Progress Report on what DPW is doing in addressing non-paying client departments & fixing their billing system

Meeting report

Non-Paying Client Departments & Fixing the Billing System: Department of Public Works progress
Overview
Mr Cox Mokgoro, Department of Public Works (DPW) Chief Financial Officer, gave a brief overview of the presentation - recap on root cause for client - non payment, update on prior year engagement, property Management Trading Entity (PMTE)  Current Operating Model, PMTE Debtors Status and action plans for recovery, and High level PMTE Information Technology (IT) System Rollout Plan.

Recap on root causes for non-payment by clients
- Previously, no binding agreements between DPW and client departments’ service level agreements (SLAs)

- Minimal enforcement of the Government Immovable Asset Management Act (No. 19 of  2007) (GIAMA) by DPW re: User Asset Management Plans (UAMPs) as bidding process documents with National Treasury for client departments' budget allocations

- Lack of capacity within client departments for compilation of UAMPs

- PMTE not yet in position to provide itemised bills to clients

- PMTE only billed clients on basis of devolved budgets

- Due to above, clients resistant to pay as the Auditor-General of South Africa (AGSA) raised findings with payments made but not supported by detailed itemised bills.

Recap on prior year’s engagement
- Service Level Agreement was developed as the preferred form of agreement to bind User Departments and DPW in terms of agreed Service Delivery Standards.

- Service Delivery Standards (SDS) were developed

- Both the SLA and the SDS documents meant to entrench the delivery of accommodation services according to agreed turnaround times, performance measures and business processes.

Progress re: Conclusion of SLAs with clients
In the financial year 2012/13, 21 departments out of a total of 33 had signed Service Level Agreements with the national Department of Public Works. 11 Departments had not signed SLAs.  This amounted to a 64 % level of compliance. (See table, slide 5)

PMTE Current Operating Model
- PMTE= Trading entity/account of the DPW since 2006 but never operationalised

- Traded under the control of the Department

- The Accounting Officer (AO) of the DPW=AO of the PMTE

- Purpose of the formation of the PMTE: Ring fencing of revenues and expenditures (including related balance sheet items) relating to the property management function (including construction and maintenance) of the Department

- Main benefit – Any revenue generated might be retained by PMTE to run itself if declared to National Treasury and approved

- Incentive to perform better

- Ultimate goal to be self-sustaining: the PMTE  would recover its cost from the revenue generated from clients rather than from the allocation from DPW (Treasury).

- Reality – this was a long way off

- Why? Unable to effectively / accurately determine cost recovery of PMTE due to –

- Incomplete and inaccurate records relating to which clients occupied which of state- owned and privately leased premises (i.e. square meters occupied)

- Outdated/ manual matching of expense recoveries (risk of under recoveries)

- Lack of proper systems for recording invoices issued - manual Microsoft (MS) Excel system

Currently mismatch between the fact that the revenue and expenditure from the Departments property management function was accounted for in the PMTE’s financial records but the:

- Immovable Assets (Buildings and land) that generated part of this revenue, and for which the expenditure is incurred, was accounted for in the Departments financial records.

- Capital expenditure – not capitalised – no proper record of asset value

- Capital budget with clients departments but assets within DPW

- An interim business case for the PMTE was approved by the Director-General (DG) at the end of March 2013 effectively transferring the property management functions (and related business units) from DPW to the PMTE effective 1 April 2013(next financial year)

- This meant that the immovable assets would only be accounted for by the PMTE in the 2013/14 financial year

- The functions and related staff would also move in the 2013/14 year

- PMTE required to prepare annual financial statements (AFS) according to Generally Recognised Accounting Practice (GRAP) as opposed to modified cash basis

- Challenge was convert accounts from modified cash basis to GRAP

- Extensive manual process to perform the conversion

The PMTE Current Operating Model 
The way this model works was 'execute now and recover later'. The cash flow timing difference was about 60 days delay due to the fact that the client was only invoiced after DWD had paid.

