the posts for Head of Department had been advertised about three weeks ago and there were processes under way already. The Chief Director of Infrastructure had been appointed. The Provincial Exco had approved phase 3 of the intervention. An Infrastructure Delivery Improvement Programme had been piloted in Western Cape, and was cascaded down, and this would now be rolled out to other provinces. Asset and Liability management were being handled, at the moment, by Mr Biyela, but the posts ha been advertised and there would be handover to new appointees.

The Chairperson asked about the post of senior manager for budget planning.

Mr Biyela said that NT was in the process of identifying whether there were suitable people available, and was trying to put core teams in place who could pick up on any future problems. He reiterated that there was a shortage of suitably qualified persons, but NT was in the process of trying to sort this out

The Chairperson asked what had happened to the person who was Head of PT prior to the intervention.

Mr Brown noted that he was, in terms of the Public Service Act, appointed by the Premier, and the Premier had moved that person back to the Premier's Office. That was an issue also to be taken up with the Department of Public Service and Administration, who was dealing with a lot of the disciplinary cases.

Ms M Mangena (ANC) supported Mr Thobejane in his concerns. She pointed out that during a prior visit to Limpopo she had noted that both the MEC and HOD had been moved, and the Chairperson of SCOPA in the Limpopo Provincial Legislature had been brought in to run PT. Matters had not gone well, despite the unqualified audit for PT. Although headcounts had been done in Health and Education she was quite sure that a number of other departments also had "ghost workers", and they might be removed from the system only to be resurrected again later. In her view, it was very simply to check whether staff existed in fact, by simply requiring that they call in to collect their pay in person. She agreed that the hospital situation was dire, and recounted that one local hospital was referring patients elsewhere because they had no plaster of paris to support broken limbs. She also asked why the departments were allowed to remove their accounts from ABSA Bank, which was exercising good control and was able to notify of payments made at odd times, such as late at night. She added that HODs were appointed who were clearly not up to the job; such as a Grade 1 teacher suddenly being promoted, and this was indicative of manipulation of systems. She agreed that people should be arrested and charged.

Mr Brown noted these comments and assured the Committee that the Department of Public Service and Administration was busy cleaning up the PERSAL systems, across all departments.

Ms G Saal (ANC) asked about overdrafts, especially at the commercial banks, and questioned that surely the costs of servicing the debt would have a negative impact on service delivery.

Mr Brown said that Limpopo province had now tabled a surplus budget of over R3 billion to deal with the expenses of the past. Those surpluses would be partially generated by savings or doing business efficiently, and there had been growth also in the budgets for education, health and social development sectors. He explained how the system of overdrafts worked. Prior to the start of the financial year, payment schedules were drawn and provided to provinces, based on past spending patterns. These indicated when and how the money would be transferred in that financial year. PT was asked to check them, and there may be some adjustments, prior to the departments also receiving communication as to when they could expect payments. However these were essentially forecasts, and the purpose of the overdrafts was to provide a cushion for the departments if the forecasts were wrong. All accounts were held at the bank, and essentially there was borrowing from the Province. However, it would be a cause for concern if the overdrafts did not get reversed, because the finances should have been paid over to clear the overdraft within a short time.

Ms Saal asked if there were interventions anticipated in other parts of the country, especially in municipalities. Annual reports of municipalities did not show a positive picture.

Mr Brown confirmed that there were a few municipalities where NT had already been interacting, such as Buffalo City. If problems there were not resolved, there would be interventions. National Treasury and political heads were working together.

Mr Ainslie said that NT seemed to take a purely accounting approach and asked if the intervention group also had a responsibility to ensure that essential services were delivered, such as food to hospitals. He accepted that delivery of textbooks might take some time, but other services should be provided to lessen harmful effects to the population of the province.

Mr Brown said that NT was essentially the Accounting Officer from 12 December 2011, and it would have to account for what had happened since that date, including any instances where hospitals might not be receiving supplies.

