Department of Public Enterprises 2011/12 audit: AGSA comments; Budget Review & Recommendations Report: researcher input

Meeting report

Auditor-General of South Africa (AGSA) briefing
Mr Kevish Lachman, Business Executive: Auditor-General of South Africa (AGSA), began the briefing by congratulating the Department on its clean audit. The Department had not received any qualified opinions, and any matters that had been flagged were matters that could be rectified. He stressed that the focus moving forward should be on the sustainability and maintenance of these positive outcomes.

Mr Carl Wessels, Senior Manager: AGSA, explained that the majority of DPE entities had had clean audit outcomes for all the key focus areas. There were no matters to report on the supply chain management of any entity. Both Alexkor Limited and Broadband Infraco (Pty) Ltd had under-achieved on their predetermined objectives, by 34% and 22% respectively. This under-achievement had not been deemed a “material finding” in either case, however. Pebble Bed Modular Reactor SOC Ltd, owing to a provision in the Care and Maintenance agreement that currently governs it, had not been required to prepare an annual performance report, and thus could not be assessed on its predetermined objectives.

There were no matters to report on the human resources and information-technology controls of any DPE entity, nor on the material errors of any entity. While the AGSA did not qualify its opinion about the financial-health status of Alexkor, it did raise concerns about the entity’s new joint-venture structure and about the long-term sustainability of the company. It had raised similar sustainability concerns about Denel (Pty) Ltd, though without qualifying its opinion about this entity either.

The two non-compliance areas noted were for Alexkor, which had not submitted its financial statements by the 31 May 2012 deadline, and for Broadband Infraco, which had not reported on its predetermined objectives for two consecutive quarters in 2011/2012.

No unauthorised expenditure had been incurred by any of the entities in the portfolio. Overall, there had been a downward trend in the fruitless and wasteful expenditure of DPE entities, but the sum for all entities still needed to be brought down to zero. The same held true for irregular expenditure.

Discussion
The Committee was unanimous in its praise of AGSA’s briefing and was encouraged by its findings.

Ms G Borman (ANC) said that the under-spending due to vacancies in certain entities needed to be carefully watched. She felt that the blue blocks on the summary page, indicating unfinalised audit findings, were disappointing.

Mr Lachman replied that the aim was not simply to fill vacancies but rather to acquire the right skills at the right time, and to disseminate these skills to the broader public sector.

Dr G Koornhof (ANC) queried Transnet Limited’s fruitless and wasteful expenditure amount of zero. He recalled Transnet reporting on its fruitless and wasteful expenditure in 2012/2012.

Mr Lachman replied that Transnet had in fact incurred a fruitless and wasteful expenditure, and that the presentation would be updated accordingly and re-sent.

Ms C September (ANC) asked if the AGSA felt there were sufficient mechanisms in place within these entities to make the changes needed. For example, did the audit committees within these entities function well enough to lift the entities out of their “systemic shortfalls”?  She was concerned that certain entities were not achieving their predetermined objectives. She asked for clarity on the Alexkor joint venture and on the AGSA’s approach to assessing this case.

Mr Lachman replied that State-Owned Companies (SOCs) should be using their quarterly reports as an opportunity to explain why they had not achieved their predetermined objectives and to show that they had the capacity to address their shortfalls.  As a joint-venture, Alexkor’s status remained ambiguous. It did not have the legal status of a corporation or of a public entity, because it had been created out of a court order. The quickest way to remedy this, he felt, was to corporatise it.

Mr A Mokoena (ANC) asked for an update on South African Airways (SAA). He was disappointed about the lack of “normative” assessment in the report -- that is, specific recommendations about what could and should be done. How thoroughgoing was this report intended to be?

Ms N Michael (DA) asked the AGSA whom within these entities the Committee should hold accountable for holding up or impeding the AGSA’s inspection process. She said SAA and South African Express (SAE) were the elephants in the room and asked for a timeline for their audit outcomes.

Mr Lachman replied that the accounting authority of each entity, and by implication its Board of Directors, was responsible not only for the proper and timely submission of annual financial statements but also for the statements’ quality. His team was awaiting the audit outcomes of SAA and SAE and would report their findings to the Committee as soon as they became available.

Mr K Dikobo (AZAPO) asked what level of fruitless and wasteful expenditure was considered significant. Eskom, for example, had incurred R20million in fruitless and wasteful expenditure, but had still received a clean audit report.

Mr Lachman replied that, when determining whether a fruitless and wasteful expenditure was “materially significant” or not, the size of the expenditure was not the only thing evaluated. The way in which the error was dealt with after the fact was also considered. If the entity followed all due procedures and, importantly, if it disclosed the error to the AGSA, the error did not necessarily have to constitute a non-compliance event or affect the opinion of the AGSA.

An ANC member said the AGSA’s emphasis on sustainability suggested that it considered the DPE’s audit outcomes a “fluke”.  What gave the AGSA this impression about these entities?

Mr Lachman replied that, in raising the issue of sustainability, the AGSA was not concerned that the outcomes were a fluke. Rather, it was about ensuring that the “internal control environment that produced materially correct financial statements” was sustained by the Department. This included the maintenance of proper record-keeping and information-flow processes, and the retention of certain critical skills.

