Co-operatives Amendment Bill: deliberations; Department of Trade & Industry Audit outcomes 2011/12

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Trade, Industry and Competition

16 October 2012
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee deliberated on issues arising from the consolidated Co-operatives Amendment Bill working document, and the Auditor-General’s report on the Department of Trade and Industry and its entities. 

Co-operatives Amendment Bill
The Committee deliberated on the consolidated Co-operatives Amendment Bill, draft “F2”. There was discussion on the definition of operational primary and secondary co-operatives, and where it would be placed in the legislation.

There were new insertions after clause 4, in section 9, dealing with pre-incorporation contracts entered into by more than one person (clause 5), the pre-incorporation contract being ratified as a whole and not selectively (clause 6), and if there were no ratification, then all persons were discharged of liability (clause 7). The repayment of members’ shares would be stipulated to be within a maximum period of two years.  Directors or executive directors needed to be appointed from among the members only.  Independent non–executive directors were allowed to be included on the board.

There was further discussion on Section 38(1), which dealt with remuneration or commission received by a director or employee of a co-operative, which needed clarity and a policy position. Could a director be paid for purchasing items on behalf of the cooperative?  As the amendment currently stood, the power to receive remuneration had been widened and in the principal Act, there had been a prohibition provided prerequisites had been met. The Department’s view was that all transactions should be banned outright so that there could be no ambiguity, and that other instances could be covered by another clause which demanded disclosure and consent. This was agreed to.
 
In Section 72(1), the Ministerial power to wind up a co-operative had been removed and the Tribunal had been given this power, in addition to the existing right of the court.

Section 91M(7) indicated that a chairperson and members of the Tribunal could serve a term of only five years and be appointed for not more than two consecutive terms. Members asked that succession planning be taken into account, which could be done through a staggering of terms initially.

There was a request for a general minority protection clause to be included if a minority felt that it was being oppressed or that the majority was being prejudicial, as was the case in company law. The Department felt that including a minority clause would dilute the seven principles on which co-operatives were based, and could block or stifle the majority. The matter was postponed for further discussion.

The matter of how many co-operatives was required to form a secondary co-operative was revisited, but it was felt that the legislation had to be of an enabling nature, therefore the minimum number of co-operatives required to form a secondary was kept at two.

Auditor–General of SA (AGSA)
AGSA gave a brief explanation of the meaning of the term ‘material’ and proceeded to give an overview of the audit performance of the Department and its entities.

The audit report was divided into three sections, an opinion on the financial statements, pre-determined objectives and lastly, other compliance matters. In the PFMA report (p3) a combined audit opinion history had been given. Entities with unqualified audit opinions with findings had decreased. The Companies and Intellectual Property Commission (CIPC) and the National Regulator for Compulsory Specifications (NRCS) had qualified findings. A summary of the key focus areas for entities was provided on p4. The dti needed an action plan to ensure adherence to getting three quotes for tenders.  There were a number of findings against the NRCS on supply chain management and a large number of documents were not available for audit. The National Lotteries Board (NLB) also had findings against it on supply chain management.

On predetermined objectives, the CIPC had repeat findings, as in the previous years. The usefulness and reliability of the information was questioned, as it stemmed from its IT system. It recommended an adequate review.

Vacancies had to be filled as soon as possible. AGSA recognised that all posts had been frozen in the CIPC, but the IT posts should be filled.  It acknowledged that the NLB was in the process of restructuring and the recruitment process would be delayed. The security policies, user access control and change management of IT systems needed attention. The root cause of material errors occurring was because the action plans were inadequate or not implemented, and therefore it was recommending the production of monthly financial statements.

Members asked what the dti was doing about the irregular expenditure. Was the person who had been suspended for two years still employed by the Department? Why was supply chain management at the dti still a problem?


Meeting report

Deliberations on the Co-operatives Amendment Bill
Adv J Strydom, dti legal advisor, said that the Committee would be using the draft consolidated Co-operatives Amendment Bill working document marked “F1”.  He said he would only raise substantive matters marked in red. He said that definitions appeared for operational primary and operational secondary co-operatives in section 1(o) and 1(p) on p10 of the document, and related this to section 6(1)(d) dealing with the composition of the national apex co-operative (p18), which contained a proviso. He suggested that the two instances were repetitive and that either the two definitions be removed or the proviso be removed.

