National and Provincial Treasuries reports on expenditure for 2011/12 & 1st quarter 2012, National Treasury, Accountant-General and Financial and Fiscal Commission comment

NCOP Finance

28 August 2012
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

The Chairperson said the objective of the meeting was to monitor the provincial treasuries (PTs), so as to avoid the kind of reckless expenditure and lack of monitoring that had led to problems earlier in the year in Limpopo. It was emphasised that all the Public Finance Management Act objectives of good governance, financial management, and achieving value for money must be met.

The North West Provincial Treasury was conducting regular reviews of supply chain, rotating suppliers, and ensuring that any suppliers or contractors found to have performed badly would be blacklisted, as well as those trying to exert undue influence when bidding for tenders. It was vetting its own officials through the National Intelligence Agency (NIA) although the process had been delayed. It was aiming to benchmark prices to avoid inflated prices being charged, and any service costing more than R1 million must be reported to PT. An inventory of all existing contracts was being developed, to allow for regular scrutiny and review, and departments had to submit monthly reports on contracts. Already, some “ghost teachers” had been isolated at the provincial Department of Education. Institutional weaknesses were being addressed, when identified, through structured committees. Overall, low expenditure in the Province was reported, with the Departments of Sport, Agriculture, Public Works and Education being the weakest performing, as well as the Office of the Premier. However, there were also instances of overspending which were being discussed, including the Provincial Legislature and departments of Finance and Human Settlements. Conditional grants expenditure was only at 16% and the Department of Agriculture had had to return some unspent funds, whilst Department of Health applied for a rollover. There were problems with some roadworks. A Forensic Investigations unit had been set up in the Office of the Premier.

The Eastern Cape Provincial Treasury noted that it had been allocated R54 billion in the last financial year, of which R44 billion was from the equitable share, an R8.8 billion by way of conditional grants. It also generated own revenue of R817 million, although this would show a drop in the next financial year. It had spent about 915 of the adjusted budget, with underspending at Department of Human Settlements and overspending at Departments of Health and Basic Education. Both of them underspent on infrastructure but overspent on compensation of employees. In Health, there were appointments without budget, and carry-over problems from Occupation Specific Dispensation, whilst in Education, the court had ordered reinstatement of temporary teachers who were surplus to requirements, and this situation occurred through poor planning over the years by the Department. Overall, poor planning was the cause of underexpenditure. An inter-departmental accounting framework was introduced, issue had been discussed with the MECs, and PT was doing dedicated runs and continuously engaging with departments, including holding regular reviews of expenditure, and withholding approval of appointments until satisfied that the proper staff were appointed. Anti-fraud and corruption measures included strengthening of controls, vetting of officials, and an anti-corruption unit at the Office of the Premier, as well as improvements to the accounting systems and headcounts. Internal audit functions were also being strengthened. An electronic web database of reported cases was developed. A policy was being investigated to prevent public servants from trading with government.

The Northern Cape said the province performed much better in 2011 than in 2010, when it had had to surrender R280 million back to the fiscus. However, it had failed to spend R61 million of conditional grant money, most notably in provincial Departments of Health and Public Works. Rollovers had been requested. The equitable share underspending was at R42 million, with the most significant underspending on compensation of employees and capital assets. IT had improved from the previous year on spending on capital assets because an inter-departmental committee was established to monitor progress. The PT commented that the Department of Education had improved from overspending to underspending, although it later clarified, in answer to criticism from Members on this statement, that whilst it did not support the underspending this did have a less adverse effect on overall provincial cashflow. Own revenue collections had been over budget in the last year and PT believed that the Department of Transport had good potential to increase this. The province was very strict in managing cash flow, and departments would not be allowed to overspend. The fraud and corruption strategies concentrated on trying to reduce risk by introducing more controls, and the PT went into some detail on the key points. However, concerns were expressed that some criminal cases were not proven beyond a reasonable doubt.

The Western Cape PT noted that 99.6% of the budget of R37 billion was spent in the last financial year. There had been underspending in transport, education and health, with underspending also on the Hospital Revitalisation Grant, and some savings due to lowering of drug prices in the health sector. There was low spending on compensation of employees. However, many departments were trying to achieve more with the same staff complements. Rollovers had been approved. There were projections that, in the current financial year, the provincial Departments of Health and Human Settlements might overspend. There were concerns that the Technical Secondary Schools Recapitalisation Grant had not spent, and supply chain management had now been centralised to head office to try to achieve greater efficiency. This province shared responsibility for prevention of fraud and corruption between PT and the Office of the Premier.  Internal audit and risk management was centralised to the Office of the Premier, and it was concentrating on strengthening governance, use of electronic systems, and training all staff in the financial environment. Each of these aspects was more fully explained. It was emphasised that cross-sharing of knowledge on supply chain would help with transfer of skills. It was cross-checking all supplier contracts with national databases to try to identify any officials who were doing business with the Western Cape.

Members voiced unhappiness with a number of aspects of the presentations. They asked specific questions around the Eastern Cape teachers, and the implications for the future budgets, whether the emphasis on municipalities submitting financial statements also extended to the quality of those statements, vetting processes and whether there was resistance from departments to the measures that PTs were taking. They were concerned at comments that not all departments had Heads of Department or Chief Financial Officers in place, and many of the Financial Officers were not qualified and should never have been appointed. Members wanted to know how the provinces were addressing issues raised by the Auditor-General, both in relation to their interactions with departments and their own plans. The underspending at the Northern Cape was of particular concern, including the low expenditure on conditional grants, and one Member wanted more detail on the anti-fraud strategies. Members also wanted more clarity on the statement around high turnover in the supply chain management positions.

National Treasury noted that it had been deploying individuals to some provinces, specifically North Wet, but lack of stability in leadership meant that interventions were not as effective as hoped. It urged that critical posts must be filled. There were challenges also with requests for rollovers, including the fact that they may exacerbate underspending. In Eastern Cape, leadership was needed on education issues. In Northern Cape, urgent interventions were need to ensure that the R130 million for disaster relief was spent by the Department of Agriculture, and to ensure that it built capacity. The Financial and Fiscal Commission said that although it was clear that PT were trying to prevent fraud and corruption, there must be compliance with the Public Finance Management Act, and internal capacity in PTs needed to be kept high. Weaknesses in the system encouraged corruption, and greater respect for the law must be fostered. The Accountant general urged the North West to adopt the Infrastructure Development Monitoring System to try to increase capital spending, and also urged that provinces must deal more stringently with wrongdoing. He emphasised that the effect of fraud was to rob the poorest of the poor of access to services. He further commented that although Treasuries had no control over the spending of money when it happened, they should certainly be checking, and taking action, if it was spent other than for the intended purpose.