The PMTE Current Operating Model: bank overdraft 
This resulted in running a high bank overdraft that currently ran at R1.4 million for 2013 (See slide 9 and graph slide 10). At least R800 million of the overdraft could be accounted for by the time difference between payment to the supplier and receiving of funds from the client. The balance of the overdraft was due to older outstanding debt and had improved over the last three financial years.

The PMTE Current Operating Model: source systems
(see diagram, slide 11)

Need to procure information technology (IT )system for PMTE

- Migration to accrual based accounting

- Compliance with GRAP requirements

- Automation of the billing process and possibly also certain future PMTE business processes to enhance operational efficiencies

- Operationalisation of the PMTE as a standalone business entity

- Current systems not integrated across the business

- Extensive, Legacy Data Quality issues (Systems and manual)

PMTE Debtors Status
Progress Since the meeting of 13 November 2012

A debt collection division was established in October 2011

- The structure consisted of three ASD and one  DD (slide 14)

- Impact to date was that outstanding debts could be substantiated with proper supporting documentation

- Monthly process relating to debt collection was:

- Preparing statements and issue to client departments

- Send reminder letters to follow up on outstanding debt

- Meeting with the client departments

-Prepare age analysis

Age analysis as at 31 March 2013
A table of the age analysis as at 31 March 2013 is given on slide 15.

PMTE Debtors analysis as at the end of March 2013
The PMTE has a debtor’s balance of R 2.3 billion at the end of March 2013.

- R1.4 billion relates to debts outstanding for the current financial year.

- Focus meetings will be held with clients during June to August to analyse the individual accounts.

Top Five Clients
Mr Mokgoro then explained that the Department had analysed the top five clients in terms of debt owed to them. He then briefed the Committee on the situation of each department – Defence, Justice and Constitutional Development, International Relations and Cooperation, Correctional Services, and the South African Police Service (SAPS).  (See slides 17-26 of the document.) 

Way Forward 2013/14
Mr Mogkoro referred to private leases (lease out), accounts receivable, revenue and billing (2013/15), clearing payable: advance account, need to engage the National Treasury, and revisit the devolution of budgets matter. (See slides 27 and 29)

Reconstruction of private leases
Mr Mogkoro explained. (See slide 28)

PMTE IT System Rollout Plan
Mr Mokgoro then outlined the Payment Monitoring Trading Entity (PMTE) IT System rollout plan giving the dates of the proposed IT Software Rollout Plan. (See table on slide 31). The proposed date for this system to go live was March 2014. He also outlined all the considerations involved in rolling out a business automation process noting that the current starting position was not aligned to best practice and there was a risk of imminent systems failure in the medium to long term.

Considerations to rollout a business automation process
Mr Mogkoro then briefly explained the nature of the business requirements of the PMTE IT System and its specifications. (See slides 30-35).

Discussion
The Chairperson reminded the Department that in the last briefing she had requested a list of the clients owing and this list was not forthcoming. She noted that the response from the Department was that the Committee members were not privileged to see such a list.

The Chairperson noted that the Committee had been informed that National Treasury owed the Public Works Department R1.9 billion. The Chairperson wanted to know if the Liberty building in Durban was being hired while no one was using it.

Mr N Magubane (ANC) stated that he had referred to the building in Durban opposite the Liberty Building which was nor being occupied but he had found out that CBS was renting it.

Ms A Dreyer (DA) noted that the debt for private accommodation was the biggest and she could not understand why.

She asked why the bank overdraft for the Department was sinking deeper into debt and what agreement had the Department reached with the bank.

Ms Dreyer queried the outstanding amounts on municipal service debt and asked why the department did not pay water, sewerage and electricity bills. She asked why there services were not terminated due to non-payment.

On the issue of Information transferred she queried why the Department had no backup system and she wanted to know what procedures were being used.

Ms P Ngwenya-Mabila (ANC) noted that there was a list prepared of money owing to the Department by its clients. 

