State Theatre Missing Funds: briefing by director general

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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

21 June 2002

Mr F Beukman (NNP)

Documents handed out
Special Investigating Unit Final Report
Executive Summary of SIU Final Report (see Appendix 1)
Introductory Notes by the DG of Arts, Culture, Science and Technology (see Appendix 2)

Relevant news article:
Report on irregularities at the State Theatre closer to finality Business Day 20/6

The Committee heard from the Director General of the Department of Arts Culture Science as to the background of the State Theatre's missing funds and the steps that have been taken to recover these funds. The money had been used to set up a slush fund - the State Reserve Fund in 1989. From 1989 to mid-1995, the fund grew from R1, 7m to about R18m. PACT/State Theatre board members had invested the slush fund money in a pyramid scheme.

The Director General reported that he had met with the National Director of Public Prosecutions, and the matter had been referred to the Organised Crime Unit to investigate the liability of those PACT/State Theatre board members who set up the State Reserve Fund.

The Special Investigating Unit was mandated to investigate the State Reserve Fund (SRF). A former board member of the then Performing Arts Council of the Transvaal (PACT) blew the whistle on possible corruption. The investigation showed that PACT intentionally misrepresented its actual financial position for a considerable period of time, and a total amount of R24m was received in the SRF, which PACT itself had established.

The Report showed that the actual business conducted by the SRF fell outside the type of business conduct authorised by its Memorandum and Articles of Association of the Section 21 company, SRF. A public body such as the then PACT could not be allowed to build up secret funds and then convert these into a voluntary retrenchment fund, as this is clearly unlawful conduct. DACST continued to fund the State Theatre and grant it subsidies, and the Board decided to invest in the Scot Asset Management. An investigation clearly showed that the State Theatre was misled on the viability of this investment.

The Committee concluded that timeframes for the tasks to be completed by all relevant role-players (Public Protector, SIU and the Department) should be furnished, so that a date may be arrived at when all the relevant information would be available in order to decide whether to pursue civil and criminal litigation.

The Chair informed the Committee that the purpose of this meeting is to ascertain the factual situation and progress made to date regarding the State Theatre. The matter will then be referred to a subgroup, which would recommend the route to be followed to take the matter forward. Thus a resolution on the State Theatre would only be released in the third term of Parliament.

Briefing by the Special Investigating Unit (SIU)
Adv Gerhard Visagie, the SIU Projects Director, informed Members that he would only be dealing with the most relevant points contained in the Special Investigating Unit Final Report (the Report).

He wished to thank Mrs Meridy Wixley, a former board member of the then Performing Arts Council of the Transvaal (PACT) and one of the whistleblowers, for the important role she has played in the investigation. It is noted under point 2 entitled "Division of Investigation" that the SIU was mandated to investigate the State Reserve Fund (SRF) alone, so that any duplication of the investigations that were being conducted at that time by Deloitte & Touche into PACT could be avoided.

Point 4 deals with the history of the SRF from 1989, and provides a detailed account of PACT's involvement in this fund, the financial situation and eventual intervention by the whistleblowers. It clearly indicates that PACT intentionally misrepresented its actual financial position for a considerable period of time, and a total amount of R24m was received in the SRF, which PACT itself had established.

"The Unlawfulness of the Special Reserve Fund" under Point 5 of the Report provides that the actual business conducted by the SRF fell outside the type of business conduct authorised by its Memorandum and Articles of Association. Furthermore, a public body such as the then PACT cannot be allowed to build up secret funds and then convert these into a voluntary retrenchment fund, as this is clearly unlawful conduct.

Point 6 deals with "The Unit's Approach Regarding Recovery of the Fund", and provides that all the relevant role-players were aware that the SRF was operating unlawfully. The Department of Arts, Culture, Science and Technology (DACST) recognised that fact that pursuing the recovery of the money would only result in resources properly owing to the arts community being lost, as PACT would spiral into bankruptcy. An impact study was thus conducted into the effects of pursuing the recovery of the money, and in September 1999 it was decided that the SRF would be kept separate from the State Theatre. The result was that no litigation could be instituted against the State Theatre because there was no justiciable dispute amongst the parties to found a civil action. This problem was further complicated by Section 31(3) of the Constitution which provides that organs of state may only sue each other once all other available remedies have been exhausted.

"The Scott Asset Managers Debacle" is detailed in Point 7 of the Report, and provides that members of the PACT board were duped into investing in Scott Asset Managers (SAM), but this turned out to be nothing more than a pyramid scheme. The net result was that the withdrawal cheque "bounced". Included under Point 7 is a financial statement of the withdrawals and investments of the State Theatre from 1 August 1998 to December 1999, which indicates that the final derivative trades figure stood at R41m, but the actual balance brought forward amounts only to R10 000.