Meeting report

Chairperson’s opening remarks
The Chairperson said the objective of this meeting was to monitor the performance by the provincial treasuries (PTs), so as to avoid the kind of reckless expenditure that had arisen in Limpopo. This exercise would allow Parliament to help provinces face and address their challenges. He emphasised that Members wished to enforce the Public Finance Management Act (PMFA) objectives of good governance, financial management, and achieving value for money. All spending should be done wisely, and with the intention of achieving service delivery at grassroots levels. As required by legislation, PTs should promote transparency and effective management on revenue and expenditure.

North West Provincial Treasury presentation
Mr Paul Sebego, Member of the Executive Council, North West, said the North West PT had put compliance measures in place, by providing regular audits, with a special emphasis on the supply chain. Regular reviews were also conducted on service providers registered in the central database. The PT had installed an e-procurement tool that ensured an automated system of rotation of suppliers.

It was intended that suppliers and contractors accused of poor performance and those that unduly influence bidding for tenders would be blacklisted. There were also systems in place to ensure rotation of officials in supply chain management in departments, including vetting of supply chain officials. To date, about 40 officials had been vetted, and the remaining 200 had been submitted to the National Intelligence Agency (NIA), but there were delays

There was regular training of officials within the supply chain and the public entities, in an attempt to maximise compliance. This PT ensured there was awareness around risk of fraud and corruption. There also had been an intervention to encourage full submissions by municipalities, as this had been a long-ongoing problem in the past. One PT function had been organised to recognise this, and in the next phase, there would be more emphasis on quality of reporting and compliance. On Friday 31 August there would be a launch of the 100% submission compliance initiative.

The province would like to emphasise the issue of transversal contracts, and also wanted to benchmark prices so as to avoid inflated prices for government work. All departments had been informed that any service rendered to the value of more than R1 million needed to be reported. This would allow for the verification of bank accounts of service providers. The inventory for all existing contracts was being developed, to ensure continued scrutiny and review of the existing suppliers. Departments now had to report on their contracts on a monthly basis. There was a daily scrutiny on all the exceptions generated by the PERSAL system, to identify possible irregular payments in the system. “Ghost teachers” were picked up in the system at the provincial Department of Education. The necessary steps were being taken continuously to counter problems as they were detected.

A new threshold to manage various stages of contracting work had been introduced. Institutional weaknesses were picked up in the administrative processes. Those were being addressed through structured committees and appointment of competent people to deal with supply chain. Pre-screening of officials and competency checks were now happening prior to appointments, mainly to ascertain the background of those in supply chain.

Provincial expenditure
Mr Sebego said there was low expenditure in the province, mainly due to the low performance of the Departments of Agriculture and Public Works. A comparison of the spending by economic classification showed that 25% would be spent on the compensation of employees. This reflected a lack of planning. The province was attending to issues relating to education, especially low maintenance of schools.

The projected over expenditure at the Provincial legislature was being discussed. The provincial Finance Department was projecting under expenditure, as a result of the review on structure. This department was recruiting and was conducting interviews over the next two months.

PT was mindful that various departments, including the provincial Department of Human Settlements, had projected an over expenditure, and the matter had been discussed with those concerned. This department had already spent 24%.

Across the province as a whole, the spending on compensation of employees was at 29%. In relation to conditional grants, the province was at 16% expenditure, or R806 million, and an under expenditure was projected in this field. The provincial Department of Agriculture had contributed R98 million as unspent funds. Given the under expenditure on infrastructure and grants, PT had held discussions with departments and remedial steps were taken. The under-expenditure at the Provincial Department of Public Works resulted from the roads infrastructure projects, and although generally there was some good work, the Litchenberg Road, costing R80 million, posed challenges that had impacted on the Department's performance. That matter had been resolved, the existing contract had been cancelled, and it was hoped that in the next two months a new contractor would be on site.

Overall, it was reported that the North West province had underspent by R1 billion in the last financial year. The lowest spending departments were the Office of the Premier, and provincial Departments of Agriculture, Sport, and Public Works (DPW). The main reason for under spending in the Department of Education was on the compensation of employees. A head count was done and there were areas that needed to be fixed. There were gaps identified at that department, and late submissions of the leaner/teacher support materials and scholar-transport were also encountered at the end of the financial year. The money would be rolled over to the current financial year. DPW under-spent about R246 million on road and maintenance infrastructure grants. The Department of Health had requested a rollover for the R107 million that it had underspent.

A unit was established in the Office of the Premier a while back to deal with forensic investigations. All the major stakeholders including South African Police Service (SAPS), NIA and the Special Investigations Unit (SIU) contributed, and this unit would undertake any kind of forensic investigations at departments.

Eastern Cape Provincial Treasury presentation
Ms Marion Mbina-Mthembu, Head of Department, Eastern Cape (EC) Provincial Treasury, said the province was allocated R54 billion, of which R44 billion was from the equitable share, and R8.8 was for conditional grants. The province also generated own revenue of about R817 million from motor vehicle licensing fees, and taxes on casinos, horse racing and liquor. This amount was higher than the adjusted budget by R87.8 million. The province spent about 91% of the adjusted budget in the last financial year. The provincial Department of Human Settlements spent only 81% (with an underspending total of R472 million), whereas Departments of Health and Basic Education over spent on the adjusted budget by R79 million and R29 million respectively. The Department of Heath had overspent on compensation of employees, goods and services, and capital payments, but underspent on infrastructure delivery, by R197 million. The same applied to the provincial Department of Education, which had overspent on the compensation of employees by R353 million, and under spent on infrastructure by R407 million.