Mr C Gololo (ANC) mentioned the Finance Fiscal Committee (FFC) and asked whether the AGSA ever met with the FFC to discuss recommendations.

Mr Lachman replied that the FFC was indeed one of the bodies that used the AGSA’s report. The AGSA ensured cooperation and information-sharing between itself and such entities.

Research briefing
Mr Eric Boskati, Researcher: Parliamentary Research Unit, presented his budget-review recommendation report for 2012/2013.

The DPE had maintained a 99% expenditure rate from 2007/2008 to 2009/2010. By 2011/2012, its expenditure rate had slowed down to 98%. The Department had incurred most of its irregular, fruitless, wasteful and unauthorised expenditure in 2006/2007, when it had had an unauthorised expenditure of R26 165 000.

The DPE’s budget for 2012/2013 had increased to R1 249 100 000 after transfer payments to Denel SOC Ltd and Alexkor. However, after subtracting monies earmarked for the recapitalisation of Denel’s Aerostructures division and for the payment of Alexkor’s Richtersveld Community Deed of Settlement, the Department was left with less than R200million to fulfil its oversight responsibilities over SOCs.

The first-quarter expenditure of the Department had been R36 200 000, or 2.91% of the total budget, with the bulk of this sum going towards employee compensation. R46 600 000 had been spent on employee compensation in the second quarter, though this was less than had been budgeted for, owing to a number of still-vacant posts.

The Department had not tabled any legislation in Parliament during the 2011/2012 financial year but had been impacted by a variety of legislation and regulations proposed by other departments. DPE had commented on these draft legislations, in the interest of its SOCs.

The Department was one of only three departments that had received clean audit opinions for 2011/2012.  Because DPE was not a service-oriented department, its performance revolved around the oversight and monitoring of its SOCs.  Specifically, its evaluation depending on the timely signing of Shareholder Compacts with SOCs, the adoption of SOCs’ corporate plans and the consideration of SOCs’ quarterly reports, along with a number of other key indicators. A Shareholder Compact was a document signed between each entity and the Minister of Public Enterprises, wherein the entity outlined its targets and objectives for the year. The Minister then signed a service-delivery agreement with the President, which guided the Department’s performance assessment for that year.

Parliament did not have access to the Minister’s service-delivery agreement with the President, nor to the Shareholder Compacts signed by the SOCs.  Details of these documents were only revealed to Parliament in the Department’s annual report, which made reference to them. Importantly, Shareholder Compacts by SOCs often did not include job-creation or skills-development targets. Failure to meet such targets thus had no bearing on the SOCs’ performance evaluation for that year. Parliament should be granted access to these documents, to facilitate its oversight responsibilities.

There was a need to increase the Department’s capacity to effectively oversee SOCs’ infrastructure programmes. Eskom and Transnet were both embarking on hundred-billion-rand capacity-expansion programmes, but the Department would not be able to monitor these programmes effectively if it did not have the staff complement necessary to do so. The Department’s current staff complement was 200. It needed funds to attract and retain specialised skills that would enhance its technical abilities.

There was also a need for legislation to assist the Department in fulfilling its oversight functions and engaging SOCs on their strategic priorities and policy alignments. The Department needed to investigate whether the oversight structures it currently had in place, such as the Chief Executive Officers’ forum and the Annual General Meetings, were working effectively.

The Presidential Review Committee (PRC) should release its findings to Parliament, to calm some of the speculation surrounding the realignment of SOCs with other departments.

Discussion
Dr Koornhof said the first-quarter expenditure figures were misleading. Expenditure should be calculated as a percentage of the R200 million amount remaining after the Denel and Alexkor payments, not of the total budget. Otherwise the Department’s quarterly expenditure stood at 2.91%, which looked like a gross under-spending. Where did the call for legislation come from? He reiterated that there were still reports outstanding from the PRC, which the Committee needed to have access to before any steps could be taken.

Ms Bohrman said the Committee had been going ahead without the PRC reports, which it should have received over a year ago. The researcher had mentioned five bills that directly affected the Department, yet the Department and the Committee had had very little to do with them. This was of concern.

Ms September said that, with all due respect to the researcher, a large chunk of the briefing had simply summarised the findings of the annual report. Where was the independent analysis? A new template was needed that directed the Minister to the critical recommendations affirmed by the Committee, specifically the need for visibility into the Shareholder Compacts and for further resources to facilitate the Department in its oversight work.

Committee Secretary Disang Mocumi told the Committee that the current briefing was a draft version and that the final report would include the observations made by the Committee.

Mr Boskati said that all the suggestions had been noted and would be incorporated.

Dr Koornhof asked that the paragraph in the final section of the briefing about the PRC be removed. If the realignment did not come to fruition, the Committee might get into trouble for mentioning speculation about it. He echoed the importance of Shareholder-Compact visibility and of retaining quality staff within the DPE.

Ms September added that the researcher should go through the FFC report and add its findings to the Committee’s recommendations, when compiling the final version of the briefing.

The Committee reviewed and adopted the minutes of previous meetings.

The meeting was adjourned.