Department Performance Monitoring and Evaluation & National Youth Development 2012 audit outcomes: Auditor-General's briefing, Parliamentary Research Unit: 1st quarter findings

Standing Committee on Appropriations

15 October 2012
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

In the first part of the meeting the Auditor General South Africa (AGSA) outlined the audit outcomes, as shown in the 2011/12 Annual Reports, for the Departments of Performance Monitoring and Evaluation (DPME) and the National Youth Development Agency (NYDA), both of whom were now overseen by this Committee. As an introduction, AGSA explained the model of combined assurance on risk management, and noted that whilst the internal management was expected to have high levels of assurance, the Audit Committees, Risk Committees and Minister would, because they were not involved in day-to-day running, have moderate levels, and the external audit and Parliamentary committees were expected to exercise limited assurance, because of how they fitted into the overall scheme. DPME had to be seen also as a coordinating institution to monitor the performance of others. Questions of clarity were asked, and Members commented that internal audit units and Audit Committees often faced challenges if they made unpopular suggestions. AGSA agreed that this was a valid point and AGSA was looking to how they could be protected.

A detailed summary, in tabular form, of audit outcomes was also presented, highlighting areas where there was compliance, partial compliance, or failures to meet targets, and the specific findings for each entity were presented. Both entities had unqualified audit opinions, but with matters of emphasis. In the case of DPME, these related to predetermined objectives (PDOs) and lack of compliance. The NYDA had findings around compliance with laws, material impairments, irregular expenditure or fruitless and wasteful expenditure. The main emphasis of matter related to irregular expenditure which had increased from R69 million in the previous year, to R133 million in 2011, representing 69% of the total procurement expenditure. This highlighted significant deficiencies in the control environment as no proper procedures were followed. Supply Chain Management (SCM) in DPME was quite good and although it did have irregular expenditure it was not out of line in the context. NYDA needed to put significant focus on correcting its SCM, although it had done well on PDOs and Human Resources. Both were in reasonable financial health, even despite the loan book at NYDA. In the case of NYDA, many of the problems were related to an ineffective audit unit and Audit Committee and the current lack of a Board, which meant its governance was also problematic. Specifics were given of the shortcomings in the PDO and SCM for both institutions, and the HR controls at the DPME. Although IT controls were not considered during audit, it was noted that these controls were lacking at both DPME and NYDA, and AGSA suggested that the Committee needed to ensure that action plans were put in place and complied with. The fact that material adjustments were needed was indicative of lack of controls. Specific comments were included on the loan book at the NYDA, where management had been lacking in several respects. NYDA had also failed to comply with the National Credit Act. AGSA summarised that action plans were needed, and had also recommended that monthly statements of account should be drawn and verified to highlight any problems at an earlier stage. It also summarised the points that this Committee should raise with the entities when they appeared.

Members asked a number of questions of clarity on the points raised, asked how the AGSA became aware of the investigation by the Public Protector, and held quite a substantial discussion on whether the NYDA itself was responsible for its failures, or the DPME or Minister, and wondered why transfers to the NYDA were not withheld. It was explained that the Public Finance Management Act did not specify when transfers could be withheld, and that a further problem lay in the lines of accountability as NYDA was independent of the DPME although it reported to the same Minister, but not the same Director General. This point would have to be clarified with the entities. Members were critical not only of the failure of controls, but the fact that most transgressions were repetitive, and expressed concerns about the loan book at NYDA, which would need to be more closely interrogated.

The Parliamentary Research Unit then presented an analysis, citing ten selected departments, of the first quarter expenditure. They suggested that the information in expenditure reports should be expanded to become truly useful to the Committee. Analysis of performance against targets, not only spending, should be given. Both the first and second quarter performance should be presented for analysis prior to the Medium Term Budget Policy Statement (MTBPS) adjustments, to give a clearer picture of spending and intended virements. Comprehensive reporting should also be included on grant performance in those reports. An analysis of the first quarter spending, generally across government, showed poor performance, and specific areas of underspending were outlined.  It was noted that continuing excuses were failure to fill vacant funded posts, and suggested that in future departments must specify the posts and amounts, so they would be ring-fenced, whilst other concerns related to Department of Public Works invoices, and delays in implementation of capital projects. Members asked about the delays with the Jobs Fund, commented that it was “criminal”, thought that the meeting of government priorities should also be interrogated, and agreed with the recommendations and importance of considering both first and second quarter spending prior to the MTBPS.

Meeting report

Department of Performance Monitoring and Evaluation and National Youth Development Agency Outcomes:  Auditor-General’s briefing
The Chairperson introduced and welcomed the new Committee Secretary, who was experienced in public finance matters. He commented that the briefing document from the Auditor General South Africa (AGSA) had been received only that morning, as there were apparently some technical problems in Parliament. He reminded Members that this Committee now also had a mandate to monitor the performance of the Department of Performance Monitoring and Evaluation (DPME) and National Youth Development Agency (NYDA).