Point 8 of the Report deals with "The Present Position of the State Theatre", and suffice to say that it has been accepted that the money invested in SAM has been lost. Point 10 details the liability of the various parties involved.

In conclusion Point 13 suggests that public funds must henceforth be regulated by the Public Finance Management Act (PFMA) "to ensure proper control when dealing with public funds". Furthermore, the board members of a Section 21 company must at least have some knowledge of financial issues, and this was clearly not the case with the PACT board, hence the problems created.

Briefing by the Director-General of DACST
Dr Rob Adam, the Director-General of DACST (the DG), informed Members that many of the sentiments expressed in his presentation have already been covered by Adv Visagie. The presentation also details the history of the PACT and its financial transactions resulting in the establishment of the SRF, the forensic investigation conducted by Deloitte & Touche in October 1996, the involvement of the SIU and DACST and the extensive consultative process engaged by the relevant role-players.

In September 1999 an impact study was conducted to inform the SIU on the recovery of the balance of the SRF from the State Theatre, approximately R16m, and the decision was taken to separate the SRF from the State Theatre account.

During the period 1 July 200 to the present, both a preliminary and final report has been received from the SIU as to the action to be taken against the individuals and entities responsible. The current financial position of the State Theatre is that it is solvent and able to meet all its liabilities, subject to the possible R24m claim of the State, and currently operates with a permanent staff complement of only 90 as opposed to the 477 employed previously.

In conclusion, DACST supports the assertion by the SIU that it is inappropriate for Section 21 companies to be used an mere conduit pipes "for organisations receiving long term funding from the State". DACST welcomes the vindication of its contention that neither the Minister nor the DG of DACST can be held liable for the financial losses incurred by PACT/State Theatre.

Briefing by Mrs Meridy Wixley
Mrs Wixley informed Members that she was not aware that she would be addressing the Committee during the meeting, and stated that her input would be made rather "ad hoc". She has not yet had the opportunity to consider the Report, and would like to make a proper submission once it has been considered properly.

If the Report presented by the SIU is indeed the final version, why have items four and five under the "Schedule" in Point 1 of the Report not been discussed or detailed in the body of the Report? These matters were mentioned by Adv Gary Pienaar, from the Office of the Public Protector, but no further progress has since been made in this regard, despite the fact that these two aspects have a large impact on the liability of the parties responsible.

Furthermore, at the bottom of the issue is the commission of fraud against the State which no-one seems to be prepared to concede, despite the fact that it has been occurring since 1989. The investigation has to return to the place where the fraudulent activity first began: the National Revenue Fund (NRF). Yet Deloitte & Touche failed to label this conduct as fraud in its forensic investigation conducted as far back as 1998, even though it had itself identified fraudulent activities within the NRF during that study. It is contended that the current problem would not have been allowed to transpire had the matter been dealt with by the then Exchequer Act, and in that year the fraudulent funds should have been returned to the arts community.

Both the Minister of Arts, Culture, Science and Technology (the Minister) and the DG "did nothing" from 1994 to 2000, and as a result of their failure to act the money invested in SAM has now been lost. This would not have occurred if they had taken positive steps to address this matter. In fact, the Minister himself appointed the directors of the PACT/State Theatre board and could himself remove them from office, as he had been granted complete control here by the Articles of Association of the Section 21 company.

Also, the opinion of Adv Visagie regarding the occurrence of fraud shifted from one opinion to the other within the period of one month. How could this come to pass? The whistleblowers were kicked off the board for reporting mismanagement of funds and fraud, and were not even provided with a copy of the SIU Report. Adv Visagie himself acknowledged the existence of fraud, yet proceeded only to hand the matter over to the Office of the Public Protector. The approach advocated by Adv Visagie seems to suggest that there would be no dispute or fraudulent activity as long as the parties involved concede that fraud has indeed been perpetrated, as seems to have been done by Mr Van den Berg, the State Theatre Financial Director.

Yet DACST continued to fund the State Theatre and grant it subsidies, and under this financial management dispensation the decision was taken to invest in SAM. A Mr Sinclair convinced the State Theatre board that SAM would be able to convert the R16m into nothing less than R85m. Yet when he was asked whether this is actually possible he answered in the negative. The most surprising development here however is that, despite this response, the board stood firm in its decision to invest the R16m with SAM, and with Mr Ken Scott and Mr Sinclair, who turned out to be members of the State Theatre's ad hoc opera.

