Compensation Fund 2011/12 Annual Report and financial statements interrogation

Public Accounts (SCOPA)

05 June 2013
Chairperson: Mr T Godi (APC)
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Meeting Summary

The Compensation Fund had been asked to appear before this Committee for the third time, for the purposes of interrogating the 2011/12 Annual Report and financial statements. The chairperson commented at the outset that matters were not being attended to properly at the entity. Strong leadership that would further the objectives of the entity was not in place, and the perceptions that the entity was failing in financial management and administration had to be addressed. The Members asked about the absence of the Minister from the meeting.

Members then directed a number of questions at the Compensation Fund (the Fund) to elicit answers on the various qualifications that the Auditor-General had raised. One of the primary problems was that there remained several challenges with completeness and accuracy of returns on earnings, an item raised already in 2010. Moreover, this extended not only to revenue, but also to the evaluation and assessment of debtors, and accruals. These were the three items that had caused the Fund to be in its present state. The AG indicated that he could not verify completeness and accuracy on penalties for late submission of return of earnings. Necessary information needed to verify accuracy and completeness of penalties – amounting to R347 million – in assessment of employers was not obtained. Interest and penalties had been incorrectly charged to the assessment of debtors. The Committee had previously recommended that management should exercise oversight responsibility over financial reporting. Members asked if any official was dedicated for IT development or if the function was performed by a service provider, and, if the latter route was adopted, how much was paid to the service provider, and whether there was anyone responsible for monitoring this aspect of governance. They were also insistent upon knowing what consequences any officials who had been shown derelict in their duties would face.

It became apparent, and was questioned also, why the former Chief Financial Officer (CFO) had left the Fund just when audits were to begin. It became apparent that a transfer to the risk side f the Unemployment Insurance Fund had been arranged, when it was apparent that the CFO was not capable of fulfilling financial duties. However, Members were very critical of this, saying that the issues should have been addressed when she was still at the Fund, and they doubted whether a sideways transfer would add any value to her new employer. This kind of failure to deal decisively with incompetent officials was one of the major problems in government. Members concluded from this, and from further questions around who had been responsible for other inadequacies, which were continuously ascribed to “systemic challenges” that the Fund showed little interest in disciplining officials, although it was the duty of the accounting officer to exercise proper accountability, and they then also questioned the Department of Labour as to what steps it intended to take, not only from the remedial, but also the disciplinary point of view. The Department was reluctant to commit itself at this meeting, other than to say that it was aware of and was dealing with challenges, but Members were most insistent that a full report, and a further meeting, in the presence of the Minister and the consultants who had been employed, must be arranged within a far shorter time than “the end of the financial year” as the Department of Labour had suggested.

Members sought clarity on the internal controls environment, following reports from the audit committee found there was no proper control environment, assets were not being safeguarded; and a lack of management ability resulted in increased fraud and corruption. They also questioned the extent of corruption, and what had happened to the officials who had colluded, including whether money was recovered.

It became apparent from the responses that in fact there was almost a system of “parallel management” at the Fund with officials being paid large quantities to do the work (and in addition receiving bonuses despite the parlous state of the financial reporting) yet outsourcing the work, at massive cost, to several different sets of consultants. The functions outsourced were core functions, and in one case a consultant “Acting CFO” was appointed, who then also outsourced again to an audit firm. Members commented that there was no incentive for the consultants ever to bring about improvements as this would effectively put an end to their jobs, and were extremely critical of the fact that this amounted to the private sector continuing the corruption and mismanagement in the public sector. Some Members then expressed their view that there was no point in this Committee continuing to interrogate the officials as they were seemingly not able to give answers as to what actually had been done, but others expressed the view that whilst indeed the Committee did need also to get answers from those who were running the systems, the officials were duty-bound to report as the consultants did not have responsibility to Parliament. It was agreed that a future date be set for all officials, consultants and the Minister to report fully, and the remark was made that if the officials failed to motivate properly for outsourcing of core functions, then they should be replaced.  This was the time when the Committee had to show strong leadership.  

Meeting report

Chairperson’s opening remarks
The Chairperson welcomed the delegation but noted that the Chief Financial Officer (CFO) was not present. This was the third time that the Compensation Fund (the Fund or CF) was appearing before this Committee, and it was clear that matters were not being attended to correctly. Leadership was not being exercised in a way that ensured realisation of the objectives of the entity. The perception that the leadership of the entity was failing on financial management and administration needed to be corrected.

Dr D George (DA) sought clarity on the whereabouts of the Minister.

Mr Nkosinathi Nhleko, Director General, Department of Labour, replied that the Minister was still occupied with the mining crisis, an ongoing issue that could not be finalised in one day. He repeated the apology tendered by the Minister on the previous day. In response to the question about the Chief Financial Officer, he noted that Mr Pitsi Moloto was Acting CFO at the Compensation Fund.