Mr Lourens van Vuuren, Business Executive, Auditor-General South Africa, asked where Brand SA fitted in, as it had moved to the Office of the Presidency, but was informed that it would not rest with this Committee.

Mr van Vuuren began by taking the Committee through a slide on the Combined Assurance Model of Risk Management in the Public Sector. He explained that in the cycle of preparing financial statements, there were various role-players, with three levels of assurance, at management, oversight and independent. Under oversight assurance there was a subsector of oversight, with a note that “limited” assurance levels were required. This meant that portfolio committees would typically be able to give only limited input into the final outcome, because they were not involved in micro-management. Their role was, however, vital as it could assist entities to achieve better outcomes. At the management level, and the internal audit, “extensive” levels of assurance were required. Ministers, and the Audit Committee, neither of whom were involved in day to day running, but who did exercise supervision and had to review internal reports and reports coming from external audit, focused mainly on controls, and interaction and commitments to clean administration. They had “moderate” levels of assurance. He noted that the National Youth Development Agency (NYDA) did not have a functioning Audit Committee. The Legal and Risk Committee also had “moderate” assurance levels, as they focused on risk assessment and gave advice. The same applied to the external audit. The Portfolio Committee focused on interactions and commitments with the DPME.

Mr van Vuuren said that DPME was in the position of itself being a coordinating institution in regard to performance information for government as a whole. The Department of Cooperative Governance and Traditional Affairs (COGTA) was another coordinating institution, and so was National Treasury. With these departments, it was necessary to look firstly at their own financial statements, compliance and performance information, and secondly to consider what they did, as coordinating departments, to improve the outcomes of government as a whole. DPME was a new department, which explained some of the comments of the AGSA.

Mr van Vuuren explained that these graphs did not in fact represent an assessment, but the three blocks at the bottom would apply when applied as an assessment tool. The red blocks indicated significantly lower than required levels, yellow indicated that some level of the requirements was reached, and the green indicated that the required levels of assistance were reached.

Discussion
Mr G Snell (ANC) asked what method portfolio committees would use to interact, and to what extent findings and recommendations through the House impacted.

Mr van Vuuren said that currently SCOPA was the only committee that formally documented these resolutions. It handed its resolutions to AGSA in a very structured manner. Once they were passed, they were formally published. If committees did want AGSA to focus on certain matters during the audits, they could communicate it to AGSA. The concerns were also, in part, addressed through the Quarterly Review process, and AGSA also requested that committees must exercise oversight of implementation of the Audit Action Plan. AGSA was working on a new relationship with this Committee, and he would welcome hearing of its needs.

Mr M Swart (DA) pointed out that this Committee was also evaluating, as the Appropriations Committee, but it would check internal controls in DPME.

The Chairperson questioned why the role of the coordinating institution was described as “limited”, saying that this was not an internal body. He wondered if it related to the extent to which the Committee could assist.

Mr van Vuurren explained that the heading was “required level of assurance” and this meant that although the Committee could do more, it was in fact only expected, because of its role in the process, to do a limited extent. The Committee was not involved with the day-to-day running or controls, and it depended on feedback from others, such as AGSA, to determine what should happen. This Committee must not draw, but only monitor, the Audit Action Plan, and it would not micro-manage. The Committee would have to rely also on information received from the institution itself.

Mr Swart thought that the Internal Audit unit and Committee could perform a better function, but commented that, particularly in municipalities, they tended to be fired if they raised unpopular comments. He wondered if there should not be more protection of these committees.

Mr van Vuuren said this was a very valid point and it was not covered in legislation. At the moment, AGSA was suggesting to the executive authority that chairpersons of Audit Committees should communicate regularly with the executive authority, outside of normal processes close to management. That would make a significant impact on the audit outcomes. In the last General Report on Municipalities, the effectiveness of audit committees were being measured. This could well be addressed in future legislation..

Presentation on DPME and National Youth Development Agency Audit Reports 2011/12
Mr van Vuuren tabled the three-year audit outcomes of both the DPME and NYDA, noting that each had got financially unqualified reports, but had findings on compliance with laws and regulations. Ideally, departments should be striving to achieve totally clean audits. He pointed out that a substantial number of findings meant that a department would be close to getting a qualified audit, but on the other side of the coin, if only a few findings were made, this was an indicator that the department could, with only a little more effort, achieve a clean audit. In the case of DMPE the findings were not so good, particularly since it did not have any history to hinder it.