The Chair invited Adv Pienaar to comment at this stage.

Adv Pienaar replied that he would not respond at this time, but wished to inform Mrs Wixley that items four and five in Point 1 of the Report do form part of the Public Protector's current and ongoing investigation into the State Theatre matter.

The Chair thanked the presenters for their input, and opened the floor to questions from Members.

Mr D Gumede (ANC) wished to thank Mrs Wixley for the critical role she has played both in exposing the disparities and in the investigations. It is evident that the quality of the investigation cannot be commented on at this stage, but it is important that the different mandates of the various bodies involved in this investigation be separated and clarified. A duty of care in dealing with state property and assets has to be ensured, as well as possible criminal and civil liability and the party responsible.

Mr Sikkie Kajee, Director of Gobodo Risk Management, replied that the Scott estate has been sequestrated in an attempt to recover some of the funds, and SAM itself has gone into liquidation. A Section 417 inquest was conducted in an attempt to trace the assets, and to date a total of R15-20m has been recovered. Yet the actual amount recovered after all the liquidation costs have been covered is not certain at this time, as the remaining amount also has to be used to settle a claim of approximately R100m. DACST aims to claim R25m, but it was decided that it would be in the best interest to reach some sort of settlement, which was concluded.

The net result is that the State Theatre would only be able to recover funds from SAFEX (South African Futures Exchange) for failing to alert DACST as to the suspicions regarding SAM. A civil claim could also be filed against those board members who invested the funds into SAM, but considerations such as the likelihood of success and the amount recoverable are important factors here.

As regards criminal acts, DACST met with the National Director of Public Prosecutions, and the matter was referred to the Organised Crime Unit to investigate the liability of those PACT/State Theatre board members who set up the SRF.

Secondly, Mr Gumede stated that, with regard to the PFMA and the Exchequer Act, the DG is the accounting officer and the Minister is held politically accountable. Yet this situation can become complex, especially when a juristic person is involved, such as the PACT. There has to be clarity regarding what is expected from the SIU, DACST, the Public Protector and this Committee and the feedback that has to be given by each party. In this regard Mrs Wixley has to be kept fully appraised of all developments as well.

The DG replied that, as far as the PFMA is concerned, the DG is not the accounting officer of PACT/the State Theatre, to which the funds were transferred. The DG stated that, in fact, he was not aware of any other DG's that bore this responsibility, because it would be too risky and would result in every DG demanding all parastatals be absorbed into government. The reason is that there would not be a definite way of accounting in the manner required by the PFMA, and a "pact" is therefore entered into with civil society to carry out the business of government in a mutually beneficial manner.

Mr B Nair (ANC) agreed with Mr Gumede and the pivotal issue here is whether, objectively, there is any possibility that the money that has been lost can be recovered at all. It is understood that this matter is being investigated and that the identity of the culprits are known. SCOPA has to ensure, by exercising its oversight function, that state property and resources are protected.

The DG replied that in July 1998 Deloitte & Touche were contracted to conduct the forensic investigation, and the issue of fraud arose here for this first time, and in April 1998 DACST had already employed the assistance of the SIU in this regard and the Office of the Public Protector. It was recognised that DACST itself has a limited competence to conduct a proper and thorough investigation into such matters, and for this reason the decision was taken to employ the services of the SIU and Deloitte & Touche.

Furthermore, Mr Nair contended that the argument has been made that PACT/the State Theatre is a Section 21 company and is therefore entitled to a relative degree of independence from the PACT/State Theatre board. Yet the fact of the matter is that DACST continued to dispense funds to this entity whether it is a Section 21 company or not, and it does not follow that DACST continues to dispense such funding despite the fact that the entity fails to account for the funds allocated to it. Thus the issue of the accountability of these bodies is important here, and should they fail to properly account for the funds, the funding should in future be immediately revoked.

It has to be accepted, in the DG's defence, that his predecessor was in fact handling this matter when it first arose, but the general principle which has to be observed here is that the DG must keep his/her finger on the pulse of such entities, so that all incidences of fraud may be nipped in the bud. This matter has to be investigated properly so that SCOPA can be provided with all the relevant and accurate information to enable it to properly exercise its oversight function, and to evaluate whether the funds could still be retrieved or whether they should be written off.

Also, information is required as to whether any of the assets of Mr Scott have been attached, as this would assist in tracking him down and bringing him to justice.

Mrs Wixley agreed with the sentiments expressed by Mr Nair, and stated further that a proactive way forward has to be identified. The efforts made to reclaim the assets of the errant board members of PACT/the State Theatre are to be commended, but this matter has been allowed to continue unresolved for such a long period of time that these directors have disposed of these assets by now.