Various reasons for over and under expenditure were given. In the Department of Health, reasons for overspending included the cost of employees, the unfunded process of provincialising state-aided hospitals, Occupation Specific Dispensation (OSD) carry-through costs, and appointments without budget. In the Department of Basic Education, there was overspending on compensation of employees as a result of the Court’s order that this Department must reinstate temporary educators who were supposed to have left the service, as well as problems moving educators to where they were most needed.  Teacher movement and OSD posed major challenges and this Department had to prioritise its budget. The under-expenditure in capital payments was due to poor infrastructure planning, and delays in making payment to contractors. At the provincial Department of Human Settlements, underexpenditure arose through inadequate capacity to manage projects, poor project planning, and poor management of contractors, and inadequate supply chain management. In some instances, budget was allocated to areas where there was no land to build houses.

The EC had been allocated R57 billion in this year, of which R14 billion was transferred to the Provincial Revenue Fund. Provincial revenue sources had now decreased, as a result of the once-off collection of taxes by the Department of Economic and Environmental Affairs from Boardwalk Casino. All departments under spent on compensation of employees, due to budget increases in the condition of services improvement. The non-filling of vacant posts by smaller departments remained an issue. She reiterated that the province would experience budget pressures due to the high court ruling on the employment of temporary teachers as well as filling vacant posts.

In order to address poor infrastructure delivery, an inter-departmental accounting framework was introduced, and the issue had been discussed with the MECs. The PT also did dedicated runs on infrastructure payments on Tuesdays and Fridays. It furthermore continuously engaged with departments on poor planning of cash flow projections that resulted in gross under spending of conditional grants. Regular expenditure review meetings were being held with departments who lacked the capacity to spend. Accounting officials had been requested to implement remedial steps, to improve spending of the conditional grants, and to adjust cash flow projections before National Treasury (NT) took a decision to withhold funds.  In addition, all Chief Financial Officers (CFOs) and Heads of Departments (HODs) were urged to financial accountability model, particularly at the provincial Departments of Health and Education, who must reprioritise and managed their costs. Provincial Treasury had also taken steps, through PERSAL, to withhold authorisation for appointments until employment processes were properly done. There had been additional requests for budget to coordinate of the provincial monitoring team.

Mr Qonda Khalimashe, Deputy-Director General, EC Provincial Treasury, outlined the steps to address fraud and corruption and to strengthen internal controls, particularly by improving financial management capacity and strong governance. He noted that internal controls would ensure that people acted on monthly accounts, and reacted in time to variances. Effective controls also allowed for vetting of officials who were in strategic operational positions, like supply chain management. This was complemented by anti-corruption unit that was coordinated at the Office of the Premier in the province. The improved use of the BAS and LOGIS accounting systems, and improvement of the payroll system, would also help to guard against corruption. Most processes in government had to go through both systems, and system access control was being strengthened. Headcounts of staff were being done in the larger departments. 

There were also increased attempts to strengthen the internal auditing function and risk management, with a better reliance on auditing reports. Particular emphasis was placed on the provincial Departments of Health and Education, because of their continued inability to spend  and high fraud, and additional capacity had been deployed to those departments. Internal capacity at the PT had also been improved to strengthen its investigative and risk management capacity. Provincial Treasury conducted awareness campaigns on anti-corruption and continuously trained officials on ethics, in conjunction with other stakeholders engaged in anti-corruption work. Employees were encouraged to report corruption, and an electronic web database of reported cases was developed. The EC Provincial Government was looking at implementing a policy that would forbid public servants from trading with government. Both a political committee, chaired by a politician, and an administrative committee chaired by the Office of the Premier, monitored work on anti-corruption.

Discussion
Mr M Makhubela (COPE, Limpopo) sought clarity on slides that dealt with under and over expenditure in the NW.

Mr Sebego replied there were various reasons for under spending. The provincial Department of Education had planned to buy laptops for teachers, but there was no interest on the part of the teachers, resulting in about R30 million of the budget not being spent. In addition, no Grade R teachers were appointed. Learner/Teacher Support Material had been submitted late. Overall, the provincial expenditure was at 95% but some departments had under-spent, such as Education and Public Works.

Mr Makhubela said the delegation should also have spoken more specifically about the fact that some NW departments did not have key personnel in place, including HODs and CFOs. If this capacity was lacking, it was not surprising that the province had not succeeded in doing its work.

Mr Sebego replied that the presentation had indicated that some departments did not have CFOs and HOD, but the situation had since changed. At the Departments of Social Development, Public Works and Education, there were interviews for positions to be filled, and the critical posts should have been filled within the next two weeks.

Mr Makhubela asked the NW province to speak about its cash position as at the end of 2011/12, and asked what measures were being taken to control the provincial revenue fund.

Mr Sebego replied that NW Provincial Treasury only received 2% of the overall revenue. The NW was studying the Gauteng and KwaZulu Natal (KZN) revenue models, to try to isolate areas that could enhance its own revenue. Various forums had suggested that the policy needed review, to allow provinces to generate revenue.

Mr Makhubela asked the Eastern Cape if it would ever be able to address the challenge of low spending as a result of non-filling of vacant posts, and when the current vacancies might be filled.

Mr Pumulo Masualle, MEC for Finance, Eastern Cape, replied that the province might not have money to fill posts. The EC Provincial Government took a decision last year that all departments must ill vacant, funded, critical posts. A committee was established to coordinate that work, and departments were to motivate to that committee. Key positions were identified at the provincial Departments of Health and Education, which included the CFO and Deputy Director General: Clinical Services posts. Failure to fill these posts led to the under expenditure, and there were further delays in getting approvals. He said that insufficient focus was given to this critical aspect of governance. PT had even had to extend the secondment of temporary officials to those posts.

Mr Makhubela sought clarity on the statement that EC Provincial Treasury was in the process of issuing a financial plan, saying that specific timeframes were needed.

Mr Masualle replied that the presentation did not reflect the full extent of this concept. The accountability  model was used as the framework that all executing authorities, accounting officers, CFOs and financial managers had embraced. Where there were problems, PT brought this to the attention of accounting officers and executing authorities, and if no response was received, it would be escalated to the Office of the Premier. Everyone had to exercise responsibility. The whole plan was already in operation and was being monitored continuously.

Mr S Monotheist (ANC Gauteng) asked if the EC’s anti-corruption strategy had been able to identify wrong doers, and what action was taken when this was detected.