The Audit Report of NYDA was on page 78 of the Presidency Annual Report, and for DPME it was at page 44.

He summarised the audit findings. For the DPME, the matters of emphasis related to predetermined objectives (PDOs) and lack of compliance. The NYDA was unqualified for two years, but for both years there were findings around compliance with laws, material impairments, irregular expenditure or fruitless and wasteful expenditure. In the previous year the NYDA had had to restate some figures.

He reminded the Committee that audit reports were in three sections. The first dealt with the opinion (qualified, unqualified, disclaimer, or adverse). The second part was financial information and the third was compliance with laws and regulations. He stressed that compliance with Supply Chain Management (SCM) policies and procedures was particularly important.

The NYDA also had an emphasis of matter. There were material impairments of R24 million. This was fully disclosed in the financial statements, so there was no irregularity, but these amounts had to be impaired because there were challenges in repayment of the loans. This was therefore highlighted as a risk area. It would be important for the Committee to focus on action plans in place to secure the loan book, and grant loans to individuals and entities who were ultimately able to replay

Another matter of emphasis related to irregular expenditure, which had increased from R69 million to R133 million, representing 69% of the total procurement expenditure. This highlighted significant deficiencies in the control environment as no proper procedures were followed.

Dr S van Dyk (DA) interjected to seek clarity on where the borderline was on irregular expenditure, and asked why it was marked with a cross.

Mr van Vuuren said that cross merely indicated that this had occurred.

Mr Snell questioned irregular expenditure’, and asked if it was judged against the NYDA’s internal policies, or National Treasury (NT) regulations.

Mr van Vuuren explained that irregular expenditure contravened Treasury regulations. Contraventions of own policies would still be reported but would not be considered as irregular expenditure.

Mr Swart commented that R24 million was apparently at risk of non-recovery at the moment.

Mr J Gelderblom (ANC), questioned the 69% figure for irregular expenditure, and asked if the problems lay mainly with management.

Mr van Vuuren confirmed that this was correct. Page 78 noted that significant deficiencies resulted in non-compliance and that leadership did not exercise responsibility. Inadequate monitoring by supervisors had resulted in the lack of compliance.

Mr Gelderblom asked about the performance bonus.

Mr van Vuuren said that he could not comments on this but it would be noted in the AR>

The Chairperson interjected to ask that the entire report be presented before questions focusing on specific areas were asked.

Mr van Vuuren continued with the presentation. Table 3 showed if key focus area performance was adequate, inadequate or not done. For the DPME, SCM was quite good, and there was around R1.6 million of irregular expenditure, which was quite limited given the environment. However, more attention was needed to PDOs and HR mandates and IT controls (which he would return to later). There were some material errors, although again they were not out of line given the environment. The financial health of DPME was quite good, although there were risk indicators.

The NYDA showed problems in SCM, and significant focus was needed on this. However, it had done well on PDOs, and HR. The IT controls showed no improvements. There were several material adjustments on the financial statements, and there was a risk that controls were not in place to ensure that the financial statements were accurate and complete. NYDA needed to pay significant attention to this. Its financial health was quite good, despite the risk of the loan book.

DPME’s SCM procedures were not highlighted as problematic, and the irregular expenditure was not significant, although it had to be mentioned. However, for NYDA there were several problematic areas (see attached presentation), mostly relating to key levels of procurement where the right processes were not followed. If an entity’s own policies were not at least aligned to minimum requirements of Treasury, that would cause difficulties, because those policies would not then be deemed to comply with laws and requirements. The action plans of the NYDA were not adequate to deal with the matters. Mr van Vuuren stressed that this was also mentioned in the previous audit report, was not adequately monitored by management and leadership. There was insufficient internal audit. He reminded the Committee that the internal audit unit needed to be fully functional, capacitated and be properly constituted. At the NYDA, there was no properly constituted committee by the year-end, and not only was this contrary to the legislation, but it also meant that there would be significant gaps.

He added that contracts and quotations were awarded to bidders who were not compliant with government requirements around tax clearance certificates, or had not submitted conflict of interest declarations, or had criteria that differed from those stipulated in the original invitation. All advertising tenders must be precise and no deviations should be made from them. The preference point system (PPS) was not applied in all procurements. Lack of understanding of laws and regulations had resulted in incorrect interpretation.

Mr van Vuuren noted that SCM responsibilities lay on the Chief Financial Officer (CFO) who did have quite a heavy load to carry.

Mr van Vuuren moved on to the predetermined objectives for DPME. The root cause of departure was that the PDO targets were not suitably developed during the strategic planning process, as it was a new department. From the total of 74 planned targets, only 46 were achieved. Where there was significant underachievement this was highlighted in the audit report. In the case of NYDA there were no material findings on Performance information.