The SIU empowering legislation requires findings of fraud to be reported, yet this was not done by the SIU after it had completed its investigations. The last paragraph under Point 10(e) of the Report stipulates that civil litigation might be taken to recover some of the funds, yet no further mention of this has been made since.

The Chair agreed with Mr Nair that an objective overview of the way forward has to be arrived at, as well as the time frame for such progress, as mentioned by Mr Gumede. In this regard, the Chair inquired as to the reason for the fact that DACST is still attempting to resolve this issue after so many years have already elapsed since the disparities were reported.

The DG replied that he only became involved in the matter after his appointment as DG, and thus the initial events and decisions taken by relevant role-players such as the SIU transpired before he took office.

Secondly, the Chair requested clarity on the steps or measures taken and planned by DACST to ensure that this matter is resolved expeditiously.

Thirdly, the Chair requested the DACST delegation to explain the measures it has taken to ensure that the funds that have been salvaged to date are kept safe.

Adv Visagie replied to the earlier concern raised by Mrs Wixley, and informed Members that he did not personally acknowledge the existence of fraud, only to then turn around and deliver a statement to a national news publication that no fraud was fund to exist. Furthermore, regarding the questions on Items four and five under Point 1 in the Report, the last paragraph under Point 2 does refer to Section 5(6)(b) of the SIU Act. It indicates that it has been decided that Items four and five would be referred to the Office of the Public Protector, and is supported by paragraph (k) under Point 4 of the Report.

Mrs Wixley agreed with the statement by Adv Visagie.

Adv Pienaar added that the Office of the Public Protector does not expect "any surprises" from its investigation into Items four and five, and in this regard the findings of the Deloitte a& Touche study will overlap with its own.

Mrs Wixley suggested that the Public Protector not be included in this investigation as it has stated that it would make its own finding "regardless of the proven facts", yet the "proven facts" clearly indicate fraudulent activity. It is thus recommended that the view expressed by the Public Protector in this matter should not be accepted, and that a judicial commission instead be established or enlisted to resolve this matter.

The Chair requested Adv Pienaar to explain the time frame anticipated for the completion of this investigation.

Adv Pienaar responded that both DACST and the Public Protector plan to finalise this matter before September 2002.

Mr Gumede reiterated his earlier contention that the particular role to be played by each party in this investigation has to be clearly articulated. With regards to Items four and five under Point 1 of the Report, the justifiable expectation of these investigations have to be ascertained, and a further concern is the impact of the relevant provisions of the PFMA here.

Secondly, with regard to the various investigating agents and their competencies, SCOPA itself must authorise the expenditure of DACST and to properly execute this function it has to have the necessary information at its disposal to make this determination. This information has to be provided to Mrs Wixley as well, and the sort of exemplary citizenship behaviour she has shown should be encouraged.

Mr Kajee replied by informing the Member that this case has no bearing on incidences of unauthorised expenditure, because the funds were allocated from the DACST budget, which was tabled and approved by Parliament itself. The real question or issue is that if the value of the management of the situation by PACT/the State Theatre board.

Thirdly, matters of policy can be referred to DACST directly, as such matters do not fall within this Committee's jurisdiction.

Mr Nair stated that even the Exchequer Act required entities such as PACT/the State Theatre to submit their financial reports to the governing department, in this case DACST, which would then evaluate the report as to whether the department should continue to fund that entity. This, he stated, is what he was getting at in his earlier question.

The DG replied by reminding Members that there are various unintended consequences that cannot always be foreseen, and these relate not only to the State Theatre but to the arts community generally. An important consideration in deciding whether or not to pursue litigation to recover the funds is the possible negative effect it could have on the arts community, because if the funds are recovered it would have significant consequences on this community.

Ms P Mothoagae (ANC) expressed her confusion at the manner in which the accounting officer is dealt with in the PFMA. Secondly, the Report does not clearly indicate the steps taken by DACST once it became aware of the occurrence of fraud, despite the fact that it was evident that the funds had to be returned to the NRF.

The Chair stated that this is an important matter and has to be addressed in the resolution to be passed by this Committee on this matter.

The DG agreed, and suggested that the proposals by Mr Gumede regarding the classification of the roles of each party to the investigation could be effected.

The Chair suggested that Mr Gumede does not seem to be requesting DACST to provide specific details or to paint a full picture of the state of affairs in the Report. Yet timeframes for the tasks to be completed by all relevant role-players should be furnished, so that a date may be arrived at when all the important and relevant information would be available. This process has to be conducted efficiently and properly.

