Economic Development Department on its 2013 Annual Report

Economic Development

15 October 2013
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Economic Development Department (EDD) told the Committee that steps had been taken to address the weak areas of governance that had been identified, in particular the establishment of an internal audit capacity capable of picking up audit issues during the course of the financial year, and enabling management to deal with them timeously. In addition, a risk management strategy had been put in place. Steps had also been taken to introduce a more effective management system, with regular structured meetings. Performance monitoring had been enhanced, with quarterly reports being reviewed to assess progress and, through improved reporting, allowing for better service delivery.

The Department had under-spent its budget by 3.3%, which was largely due to a late additional allocation of R30 million from the National Treasury for capacity building. Of this amount, R10 million had been spent on an ongoing project with the University of Johannesburg, but R20 million – a vast chunk of the under-spending – had not been used. Staffing levels had been increased by 21% during the course of the year, accompanied by better monitoring of staff issues and relevant training.

The EDD’s total number of targets had been 42, of which 19 had been exceeded, 22 met and just one under-achieved. The total adjusted budget of R696.5m had been under-spent by R23m (3.3%). Compared to the previous year, expenditure was up by R95.9m. Revenue collection had increased from R593m to R671m, largely due to the increase in fines and penalties imposed by the Competition Commission, and these had been transferred to the National Revenue Fund. R527.7m of the budget had been transferred to EDD agencies, of which R109m had gone to the Industrial Development Corporation, R171.3m to the Small Enterprise Finance Agency (SEFA), R157.2m to the Competition Commission, R15.8m to the Competition Tribunal and R74.4m to the International Trade Administration Commission.

By 31 March 2013,139 funded posts had been filled. Funded posts for the remainder of the medium-term expenditure framework (MTEF) had been expanded to 166, and EDD’s objective was to fill 146 of these by the end of March next year. Difficulty had been encountered in recruiting staff with specialised and critical skills, as well as finding women for senior management positions. Nevertheless, women filled 46% of EDD’s senior management posts, compared to the national average of 38.1%. An Employee Assistance Programme had been implemented to render a 24-hour service to staff and their families. The organisational structure would be aligned more closely to the mandate of the EDD, in particular the Presidential Infrastructure Coordinating Commission (PICC) functions, with effect from the beginning of 2014.

Members sought reassurance that the new management team would be able to address the issues raised in the Auditor-General’s report. Other matters discussed were the use of consultants, the challenges involved in recruiting skilled staff, overseeing the use of funds transferred to entities, disciplinary procedures for non-compliance by officials, the allocation of Competition Commission fines to the victims of unfair competition, and funding of the Small Enterprise Finance Agency
 

Meeting report

The Chairperson said the meeting provided the Committee with an opportunity to interact with the Economic Development Department (EDD) on issues still requiring clarification, following the Auditor General’s (AG’s) report on the entity’s performance the previous week. It would mark the start of the Budgetary Review and Recommendations Report (BRRR) process.

Ms Jenny Schreiner, Director General: EDD, said the department welcomed the opportunity to build on the performance information report, focusing on the financial and human resources aspects. She hoped the Committee would perceive in the presentation that steps had been taken to address the weak areas of governance that had been identified, in particular the establishment of an internal audit capacity capable of picking up audit issues during the course of the financial year, and enabling management to deal with them timeously. In addition, a risk management strategy had been put in place. Steps had also been taken to introduce a more effective management system, with regular structured meetings. Performance monitoring had been enhanced, with quarterly reports being reviewed to assess progress and, through improved reporting, allowing for better service delivery. The EDD was delighted to have received an unqualified audit. In the process of compiling the annual financial statement it had uncovered an error in the previous year’s financial statements, and this had been corrected and was reflected in the AG’s report.

She said the Department had under-spent its budget by 3.3%, which was largely due to a late additional allocation of R30 million from the National Treasury (NT) for capacity building. Of this amount R10 million had been spent on an on-going project with the University of Johannesburg, but R20 million – a vast chunk of the under-spending – had not been used. Staffing levels had been increased by 21% during the course of the year, accompanied by better monitoring of staff issues and relevant training. In essence, the Department had tried to achieve a better alignment of planning between the different components of the Department, in particular between strategy, finance and human resources.

Ms Schreiner gave a brief overview of the performance indicators which had been presented at the previous meeting. The EDD’s total number of targets had been 42, of which 19 had been exceeded, 22 met and just one under-achieved. The total budget of R696.5m had been under-spent by R23m, and the number of people employed had been 139, against a target of 142 funded posts. The Management Performance Assessment Tool (MPAT) carried out in the middle of the financial year had proved useful in identifying where there were inadequacies in the EDD’s systems, particularly as it was a new department. The MPAT had revealed shortcomings in both governance and human resource management, and remedial measures had already been put in place.