Mr N Singh sought clarity on whether the Minister was in or away from Cape Town, indicating that he had seen the Minister in the House replying to questions.

Mr Nhleko replied the Minister was indeed in Cape Town.

The Chairperson commented he found it disturbing that the Minister would find time to reply to questions, but not avail herself for the meeting. He said he had thought the Minister was in Johannesburg, where the mining companies were based.

Mr Nhleko clarified that the engagements took place in Cape Town and that a labour delegation flew down from Johannesburg the day before, whilst another scheduled meeting with the Deputy President, Mr Kgalema Motlanthe, was also held in the evening.

The Chairperson accepted the explanation and asked Members to proceed with questions to the Compensation Fund.

Compensation Fund 2012 Annual Report and financial statements
Completeness and accuracy of returns
Ms T Chiloane (ANC) asked if the Committee’s recommendation of 2010, that management of the Fund should design and implement internal controls to ensure that revenue contributions and assessment of debtors were performed regularly, had been implemented.

Mr Shadrack Mkhonto Commissioner, Compensation Fund, said that when the recommendation was made, the Fund had received an audit disclaimer on this aspect. It was promised that measures would be put in place to address the matter. The Fund had indeed designed a policy strategy to deal with revenue collection and management. The main issues around completeness and accuracy of revenue that affected the Fund at the time would continue to do so until other measures were implemented. The Fund was required to report revenue on an accrual basis. The revenue raised was from employers who were supposed to contribute to the CF, and it was required that the collections and declarations that employers made were accurate.

Ms Chiloane sought clarity on the policies that had been designed. She pointed out that the report from the Auditor-General (AG) indicated there were still challenges with the completeness and accuracy of information. If the policies were implemented, she questioned how the amounts involved still stood at R4.8 billion, only a slight improvement from the R4.9 billion reported upon in 2010. The difference was minimal, so she did not find the statement that something was being done to be convincing. Moreover, it was not only the completeness and accuracy of the revenue contribution that was called into question, but also that of evaluation and assessment of debtors, and accruals. These were the three items that had caused the Fund to be in its current position. She wanted to know exactly why the recommendation from this Committee was not complied with. She commented that it seemed there were no improvements in terms of financial management.

Mr Mkhonto replied that as long as the objective of the policy being implemented was not realised, the challenges with completeness and accuracy would continue. The Fund could not convince the AG that it knew all the employers in the South African labour market, and this was a challenge. At the Unemployment Insurance Fund (UIF) similar challenges had been experienced, and here the option used was to make application to the Minister of Finance to request an exemption from the accrual system to a cash basis. When that was granted, the qualification at the UIF was removed. This option was being looked at even now within the CF, and there was a plan to approach the Department of Labour (DoL or the Department) to assist in addressing the matter.

Various measures were being implemented, and one such intervention related to the returns on earnings that employers submitted. Because these were done manually, there was room for error, and often it had happened that employers complained of inaccuracies in amounts assessed, and thus requested revision. Permission would be granted for revision because it could be that a capturing error had occurred.

Another measure put in place was automation of the returns submission, which had been done since April 2011. Employers would now be required to submit electronically on the system. The new IT service providers had assisted the CF to implement some improvements, including the speed with which employers could access the systems to make declarations.

The Chairperson interjected and said the core issue was not speed, but completeness and accuracy of figures.

Ms Chiloane asked if there was a dedicated person working on IT at the CF’s offices. If this was done with the help of a service provider, then she wanted to know how much was being paid to that service provider. She asked if there was anyone responsible for monitoring this aspect of governance, and what consequences such an official would face if it was realised monitoring had failed. She also sought clarity on whether there was any other legislation that could assist, as opposed to applying to the Minister of Finance for exemption from accruals.

Commissioner Mkhonto replied that, in regard to the comment of approaching National Treasury, he had merely used this as an example of how the issue had been addressed elsewhere.

The Chairperson pointed that the meeting was sidetracking, as the Commissioner had indicated that until there was a complete list of employers, completeness and accuracy would forever be a problem. The discussion should rather seek to establish how a complete list of employers could be accomplished.

Ms Chiloane retorted that legislation was in place, and if respected and complied with, she thought there would not be challenges.

Commissioner Mkhonto that the replied that the Public Finance Management Act (PFMA) governed the Fund. He repeated that his allusion to the situation at the UIF was merely an illustration of what had been done there. This was, however, a short term measure to remove the qualification, and was not a solution. The CF had not yet submitted the application but was in the process of doing so. In the meantime the Fund was putting in place a revenue strategy, whose intention was to increase revenue, and the number of employers to be registered.