On the Service Level Agreements issue she asked why some Departments did not need SLAs and how many they were. She noted that UAMPS was supposed to be discussed in a workshop with the Departments. She asked what was the Department planning to do with old debts and she noted that the Members had not been informed about all the departments that owed little amounts.

She noted that the Department was conducting an exercise in reconstructing the amounts for the outstanding leases and wanted this explained. She noted that the bank overdraft was far too high and was of concern to the Committee. The plans tabled had been done before and she requested a progress report on the implementation.

Ms C Madlopha (ANC) wanted to know the Department's policy on debt write-off. She asked what progress the Department had made on the PMTE system. She advocated that the departments should pay in advance. She noted that old debt kept recurring.

Mr K Sithole (IFP) noted that the Department was still in a crisis, since Mr Mokgoro had said that one must not panic about the huge overdraft. This was the wrong attitude. Had the Department the capacity and policy to deal with things. He expected a progress report from the last year until now.

Ms N November (ANC) stated that the government stood accused of being 20 years in existence while nothing was happening. Had DPW the necessary capacity or was this just another case of poor governance?

Ms N Ngcengwane (ANC) noted that this was a very sad state of affairs and it seemed that the minimal enforcing of GIAMA was giving problems. The Department bought an IT system in 2006 at great expense but it just sat and just gathered dust. The Department had leases agreed to and did not know the square meters of the building concerned. She referred to slide 10 on the bank overdraft and could not understand how the Department could maintain that a R1.4 billion overdraft was not a risk.

She asked what were the invoices based on. She asked for the private leases to be identified and why there was no back up for the lost data. She asked how a dispute occurred if the Department had the correct dimensions of the building available. The Department was going backward.

Mr J van Der Linde (DA) stated that the Department's problems represented a sad state of affairs as they took so long to sort out. He noted that the leases could be billed and the Department could pay the municipal services. He felt that payments should be made more quickly and only new property leases would be a problem. Capacity was a problem with the Department and he cited Nkandla as an example.

The Chairperson interjected that Nkandla was a private trust and Mr Van Der Linde was being 'naughty' to bring up this topic which was not relevant to this debate.

Mr Mogkoro replied that he wished to provide the context within which the Department acknowledged these challenges and the failings. He noted that the Minister had come into the Department and announced a major turnaround strategy that was put in place in 2012/13 and this strategy took time to show results. He acknowledged that the Committee members were requesting a briefing on the progress. He noted that the lease review had progressed and this meant it could be completed by the end of September. The Department would be able to report on the improvements at the next meeting.

Mr Mokgoro noted that Asset Registers were central and up till this point they had not been credible. In the Department's plan considerable progress had been made and the project would be completed in March 2014.

He noted that a clean Audit Outcomes Project was also underway and he appealed to the Committee that the turnaround strategy would take time to yield results. The Department was in a period of transformation and he was fully aware that this had to be done quickly. He felt that some of these issues were systemic but he assured Members that the Department was in full control of the process.

Mr Mokgoro stated that the bank overdraft had been R2.4 billion and it had been reduced to the current level of R1.4 billion, which was a significant improvement. He ascribed the increase in debtors to the reconstruction of the debtors and because of this effort the Department had uncovered additional amounts of debt.

Mr Mokgoro apologised to the Committee Members that the list of outstanding debtors was not given to the Committee.

The Chairperson informed him that she had received the list.

Mr Mokgoro noted that there were issues relating to the old debt and the Department would not go on a wholesale debt write-off because it was subject to the strict regulations of National Treasury in its debt write-off policy guidelines. Demonstrable evidence was required to prove that the amount was not recoverable.

Concerning the state of the bank overdraft, he apologised to the Committee for saying that there was no need to panic about the overdraft amount. R 800 million of this money related to money not subject to risks. The other R600 million balance outstanding related to older outstanding debt that had improved over the last three financial years. The Department was doing a reconstruction and was going through a process with its clients to recover the money.

Regarding the operating model being used by the Department he noted that this was something on which the Department had to engage with the National Treasury because it was saddled with this operating model as well as the devolution of the budgets.

The Chairperson inquired if the Department of Public Works ever had a clean audit.