The quality of performance reporting had been improved since the past financial year, where a thorough review had indicated inconsistencies in approach during the first three quarters. The quarterly reports had been reworked and files of evidence compiled to support the information, allowing the AG to verify the information. For the current year, indicators had been refined to ensure the annual performance plan was in keeping with “SMART” principles, and the DG had approved a reviewed policy and procedure for performance information reporting in May 2013.

At the inception of the EDD in 2009, there had been no internal audit unit. A director of internal audit had been appointed in November, 2010, followed by a five-person audit committee on February 2011. Because of a lack of capacity and resources, there had been a co-sourcing arrangement with the Department of Trade and Industry (dti) to conduct the audits, but at the end of last year an assistant and deputy director had been appointed for the unit, and the audit committee has since met on a quarterly basis. A risk management assessment had been completed in the last quarter of the financial year, and the EDD risk strategy had been approved by the DG in March. A Deputy Director had been appointed in April, and work on the risk charter had been initiated. The appointment of a risk committee would be finalised by the end of October, and the process of appointing a chairperson of the risk committee was at an advanced stage.

The Department had obtained an unqualified audit report, with one emphasis of matter relating to the restatement of a corresponding figure in the previous year as the result of an error in interpretation – which had been picked up and corrected. A consolidated “heat map” to rectify the audit findings had been compiled, which reflected the people responsible and the time frames in which to rectify each of the AG’s findings. Mitigation plans were being monitored every second Friday at progress meetings, attended by the internal audit unit, which would audit the corrective measures implemented as part of the audit coverage plan. The management report issued by the AG had reflected 70 findings, of which 34 related to supply chain management, 14 to financial accounting, 23 to human resource management, and the remainder to internal audit, information technology and the branches. Of the 70 findings, 60 had already been addressed.

Ms Semphete Thobejane, Chief Financial Officer (CFO): EDD, presented the Department’s financial performance figures. Overall, expenditure had amounted to R673.5m, which was R23m (3.3%) below the adjusted budget of R696.5m. Compared to the previous year, expenditure was up by R95.9m. The reasons for under-expenditure were largely due to compensation of employees (R8m) caused by vacancies during the year and at the financial year end, goods and services (R11m), which was mainly the result of the R20m allocated during the adjustments estimates process for capacity building, and machinery and equipment (3.7m), where there had been a delay in procuring video conferencing and IT equipment. Revenue collection had increased from R593m to R671m, largely due to the increase in fines and penalties imposed by the Competition Commission, which had been transferred to the National Revenue Fund. R527.7m had been transferred to EDD agencies, of which R109m had gone to the Industrial Development Corporation, R171.3m to the Small Enterprise Finance Agency (SEFA), R157.2m to the Competition Commission, R15.8m to the Competition Tribunal and R74.4m to the International Trade Administration Commission (ITAC). Transfers to entities and agencies included R1.8m to the CSIR for research, R9m to the SA Institute of Chartered Accountants for business training, R2.3m to Wits University for continuation of the capacity building programme for municipalities, and R10m to the University ofJohannesburg for the establishment of an economic regulatory course.

Mr Alan Meyer, Acting Chief Director, Corporate Management: EDD, said that 139 funded posts had been filled by 31 March, 2013. Funded posts for the remainder of the medium-term expenditure framework (MTEF) had been expanded to 166, and EDD’s objective was to fill 146 of these by the end of March next year. The recruitment of appropriate staff had reduced the vacancy rate to 2.1% by the end of the financial year. Difficulty had been encountered in recruiting staff with specialised and critical skills, as well as finding women for senior management positions. Nevertheless, women filled 46% of EDD’s senior management posts, compared to the national average of 38.1%. It had reached the 2% target for employing people with disabilities. The core staff complement ranged in age from 20 to 35 years. An Employee Assistance Programme had been implemented to render a 24-hour service to staff and their families. The organisational structure would be aligned more closely to the mandate of the EDD, in particular the Presidential Infrastructure Coordinating Commission (PICC) functions, with effect from the beginning of 2014.

Discussion
Mr F Beukman (ANC) said the AG’s report had red-flagged a number of financial and human resources issues, and asked if the EDD could give an assurance that the current executive team was capable of addressing these issues. He noted that although it was good to see a reduced expenditure on consultants, the AG’s bill was much higher, and he asked if measures were in place to ensure that the Department always received value for money.