The Chairperson interjected and said that those things should have been done prior to this meeting. He reminded the Members and representatives that this meeting was looking at what caused the qualification, and any futuristic postulation was for the Portfolio Committee on Labour to consider.

Ms Chiloane asked who was responsible for monitoring, and whether that person had provided reasons why contracts were not monitored.

Commissioner Mkhonto replied there was a Director responsible for IT, but this person reported to the Chief Information Officer (CIO). There was no service provider internally, however through the public-private partnerships (Triple P) Siemens (now EOH) was contracted to provide IT support.

Ms Ella Ntshabele, Director: Income, Compensation Fund, reiterated that it would take a while to resolve the issues of completeness and accuracy of revenue.

The Chairperson asked how much time.

Ms Ntshabele replied there were so many employers who might not be registered with the Fund. Those registered were assessed, and measures were put in place to bring them on board. In order to address the time challenge, it would be necessary to firstly resolve the application to get an exemption from the accruals system, in the short term, so that the CF could then account for revenue when it received it. A combination of challenges impacted on accuracy. She also repeated that because this was a manual process, it was prone to errors.

The Chairperson interjected and said that Parliament had not given, nor insisted upon the manual system, and asked why had it not been changed if it gave problems. The Fund had been around for a while, and the leadership was supposed to solve whatever challenges existed.

Ms Chiloane said this was the reason she was insisting on legislative amendments, as this would compel responsible officials to put controls in place.

Non-payment of service provider
Ms Chiloane sought clarity on the finding that a service provider was not paid, and pointed out in the report that there was a service provider employed to do debt collection. An amount of R68 million was being paid to that service provider, and yet debt collection appeared to be part of the core functions also at the Fund.

Commissioner Mkhonto replied it could be that CF officials were not being articulate enough. He assured the Committee that the CF had indeed put plans in place, since the 2010 discussions with the Committee. With regard to IT, there was a service provider who was a “deputy contractor”, but in the revenue strategy, measures were put in place, including the automation of the return of earnings. The second issue was revenue collection. The debt book was high, and since this matter was one of the list of items to be resolved the Fund appointed a service provider to assist with increasing revenue, and also with analysing the value of debt. The electronic system was meant to minimise manual capturing. The Fund was now able to automate the processing of invoices, and determine the revenue owed to the Fund. As a result, there had been a positive impact on the amount of revenue generated.

The Chairperson said the impact was not seen in the Annual Report at hand.

Commissioner Mkhonto admitted he was talking about the future impact. Following the 2010 meeting with the Committee the Fund went back and devised some plans, some of which required additional resources, revision of policies and modification of IT systems. This would allow the Fund to meet the challenges. At the time this 2012 Annual Report was compiled the improvement measures were unfolding. The benefit of all the measures might not have been realised by the time of that report. There also was a challenge with IT, in that the things that were required were not received on time.

Ms Chiloane insisted on the name of the officials tasked with monitoring the contract, and asked whether any disciplinary measures were taken against such an official, as the PFMA stipulated that the Commissioner should have taken some disciplinary measures.

Commissioner Mkhonto replied it was Ms Ella Ntshabele.

The Chairperson reiterated that the challenge was that although there was a person responsible for debt collection, there was a service provider hired to do debt collection at the same time. The official lacked capacity, yet she was being paid to do the job.

Ms Chiloane commented that it pained her that R68 million was paid to a service provider whilst an official was employed to do exactly the same task. She failed to understand how disciplinary measures were not preferred, and requested that the Committee deliberate on the matter.

The Chairperson asked that the issue be noted, as it could be that more issues might arise as the meeting went on.

Interest, debtors, and former CFO
Ms Chiloane said the AG had indicated that he could not verify completeness and accuracy on penalties for late submission of return of earnings. The necessary information needed to verify accuracy and completeness of penalties – amounting to R347 million – on assessments of employers was not obtained. Interest and penalties had been incorrectly charged on debtors. The Committee had previously recommended that management should exercise oversight responsibility over financial reporting. The matter had now been raised again. She asked who was responsible to ensure that penalties were accurately charged and assessed.

Commissioner Mkhonto replied in terms of the PFMA the official responsible was the CFO, but according to the Fund’s organisational structure Ms Ntshabele was, and that she reported to the CFO.

The Chairperson asked where the Chief Financial Officer at that time was now.

Commissioner Mkhonto replied that she had left in March 2012, after she had requested a transfer to the UIF, where she was currently a Director of Risk Management.

The Chairperson wondered how she was managing the UIF’s risk, “after producing financial report of this nature” and said further clarity would be sought from Mr Nhleko, who had stepped out of the meeting at the time.