In relation to HR, he noted that in the DPME the person in charge at pay points did not always certify that the employees receiving payment were entitled to it. This was a key control that was so important it had been incorporated into the Treasury Regulations. NYDA had adequate HR.

In relation to IT controls, he said that although these were not included in the audit report, this was nonetheless a very important area, and he wanted to highlight it in this meeting. DPME had no formal IT governance control at high-level, and there were inadequate user account controls – such as limiting access, changing passwords, and programme change controls. These controls were needed to ensure that information would not be lost and business could continue after a disaster. For the NYDA, there were inadequate security management controls, inadequate user access controls and inadequate IT service continuity controls. Both of these entities needed an action plan to address these findings, and should be asked for feedback, during the year, on how they had progressed.

Material adjustments to the financial statements and non-compliance were found for both DPME and NYDA. He explained that material adjustments and restatement of figures were needed before the AG could give an unqualified opinion that the financial statements were correct. This was because the annual statements were not checked properly by the CFO, Audit Committee and Board and Accounting Officer, before being submitted. AGSA proposed that financial statements should not be compiled annually, but monthly accounts should be compiled and reviewed, which would identify problems at an early point, allowing the final figures to be complete and accurate.

He returned to his concerns about the Audit Committee at the NYDA, noting that there probably was not yet a functioning Committee, and it was vital that one should be appointed and remain functional, to focus on the areas he had highlighted. The in-year asset management was not adequate. AGSA therefore reiterated that monthly reconciliations, quarterly asset verifications, and monthly reports by the CFO to the Accounting Officer and Internal Audit were needed. In respect of the NYDA, the Treasury Regulation 30.2.1 requirement of making quarterly reports to the Presidency was not met.

Mr van Vuuren drew attention to the note on Revenue Management for the NYDA, noting that the Accounting Authority did not take effective and appropriate steps to collect all money due from the loan book, on a monthly basis. The NYDA did not properly implement the loan management system, did not perform basic controls on long-outstanding payments, and gave loans without proper assessments. AGSA realised that the loans were granted in a very specific market, but the risks still had to be managed properly.  It had recommended that the loan management system must be finalised, a report must be compiled monthly by the CFO and submitted to the Board, and the latter must take appropriate steps. Again, the Audit Committee had to be involved.

He pointed out that NYDA was also a credit provider in terms of the National Credit Act, and there were two instances in which it failed to comply with this Act, including not providing the annual report required of it.

Another concern was that the term of the Board of the NYDA had expired at year-end and there was not currently a fully-functioning Board, whilst the CEO was Acting Chair, which was poor governance practice.

The fruitless and wasteful expenditure at NYDA amounted to R133.2 million, compared to R68 million in the previous year. The Public Protector was continuing investigations into the NYDA procurement and SCM aspects of the World Festival 2010.

In conclusion, Mr van Vuuren summarised the key concerns, pointing out that NYDA was the bigger risk. AGSA had held quarterly discussions with management, but the key messages did not appear to have been taken seriously by management. There was inadequate leadership and governance leadership, and a particular concern was that the financial statements and annual performance reports were not reviewed adequately prior to being submitted for audit.

AGSA stressed that all transgressors should be held accountable. Action plans must be implemented properly, and regularly overseen, to ensure that all matters highlighted were addressed. This Committee should get assurance that such plans existed, and they should be brought forward on a quarterly basis.

He noted the emerging risks, saying that the revised Preferential Procurement Regulations came into effect on 7 December 2011. The most significant changes were the introduction of B-BBEE certificates and requirements for evaluations of functionality. Every entity must ensure that its policies and procedures were in compliance. He suggested that the Committee must ask the entities if they were aware of the processes, and if proper systems and processes were in place to deal with them. AGSA had communicated this change already, and the entities must take ownership. A new framework was also applicable to performance information, from 1 April 2012, and entities should also already have taken that into account. Although the DPME and NYDA were relatively compliant with performance information, they should not be allowed to regress, so they should also be asked to confirm that they were aware of the framework. New accounting frameworks introduced would affect NYDA, which must comply with the additional twelve Generally Recognised Accounting Principle standards.

Mr van Vuuren summarised that this Committee must therefore monitor the compilation of monthly and quarterly financial and performance reporting, the implementation of audit action plans, and implementation of the quarterly key controls. Quarterly key control assessments were done by AGSA and it did give feedback to the entities. Finally, he noted that the slide headed “Audit Outcomes” gave a snapshot overview of matters he had outlined.

Discussion
Mr Snell asked this analysis was done for all departments.

Mr van Vuuren said that the presentations might different slightly, but they were done for all departments, and AGSA was presently busy with presenting them to other committees.

The Chairperson asked how the Public Protector had become involved.