Ms Schreiner said she was confident the management team would be able to “step up to the plate”, as the processes of identifying weaknesses in internal controls in the finance and human resource areas were already in place, and their efforts had “momentum.”

The AG’s account had been higher because they had had to re-do some of their work in support of the EDD’s review of its financial statements, and it had been good value for money. The Department was committed to reducing its expenditure on consultants, but when specialised expertise was required, they would be used from time to time.

Ms Thobejane added that the Minister was insistent on limiting the use of consultants. The AG’s costs had almost doubled, but this was because they had spent more time in the Department and it had helped to learn more about the weaknesses that had to be addressed. She was “pretty certain” that all the issues raised by the AG would be dealt with. The EDD looked carefully at ensuring it received value for money. If it was not happy with a price, it would negotiate. This was sometimes a challenge, if time was a factor.

Mr K Mubu (DA) said he was surprised that the Department was experiencing difficulty in filling vacant positions, as there was a large number of unemployed – and well qualified – people available. The EDD’s mandate was to create jobs, so there needed to be more urgency to fill the positions.

Ms Schreiner said the Department was driving hard to fill the vacant positions systematically. Challenges arose when people with the right skills were found, but the remuneration package available was insufficient to secure their employment. The EDD took the issue of job creation very seriously, and had moved away from offering short-term contracts in favour of long-term, sustainable and decent work.

Mr X Mabasa (ANC) agreed that the EDD was the entity to “champion” employment, but if graduates were not suitable to fill the vacancies, it would seem that the universities were not producing the necessary skills. Did the EDD have a policy to retain its interns? If not, it would lose staff. He said the terminology of “transferring funds” that was used in the financial report created the impression that the EDD was merely a “conduit”, rather than actively involved in service delivery itself.

Ms Schreiner said one of the anomalies in the original 2009 structure had been that it had a real capacity of specialist posts at the top end of the organisation, but was very weak in this regard at the lower levels. This was being addressed by such measures as creating multi-year project posts, which allowed graduates to be brought in at that level. This would allow people to develop and mature within the Department.

The EDD was not bound by equity issues to the extent that skills had to be lost to ensure representivity. She pointed out that the middle management team was comprised mostly of black post-graduates who were being mentored by their more senior colleagues.

There had been 11 interns in the EDD, and the feedback had been that they had been used constructively and had “grown.” Two had been retained in the Department, and new interns were currently being taken on.

The “transferring funds” terminology was standard use by financial people, but the EDD was not merely a conduit for funds to entities. It held regular meetings with these organisations, ensuring that a holistic oversight responsibility was brought to bear on financial and human resource issues.

Ms D Chili (ANC) said the AG’s report had pointed out that the accounting officer had not recorded all leave taken properly. It had also stated that people in charge at pay points did not always ensure that employees receiving payment were entitled to it. Was this being addressed?

Ms Thobejane said what had been found was that not all the pay points were certified and returned on time, and a register had not been kept on when they were returned. Additional controls on paysheets had since been implemented.

Mr Meyer said numbered leave forms now had to be accounted for. There were very specific control measures, and although it was a cumbersome manual process, it was necessary. The use of electronic control measures was desirable, but at this stage the technology was not available throughout the Department.

The Chairperson asked if any action had been taken against the officials involved in the pay point issue. Had there been any reprimands, or had the situation merely been noted and nobody held accountable? Compliance was important, because examples needed to be set.

Rev W Thring (ACDP) said that by the nature of its portfolio, the EDD needed to “lead from the front”, and should set itself a target of achieving a clean audit. Had the receipt of R30m of unsolicited funds from Treasury placed pressure on the Department to spend unnecessarily? He asked whether there was the possibility of “restorative justice” being achieved by distributing the proceeds of fines imposed by the Competition Commission to the “ordinary citizens who had been ripped off.” Skin colour did not matter when it came to service delivery, so it was important that skilled applicants for positions were not disqualified because they did not meet quota requirements.

Ms Schreiner said she agreed that the Department needed to set a clean audit as its goal. The R30m had come as “quite a surprise” when it had been announced in the budget adjustment process at the end of November, and the Department’s approach had been to avoid being pressurised into spending unnecessarily. It had consulted intensively with NT to establish what had been identified as warranting expenditure, and had then worked with the University of Johannesburg to design the economic regulatory course, with the understanding from NT that the R20m remaining would be rolled over.

Elements of “restorative justice” had surfaced in the Walmart-Massmart settlement, with R200m being required for the establishment of a supplier development fund. In essence, however, these were decisions of the Competition Tribunal, and would be worth further consideration, as a public interest issue.