Mr Masualle replied that EC province had adopted a plan with various components, over a five-year period. Every government department had to comply with certain requirements. The Anti-Corruption Unit monitored adherence to the strategy, but he did not have details of the successes to hand. The Anti-Corruption Forum comprised of the departments and other state organs like the SIU and SAPS. Continuous vetting and anti-fraud work was being done. A number of officials had been prosecuted and some officials were currently serving jail sentences.

Mr Monotheist commented that the Committee needed a report on the number of officials who had been prosecuted.

Mr T Chaney (ANC, North West) wanted to know about the current situation with temporary teachers in the EC, and those that were reinstated by the court. He wondered about the impact of the court order, and whether it might lead to over-expenditure.

Mr Masualle replied that temporary teachers should not be an issue in the EC. At one stage an excess had accumulated, over 6 500, who were supposed to move to places where their services were most needed, but the Department of Education had not implemented a posts strategy. The MEC was required to declare vacant posts in the previous year, to determine the movement of teachers, but this too was not done, resulting in some teachers remaining where they were not needed, whilst temporary teachers were appointed in other areas. This led to double-payments. It could be avoided by a timeous shifting of teachers in future, and EC Provincial Government had now instructed the Department of Education to urgently fill the declared posts. There were other challenges with the movement of learners, and other variables. Annual declarations of posts should respond to learner movement and needs of schools in the future. There would be a negative impact if funded vacancies were not filled permanently.

Mr Chaane sought clarity on the 100% submission of financial statements this year, particularly in light of the number outstanding in previous years, and asked if the quality of the financial statements was being checked.

Mr Sebego replied that all municipalities in North West with outstanding financial reports would be submitting them, and 39 reports were expected this Friday. PT worked jointly with municipalities on the initial stages of submissions, and the second phase of the initiative would look to the details of those financial statements. He said that there should not be a compromise in quality and PT was satisfied that the required information would be in the submissions by Friday.

Mr Chaane asked if departments cooperated with the NW directive to rotate supply chain staff. He said he was also interested in hearing more about the vetting process, and how the province would deal with the delays.

Mr Sebego replied that there was sometimes resistance from departments in complying with the directive, but the PT was committed to ensuring that this policy was enforceable, as it was the best way to address the issue of colluding officials. In regard to the vetting, he reiterated that 40 officials had been vetted and over 200 were outstanding. It was possible that the amount outstanding arose from incapacity at NIA, but PT was ascertaining the reasons for the delays. Every audit report had noted problems in supply chains, and this was something that NW treasury expected NIA to have noted.

Mr Chaane said the NW provincial DPW seemed to be on a continuous path of underspending. Its first quarter under expenditure was perhaps understandable, as there was rollover funding relating to some projects, but he wanted details of the challenges in this department. He also wanted more details of the reported settlement of the Lichtenburg Road case, and the figure of R26 million, since this department had recently told the Committee that there was new contractor on site.

Mr Sebego replied that the provincial DPW’s main area of underspending was on the R80-million contract that was issued for the Lichtenburg Road. The province was unhappy with this amount. The matter had now been settled, with part of that settlement to do with the management of roads and an establishment of plant on site, which the contractor claimed, and which the provincial government agreed had been incurred, so it was prepared to settle by paying R26 million to that contractor. There had been serious challenges with the DPW but PT had also assisted in the deployment of technical skills. The PT also assisted bid committees, but there were situations where such committees could not sit. It was expected that, with the appointment of the new contractor, the province could eventually make a saving on the project.

Mr Chaane found it strange that R8.3 billion of a budget of R10.8 billion would be allocated to employee compensation, while there were still vacancies. He asked if this situation was being monitored, as he was worried that overspending on employee compensation could lead to a situation where all other programmes were being run on conditional grants.

Mr Sebego replied that when PT noticed this trend in the Department of Education, it had conducted an assessment to confirm the number of teachers, and many could not be accounted for. PT generated a report, and the provincial Department of Education was working through it and would indicate the remedial steps on these ghost teachers before the end of September. He added that a significant number of teachers were taking permanent disability leave, which had serious implications for the payroll, and this had not to date been properly monitored. He said that the Department had been requested to come up with a clear plan to redress this trend.

Mr Chaane sought clarity on the statement that NW Department of Economic Development spent nothing on infrastructure, despite infrastructure programmes being under way.

Mr Sebego replied that PT had noted an issue of poor planning at the Department of Economic Development. Although it did not have a substantial budget, it still underspent, and it appeared that this was a case of not committing to projects that had been prioritised.

Mr J Bekker (DA, Western Cape) asked both provinces if they were doing anything to rectify bad management and lack of capacity that resulted in under-spending on capital expenses, and overspending on personnel.

Mr Masualle replied that EC had taken measures to strengthen project management at the provincial DPW, and had also increased capacity at departments by appointing technically qualified people who could lead the kind of work required on capital expenditure.

Mr Bekker asked what happened to those accused of corruption and fraud related offences.

Mr Sebego replied that many people had been suspended and were going through disciplinary processes, and it was important that such steps be pursued and the public should know what was done.

Mr Montshitsi asked for further elaboration on the disciplinary measures.

Mr Sebego replied that, at the provincial level, it was easy to apply disciplinary action; but less so at municipalities. PT had been communicating with mayors and had realised that few disciplinary steps were taken. Previously, PT had written to the mayors, to request special council sittings, to ensure that there was a collective understanding of issues. Whilst there was no immediate effect at the council level, it was hoped to strengthen the initiative. His province was not comfortable with the level of intervention within municipalities, with little action shown unless the provincial government also intervened.

Mr Mkhangeli Matomela (EC Finance Committee Chairperson) asked about the 44 officials that were vetted by the NIA.

Mr Sebego replied that there were no negative findings for the officials.

Mr R Lees (DA, KZN) asked if the NW verified whether actual delivery happened on the ground for the money spent. He wondered if any of the PTs measured the outputs of monies transferred.

Mr Sebego replied that in the NW, PT met with departments in monthly financial review sessions, raising issues and discussing how best to address them. It was hoped to achieve improvements over time.

Mr Lees wanted to know where the EC would find the R376 million that was projected as over expenditure. He pointed out that already in the first quarter there was an indication that it would overspend.

Mr Masualle replied that it was necessary to keep revising departmental allocations. Other departments had to take a lot of cut backs as a result of the social spending, especially in education and health. The departments should look at how they could reorganise themselves. EC would be looking at how it employed, and some functions had been centralised so that departments could not employ extra staff if they had no budget to pay them. The court decisions had depleted the resources.