Mr Gelderblom and Ms L Yengeni (ANC) asked how confirmations of the investigations by the Public Protector were obtained.

Mr van Vuuren explained that the Public Protector reacted to formal complaints lodged to her Office. In the case of the NYDA a formal investigation was requested, and although he was not aware of the source, it would be confirmed to AGSA, on request, whether investigations were ongoing. The question was asked of management, during the audit, whether any other investigations were pending, as AGSA had to report on them. 

Mr Snell said that the transfers to the NYDA would probably be done on a quarterly basis, and quarterly meetings were held. He was concerned that the Department was continuing to transfer money, despite severe deficiencies in he governance structure. He wondered why this was done without ensuring that correct action plans were in place.

Mr Swart suggested that this might be because of different lines of reporting of the Directors General.

Ms Yengeni commented that although there were clearly deficiencies from the side of the NYDA, the role of the DPME, as the lead department, must be questioned and it must be ascertained who was ultimately responsible. She would have thought that the Accounting Officer and Minister had to account. She was also concerned that repeated transgressions were apparent, which seemed to indicate lack of concern.

Mr van Vuuren explained that section 38(1)(j) of the Public Finance Management Act (PFMA) said that before a department made transfers to an entity it should receive written confirmation from that entity that controls were in place. The relationship was difficult, as it was incumbent on the Accounting Officer to determine at what point transfers could be halted. This was not clearly set out in the PMFA, and was thus up to the discretion of the Accounting Officer. Some would insist upon further measures being put in place, as the Act allowed, but the withholding of payments would, because of the implications, need to be based on very strong reasons.

Dr S van Dyk (DA) wondered if it would not be appropriate for the Committee to ask the Accounting Officer when these measures would be exercised, and at what stage. Somebody should be accepting responsibility.

Ms Yengeni followed up, saying she did not understand the comment that there was little that could be done in relation to the transfers. The responsibility of DPME was surely the same as other entities. She questioned specifically if the DPME had followed the legal prescripts, when discovering the deficiencies, and whether it had really exercised sufficient oversight and had put the NYDA on the right track. If entities were not doing the right thing, the oversight departments also bore responsibility.

Dr van Dyk added that the same trangressions of legislation appeared year after year. He agreed with Ms Yengeni that someone must take responsibility and said it was of serious concern if Accounting Officers failed in this regard. He agreed that the absence of the board and Audit Committee were very serious, and wondered why AGSA had only made a recommendation for their appointment, instead of more stringent action.

Ms N Mfulo (ANC) agreed that NYDA was clearly misbehaving, but agreed with Ms Yengeni that it was not correct to focus all blame on this entity, as DPME was not fulfilling its responsibilities to ensure that NYDA acted correctly. She sought clarity on the roles.

Mr van Vuuren noted that section 38 of the PFMA and Treasury Regulation 8 related to the transfer payments. However the difficulty was that the PFMA did not say that the Accounting Officer could stop transfers if audit reports were qualified, or if there had been irregular expenditure. He reiterated that this was left to the discretion of the Accounting Officer. Although in the past, funds had been withheld, in the case of the NYDA direct accountability for funds rested with the NYDA Board (which was of course not presently constituted).

He explained to Dr van Dyk that all that AGSA could do in relation to the Board and Committees was to recommend that they should be appointed, as AGSA itself could not appoint them. The relevant legislation should be complied with by the President.

Mr L Ramatlakane (COPE) wanted to follow up on this point. At a strategic workshop, the Director General of DPME had said that the NYDA was in fact an independent entity, in terms of the law, and it did not account to DPME. The only connection was that both reported to the same Minister. That was clearly posing a challenge, as evidenced by this debate. There were clear anomalies about the governance of NYDA having the CEO as Acting Chairperson. He thought speedy resolution was needed.

Mr Swart added that not only was there no board to report, but the lines of reporting were that NYDA reported to Minister Collins Chabane, with the Presidency being the Accounting Officer. Minister Chabane would not have the details of what money was transferred by the Director General of the Presidency. There were different individuals holding the Director General posts in the Presidency and the DPME.

Ms Yengeni noted these comments, but said a response was needed from the responsible individual.

The Chairperson agreed that difficult questions arose out of the failure of control mechanisms. He recommended that the matter be held over for the moment, and when the DPME, accompanied by the Minister, appeared before the Committee, questions should be directed to them. The role of the AGSA was to give information, and make recommendations. He stressed that the problems in NYDA also related to SCM, and it should not be assumed that the whole of NYDA was dysfunctional.

Mr van Dyk noted that the irregular expenditure was explained, but there was no explanation on the unauthorised and fruitless expenditure Only 48 of the targets had been reached, and he questioned how AGSA could be sure, from its sample, that this was correct.