Ms Ntshabele replied that penalties and interest were legislated for, and were charged.

The Chairperson interjected and said the question was why there were inaccuracies in charging that interest, and why also the issue had persisted after being addressed in 2010.

Ms Ntshabele replied after the audit finding of 2010, the Fund went back to check if the system was calculating correctly. During this time the Fund still operated on a legacy system. The analysis was done, and it was confirmed that indeed calculations were not correctly done. However, the Fund had since requested the DoL to allow a write-off of the interest. Had the Fund gone back and checked everything it would still not have known how far back the problem had started, and for this reason the DoL had granted permission for the write off, which would be done in this financial year.

Ms Chiloane sought clarity on whether this meant the R347 million would be completely cancelled.

Ms Ntshabele replied this was indeed correct.

Ms Chiloane requested that the Director General should clarify the position on the former CFO.

The Chairperson also sought clarity on whether it was correct to assume that Mr Nhleko had a hand in the transfer of the former CFO.

Mr Nhleko replied that the assumption was correct.

The Chairperson asked if this was a vertical movement or a promotion, and if it was the latter, he questioned how the former CFO could have been promoted to another entity, having failed to properly account at the Fund.

Mr Nhleko replied it was a lateral transfer and not a promotion. It also took place before the production of the Annual Report.

The Chairperson asked how was it possible that the CFO be allowed to move in March, just when the audit was suppose to commence.

Mr Nhleko replied the transfer happened in the context of dealing with financial management challenges at the Fund. Serious challenges were raised by oversight bodies like AG, and the Audit Committee, about the former CFO’s financial management capability.

The Chairperson asked how, if the CFO had such poor financial skills, her move could help the UIF, and what value she could add there.

Mr Nhleko replied this was the reason she was moved to risk management, but not financial management and said it remained to be seen what value she was adding to the UIF.

The Chairperson asked what was likely to happen if she was found not to be adding value at the UIF.

Mr Nhleko replied that those matters were regulated. The Director General would have to deal with issues of performance management.

The Chairperson retorted “that should have been done right here”, at the CF, where she first failed.

Mr Nhleko replied he accepted the point, but said there were many pressures, and it was thought preferable firstly to “rescue” the situation at the CF.

The Chairperson still felt that the necessary action on the failure of the former CFO should have been taken when she was still at the CF. This whole issue called into serious question how people were appointed to positions of responsibility. However, he suggested the matter be left there for the time being.

Ms Chiloane commented that the entity did not appear to have interest in disciplining officials. The practice of “recycling” failing officials, without subjecting them to any kind of a disciplinary action, was unfair, and surely there were better ways to deal with their lack of capacity. Deploying failing officials was an area that government needed to improve on; the Fund was a critical entity that dealt with vulnerable people, and if it could not perform its internal financial management functions, then she wondered how it could deliver to those vulnerable people needing its critical services.

Ms Chiloane said the AG had stated he was unable to form an opinion on the completeness, accuracy and occurrence of benefits paid. Included in this was a sum of R2.8 billion disclosed in the Annual Report but it was apparent that an amount of R43 million relating to permanent disability could not be reconciled. She asked why the amount was not reconciled, who was responsible for doing so, and where that person was.

Commissioner Mkhonto replied he had been informed that the qualification was as a result of the systems being employed. In October 2011, Siemens indicated that the new claims management system was ready for deployment. The Fund had faced time constraints in having the data migrated to the new system, and as a result the new system was deployed parallel with the old system. A cut-off date was selected, by which all claims would be dealt with in the new system. At the year end, when financial reports were prepared there had to be reconciliation of claims in both systems. A discrepancy of about R43 million could not initially be reconciled; but that money had since been reconciled, leaving about R6 million still to be reconciled.

Ms Chiloane asked who was responsible for all the mishaps.

Commissioner Mkhonto replied in as much as officials were responsible for managing areas, they needed tools. The systems used were not appropriate systems and it was a systems problem.

Ms Chiloane commented that it seemed that the Commissioner was protecting the officials.

Commissioner Mkhonto replied he did not protect anybody.

The Chairperson pointed that according to the PFMA, the Commissioner, as accounting officer, was the responsible official, and could therefore not come and tell Parliament about faulty systems. He repeated that the systems were not imposed on officials by Parliament.

Ms Chiloane amplified the point and said every year the Fund came to Parliament to ask for money to improve its operations. After twenty years, it was unacceptable that it should still be talking about “failing systems” and this was not convincing. She asked if the systems challenge would ever be put right.

Material losses
Ms Chiloane sought clarity on whether the item of material losses was linked with fraudulent activities. This was after the finding by the AG that an amount of R26 million was disclosed, and R3.1 million of the money was recouped.