Mr Lees asked if the EC Treasury could confirm the allegation that contractors locked five schools because the province had failed to pay in June.

Mr Masualle was aware of instances where contractors had refused children entry into schools. He explained that the provincial DPW, as implementing agent, would process all payment certificates, but only after approval of the facility by the donor departments. There had been late payments because of inefficiencies in getting payments cleared within the proper time, and in such cases this often resulted in the contractors either leaving the site, or charging interest. In order to address this problem, EC provincial government had created an inter-departmental accounting system that would provide up-front credit to DPW. It was now being monitored by a competent person to ensure that DPW would pay on time, then claim from the departments. This should mitigate delays and help contractors.

Mr Lees commented that it seemed that the anti-corruption initiatives were mainly focused on trying to influence behaviour. Nothing had been said about the actions that would be taken if the behaviour failed to meet expectations.

The Chairperson said the main purpose behind all interventions was not so much to confirm the amount of money spend, but rather how it was spent, and how service delivery was achieved. He requested NW to clarify its action plan.

Mr Sebego replied that PT had conducted assessments of CFOs in all the departments. Some were not qualified and should not have been appointed, and where this was found, the departments were advised to consider redeploying such people, as in most instances, it was impossible to train these people. Ideally, chartered accountants should be holding these positions.

The Chairperson asked how the EC would address the decrease in its revenue and the shortfall of R375 million. The Committee wanted to see sound financial management. He asked if this province had sufficient qualified personnel to do proper financial management. He also asked how this province was tapping into the brainpower at its local universities to boost capacity.

Mr Masualle replied that the projected decline in revenue resulted from the fact that revenue in the previous year had included once-off payments for casino licences. EC also did not anticipate an  increase in the ongoing sources of revenue, such as car licences. He said that EC PT had insisted that it had qualified people to manage critical areas, like finance. A forum had been established with universities, to influence some of their programmes, and boost their training in critical skill areas. The University of Fort Hare was training accountants, not only for this province, and there was a generally good working relationship with universities.

Comment from the Accountant General
Mr Freeman Nomvalo, Accountant General, said that under spending on infrastructure was noticeable in the NW. It was important that the province adopted the Infrastructure Development Monitoring System (IDMS), which had shown good results in the provinces where it had been used. In September, there were plans to take the discussion around IDMS to the NW. He was encouraged by the fact that provinces clearly intended to deal more strictly with wrong doing. All provinces should increase efforts in that area, and in addition, government needed to be alert to the risks, so that it could address them as soon as they arose.

Comment from National Treasury
Mr Edgar Sishi, Acting Chief Director, National Treasury, wanted to  pick up on some issues. He noted that National Treasury (NT) had, in the past, deployed financial management experts to the NW, but there was insufficient stability of leadership of some departments, including DPW, resulting in the intervention being less effective than it should have been. Once again, NT was going to deploy support to this province. Strict conditions were attached. One instruction had been that critical positions should be filled. It was undesirable for NT to deploy support to a province and yet find that no transfer of skills had taken place.

Another challenge lay in the rollovers. He explained that when provinces asked for rollovers, there was already a set budget for the year into which they were requesting that the money be rolled over. Rollover funds should be reflected in the year that the money was allocated, to avoid the risk that NT might contribute further to under spending, by granting money that provinces did not have capacity to spend. He commented that NT was alert to the fact that the NW only spent 51% of the budget last year, and was now sitting at a very low expenditure of only 11% in the first quarter. NT wanted the money to be fully spent as it was difficult to grant rollovers every year.

He commented that the EC was doing fairly well in addressing irregularities. However, the question of the education personnel would require leadership at the highest level. This needed to be cleared, so that there was credible budget for personnel in the future.

Comment by Financial and Fiscal Commission
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission, commented that there was a need to ensure credibility around the legislative framework when dealing with financial management, and prevention of fraud and corruption. These presentations had indicated a clear intention to assist people to do the right thing. During a budget council meeting earlier in the year, it was emphasised that there had to be compliance with the PFMA. Lack of capacity was identified as a contributing factor to under-spending. He asked PTs to assess their own internal capacity when it came to providing leadership to other departments.

Mr Sebego replied that the NW had a unit composed of technical people assisting departments. This was not enough, and NT further intervened into the unit's work. People were deployed to departments, and they generated reports on a monthly basis.

Mr Masualle said that in the EC, strengthening the capacity for PT was an ongoing activity. The EC had undertaken to clarify responsibilities, as sanctioned by the PFMA, in order to support local government. The intention was not only to focus on compliance, but also to render support to the municipalities and provincial departments. PT tended to have officials who became subsumed into other departments, but it remained a priority to build capacity at PT.

Northern Cape Provincial Treasury presentation
Mr Sello Mokoko, Head of Department, NC Provincial Treasury, said that the Northern Cape (NC) province failed to spend R61 million of conditional grant money, with the biggest recorded under spending being R40 million from the provincial Department of Health (DoH), and R11 million from provincial DPW, due to the devolution of property taxes. This money was in dispute when the financial year ended. Arrangements had been made with affected municipalities to pay, but NT had also in the meantime been requested to roll over the funds. R51.8 million of this money had been cleared for return.

In respect of the equitable share, departments had, overall, failed to spend R42 million and were now requesting rollovers. For the financial year, R103 million was underspent, from the total R10.8 billion budget allocated. The highest under expenditure was seen in the compensation of employees. Other underspending related to subsidies to departments and other state agencies. In respect of capital assets, around R34 million was not spent. Some of this money was included in the conditional grant and would thus be rolled over into the current financial year.

Mr Mokoko said the NC province performed much better in 2011 than in 2010, where R280 million had to be surrendered back to NT. The spending on capital assets was at 98%, and the improvement in this area resulted from the provincial government having established a committee across four departments, led by Provincial Treasury, with the provincial departments of Health, Education, and Public Works. The intention was to monitor progress and prevent money having to be surrendered back to the national revenue fund.

In  health, he noted that over the last three years, money was not spent on the Hospital Revitalisation Grant, despite having ongoing projects. The Department of Education, in the last year, showed a marked improvement, moving from a position of major overspending to a position where it remained within allocation. Whilst PT did not support underspending, it was at least better than overspending, which led to a situation where the province did not have sufficient cashflow to finance operations, which could lead to provincial finances being placed under administration.