Mr van Vuuren clarified that “unauthorised” referred to payments that exceeded the vote or were not for their intended purpose.

Mr van Dyk understood this, but said the facts were “shocking”.

Mr van Vuuren agreed with his concern and said this was the reason why he had gone into detail on the irregularities. Although there was an internal audit section at NYDA, it had to improve, as there was a difference between being in place, and being effective. The absence of an Audit Committee meant that there was no proper oversight or implementation.

Mr van Dyk took issue with the excuse proffered that lack of compliance was linked to the newness of the DPME. Public finance should be run in as disciplined a fashion as the private sector, with full compliance.

Ms R Mashigo (ANC) expressed concerns about the loan book. It was likely that this money would never be recovered, and it was noted that there were even difficulties in recovering from businesses that were in good standing. She asked that the Committee be provided with solutions.

The Chairperson wondered if this was not a political issue, and was tied in to the question of the market in which it operated.

Mr Geldenhuys asked for more details on the amount of spending on loans, the success ratio how many of the loans were still sustainable, and how many were failures.

Mr van Vuuren did not have that information and said it should be obtained from NYDA. In relation to the policies and procedures, he suggested that the Committee should also engage with NYDA to ensure that when NYDA made loans, it was following all prescribed procedures.

Mr Snell was not sure whether any credit checks were in place, prior to getting the loan.

Mr Swart said that the had raised this point several times, and NYDA had answered that it was not a bank. Now that this Committee had oversight, it could follow up on this and ensure that policies were in place.

Ms Mfulo noted that many matters were recurring, and she questioned who was responsible for ensuring compliance.

Mr van Vuuren noted that the role of AGSA was limited to reporting and recommending. It was up to the roleplayers who had oversight to take the necessary action to ensure future compliance. The Committee thus had to engage on the problematic areas, such as the loan book – and question the policies and procedures followed.

Mr Ramatlakane asked if the number of yellow and red blocks in the summary of findings, for the NYDA, were indicative of systemic problems, and at what point this might affect audit findings. He asked for further comment also on the broad statement that “leadership was lacking”.

Mr van Vuuren said that “leadership”, for the purposes of the audit report, started with the Board, CFO, CEO and senior management. Normal day-to-day managers were at another level. The specific leadership at NYDA would be the Board. When doing its audit, AGSA would assess the control environments, which would inform its findings on the audit risk. In the case of the NYDA, there were a number of adjustments needed, and if it had not been able to do these adjustments, providing the proper evidence, within the time allowed, it would have got a qualified report. He noted that the adjustments had to be done in a limited time, and NYDA could reach the stage that it was not able to effect substantive adjustments within that time. That was why AGSA recommended monthly statements. He reminded Members that the shading did not reflect the severity of the risk. The red or yellow shading showed that adjustments were needed. A green shading would indicate that matters had been properly attended to.

Mr Ramatlakane noted that there had been much discussion around compliance with information security, and he wondered if the government-wide framework was not being properly implemented.

Mr van Vuuren noted that transversal systems of PERSAL and LOGIS were used, but some resided at SITA. In the case of NYDA, everything was in-house, so it did not use these transversal systems. However, both with NYDA and DPME, the controls that AGSA had commented were lacking were in the nature of “home” controls, such as user accounts, to control access to systems, and for these the entities were personally responsible.

The Chairperson formally invited Mr van Vuuren to be present when the entities presented their Annual Reports.

Government’s First Quarter Expenditure Analysis: Parliamentary Research Unit
Mr Phelelani Dlomo and Mr Musa Zamisa, Parliamentary Researchers, tabled a joint report making a number of recommendations in relation to the forthcoming Medium Term Budget Policy Statement (MTBPS) adjustment process.

Mr Dlomo explained that in this report, more emphasis had been placed on putting the adjustment process into context by using the First Quarter information. Contrary to the assumption by some that the first quarter spending might not be important, the Research Unit believed that it was a vital part of the process, because this and the Second Quarter results provided ample information to interrogate the entities and departments on their future requests.

He briefly took the Committee through the background and said that the issues to be considered related to proper planning and good budgeting. In the past, during the adjustments, some requests were merely tabled – such as the funding for the Accelerated Schools Infrastructure Delivery Initiative (ASIDI)- without enough consideration being given as to whether those funds could in fact be spent before the end of the financial year and whether the right plans were in place. The failure to question this had ultimately resulted in under-performance and the necessity for rollovers. This Committee still had the right to ask departments for proof of plans before approving the allocations.

The performance information in the first six months was traditionally only tabled at this stage of the year, as a first-quarter report, with the second quarter results being tabled immediately prior to or simultaneously with the MTBPS. That, in his view, did not give the Committee sufficient time to assess what departments were likely to request, and what considerations should inform the Committee as well as whether the 8% allowable adjustments were exceeded.  The Researchers believed that it was imperative that both performance and expenditure reports must be tabled before the adjustments.