Ms D Tsotetsi (ANC) asked for details about the Employee Assistance Programme, such as the qualifications of the officer executing this task. What assurance could the EDD give that the newly recruited personnel would stay with the Department, given the high turnover rate? She was concerned that the “core” staff complement fell in the 20 to 35 year age group, as historically disadvantaged people were unlikely to have acquired sufficient expertise and experience at this age, and would be left out. Was it possible to provide on-the-job training to overcome skills shortages? Action needed to be taken against officials who had failed to record leave properly.

Mr Meyer said the Employee Assistance Programme was a one-one-one telephonic counselling service provided by a company appointed to help staff and their immediate family on issues ranging from financial matters to marriage counselling. It also arranged workshops for staff.

He sought to allay concerns that the young “core group” was having a discriminatory effect on the Department’s employment profile. The overall staff component was about 77% black, 7% coloured, 4.3% Indian and 10% white. Black men and women were proportionally more represented at the senior management level.

Mr Z Ntuli (ANC) said that the EDD had transferred less money to the Small Enterprise Finance Agency (SEFA) last year than in the previous year. What was the rationale for this, and from where else did the agency get its funds? He also wanted to know at what level the people with disabilities were employed at the EDD.

Ms Thobejane said less money had been transferred to SEFA because in the previous year, it had received a once-off allocation of R55m from Treasury for a pilot project. The rest was a base line allocation.

The DG said the Department would establish from where else SEFA might get funds, and would provide a written response by the end of the week.

Mr Meyer said the two people with disabilities were an African male and an African female. One was a personnel practitioner, and the other was a senior personnel practitioner.

Mr N Kwankwa (UDM) said there was an apparent contradiction between the Department’s audit report, which stated that there were no reasons to believe there were any material breakdowns in the design and operating effectiveness of the internal financial controls during the year, that had not been addressed or were in the process of being addressed, and the AG’s report, which stated that management had not established the required controls to ensure a complete and accurate financial statement. Was the problem with the internal audit committee, or in the internal audit itself?

Ms Thobejane said the audit committee compiled its report after it had seen the AG’s comments. In the same report, the AG had said that the EDD’s “financial records could thus be relied upon in the preparation of financial statements” and also that “the audit committee had noted the progress made by the Department in addressing the shortcomings raised by the AG.” The concerns of the AG were related to the difficulties encountered with the NT’s template not linking to an asset in the Department, and the problem had had to be resolved manually.

The Chairperson said that she was concerned that the discrepancies were being picked up only at the end of the financial year, despite the fact that AG staff sat on the audit committee and raised issues. What did the Department do about those issues, prior to the final management letter?

Ms Thobejane said it was a source of embarrassment that an item identified by the AG had been corrected only during the final audit.

Ms Schreiner said that under the current management team, an audit steering committee had been put in place which was meeting on a fortnightly basis precisely to pick up on the issues raised by the AG in the management report, and to ensure steps were taken to rectify them. While the AG was not completely satisfied with the way in which the EDD had responded in the past year, there was now a very organised way of addressing the findings.

The Chairperson said she was not convinced that people would not start repeating the mistakes of the past. Why had there been no disciplinary measures imposed? Not enough resources were being put into training and developing the skills of the Department’s personnel.

Ms Thobejane said she wanted to allay the Committee’s fears over the issue of reconciliations. These were now being done monthly. Although funds might not be spent on training, as CFO she was mentoring staff on a daily basis on what needed to be done.

Regarding discipline for non-compliance, there was a process which needed to be followed. The route the Department had taken had avoided negative actions, and had focused rather on capacitating those involved. Only if they continued with non-compliance would the Department “bring out the big stick.”

The Chairperson said people should be made aware they could not do things wrongly. If one was lenient, they would carry on year in and year out. All the AG could do was alert the Department, and it was up to the Department to take the necessary remedial action.
 
Ms M Mohorosi (ANC) said funds had been transferred to Wits University and the University of Johannesburg (UJ), and asked how the EDD could be sure this expenditure was not fruitless. Was it following up on the use of those funds? The issue of unemployment was haunting Members, as it affected all political parties, and she urged the EDD to assist in promoting job creation.

The DG said she did not have the details of the monitoring of the courses at Wits and UJ, but would provide details to the Committee in writing. Her understanding was that the expenditure had added value. The training programme at Wits had been specifically to deal with procurement issues for municipal officials.

Conclusion
The Chairperson said the Committee was generally happy with the improvements that had been reported, but felt that the Department could do much better.

The meeting was adjourned.
 

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