Most of the revenue for 2011 was received from motor licensing, and there was collection of R28 million over budget in the last year. In the first quarter of 2012, the province had collected R81 million, and was projecting an under-collection in this year. PT however believed that the provincial Department of Transport was too conservative in its projections, and that there was a better potential to collect if the department did its work well.

This province was very strict on cash flow management, and was invited to share its experiences and good practices with the Limpopo Province, when it was put under administration. Although departments were projecting to overspend, the PT would not allow them to do so and would ensure that they remained within their budgets.

Mr Mokoko outlined the fraud and corruption prevention strategies. He said all organisations were prone to fraud and corruption, especially in their procurement cycles, which manifested itself in illicit rebates, kickbacks, dubious suppliers and service relationships. Whilst the risk could never be eliminated altogether, departments needed to have controls in place to reduce the likelihood of fraud and corruption. Instances of corruption in the procurement cycle were not easy to detect and were difficult to prove and then to prosecute. However, he said that the right approach could reduce instances. He suggested that this had eight facets. Firstly, there must be hiring of the right people, and internal controls must be assessed and actively monitored. A department must develop a fraud response plan. It must know its suppliers, and check the supplier’s capacity to deliver.  It must closely monitor all procurement processes, and have proper management of sub-contractors.

He expanded on this by saying that only those who knew how the systems worked should be hired. People with little understanding of the systems could easily be exploited. Segregation of duties was critical to ensure that one person did not do every transaction, from start to finish. PFMA regulations required that accounting officials must have internal controls to minimise the risk of fraud. Existing controls and thresholds should be reviewed. There was a need for risk management, and identification of fraud, through highlighting those areas most susceptible. Even the most carefully designed and tightly controlled system could still be circumvented. Fraud in the procurement environment most easily occurred when an individual, who knew that he would not be challenged, overrode systems or when there was collusion of a group that was using its knowledge to hide the fraudulent activities. There was a need to develop a fraud response plan, because it was an effective deterrent if people knew that they would be fired if caught in wrongdoing.

In relation to suppliers, Mr Mokoko said that suppliers who lacked capacity tended to bribe and ask for favours. The sub-contractors also needed to be monitored by putting in place routine checks for deliveries and non-deliveries, examining repeated deliveries for the same order, and discrepancies in purchasing orders.

Unfettered access to, and then incorrect use of BAS, LOGIS and PERSAL systems was a risk. The report by NT had highlighted that there were ongoing challenges in supply chain management, with high vacancy rates, as people tended not to stay longer than 14 months in supply chain management. This, however, led to the risk that people would be placed there if they were not desperately needed elsewhere. The provincial departments had to take proper ownership of, and use the systems properly, in order to have effective supply chain management. Staff who were appointed must be able to use the systems and match them to the specific requirements of their sector and training and ongoing support should be provided at all times.

Mr Mokoko said the NC province had already launched the LOGIS system to improve compliance, and this provincial government would enforce all necessary measures to improve the management and deterrence of fraud. It would investigate whether bidders had the capacity to deliver. Finally, he noted that the NC province had lost a number of criminal court cases because it could not prove matters beyond a reasonable doubt. For this reason, NC wanted to implement biometric access to the BAS, PERSAL and LOGIS systems, requiring that both a staff card and fingerprint be used for identification. This would offer immeasurable benefits.

Western Cape Provincial Treasury presentation
Ms Aneliese Pick, Director, Western Cape Provincial Treasury, said the Western Cape Province’s budget for 2011/12 financial year was R37 billion, and the province spent 99.6% of that money. The province under spent by R138 million, due to underspending by provincial departments of Transport, Education and Health. The Department of Health under spent on the Hospital Revitalisation Grant, and there was late delivery of some equipment. It also achieved some savings as a result of the reduced prices for anti-retroviral drugs. The Department of Transport cited shortage of human capacity as the major reasons for underspending on projects. Both this department, and the provincial DPW, also cited slow filling of posts, and lower than expected spending on compensation of employees.

The Western Cape (WC) province spent 99.8% of the total allocation on the conditional grant. All departments had put work-plans of district staff  in place. Departments had not been employing more people, but had been getting the same staff complement to achieve more, and this was referred to as an efficiency gain, particularly in respect of the provincial Department of Education. NT had been requested to approve rollovers on all the conditional grants that were underspent, and these had been approved.

For the current year the province received R39 billion, and R11 billion had been spent to date. The Departments of Health and Human Settlements were projecting over spending. The Department of Health indicated a risk of over R53 million overexpenditure, due to services being moved to the Khayelitsha District Hospital, although it said that it had put plans in place to try to minimise or negate this risk.

Ms Pick explained that the R1.3 million projected overexpenditure by this provincial Department of Human Settlements was due to an incorrect PERSAL interface, and a difference between the budgeted cost of living increase and the negotiated salary increase. However, in general, the departments were spending well so far, in the current financial year.

Ms Pick wanted to note that the Technical Secondary Schools Recapitalisation Grant had not spent the R1.6 million that was indicated in the financial statements, due to efficiency issues. The provincial Department of Education took a decision to attend to all supply chain management issues at head office, and not at district level, to try to achieve greater efficiency on the supply chain. The spending of the grant was not going according to plan, but once the new supply chain systems were in place, spending was expected to improve.

Mr Isaac Smith, Chief Director, WC Provincial Treasury, said the province had a holistic approach to fraud and corruption prevention, as the responsibility was shared between PT and the Office of the Premier. The Office of the Premier drove fraud prevention, and there was also a Forensic Investigative Unit in that office. The province had also centralised the internal audit and risk management to the Office of the Premier, to ensure uniformity across departments. The three focal areas for combating of fraud and corruption were strengthening governance, use of electronic systems, and training all staff in the financial environment.