Mr Ainslie pointed out that this Committee relied heavily on the AG's reports. He noted that only the provincial Department of Health had a disclaimer, three others had qualified reports, and PT had an unqualified report. He wondered how that had happened. The audit outcomes, on paper, were not that serious, but radical interventions were required. He asked if this was indicative of failure of auditing systems and failure by NT to supervise adequately.

Mr Nomvalo responded that he had emphasised on various occasions that an audit report was not an accountability report, but was simply an indication, to the reader, that the accountability report contained information that seemed to be correct. It did nothing more and nothing less. Oversight was exercised by portfolio committees and SCOPA on the basis of the Annual Report, and the AG's report simply said that the financial statements were a true statement of what was in the books. It was important also to understand that the end of the year audit was not fully comprehensive, since the AG would select a sample to investigate. Even if he decided to use a larger sample it was still possible that this sample might not reflect what was actually happening in a department. The importance of the audit report should not be minimised, but it must be recognised that relying on the audit report alone could be dangerous.

Mr Nomvalo agreed that although one disclaimer only was given, for the provincial Department of Health, there were nonetheless some quite serious issues in the other departments which had led to the qualifications. PT had not received a qualified audit but he reminded Members that the main concern around PT was that it was not executing its functions properly. Whilst there was no indication of any financial problems, there were issues with the lack of proper checking on budgets, performing early warning processes, and following up on cash flow? A performance audit might have shown up these problems.

Mr Thobejane said that he was concerned about Exco endorsing payments illegally and asked for a further explanation, and what had been done.

The Chairperson asked who Exco comprised.

Mr Brown said that there had been a particular interpretation and implementation of rules by the previous HOD and MEC, and this Exco had given instructions around outsourcing a group who might manage procurement processes. NT had picked up that problem and was aware that it would need to do more in relation to oversight over supply chain management. NT realised that it must ensure that the correct regulations were being adhered to in full.

The Chairperson said that it might be appropriate for the Committee to pay a visit to Limpopo. People in the intervention team may be better able to explain the logic of what happened. Once political leadership was authorising illegal payments, it was unlikely that other matters would go well.

He commented on the possible legal impediments as to what national departments may do in relation to provinces and municipalities. He pointed out that one of the main problems was that national departments made payments to provinces, but effectively lost control of what was done with that money, and administrative problems often had their origin in political problems. He noted that there were also inconsistencies within departments; in one instance a department was embroiled in a court dispute with a supplier, but officials were continuing to make payments to the same supplier. This indicated that systems were in chaos. He agreed that a fundamental consideration was what the legislatures were doing by way of oversight. He agreed that matters had clearly deteriorated over time, not overnight, and so it was necessary to look at whether the in-year trends were being tracked. 

The Chairperson was aware of the Constitutional implications and arrangements about the spheres of government, but was also concerned that too much time and too many processes had to take place before interventions were made, and this meant that the situation could have deteriorated seriously before anything was done. Many municipalities were not even submitting financial statements, and there was a need to ask what would happen to the officials and political leadership, and whether they would be held accountable. These were ongoing challenges. He agreed that it was shocking that, after eighteen years, scholars were still unable to get textbooks until halfway through the year, but said that this was a debate for another day.

Board Effectiveness in Public Entities: National Treasury presentation
Mr Goolam Manack, Chief Director: Public Entities Governance, National Treasury, said that a “public entity” was broadly defined, and could include a board, commission, company, corporation, fund or entity other than a national government business enterprise. In terms of section 47(2) of the PFMA, the Accounting Authority must notify NT if any public entity was not listed, and this was a very important provision that allowed entities to be captured. Section 38(1)(m) of the PFMA said that where accounting officers wanted to establish an entity, NT approval was needed and an evaluation panel would be set up.

Mr Manack highlighted that there had been an examination of the types of public entities and tabled a diagram that categorised the different public entities (see attached presentation). He explained that some of the categories included institutions of a regulatory, heritage, research, statutory, advisory or enterprise nature. This provided the context for how boards were set up, since the board was not a standard body that could be all things to al people. He said that some boards were very successful but others had been a failure.