Commissioner Mkhonto replied that material losses were identified as a result of the initiatives by the risk management unit. The unit investigated tendencies that were not normal. Indeed wrongdoing was found, it was investigated and law enforcement agencies were brought in. There had been successes but equally there were set backs. When external service providers were involved, they were reported to their professional bodies for disciplinary measures.

Ms Chiloane sought clarity on the note about cheques intercepted and cashed fraudulently. The report indicated 208 cases, and 137 had been dealt with, so she enquired what happened to the remainder of the cases. She commented that when a cheque was cashed fraudulently, syndicates usually worked with internal staff, and asked which Fund officials were involved.

Mr Twana Makubela, Deputy Director: Risk Management, CF, replied that 13 officials had been dismissed on account of their collusion in the fraud. Criminal cases had been opened against those officials.

The Chairperson interjected and pointed out that the 13 cases were for 2011.

Mr Makubela replied this was so, but said that one official was dismissed last year.

The Chairperson insisted on a name, as requested, and asked what had happened to the official.

Mr Makubela replied it was Mr Mbongeni Magwaza. He was dismissed after he irregularly effected payments to someone’s banking account.

The Chairperson asked how much money was involved.

Mr Makubela replied it was R134 000.

Ms Chiloane asked if the 13 officials were part of the group involved in the cashing of cheques fraudulently. She also asked if the R3.1 million recovered was recouped from the concerned officials.

Mr Makubela replied that this was not recouped from them; instead, the R3.1 million related to the cases that had been finalised. The money was recovered from the pensions of the officials. There were civil claims ongoing against other officials. A different route had been taken to recoup the other money. From the next financial year there would be an increase in the monies recovered, and the criminal matters that had been preferred. The Fund was in a process with the Asset Forfeiture Unit (AFU) to recover in the outstanding matters.

Ms Chiloane requested a fuller and more detailed breakdown of all the officials involved, the transgressions and monies they had embezzled. She asked if there was anyone currently on suspension regarding this matters.

Mr Makubela replied that there was not.

Mr R Ainslie (ANC) commented the important thing that the Committee had not stressed to this point was the effect that all of this had on was not talking about was service delivery. The matters raised concerned the most vulnerable people in society. He said the lack of financial controls was mirrored in the lack of service delivery. The Committee should discuss the possibility of having the AG doing some kind of an investigation into service delivery, and in deciding whether there was value for money.

Predetermined objectives
Mr Ainslie said the AG had indicated that about 56% of the targets were not reached. He sought clarity on claims adjudicated as they related to the target of improvement in compensation claims turnaround time. What was meant by “adjudicated”- he asked if this meant people who actually received their compensation.

Commissioner Mkhonto replied that after the reporting of an accident by the employer, and a medical report by the doctor, the Fund would “adjudicate” whether it accepted the responsibility. The item on the report referred to adjudication where the Fund accepted liability, and it was not payment.

Mr Ainslie said the raw test of the target on improvement in compensation claims was the actual number of people paid out, and not cases adjudicated. He requested that the CF use targets that gave a correct impression on whether service delivery happened or not.

Mr Ainslie also sought clarity on targets on medical services. He asked why only 67% percent of the targets were achieved against the 70% planned target, which was already fairly low.

Commissioner Mkhonto replied the process used to process medical invoices was manual and very tedious. It took a lot of time to capture. In the year in question the Fund had intended to automate the system, as that appeared to be safe route, but it was not achieved.

Mr Ainslie interjected and said that had not been done, and that it went without saying that there were enormous backlogs in compensation and medical claims. He asked for an indication of backlogs in the two areas he mentioned.

Commissioner Mkhonto replied that in January 2013, with the assistance of the Director General of the DoL and the Department of Health (DoH), the Fund had dramatically dealt with the backlogs in the medical area.

Mr Bafana Dingaan, Director: Compensation Claims, DoL, replied that in the area of compensation the backlogs were at 240 000 in February 2013, but at the end of March 2013 only  6 109 were still outstanding.

Mr Ainslie commented this was unbelievable, dramatic, and impossible to manage. He asked what the Fund had done.

Mr Dingaan replied that a backlogs rescue team was set up in all provinces.

Mr Ainslie commented that the figures seemed “unbelievable” and hoped they could be independently verified.

Commissioner Mkhonto commented he would personally prepare a report for the Committee on backlogs.

Mr Ainslie asked if he agreed with the figures bandied about.

Commissioner Mkhonto replied this was the same information he had, but he still needed to verify.

Mr Ainslie commented that paying people on time was critical and that he was surprised that information on backlogs had not been verified prior to the meeting. Verification of the statistic needed to be done immediately. He said he would prefer a detailed report on the matter.