To strengthen governance, the province had issued new instructions for supply chain management. There was a disjuncture between the NT regulations and departments in this regard, and PT was busy with management accounting, because it had identified a lot of gaps in the control environment. A strengthened control environment would help combat fraud and corruption. An assessment had been done at all departments to ensure separation of powers. PT had looked at bid committees and had made recommendations to departments on how these could be improved. PT also introduced transaction checklists, to follow up on payments made. There was an audit trail, before a final payment was made. Reporting tools were in place and supply chain officials had to do monthly reporting. This allowed PT to investigate all contracts that were awarded, to check whether they were done through open processes, to identify any deviations and to assess the risks. Departments were also expected to get approvals from PT when there were deviations from open tendering.

Mr Smith said the PT had also been driving an initiative on electronic systems. At PT, there was a fully-fledged financial systems component. Various components on PERSAL, BAS and LOGIS were in place. All institutions in the WC were using LOGIS. Access control and user accounts systems were centralised. Individuals were not allowed access to all the systems, as that could promote collusive behaviour.

The province was introducing a spend-analysis tool that helped with expenditure trends in the departments. That could also assist in identifying where possible corruption could occur. There was already a centralised database of suppliers at PT. Although the database had been in existence for the past eight years, PT had taken a decision that it would work with suppliers who were registered longer than that. He explained that the benefit of centralising the database was that it would allow departments to focus on the core functions, while compliance was dealt with at PT level. The supplier database was matched with the PERSAL system, and any matches were reported and investigated. The province would also interact with NT, and compare the provincial and country-wide PERSAL information to determine if any government officials outside Western Cape were doing business with this provincial government.

Over the last couple of years, the WC province had introduced electronic procurement for quotations, which limited the contact between officials and suppliers. PT was looking at introducing this system for purchases above R500 000 as well. A contract management system was being investigated.

The WC province was putting more emphasis on training officials in the use of the systems, and now required that all officials had to be trained, with a number of short courses being offered. PT had linked up with the NT training component, and with universities, to provide formal training courses on supply chain management. The skills level in the supply chain management differed among provinces. Such cross sharing of knowledge would allow for transfer of skills among peers. He emphasised that another aspect that was crucial to supply chain management was linking of procurement to the budget.

Discussion
Mr Montshitsi commented that the NC strategy on corruption deterrence was weak, and sought only to reduce corruption, rather than doing away with it altogether. NC had to understand that no corruption should be allowed to thrive under any circumstances.

Mr John Block, MEC for Finance, Northern Cape, accepted the criticism that the NC was not doing enough. He said that in fact the NC did not merely wish to reduce corruption, although unfortunately that was how it had come across, and his delegation would attend to correcting the presentation.

Mr Montshitsi commented that exchange of passwords should be an issue that gave rise to severe disciplinary steps.

Mr Mokoko replied that exchange of passwords did not happen at PT, but he conceded that it had happened in some other departments, including Department of Education. A number of officials had been taken to court, with their cases still pending, and some were facing internal disciplinary proceedings in that department.

Mr Montshitsi questioned the conclusion by the NC that it was better to under- than to over-spend. He reminded the delegation that underspending implied that delivery had suffered, and departments should always strive to spend their full budget.

Mr Block replied that he was trying to put in context the fact that there had been challenges recently around the spending in education, and at last the expenditure in this area was nearer to acceptable levels. Now that the Department of Education had improved and was no longer proving a risk to overall provincial finances, the focus would be shifting to the Department of Health. He agreed that under expenditure was also undesirable.

Mr Montshitsi said the Committee would prefer not only to see dismissal of staff who had defrauded the state, but also that they were arrested, charged and imprisoned. A mere dismissal, whilst they may still have benefited financially, was not enough. He urged that proper investigations of wrongdoers, accompanied by seizure of their assets, would send out a strong message. The report by the NC did not inspire confidence that it was doing enough to address corruption.

Mr Block said the NC province had agreed to visit KZN, to view the systems it had put in place, and to assess what models it could adopt from KZN, which had moved further than other provinces in this area.

Mr Makhubela commented that all the issues raised by provinces in fact were more in the nature of proactive prevention of corruption, rather than being strong deterrents. He suggested that effective deterrence probably would come from frightening people by having strong legislation in place. He questioned why the NC had laid charges, and then lost the cases for lack of evidence, suggesting that this implied that the National Prosecuting Authority (NPA) was not doing its job properly. He urged all he provinces to come up with proper deterrents.

Mr Block wanted to indicate that the NC province would have to go back and prepare written responses on the disruptions at one of the regions in the province, which were likely to have an impact on the overall budget of the Department of Education and DPW.

Mr Alan Winde, MEC for Finance, Western Cape, said that the WC province took the view that it was necessary to have systems in place to pick up instances where people tried to defraud government. Two cases were in the process of being prosecuted in WC. He said that the message had to be one of constant improvement of systems across the provincial government.

Mr Makhubela asked the two provinces to clarify the Committee how they were addressing issues raised by the Auditor-General (AG) in their reports, particularly in regard to supply chain management.

Mr Mokoko replied that PT had asked departments to prepare implementation plans in which they must indicate how they hoped to address such issues. PT reported to the provincial government on a regular basis. The provincial government had agreed to the establishment of Operation Clean Audit by 2014, which looked at how both provincial departments and municipalities could be helped to achieve clean audits by 2014. He offered to supply written replies to other questions.

Mr Winde replied that the issues identified by the AG were part of the continuous improvement plan of the PT, and dictated the way in which PT interacted with each department and with local government. PT took ownership of the issues across the board and they became part of the plans. A team comprising of the Premier, the MECs for Finance and for Local Government, and senior officials interacted with the AG and then took the improvement plan and the AG's plan to the Provincial Legislature, for an open debate on the issues. There was a continuous cycle of trying to improve.  During the latest round of discussions with the AG, the issue of members of staff doing business with government was raised.

Mr Chaane said he was concerned about the expenditure pattern in the NC, which showed continuous under spending at all departments. Expenditure for the first four months of this financial year was also quite low. He asked if there were control measures to ensure that the departments projecting under spending now did not end on a negative at the end of the financial year. He wanted clarity on the underspending, and also said that further clarity was needed on the projected overspend by the provincial Department of Agriculture. He noted that expenditure on the conditional grants was still very low, and asked if there were control systems in place to monitor low expenditure here.