Furthermore, there are additional issues which are important to this matter but which do not fall within the jurisdiction of this Committee, such as the role of the auditors of PACT/the State Theatre and corporate governance concerns such as mismanagement of funds.

Mrs Wixley reminded Members that the board members themselves appointed the auditors, and they instructed the auditors to deal with certain information and records only. The blame cannot therefore be placed solely on the shoulders of the auditors.

Adv Visagie stated that the prosecution aspect of the matter will be monitored, and the possibility of instituting a claim against SAFEX and the Financial Services Board officials

There were no further questions or comments and the meeting was adjourned.

Appendix 1:
Executive Summary of SIU Final Report
The Special Investigating Unit's investigation confirmed earlier allegations that PACT (later to became the State Theatre), a Section 21 Company in which the State had a material financial interest, did between 1989 and 1995 secretively and unlawfully accumulate a "Special Reserve Fund", with a balance varying between R14million and R24million, which "Special Reserve Fund" was not reflected in the company's Annual Financial Statements.

(a) In 1995 the "Special Reserve Fund" was transferred to two separate retirement funds for senior and other employees which funds had to finance severance packages.

(b) PACT's Annual Financial Statements for the year ending 31 March 1996 for the first time reflected the secret fund. The earlier failure to reflect the secret fund on the Annual Financial Statements took place with full knowledge of PACT's auditors.

(c) At the request of the Department of Arts, Culture, Science and Technology a viability study was commissioned to determine the impact that repayment of the "Special Reserve Fund" would have on PACT as a company.

(d) Before this impact study was completed, it became clear that PACT, or The State Theatre as it was known by then, had invested not only the remainder of the secret fund, but also virtually all its other funds with Scott Asset Managers, which turned out to be a fraudulent pyramid scheme which was subsequently placed in liquidation resulting in The State Theatre effectively losing R18million - R20million.

(e) The State Theatre was clearly defrauded by Keith Scott of Scott Asset Managers who materially misrepresented both the nature and performance of The State Theatre's "investment". A criminal investigation into Scott's conduct is ongoing and the Special Investigating Unit strongly recommends to the prosecutorial authorities that his prosecution must be pursued vigorously.

(f) Following the discovery of this "investment", The State Theatre was "mothballed" by the Minister responsible for the Department of Arts, Culture, Science and Technology.

(g) The Special Investigating Unit could find no basis upon which the Minister could be held liable in civil law for the losses suffered, but recommends the consideration of legal action by affected parties against members of the Board of "The State Theatre" and its former CEO Mr Joseph, as well as its former Financial Director, Mr van den Berg.

(h) The Special Investigating Unit strongly advises against Organs of State, which are largely dependent on public funds, being allowed to operate as companies not subject to the Public Finance Management Act (or in earlier years the Treasury Act). The absence of the normal rules of accountability for public funds and the fact that the Auditor General, the watchdog of public funds, could not audit The State Theatre's books, strongly contributed to The State Theatre being able to invest its money in high risk "investments" and the loss of public funds.


Appendix 2:

PERIOD: 1996-28 FEBRUARY 2000

1.In November 1994 Minister Ben Ngubane was informed of the existence of the so-called Special Reserve Fund, which was described as an undisclosed "Retrenchment Financial Contingency".

2.The Department of Arts, Culture, Science and Technology (DACST) contracted Deloitte & Touche in
the 1995/1996 financial year to develop core-funding proposals for the Performing Arts Councils. On 14 March 1996 Deloitte & Touche informed DACST that during their information gathering process they have discovered that the Performing Arts Council of Transvaal (hereafter referred to as the State Theatre) had previously created a Special Reserve Fund (in the 1987/88 financial year) of which the purpose was to set aside funds for anticipated shortfalls from budget cuts. This fund grew from an amount of R1.7 million (31 March 1989) to approximately R18 million as on 31 March 1995.

3.The Deloitte and Touche funding report resulted in the phased reduction of the Performing Arts Council Budgets to approximately two-thirds of their 1994/95 values over 3 financial years. This signalled a complete departure from so-called formula budgeting and was based on a needs assessment by Deloitte and Touche regarding the conversion of the PACs into playhouses. The funds liberated by the budget cuts were used to create a funding base for the National Arts Council.

4.In 1995 two trust funds were set up, utilising the money from the Special Reserve Fund, called the Employee's Trust Fund (Rl3m) and the Senior Management Trust Fund (R1.7m). An amount of R3.5 million was also used for a five-year investment plan with Old Mutual. The trust funds were established for possible retrenchments. The legality of setting up the trust funds and the utilisation thereof were questionable.