Annual financial statements
Mr Ainslie pointed out that the report indicated that the Fund did not keep proper records and as a result it received a qualified audit opinion. He asked why that had happened, and why such a basic section of the PFMA regarding record keeping and financial statement was not being complied with. He asked if this had to do with issues of lack of capacity.

Mr Pitsi Moloto, Acting Chief Financial Officer, Compensation Fund, replied there were challenges, especially with a finding that occurred the previous year. This was being improved on, as the Fund was now implementing a new system that made it easier to retrieve information to put together the financial statements. It was now possible to do all reconciliations, but generally there was a challenge of skill and personnel in that area.

Mr Ainslie commented there were no improvements apparent from the latest Annual Report and if anything there was regression. He asked if the improvement would only be applicable in future.

Mr Moloto replied that the matter he referred to was around record-keeping. Previously the Fund found it difficult to reconcile between the operational system and the payment system. There had been dramatic improvements, especially at the end of 2012.

The Chairperson said the Fund was expected to get it right and not just to show improvement. Officials were employed to do the right thing.

Mr Ainslie said the report was damning on the internal controls environment. The audit committee found there was no proper control environment, assets were not being safeguarded, and that a lack of management ability resulted in increased fraud and corruption. The report did not engender much confidence. The report also spoke of the lack of ability and little progress in trying to improve the situation on behalf of the accounting officer. He asked what exactly was the problem and if any remedial action was taken to improve ability to ensure this kind of report was not a regular occurrence.

Commissioner Mkhonto replied that subsequent to the departure of the former CFO, the Fund had engaged the services of an Acting CFO to assist with financial management.

Appointment of various consultants
Mr Ainslie commented that a service provider was also appointed to assist as well.

Commissioner Mkhonto clarified that the Acting CFO (whom he later confirmed was in fact a consultant) was appointed soon after the former CFO had left, when KPMG was appointed to assist.

Mr Ainslie commented that KPMG was appointed at a fee of R39 million and yet the reporting was pitiful. He asked how this showed value for money and where exactly the improvement was to be found. He also pointed out that proper financial management and reporting formed a part of the Fund’s core functions, and yet it was outsourced to a consultant. There was no value for the money in his opinion and the situation had not improved.

Commissioner Mkhonto replied that in the financial year under consideration there was no assistance from the consultants.

Mr Ainslie commented again that there was no value for money, and it seemed that the Fund outsourced a number of its core functions at a tremendous cost. The question had to be asked – for what were the senior staff being paid? This was almost a case of parallel administration. The people who really needed to be at this meeting to answer the questions were all the eight consultants, whom he named, since it appeared  that the CF officials were a mere shadow of the real administration by consultants. Earlier in the meeting, reference was made to Siemens. The senior managers had taken a step back and allowed consultants to run the operations of the entity. He wanted comment on this perception.

Commissioner Mkhonto replied it was important to separate the issues. He cited risk management as an example and said in that aspect successes could be identified. A number of fraudulent activities had been identified, and cases were prosecuted.

Mr Ainslie observed that the audit committee report spoke of increased fraud and corruption.

Commissioner Mkhonto replied he meant to highlight the success stories that had been realised.

The Chairperson clarified that the essence of the question was whether this Committee was in fact engaging with the right people in the form of the officials, since in practice core functions were not being carried out by these officials, but by others. That called into question the value of the meeting because officials were giving responses, but at the end of the day they were not the implementers. Had the consultants been at the meeting they would give the Committee a better idea of why things were as they were. Even the person named as the new Acting CFO, appointed after the former CFO had left, was a consultant and he could have been of more assistance.

Mr Ainslie commented that SCOPA had heard of some strange things in the past, yet he had never yet heard of a consultant being appointed as “CFO” and then hiring another consultant. It was clear to him that there were in fact two administrative systems operating. He asked if the consultants were transferring skills in areas of debt collection, financial management, medical services, claims unit, and internal audit. He also demanded to know how much longer the Fund would be dependent on consultants.

The Chairperson quipped the Member was too eager for good news, as the Commissioner would simply indicate this was indeed the case.

Commissioner Mkhonto replied the responsibility lay with the managers in the respective units to ensure that skills were transferred.

Mr Ainslie asked if the skills transfer clause was provided for in all of the contracts.

Commissioner Mkhonto replied that they were. He said that after the Deloitte consortium had left, the internal audit unit was fully functional and the AG had been satisfied that reports from that unit were reliable. On risk management, the focus had been on operational risk.

The Chairperson returned to the point that he was now under the impression that the Committee was in fact talking to the wrong people, as they, despite supposedly being the officials in charge, could not give the right answers.

Mr Ainslie said it was unbelievable that R155 million was spent on consultants in a single year, whilst in addition the officials were holding their positions, at a huge cost.