Planning should be regarded as a cornerstone for results-based oversight. There were sufficient institutions that could assist with performance-based interrogations, and the strategic and annual performance plans had to be properly investigated. Many portfolio committees had adopted inadequate strategic plans, and this hindered this Committee when it had to consider the adjustments.

Mr Zamisa added that if performance targets were not up to scratch, from the start, they could not be met. By the time the annual reports were debated, it was too late to correct this point.

Mr Dlomo reiterated that strategic plans should have clearly defined measurable objectives, clear indicators, have specific performance targets that were time bound and attach the amount budgeted for each programme. These points were stressed by AGSA.

The Research Unit also proposed a template for quarterly reports. This Committee had the prerogative to tell National Treasury what type of report it needed in order to perform proper oversight. National Treasury therefore should move away from the notion of providing expenditure only, but incorporate both expenditure and performance information, showing not only the budgeted, projected and actual expenditure, but also whether the targets were achieved, and the reasons. This Committee always struggled to assess performance, because the expenditure reports in-year did not include sufficient detail on the targets.

Mr Swart suggested it would be useful to include a column for variances, and the reason for them.

Mr Snell thought that this would be a very progressive step. A similar format was followed for Annual Performance Plans, and he agreed that it would be very useful to carry it through to reports to NT.

The Chairperson commented that there was another possible gap; if a department had spent less than the assumed 25%, then it must be noted whether this was deliberate in the sense that it may only have planned to achieve 18% of that target in the relevant time frame.

Mr Dlomo continued that this Committee had the advantage of being able to integrate information from a number of different stakeholders to assess performance and expenditure. He was pleased to hear about the increased interaction with AGSA, and he noted that the Research Unit was now also commenting on those reports.

Mr Zamisa noted the Chairperson’s point on spending projections. The problem was that quarterly reports assumed that 25% should have been spent, but departments could, on the day of the meeting, explain that they had only in fact projected to spend 18%. He agreed that this kind of information should have been provided to the Committee at an earlier stage. Projections were variable in nature.

Mr Dlomo added that the Researchers had noticed that a substantial number of departments had not, in the first quarter, spent even in line with their own projections. They should be held accountable for this, by clear rationales being required for the projections, and the reasons for them not being met.

Mr Zamisa commented also on the shifting of funds meant for filling the vacant positions, which was seen as a problem across all departments, for which the adjustments process regrettably provided fertile ground. When departments claimed that they could not spend, they did not mention specific posts tied to specific values, and this information was vital.

Mr Zamisa further suggested that National Treasury should give comprehensive reporting on performance of grants. The information currently provided did not give specifics as to how the grants were performing. Most departments’ budgets were comprised, in the main, of conditional grants, and although they were normally incorporated into section 71 reports, or reports of provinces, it would be useful for that information also to be included into reports to NT.

Mr Dlomo moved to the overall expenditure outcomes in the first quarter. None of the ten departments analysed by the Research Unit had performed well. Overall expenditure was R115.8 billion, about R13.3 billion less than the R129.1 billion projected. Those figures were derived from the NT reports. A closer analysis of the budget framework looked at the economic classifications that were under-performing. In current payments, R33.5 billion of the R35.8 billion projection, was spent. Goods and services spent R9.1 billion of the R11.3 billion expected. There were specific major variances in the Department of Defence. In respect of transfers and subsidies, R80.2 billion was spent against the R89.4 billion projection, due to lower than expected transfer payments on social grants within the Department of Social Development. He pointed out that transfers and subsidies tended to be transferred only from the second quarter. Capital assets payments were R1.7 billion instead of the projected R3.3 billion.

The Research Unit had given a sector analysis of selected departments (see attached presentation slide 11). The spending ranged from 0.3% (COGTA) to 25.8% (Department of Science and Technology), but there was generally underspending. Mr Zamisa noted that the reasons for slow spending were recurrent. For instance, 90% of the COGTA budget related to transfers and subsidies. This department often cited the mismatch between the national and municipal financial years, which meant that it transferred in the second quarter. However, it was notable that other, recurrent key drivers of under-expenditure for COGTA included vacant positions, ICT upgrades taking longer than anticipated, the Community Works Programme taking longer than anticipated, and the relocation of the Municipal Infrastructure Support Agency to new premises. Here, it would have been useful for COGTA to give the exact sum for the vacant positions, so that it could be ring-fenced, and did not disappear. He added that at National Treasury, the key drivers of under-spending were 125 vacant positions. However, these had been vacant for months. Another major issue was that a Memorandum of Understanding on the Jobs Fund had also still not been concluded. It was discussed at length in the past.