Mr Chaane also commented on the court cases that NC had lost, and said that he was not convinced that lack of evidence was the real reason, but instead he suspected that some officials deliberately failed to prepare properly for the cases, and created loopholes. He asked how NC was trying to redress the failure to win its cases, and asked what happened to those who were charged, and particularly whether they were still in the public service. He was distressed at the tendency for some non-compliant officials to find ways back into the public service. He asked whether NC had a specific plan around fraud and corruption, saying that the presentation had tended to gloss over the issue, and had not specified what internal processes were followed as well.

Mr Mokoko replied that he was unable to comment whether there was proper preparation for cases in court, and that PT would only get the result after the case was finalised. He could only comment that some of the cases in the past were dismissed for the reason that the person had not been proven, beyond a reasonable doubt, to be guilty of the charges. PT knew that the unions played a major role in the disciplinary actions against their members.

Mr Chaane sought clarity whether people, once found guilty, were automatically dismissed from departments, and whether there had been instances where this had not happened.

Mr Mokoko replied that PT would dismiss such people, as part of setting the tone and a strong indicator that PT would not tolerate fraud. Those who had acted incorrectly, at PT, were subjected to internal disciplinary proceedings and were also criminally charged. PT attended to prosecuting such cases with vigour. However, the cases referred to in the presentation did not involve PT officials but officials from other departments. PT had also previously dismissed people for reasons other than corruption.

Mr Chaane sought clarity also on the statement that officials did not want to stay at the supply chain management, as it was “hot”, yet they would be moved there if there was nowhere else for them to go. He asked if the implication was that people would work for a while there, would abuse the system, and leave when the investigations started to hot up, and if one official who stole would be replaced by another who could do the same.

Mr Mokoko replied that the description of supply chain management as “hot” did not imply that people looted and left. There were fundamental issues within the supply chain management that had to be dealt with. He said that the “hot” system implied that the system was a challenge to know and understand, and it laid employees open to exploitation. Although “dumping” of employees at supply chain management was not happening at the moment, there were lingering effects of this happening in the past. He had meant to emphasis that it was crucial to give proper training to all officials in the supply chain management processes.

Mr Chaane said the provincial Departments of Cooperative Governance were poorly resourced, and in the Northern Cape it had staff scattered all over under the pretext of helping municipalities. This was identified last year, and the problem persisted into this year. He asked if this was another reason that contributed to the expenditure pattern of the departments.

Mr Lees commented that the expenditure pattern in respect of the educational conditional grants, in the WC, was too low. He asked that PT comment on what it was doing to assist that provincial department.

Mr Winde replied that the Dinaledi and Technical Schools Recapitalisation grant had shown challenges in the supply chain management processes. There was a delay in the payments, due to late invoices, but steps were taken to ensure that it should not be an ongoing problem and expenditure would thus pick up easily. PT would monitor that in the next quarter to check that this happened.

Mr Lees asked why there was much discrepancy between the actual and budgeted expenditure in the last year.

Mr Lees asked how the NC PT monitored the shifting of grant money around projects, especially in light of the fact that the MEC for Health in that province had indicated that money would be shifted from some projects to other projects.

Mr Mokoko replied that provincial governments received money from NT, and there was a payment schedule indicating how much money would go to each particular department. The grant money, however, was given as a lump sum, together with the equitable share. Departments would then decide for themselves how they should prioritise and spend on their projects. It was not NT’s or PT’s  responsibility to determine which projects to prioritise. Departments were financed, but they then decided on where they would spend.

Mr Chaane interjected that this explanation did not make sense. He agreed that Treasury did not instruct departments how they must spend, but it must be remembered that the money was released on the basis of the plans that were forwarded and approved. Whilst Treasury did not tell the Departments exactly how to use the money, it did have to monitor their expenditure. Departments could not be allowed to spend money on projects that were not approved.

Mr Mokoko replied that, clearly, PT would not encourage departments to use money for unbudgeted projects. However, the final expenditure decisions rested with departments. Departments did not even prepare detailed plans, but merely summaries, when they requested funding. There was no breakdown in those plans showing where the money would be spent; he reiterated that departments would merely indicate the sum required, and then they did not even report back to PT on the projects they were funding.

Mr Lees said the answer to the question indicated clearly that Treasury did nothing to monitor shifting of grant funds in projects.

Comment by Accountant General
Mr Nomvalo said the shifting of funds to projects for which the money was not originally intended, was in fact a crime. However, the NC official had been trying to explain that once the funding was released there was little that Treasury could do, in practice, to state how that money must be spent on the ground. There were instances where the money was spent, not on the projects for which it was intended, simply because it was available, and this was even more apparent where the department concerned had too few controls.

The Division of Revenue Act put responsibilities on Treasury in relation to funding. Money should be spent according to the purpose for which it was allocated. DORA stated that departments should provide project implementation plans, as a pre-condition for the release of funds. Whilst Treasuries could not control what went on at the departments, they did have a responsibility to follow up afterwards.

Mr Nomvalo emphasised that when fraud and corruption happened, the poorest of the poor were robbed of their access to services. Officials needed to remember those who depended on them for livelihoods. There was a need to carry out responsibilities in a way that would ensure a positive impact in society. Public servants should never allow a situation where government had to pay double for services. The pain of stealth was not that harsh, because South Africa could raise resources, at the moment, but there would come a time when the country might not be able to raise resources. For this reason, corruption and fraud had to be dealt with now.

Comment by National Treasury
Mr Sishi commented that NT would need to deal with the situation with the Department of Agriculture in the NC now, especially after the flooding last year. There were serious concerns, most particularly that the R130 million provided as emergency funding for the disaster was not spent. Expenditure had been the lowest in the NC on agriculture than anywhere in the country, and yet the need there was the greatest.

He said the NC provincial Department of Agriculture had submitted a plan on how it would use the money, but there were still questions around its capacity. He said he failed to understand how a province could make a request for a substantial amount when it knew it had no capacity to spend. Planning and conceptualisation was a serious concern in the NC. NT had agreed with that province to reschedule how the money would be released, even if it meant releasing a certain portion only, over a number of years. There was no intention to take the money back from the NC, because people needed it to be spent.

Comment by FFC
Mr Khumalo said it was clear that the PTs were making an effort to arrest the scourge of corruption. However, it must be remembered that wherever there were weaknesses in the system, there was room for corruption to breed. A broader aspect was fostering greater respect for the law.

Committee business: Adoption of minutes
The Committee adopted the minutes of meetings on 20 June and 14 August.

The meeting was adjourned.

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