5 Based on the above information my predecessor, Mr Roger Jardine, contracted Deloitte & Touche to conduct a forensic investigation at the State Theatre. The forensic investigation commenced on 4 October 1996.

6.After a discussion on their draft report Deloitte & Touche proposed, in a letter dated 24 July 1997, to DACST that their mandate be expanded to include the investigation of certain information they have discovered during their initial investigation This expansion was necessary in order for Deloitte & Touche to fulfil their original mandate and to report on ciher important information they have discovered. DACST requested the National State Tender Board's approval for this expansion which was granted on .23 December 1 997 subject to a detailed cost estimate from Deloitte & Touche. Deloitte & Touche's tender was received on 3 February 1998 and a letter of appointment issued on 10 February 1998.

7.As early as April 1998 there had already been contact between DACST, the Office of the Public Protector and the Special Investigating Unit on the Stale Theatre matter. Apparently allegations of serious irregularities at the State Theatre and the alleged unlawful, unauthorised and/or irregular establishment of the trust funds had been reported to the Special Investigating Unit. The President issued proclamation, No. R.59 of 1998 in order for the Unit to investigate the allegations. On 30 July 1998 the Special Investigating Unit furnished DACST with an opinion, based on the Forensic Report, that they are of the view that there appears to be no prima fade reason for the Unit to institute any action for recovery at that stage.

8.Deloitte & Touche submitted their final report on the forensic investigation to DACST on 12 June 1998. DACST requested the CEO of the State Theatre, Mr Alan Joseph, on 5 October 1998 and again in December 1998 and February 1999 to respond on the findings of the report. A response was only received on 2 March 1999.

9.On 19 April 1999 The Head: Internal Audit from DACSI met with individuals from the Office of the Public Protector, the Special Investigating Unit and
Deloitte & Touche to establish responsibilities and the way forward in the
State Theatre matter. In this meeting the parties agreed on the following:
(a)Deloitte & Touche would issue a clarification report based on the contentions of a former State Theatre board member, Mrs Meridy Wixley, on some of the issues contained in the Forensic Report.

(b)DACST would issue Deloitte & Touche with a mandate to reconcile the unaccounted for amount of the Special Reserve Fund (R741 754).

(c)The Special Investigating Unit will investigate the recovery of monies related to the Special Reserve Fund (An amount of R24 341 248 according to the Forensic Report).

(d)The Office of the Public Protector would issue their final report on State Theatre matters reported to them by former State Theatre Board members (Mrs Wixley and Franks), after the above-mentioned have been finalised.

8.Based on a question from the Special Investigating Unit regarding the recovery of the money from the State Theatre, DACST informed them on 27 May 1999 that the Department would consider contracting a consultant to conduct an impact study to determine how the recovery of the money would affect the State Theatre as a going concern.

9.Deloitte & Touche furnished DACST with the reconciliation on the unaccounted funds (refer to paragraph 7 (b) above) on 18 June 1999. Deloitte & Touche's finding was that no indications of misappropriation were found on the Special Reserve Fund.

10.In September 1999 it was agreed in a meeting between DACST officials and the CEO of the State Theatre that consultants be contracted by DACST to conduct the impact study at the State Theatre and that the Public Protector also be afforded an opportunity to give inputs in the specifications. Originally the CEO of the State Theatre was requested to contract the consultants for the impact study as the Theatre did not have to comply with the lengthy tender process prescribed by the State Tender Board. The State Theatre did however not comply with this request. On 21 September 1999 DACST
informed the Special Investigating Unit that it would contract a consultant to conduct the impact study at the State Theatre after which it would furnish the Special Investigating Unit with a proposal on the recovery of the balance of the Special Reserve Fund from the State Theatre. The main reason for the impact study was to determine whether the State Theatre could continue as a going concern if the balance of the Special Reserve Fund (approximately R16 million) was recovered.

11.The Special Investigating Unit informed DACST on 29 September 1999 that the balance of the Special Reserve Fund was managed by a company called Scott Asset Managers and recommended that the funds and interest earned on the investment be deposited in a separate account. On 15 October 1999 the State Theatre was requested to invest the balance of the Special Reserve Fund and interest earned in a separate bank account.

12.The CEO of the State Theatre informed DACST cin 29 October 1999 that he presented DACST's request for the balance of the SRF to be held in a separate account to the State Theatre Finance Committee and they agreed that DACST's recommendation be implemented and that the interest earned on the capital would be accounted for separately from their other invested funds. Given this assurance DACST felt that the funds were secured until a proposal for recovery had been finalised.