Adv Kathy Idensohn, of the law faculty of the University of Cape Town, said that the proviso had to be kept, as it covered tertiary co-operatives as well.

Mr Jeffrey Ndumo, Chief Director of Co-operatives, said the intention was for all co-operatives to be operational and therefore the proviso had to be kept and the definitions could be removed.

Adv Charmaine van der Merwe, Parliamentary Legal Advisor, said she did not see the definition as repetitive, as the definition indicated when co-operatives were operational and there was a need to indicate what constituted a co-operative as being operational.

Adv Idensohn said this sentiment could be included in the proviso.

Adv Strydom said section 6(1)(d) was the definition for the national apex cop.

Adv Idensohn said more work needed to be done on the provisos, and on who could be a member of it and who could form it. It was still problematic and a work in progress.
 
Mr Ndumo suggested that the proviso be a new clause.

Ms S van der Merwe (ANC) asked if a situation could arise where there might not be a national apex co-operative inexistence.

Mr Ndumo replied that the secondary, tertiary and apex co-operatives were all voluntary structures. The law permitted the establishment of an apex cooperative, but did not demand it. He added that all the co-operatives wanted an apex structure.

Mr X Mabasa (ANC) said that the legislation stipulated only the minimum amount of co-operatives in the structure, but it could comprise of much more.

Mr Rector Rapoo, Commissioner of Co-operatives, said that the minimum amount had to be maintained, otherwise the Commissioner of Co-operative had to be informed.

Adv Strydom said that there were new insertions after clause 4, in section 9, dealing with pre-incorporation contracts entered into by more than one person (clause 5), dealing with the pre-incorporation contract being ratified as a whole and not selectively (clause 6) and that if there was no ratification, then all persons were discharged of liability (clause 7).

Adv Idensohn said her document, marked Opinion 6, had made suggestions that where a co-operative received notice and did not do anything, the contract would be deemed as being ratified.

Mr Ndumo said that the notice had to be in writing and be dated. This would be drafted into the amendments.

Adv Strydom said section 14(1A)(e) stipulated that the repayment of member’s shares be within a maximum period of two years.

Section 14(1)(dd) provided for the appointment of directors or executive directors from among the members only.

Section 14(2)(k) allowed for the inclusion on the board of independent, non-executive directors, holding no membership shares and no voting rights.

In Section 14(2)(j)  the phrase ‘role players’ has been substituted with ‘interested persons’.

Section 38(1), which dealt with remuneration or commission received by a director or employee of a co-operative, needed clarity and a policy position.  Could a director be paid for purchasing items on behalf of the cooperative? As the amendment currently stood, the power to receive remuneration had been widened and in the principal Act, there had been a prohibition, provided pre-requisites had been met.

Adv Idensohn said the directors had a fiduciary duty of trust in all law, including company law, by which no person could benefit personally through his position unless proper consent and disclosure had been made. Framing the prohibition to account only for transactions would permit other ways of benefiting.

Mr Ndumo said all transactions should be banned outright so that there could be no ambiguity, and other instances could be covered by another clause which demanded disclosure and consent. This was agreed to.
 
Adv Strydom said that in Section 49(1a)(iii) the word ‘accounting’ had been included.

In Section 72(1) the ministerial power to wind up a co-operative had been removed and the Tribunal had been given this power, in addition to the existing right of the court.

The words ‘the Tribunal’ had been included in Section 72B(e)

Section 91M(7) indicated that a chairperson and members of the Tribunal could serve a term of only five years and be appointed for not more than two consecutive terms.

Mr Wilmot James (DP) said succession planning had to be taken into account, which could be done through a staggering of terms initially.

Adv Idensohn said that a general minority protection clause should be included if a minority felt that it was being oppressed or that the majority was being prejudicial, as was the case in company law. There had not been consensus on the matter at the sub-committee level.  Provision should be made that if an organisation was not the national apex co-operative, then it could not call itself the national apex co-operative.

Mr Ndumo said he agreed with the latter proposal for the purposes of certainty. On the issue of minorities, he said that co-operatives were founded on the democratic seven principles of co-operatives, which allowed the majority to exercise its voting and decision power. If not, the co-operative could be paralysed or blocked by a minority which undermined the seven principals. In addition, a co-operative was based on membership and was not a company which had shareholders. He requested that the issue be postponed for further discussion.