The Chairperson wondered if there was any point now in continuing with the meeting, since it was apparent that those who, in practice were running the systems, were not present. The sense that Members had was that all statistics on backlogs were achieved by consultants, and hence the Fund leadership could not confirm if the figures were accurate.

Mr Ainslie said consultants had a vested interest, to ensure that problems continued, and they would be unlikely to “work themselves out of a job”. They would be needed as long as the financial reports remained poor.

Ms Chiloane agreed and suggested the meeting be postponed, and reconvened when the former CFO, the Acting (consultant) CFO and all other consultants were available. These officials were not assisting the Committee.

Dr George concurred with the suggestion and said the Committee was confronted with a “frontier” and was not sure what lay behind. The Committee should get the consultants in and ask the questions. Mr Ainslie’s comments were pertinent, because if consultants were guaranteed of their jobs continuing and unending streams of income, they would have no incentive to provide any real assistance.

Kgoshi S Thobejane (ANC) differed with the views of his colleagues and said that a postponement would not be in order, because the Committee needed to deal with the Fund officials, who were legally bound to account. The officials could not tell Parliament that they had hired someone else, whom they were unable to monitor, to do the job on their behalf. The officials should account and motivate for their reasons of outsourcing the core functions. If they failed, they should then tell the Committee why they should be kept in the employment of the Fund. This was the time the Committee showed leadership.

He asked if there was a performance agreement between the DoL and the Commissioner. If it existed, questions needed to be asked around his performance and if the Commissioner was found to be failing, he should be replaced. Section 86 of the PFMA stipulated that where there was a failure of an official to deliver, the Director General must consider disciplinary steps, including approaching law enforcement.

Mr N Singh (IFP) reminded the Committee that Members were looking at what had happened in the 2011/12 financial year. Whilst he supported, in principle, the idea that the consultants be brought to Parliament, he also felt that the Fund officials should explain whether inviting all these consultants would assist in finding exactly what had happened.

Mr Ainslie suggested that the meeting be continued, but also that the Committee set aside a date when the consultants would be invited to Parliament.

Dr P Rabie (DA)  pointed that when the consultants were invited, they should be accompanied by the officials.

The Chairperson, having considered the views of the Members, then ruled the meeting could continue, but also noted that very relevant points had been made about officials appointing consultants, although the officials were legally liable to account. If they failed to do so properly, then he fully agreed there was no reason to keep them in their posts. As much as accountability could be demanded from the consultants, they in turn did not have a legal responsibility to run the Fund. This was the task of the officials who were being paid to run the entity. It also needed to be noted that the private sector had a lot of things to say about corruption in the public service and yet often the private sector was equally guilty of perpetuating it.

Supply chain management (SCM) policy
Mr Ainslie asked if the Fund had an SCM policy, and, if so, if it was effective and implemented.

Mr Moloto replied yes, and said the policy was adopted in 2010. There were hiccups here and there.

Mr Ainslie retorted that the Fund could not have “hiccups”. The finding of the AG was that there was no SCM policy at the Fund, and it seemed to be a free-for-all. Performance of contractors was not monitored, there was no fraud prevention strategy that provided measures required by regulation, and the Fund did not make provision for selection of members for the bid adjudication committee. The report contained damning findings on irregular and wasteful expenditure.

Mr Moloto said there was an SCM document and it was available.

Mr Ainslie said the Committee would like to have the document, and to have a definite indication whether the policy was being implemented.

The Chairperson said the issue was not whether the document was in place or not, but whether it was being implemented.

Fruitless and wasteful expenditure
Mr Ainslie sought clarity on fruitless and wasteful expenditure that seemed to have increased from R9 million to R14 million. There were three noticeable incidents – the Annual Report claimed there were investigations on the interests charged on overdue accounts amounting to R1.5 million, and yet no investigations were indicated on the R10 million delays charged by Siemens, and another matter from 2008 regarding late payments to SARS. He asked for a progress report on the investigations that the report claimed, and wanted to know why the other two incidents were not being investigated. He also asked who was responsible for this dereliction of duty, and why no action had been taken against such individuals.

Mr Moloto replied the R1.5 million related to money paid to Compsole. There was a court order that instructed the Fund to process Compsole’s invoices within a specified period.

Mr Ainslie interjected and said that was in the Annual Report already; all he wanted to know who failed the Fund and if such a person had been disciplined.

Commissioner Mkhonto replied no one was disciplined, as the challenge was generic and systemic challenges existed in the processing of medical claims.

Mr Ainslie said the matter appeared to be simply ignorance, as someone had ignored to pay the account.

Commissioner Mkhonto replied it was not a case of one account. Compsole would submit claims on behalf of a number of doctors.