13In October 1999 I approved the appointment of consultants through the tender process to conduct the impact study, and the contract was awarded to Gobodo Inc. in February 2000.

14.On 11 January 2000 DACST informed the Special Investigating Unit that the Minister had already agreed to provisionally cut the State Theatre's budget for the 2000/2001 financial year with an amouni of R16 million, pending the outcome of the impact study. A similar letter was sent to the CEO of the State Theatre on 25 February 2000.

PERIOD: 29 FEBRUARY 2000-30 JUNE 2000

15.DACST's Financial Manager and Head of Internal Audit met with the CEO and Financial Manager of the State Theatre on 29 February 2000 to introduce the consultant from Gobodo Inc. who would conduct the impact study. In this meeting DACST became aware for the first time that Scott Asset Managers was being investigated by the Financial Services Board for operating a pyramid scheme in derivatives trading and that the State Theatre's investments were frozen. The investments at this time totalled approximately R18 million.

16.DACST was informed on 2 March 2000 that the Financial Manager of the State Theatre had been suspended pending further investigation. On the same date the Special Investigating Unit informed DACST that Scott Asset Managers was under liquidation.

17.The Minister requested the State Theatre Board on 3 March 2000 to irrevocably and unconditionally delegate all its authority to him otherwise all further funding to the State Theatre would be suspended. The Board agreed with this request on the same date. The consulting firm, Gobodo Inc. was appointed by the Minister as Interim Administrator of the State Theatre on 6 March 2000 in terms of the emergency delegation of the National State Tender Board. Gobodo Inc. then seconded the consultant who was to conduct the impact study, Mr S Kajee, to occupy the post of Interim Administrator on their behalf.

18.In April 2000 the Minister of DACST requested the Minister of Justice to expand the mandate of the Special Investigating Unit to include an investigation into the investment losses suffered by the State Theatre, and subsequently another proclamation, No. R.31 of 2000 was gazetted on 19 May 2000. On 15 May 2000 the Special Investigating Unit issued DACST with the first progress report on their initial proclamation No. R.59, 1998.

19.As one of his tasks the Interim Administrator prepared various proposals to the Minister on the best way to deal with the situation at the State Theatre. The only viable solution was to temporarily close the State Theatre and subsequently the Interim Administrator prepared a proposal for the Minister's approval to temporarily close down the State Theatre. On 12 June 2000 the Minister submitted a memorandum to Cabinet outlining the proposal to temporarily close the State Theatre. Subsequently Cabinet approved on 14 June 2000 that the activities of the State Theatre be temporarily suspended for the remainder of the 2000/2001 financial year. This approval also included the closure of the Section 21 Company and the retrenchments of all its staff members.

20.On 30 June 2000 the Minister approved the restructuring process as proposed by the Interim Administrator. The remainder of the funds earmarked for the State Theatre for the 2000/2001 financial year was paid over to the Theatre on 30 June 2000 and was utilised by the Interim Administrator to inter alia effect the retrenchments of all the staff.


21 DACST's departmental tender committee approved a 20% extension (in accordance with tender prescripts) on 1 June 2000 on the Interim Administrator's contract and requested the National State Tender Board's approval to expand the Interim Administrator's mandate and extend his appointment to 31 October 2000. Subsequent to the expiry of this period the new State Theatre Board (appointed in June 2G00) appointed the Interim Administrator as acting CEO. On 12 July 2000 the State Theatre Board had its first meeting.

22.In November/December 2000 the Department received a preliminary report from the Special Investigating Unit on their first proclamation, No. R.59 of 1 998. On 11 April 2001 DACST requested the Special Investigating Unit's assistance to determine whom, and in what manner, should action be taken against the individuals and entities identified in their preliminary report and also inquired when a final report on both their proclamations could be expected.

23.Based on the information in the Special Investigating Unit's preliminary report the State Theatre Board informed the Minister of DACST on 28 June 2001 of actions to be taken by them against parties who were responsible for the loss of investments.

24.Based on an article in the Beeld newspaper, containing misleading information on the State Theatre matter, DACST furnished SCOPA with a summary of events regarding the State Theatre matter, on 27 July 2001, highlighting the involvement of institutions such as the Office of the Public Protector, the Office of the Auditor-General, the Special Investigating Unit and Cabinet in the State Theatre saga.

25.On 21 August 2001 the Minister requested the Acting CEO of the State Theatre that the Board's proposed actions be implemented as soon as possible.