Mr Mokgoro replied in the affirmative that for the main vote in 2013/14 the Department expected it would get a clean audit with the exception being PMTE, for which it expected a qualified audit because it was 'incomplete'.

He stated that the following year would be a different story. The attitude of the Department was not that that of panic but rather one in which it was in charge and had set itself an objective that it would achieve.

The Chairperson asked Mr Mokgoro to fully answer the question of Ms Dreyer.

Mr Mokgoro responded that what was owed was revenue to the landlord. The Department had to pay and recover the money from the department renting the property.

Ms Dreyer thanked him for the clarity.

Mr Obed Molotsi, DPW Chief Director: Projects, noted that the Department had an agreement with the South African Local Government Association (SALGA) and it looked at improving the situation in Mpumalanga.

Ms Ngcengwane noted that municipalities did sometimes terminate their services and she asked why not claim in advance. She appealed for the Department's support and mentioned the complaints of losing control of the infrastructure budgets.

Ms Madlopha suggested that the Committee engage with National Treasury on the incentive grant model as the Department was struggling to change the system of municipal payment. She noted that the Department was battling to get the money from client departments and if they paid in advance this would solve the problem of the bank overdraft.

The Chairperson wanted to know what was in the Service Level Agreements because it looked as if there were gaps in the SLA that needed tightening up. She added that some of the clients had not signed the SLAs. She stated that the SLA’s must be implemented. 

Ms Ngcengwane stated that in North West province the problem with billing at municipal level was that one did not know whether to bill the national or the provincial Department as some of the assets were not identified as national or provincial.

Ms Dreyer questioned whether SAPS had its own special form of lease with private property owners and cited Worcester’s regional police headquarters as an example. She wanted to be informed what the arrangements were.

Mr Butcher Matutle, Deputy Director-General, DPW, responded that the issue of leases had been one of the biggest problems. He noted that a structure had been implemented called the Bid Application Committee which did an evaluation of all the leases to see that they were all correct. It had already visited Mpumalanga, Johannesburg, Polokwane, Mmbatho, Durban and Cape Town was last on their list. This would be concluded in December 2013 and those to be renewed would be nominated. Good progress had been made and post September the Department would report fully.

He replied to Ms Dreyer that a plan must be submitted, then based on these considerations the Department acquired a suitable property.  On the basis of this the Department then made its recommendations. 

Ms Mabila wanted to know was the turnaround time for compilation of the UAMPS because most departments complained that the time taken was very long. It was often found that they did not have the capacity to compile the UAMPS.

Ms Dreyer asked if SAPS had a special arrangement and sometimes negotiated directly with the private owner.

Mr Van der Linde asked how far the Department was with those outstanding SLAs not signed by the departments.

Mr Sithole asked that a copy of the list of smaller clients that the Department was focusing on to be sent to the Committee Secretary.

Mr Mokgoro stated that there was no special dispensation for SAPS. However, clients had become frustrated and resorted to their own negotiations but the Department wanted to win back their goodwill.

He noted that a process to conclude SLAs and address the capacity of UAMPs was the reason that the Department decided to support joint teams with clients. This would help in the compilation of the UAMPs and it was a Departmental intervention rolled out from 01 April 2013.

He stated that the Department would provide a plan of transfer of the functions from the main vote to PMTE.

Mr Mokgoro referred to the rest of the 46 clients and he advised the Members that the Department was doing very much the same as it was doing with the top five clients. The Department was putting all its efforts into recovering money.

He elaborated on why it took so long to respond to clients. The Department's systems were 'just so slow' and the supply chain management (SCM) process was not suited for leases but was good for goods and services.

He noted that to provide a building was not the same as providing for catering. The department was arguing for new prescripts.

Ms Juanita Prinsloo, DPW Chief Director: PMTE then addressed the issue of last data. The data was not lost, but remained in the system. However, the Excel programme did not have enough lines to accommodate it all when downloaded.

The Chairperson thanked Members and delegates and adjourned the meeting.