Mr Ainslie commented that it appeared to be that despite the investigations, no action against anybody was deemed necessary. He sought clarity on the R10.2 million relating to Siemens.

Commissioner Mkhonto clarified that Siemens indicated the system was ready for implementation on 1 April 2011. It was realised that data migration and some functionalities in the system could not be provided. That resulted in delays. The Fund was advised to move with speed in implementing once Siemens had delivered the system so as to avoid delay and extra cost. However, when the system went live it was realised that the system was dysfunctional. The Fund looked to recover penalties, and the matter was still ongoing with the new service provider who had since taken over the contract. Post implementation audits had been undertaken to identify whether the Fund was to blame.

Mr Ainslie commented this statement vindicated the AG’s finding that the Fund did not monitor contracts, otherwise it would have known, well in advance, that Siemens was not ready to deliver.

Commissioner Mkhonto replied that the public-private partnership (Triple P)  contract was transversal and was managed by the Department. A query was raised that the Fund was responsible for liabilities, but when the product was delivered it was realised the product was incomplete. A counter claim was instituted.

Mr Ainslie asked if it was possible that the money would be recouped.

Commissioner Mkhonto replied the CFO was looking into the matter, and a report would be in future be prepared on the matter.

Mr Ainslie asked sought clarity on all the cases that were being investigated, and requested that a consolidated list, with as much detail as possible, of all investigations be availed.

General items
Kgoshi Thobejane asked if there was a performance agreement between the Commissioner and the DG, and if such agreement was regularly evaluated.

Mr Nhleko replied that there was, and that it was evaluated annually.

Kgoshi Thobejane asked about the position of the Director General in relation to what had transpired at this session.

Mr Nhleko replied he had hoped the meeting would not get to “that point” as that would be for a different platform. He profusely apologised and said he felt ashamed about what had transpired. The question by the Member was valid. Whilst there were some interventions but the focus needed to be on the report. He was reluctant to reveal steps to be followed but said the situation had to be attended to.

Kgoshi Thobejane asked how much time the DoL and the Director General required in order to attend to all the issues that had been raised.

Mr Nhleko replied that this could be done the next time the Department appeared in Parliament.

Kgoshi Thobejane quipped and said the Director General was obviously hoping that the same Members would not be on this Committee after the elections. However, on a serious note, he added that the situation required urgent intervention and if it was left as it was for too long, Members would be seen to have failed in their duties.

Mr Nhleko replied he accepted that, and said that before the financial year end the Department should provide a report.

Kgoshi Thobejane said there was prima facie case of gross negligence, and failure to comply with the laws. He suggested that the Department of Labour be given six months by which to indicate what interventions it had taken.

The Chairperson reminded the officials from the CF and the DoL that essentially Members had stressed that this was not the first time this Committee had needed to interrogate issues with this entity, and in all the instances, previous explanations and remedial action that the CF should take were provided. The Committee was now simply saying that the usual conclusion of taking remedial action would not be sufficient and there needed to be consequences.

Kgoshi Thobejane sought clarity on the R8.1 million and R1.5 million figures listed as bonuses. He questioned how bonuses could be warranted if this was the status of affairs at the CF.

Commissioner Mkhonto replied that at lower level there was a performance management committee that dealt with the money. Motivation was made to the evaluation committee which in turn liaised with the national review board at the Department. The information would be further expanded on and made available to the Committee.

Dr George commented that too many questions had been asked that were not adequately dealt with. A lot of money was spent and the Committee could not wait until next year. Something had to be done. There was a very strong case that could be pursued through the law enforcement agencies. The Department should be called back soon, together with the consultants. If consultants exploited incapacity they should be held to account. He pointed out that corruption was two way process between government and the private sector. It could not be allowed, something should be done about this.

Mr Singh said another element that needed to be considered was the position of the board members. They surely should take responsibility, as they were well paid. He suggested that two months be given to the Department and felt that this would be quite adequate in view of the fact that more immediate interventions were required.

Dr Rabie proposed that the Minister be present for the follow up meeting, as there were political considerations on the CF issue.

Closing remarks
The Chairperson requested that the meeting halt at this point. All officials were urged to think carefully about what had been said.  Before the end of the year the Committee was expected to write recommendations to Parliament. The follow up meeting needed to happen sooner than the DoL had requested. He reiterated that the situation of the CF had resulted in much frustration among Members. The entities dealing with vulnerable people should be effective. From the Committee’s perspective, this kind of use of consultants were simply not acceptable. From time to time consultants could be invited to carry specialised functions, but entities should not have them perform administrative duties full time. The report of the AG on consultants earlier in the year did not make for any good reading.

The meeting was adjourned.


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