The Accounting Authority of a public entity was either the Board or the Chief Executive Officer, and this authority was accountable, for the purposes of the PFMA, and had various duties and functions. A very important aspect was the fiduciary duty. An accounting officer had a duty to exercise utmost care. Some of the responsibilities included managing effective systems of financial and risk management, making sure that there was a system for internal audit, procurement, and taking disciplinary steps against officials who may have contravened the PFMA.

Any delegations of powers and duties must be done in writing, and they were subject to the limitations and conditions of the Accounting Authority. Any delegation did not have the effect of divesting the Accounting Authority of the responsibility for the delegated power.

The information that Accounting Officers were required to submit was set out (see attached presentation). Certain transactions required prior approval by the executive authority.

A prime responsibility was that of ensuring that annual reports and financial statements were completed and effective, and there were various rules around internal controls. There must be clear cut and written terms of reference, and Accounting Officers should deal with issues of control regularly.

Mr Manack noted that if an Accounting Authority took a decision to establish a new entity it must submit proposals to the NT and this was done under an interim process approved by Cabinet, with an evaluation panel consisting of officials from the NT and Department of Public Service and Administration (DPSA).

Budgets must be submitted six months prior to the start of the financial year. Entities may not budget for a surplus or deficit. The cash banking and investment management requirements were described. Only appropriate people delegated by the Accounting Authority could open accounts. If there was no other investment policy, all surplus funds must be invested with the Corporation for Public Deposits.

Accounting Authorities had to investigate any financial misconduct and there had to be notification of any criminal charges. There was a necessity to report these matters in terms of the PFMA.

Section 53(3) of the PFMA required written approval for budget surpluses, and although implementation was sometimes problematic, there were guidelines.

Section 54(2) required an entity to inform the relevant Treasury of certain transaction, such as establishing a company, acquisition or disposal of significant shareholdings, or assets, or cessation or commencement of a significant business activity.

Mr Manack noted that good governance was essential. Codes of good governance essentially ensured the separation between ownership and control in large corporations. These Codes could be regarded as best practice governing the relationship between the various stakeholders, and were designed to address deficiencies in the corporate governance system. These applied to all organisations. A good corporate governance framework should recognise the rights of stakeholders and encourage active cooperation between the corporate body and its stakeholders. He quoted that “everyone must be involved, all the time”.

Good governance also made good business sense. Surveys had shown that it was at the heart of investment decisions, on a par with financial indicators, and many investors were prepared to pay a premium for companies exercising high governance standards, because it led to good leadership, showing character, competence and commitment.

He outlined that the role of the board was provide entrepreneurial leadership, establish a framework for prudent and effective controls to enable risk to be assessed and managed, to review management performance and to set company values and standards.

Mr Manack then tabled a diagram showing the relationship between the stakeholders (see attached presentation)

In respect of the leadership of entities, he suggested that the questions to be asked were whether the Chief Executive Officer (CEO) had a clear understanding as to what decisions required board approval, whether many matters were left to the discretion of the CEO rather than the board, and whether the board always should make a decision when asked by the CEO.

Five suggestions were given for improvement by boards: They should implement a comprehensive code of conduct, emphasising ethics from the top. They should implement whistleblower arrangements. The roles of the Board and CEO had to be clarified and there should be Board Charters or delegation guidelines. Boards should implement proper frameworks for internal control and risk management. They should pay more attention to succession planning.

Finally, he tabled slides showing the ideal relationships between shareholders, board and management, and what might happen if the functions were blurred.

The Chairperson noted that Members had to attend a plenary session. It was clear that this presentation had raised several issues and the relationships, in practice, were vital to good or poor management, so it was necessary for this Committee to consider where governance arrangements in public entities needed to be improved. He suggested that Members should not debate the issues now, in view of time constraints, but that this presentation be noted as the basis for further engagement in the future. It was also necessary to have a debate around audit committees and he informed NT that in a recent hearing it had come to light that the audit committee was chaired by a member of the Board, which was clearly problematic. There were also some concerns around the templates for reporting, and some fundamental changes were needed to assist with oversight.

The meeting was adjourned.


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