Mr Mabasa said he wanted to revisit the issue of how many co-operatives was required to form a secondary co-operative, as he feared there would be a proliferation of secondary co-operatives.

Adv Van Der Merwe said secondary co-operatives were there to provide sectoral services such as marketing and sales.

Mr Ndumo said the law had to be enabling, and therefore the minimum was set at two.

Mr Lionel October, DG, said the Department wanted to make it as easy as possible to create secondary co-operatives as the key weakness of the co-operative movement in South Africa was the limitations on secondary co-operatives.

Auditor – General of SA (AGSA)
Ms Fubbs asked what the meaning of the term ‘material’ was.

Mr Lowrens van Vuuren, Business Executive of AGSA, said that ‘material’ referred to what would affect the user of the financial statements – what would materially affect the audited entity’s operation. An unqualified audit was thus one where there was no material misstatement of the figures. He said the process of quarterly reports was a key control assessment. He used the example of the National Consumer Commission (NCC), where there had been concerns over the control environment, which had ultimately received an unqualified audit. The key control assessments should be done by management, which should in fact do accurate monthly financial statements, as this would assist them to base their management decisions, although the latter was not a legislative requirement.

Mr Shabeer Khan, Senior Manager at AGSA, said the audit report was divided into three sections, an opinion on the financial statements, pre-determined objectives and lastly, other compliance matters. In the PFMA report (p3) a combined audit opinion history was given. Entities with unqualified audit opinions with findings had decreased. The Companies and Intellectual Property Commission (CIPC) and the National Regulator for Compulsory Specifications (NRCS) had qualified findings. A summary of the key focus areas for entities was provided on p4. The dti needed an action plan to ensure adherence to getting three quotes for tenders.  There were a number of findings against the NRCS on supply chain management and a large number of documents were not available for audit. He recommended that an irregular expense report be compiled. The National Lotteries Board (NLB) also had findings against it on supply chain management.

On predetermined objectives, he said the CIPC had repeat findings, as in the previous years. The usefulness and reliability of the information was questioned, as it stemmed from its IT system. It recommended an adequate review.

Vacancies had to be filled as soon as possible. AGSA recognised that all posts had been frozen in the CIPC, but the IT posts should be filled. It acknowledged that the NLB was in the process of restructuring and the recruitment process would be delayed.

The security policies, user access control and change management of IT systems needed attention. The root cause of material errors occurring was because the action plans were inadequate or not implemented. It was therefore recommending the production of monthly financial statements. He said the Small Enterprise Development Agency (SEDA) had a net deficit, so proper budget processes needed to be established to ensure the budget would not be exceeded. Irregular, fruitless and wasteful expenditure had increased at the dti and decreased at the CIPC.

Mr James asked the dti what it was doing about the irregular expenditure.

Mr Mackintosh (COPE) asked if the person who had been suspended for two years was still employed by the Department.

Ms Van der Merwe asked why supply chain management at the dti was still a problem. She added that she thought the NCC had received an unqualified report.

Mr October said disciplinary action against a department official still had three months to go. Labour issues were under control. The irregular expenditure was for instances where there was only one supplier, but the Department had convened a meeting to ensure that the proper processes were followed when deviations were requested. In all cases, the Department had received value for money.  Regarding the CIPC, he said that in the absence of a proper IT system to generate revenue, there was a great need to put in a new system. He said the CFO and the CEO at the NRCS had been suspected of fraud. The Department had experienced problems with the NRCS board and the chairperson had been suspended, as it was possible that he too was involved in the fraud. The supply chain manager and the CFO had resigned.   At the NCC, big tenders had been irregular, with the accommodation lease tender being issued without following proper tender procedures.

Mr Kumaran Naidoo, Group CFO, said that every entity would be doing monthly financial statements, as the quarterly reports were only to ensure that expenditure adhered to budgets.  The DG, who was the official to sign off if there was only one supplier, had delegated that duty to the DDG’s and chief directors, and a template had been developed as to when a single quote was legitimate. The position of CFO and supply chain manager at the NRCS had been filled.

Mr Khan acknowledged that the CIPC had teething problems and had been stuck with the legacy of the old Vela IT system. He said the NCC had received an unqualified report, with findings, because it had disclosed irregular expenditure. An internal audit had been conducted in January, but its report had been given only in May, leaving no time to correct errors.   Therefore it was important that the control environment be looked at.

The meeting was adjourned.

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