26.On 26 July 2001 the Head: Internal Audit of DACST called a meeting with officials from the Special Investigating Unit and Public Protector to discuss the finalisation of their involvement in the State Theatre matter. At this meeting the aforementioned officials agreed that they would issue their final reports as soon as possible. On 7 September 2001 the Special Investigating Unit informed DASCT of their plans to finalise their investigation and issue a final report.

27.On 10 October 20011 met with Dr. G Woods, the then chairman of SCOPA, in which meeting he requested that a summary of events at the State Theatre be prepared for him. This document was forwarded to him on 6 March 2002.

28.A permanent Chief Executive Officer, Mr MJ Lovegrove, took up office at the State Theatre with effect from 1 January 2002. The current financial situation of the State Theatre is that, except for the possible claim of the State, amounting to R24 million, it is solvent and able to meet all its liabilities. Operationally, the theatre now operates with a permanent staff complement of approximately 90 (vs. 477 previously) persons and during the first six months of this year, has attracted an audience of approximately 160,000 people (vs. 200,000 people in the calendar year 1999). Furthermore, the State subsidy to the State Theatre has been reduced to less than 50% for two consecutive years, resulting in a saving of at least R30 million.


29.Since the appointment of Deloitte & Touche in 1996 to conduct the forensic investigation the above-mentioned former State Theatre Board members had written various letters to DACST expressing their concerns regarding the management of the State Theatre. The Department did not respond to these allegations as the forensic investigation was still ongoing and according to the mandate of Deloitte & Touche their findings would clarify most of the allegations made by the two individuals. When DACST received the final report in 1998 all correspondence received from Ms. Wixey and Franks were scrutinised and the following conclusions were made:
Most of the allegations had been included in the findings of the Forensic report and would be dealt with.

Some allegations seemed to refer to personal clashes between these Board members and management and had to be resolved within the State Theatre.
Allegations not covered in the findings of the Forensic report would be taken up with the
State Theatre Board and management.
In the meeting with the Office of the Public Protector on 19 April 1999 (refer to paragraph 7 above) it was agreed between DACST and the official from the Public Protector that the allegations by the above individuals that have not been addressed by the Forensic Report had been lodged with the Public Protector and would be dealt with in their final report.


29.From the proclamations issued to the Special Investigating Unit it is evident that the Unit was mandated to investigate everything from the Special Reserve Fund to the investment losses suffered by the State Theatre. Although the State Theatre is one of DACST's associated institutions there is no specialised capacity within DACST to conduct investigations of this magnitude and complexity. For this reason DACST has relied on the Special Investigating Unit to investigate and take the necessary actions in this matter. As is evident from the above report DACST has assisted the Unit throughout this ordeal.

30.A new Board was appointed at the State Theatre and they had their first meeting on 12 July 2000. An Audit Committee has been set up at the State Theatre as required by the Public Finance Management Act (PFMA). Investment guidelines has been adopted by the Board in line with the requirements of the Treasury Regulations for Public Entities. The Department is actively involved in monitoring the compliance of its Public Entities with the PFMA and assisting and educating entities on compliance issues.

31.The Department is in full agreement with the Special Investigating Unit regarding the inappropriateness of the Section 21 of the Companies Act being used a framework for organisations receiving long term funding from the State. Before sight of the SIU report, last year an Arts and Culture MINMEC meeting accepted the recommendation that the Cultural Institutions Act be considered as an alternate legal mechanism for playhouses funded by the State.

32.Over the past 3 years DACST has made 3 senior appointments (one in Arts and Culture, two in Science and Technology) in the area of institutional governance and portfolio management. This in recognition of our responsibilities regarding the PFMA and other legislation affecting institutions reporting to us, given the fact that approximately 90% of the funds voted to DACST are earmarked for transfer payment to such institutions.

33.Regarding the findings of the SIU:

(i)We welcome the vindication of our contention that no Minister or Director-General of DACST can be held liable for the financial losses;

(ii)We will investigate the recommendation that DACST pursues action in terms of the Companies Act against former employees and Directors of the State Theatre;
(iii)We take note of possible criminal action against Keith Scott, against auditors of PACT and against employees and Directors;
(iv) We take note of possible civil action against SAFEX;
(v)We take issue with the report in certain aspects. In particular, Minister Ngubane has no recollection of and indeed refutes the allegation that he waived the offer of a full audit of the affairs of PACT. We also do not accept the finding that the State Theatre budget was not cut between the years 1995 and 1997. In fact there were substantial cuts based on the recommendations of Deloitte and Touche.

Notwithstanding the few minor exceptions mentioned in (v) above, we welcome the SIU report but ask that, given the fact that we have not had much time to study the report, these remarks be accepted by SCOPA without prejudice.




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