The Chairperson commented that this was “criminal”.

Mr Zamisa agreed, particularly since this was such an important issue.

Mr Dlomo noted that he would skip the rest of the slides, due to time constraints and move to the last slide. Overall observations were that the Department of Public Works and other service providers were often reportedly delaying invoices, which impacted negatively on budget processes in other departments.  The failure to fill funded vacancies was another major reason.  Delays in implementation of capital projects by the Department of Water Affairs was of continuing concern, despite several oversight visits. The ASIDI programme was the exact opposite of being “accelerated”. He stressed that this was the major reason for the proposal that performance and results-based information was needed.

Discussion
The Chairperson asked about the Jobs Fund.

Mr Zamisa confirmed that in order for the Jobs Fund to be implemented, the Memorandum of Understanding must be signed.

Mr Dlomo noted that some of the allocations in the MTBPS were problematic. It was the lack of planning at the time that the allocation was requested that hindered the spending.

Ms Mfolo commented that the presentation was very clear. She asked if this Committee had to put something in place to ensure that departments complied.

Ms Yengeni referred to overall expenditure outcomes, and questioned how NT made projections on spending. She wondered if the projections on what departments could achieve were in fact too high.

Mr Zamisa responded that each individual department would make its own projections on spending at the end of the first quarter. National Treasury would then consolidate those figures into an overall projection. However one of the reasons why they struggled to reach the projections was that Parliament did not have the chance to comment on the projections before the spending took place, as only Treasury was given that information. The key drivers of underspending also came into play throughout.

Mr Dlomo added that this Committee had to engage further with departments on their projections. He also commented that, as apparent from annual reports, departments may spend 100% of budget, yet achieve relatively few of the targets. If departments had not met projections in the first quarter, this was already an indicator of likely problems in meeting targets, although the spending may be on track.

Ms Mashigo agreed that the relationship of the MTBPS to the first and second quarter spending was very important. The Committee often found itself short of time to do proper interrogations when the adjustments were requested. She commented that many of the departments who regularly requested adjustments were listed in this presentation.

The Chairperson agreed on this point. Department of Public Enterprises regularly spent only 2% or 3% in the first quarter, but it did usually spend in full by the end of the year. Although AGSA was looking at performance to an extent, it was not doing full performance audits. Pre-determined objectives went to performance, and the Public Service Commission scored some departments very low.

Ms Mfolo noted the suggestions by the Researchers, and thought this Committee must now agree on a procedure to get more clear reports. She agreed fully on the points around the vacancy reporting, and said that the practical issues had to be addressed. It was necessary to know if the initial projections were “guesswork”.

Ms Yengeni agreed. She asked when the Committee would be meeting National Treasury on the MTBPS. She was concerned that sufficient time must be set aside for debate and interrogation as to what informed the calculations.

The Committee’s Content Advisor said that Accounting Officers were supposed to submit monthly statements  to Treasury which informed the figures in the NT reports.

Mr Dlomo agreed that the first and second quarter reports should be tabled before the MTBPS, as this would enhance oversight and inform the way forward.

Mr Ramatlakane was also in agreement. He suggested that when NT narratives of reasons for underspending were set out, some of these points should be isolated for engagement with the departments, particularly since many repetitions would be seen. He also noted that when dealing with expenditure, it was necessary to look at the government priorities. The spending of COGTA could never meet the very real service delivery challenges. The root causes had to be addressed, and it might be useful to cluster issues. He also noted that the spending of some departments had a more direct effect on the public than others.

Mr Dlomo noted that in the past, this Committee had focused on priority areas, with certain Members being assigned to question the priorities. When quarterly performance targets were not met, this affected the final year performance.

The Chairperson noted the comment by the Research Unit that to some degree the figures were speculative. However, departments should be held to account to the Annual Performance Plans, and since the baselines for 2013 were already known, planning should be a pre-condition during the MTBPS process. When municipalities applied for grants, they were required to produce plans and he felt the same should apply to national departments. The Departments of Water Affairs (DWA) and of Rural Development and Land Reform had both asked for more money, but neither was spending even the limited mounts they were getting. The DWA had assured the Committee that systems were in place to spend in the third quarter, but it had still not resolved some major issues.

Mr Snell asked if rollovers were factored into the figures for the first quarter. If they were, then the expenditure, in real terms, would be even less.

Mr Dlomo said that this would become clearer if performance and expenditure were handled together. The Committee should then be able to identify the gaps. Underspending meant that targets were not met.

Mr Zamisa noted that the overall theme was that a change in the culture of reporting was needed to allow the Committee to have effective oversight.

The meeting was adjourned.

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