Passenger Rail Agency of South Africa (PRASA) 2013 Annual Report: interrogation, with Deputy Minister present

Meeting report

Opening remarks
The Chairperson welcomed guests and acknowledged apologies from the Minister of Transport, Dipuo Peters, who was out of the country. The Committee last met the Passenger Rail Agency of SA (PRASA) in the third democratic Parliament when it took an oversight visit on the state of railway stations. Since then there had not been time to interact. The importance of PRASA could not be emphasised enough in enabling the public to attend to daily activities. The Committee had an interest in how the entity functioned and met its mandate in the area of managing resources. Also worth noting was the fact that the Committee retrospectively looked at issues. He handed over to Members to lead the interrogation.

Unachieved targets
Ms T Chiloane (ANC) commented that she would focus on achievement of planned targets, and procurement and contracts management. She congratulated the entity on the unqualified report, but noted that the Auditor-General (AG) had raised a couple of matters. If the entity did not look at the issues they could potentially result in the entity regressing. The AG reported that out of 56 targets for the financial year, the entity did not achieved 29 and that translated to 52% not achieved. The AG attributed this to indicators that were not strategically developed. Entities were required to ensure that SMART principles were followed when setting targets. She asked if the entity had ensured it would comply with SMART principles when it formulated its targets.

Mr Lucky Montana, PRASA CEO, disputed the figure of 56 targets, and said the targets were 35. He assured Members that SMART principles were followed when setting the targets. The PRASA corporate plan was tabled to the Department of Transport (DoT) at the beginning of the year, and it detailed the activities that had been undertaken. There also was a detailed strategic plan that indicated where the entity wanted to go. Unfortunately when one looked at the performance of PRASA, the targets were not 56.

The Chairperson noted that Members spoke on what was contained in the report’s page 42, the last paragraph.

Mr Montana said the audit report was that of the AG, and had been looked at. The report was discussed with the AG before it was published. He referred Members to page 47-54 of the report where the targets were detailed.

The Chairperson asked if the report was wrong.

Mr Montana replied “yes, it was”.

The Chairperson asked how many of the 35 targets were achieved.

Mr Montana replied 28 of the targets were achieved, constituting 80% achievement.

Ms Chiloane reiterated that Members relied on the Audit Report presented by the AG. She requested that the AG comment on the disagreement. One of the issues mentioned as a root cause for not meeting the targets was that the Board did not consider the proposal from management, that the targets be revised downward.

Mr Sifiso Buthelezi, PRASA Board Chairman, replied this was difficult, because reference was made to the plan which was also part of the Annual Report. The targets were set by the entity.

The Chairperson interjected and asked how the entity submitted an error-ridden report to Parliament if this was the case.

Mr Montana replied all the information in the Annual Report belonged to PRASA, but the AG’s report was written independently. It was possible that there would be a difference of view between PRASA and the AG.

The Chairperson said the issue could not be a difference of view when it came to numbers; it was either 35 or 56. The AG sent the entity management letters and provided the audit report. PRASA added it to its Annual Report and submitted to Parliament. Whether it was 35 or 56 was a simple matter that could have been resolved.

Mr Montana agreed and explained the methodology the AG used during the audit. The AG confirmed to PRASA that it did not audit every output that was there. The AG did a sample.

The Chairperson pointed out that the AG claimed when it briefed the Committee that PRASA did not submit the final Annual Report so that they could review inconsistencies on the audited information.

Mr Montana replied this was incorrect; both the draft financials and the draft Annual Report were submitted on time to the Board as required by the Public Finance Management Act (PFMA). During the audit there was a standing committee that dealt with any issues arising.

Ms Chiloane commented that when one counted the targets they were well over 50.

Mr N Singh (IFP) requested that the official should clarify the targets. If the Committee started on the wrong footing nothing would be achieved. There probably were 35 programmes in the Annual Report, but the targets, as reported by PRASA, were about 57. He failed to grasp the statement "there were 35 targets".

Ms Lindani Mukhudwani, Senior Manager AGSA, replied that based on the Annual Report that was audited there were 56 targets. This was raised way before the audit report was signed. This item was discussed and there was no formal dispute from PRASA to indicate targets were incorrectly counted. She was hearing the complaint for the first time at this meeting.

Mr Montana disputed this and said it was not the first time the matter was raised with the AG, but the executive was not with the AG at the time. There were different targets for the programmes and the outputs. The auditors had included dates and all of the issues. This meant these were qualitative and quantitative. The auditors sampled about 45% of what was presented. The issue of performance could not be measured on a sample basis. It was pointed out to the AG that the methodology it used was wrong. The team went back and promised to come back and never did.

The Chairperson sought clarity on whether counting the targets on page 47 would give 35 targets.

Mr Montana replied that the targets could be broken down into 3 resulting in 37 targets.

The Chairperson asked if it was 37 or 35, but also was there no other target that could be broken down into phases that could take the total to 56. The Committee might be quibbling over a little matter.

Mr Montana said the targets were not realistic and secondly, the variances were not huge.

The Chairperson commented no entity of Government loved getting a negative audit opinion. He asked if the official agreed that there was variance. If there was a variance what was the reason for this. This was an opportunity to be give context. PRASA was the first entity to say the auditors counted wrong; this was what made Members uncomfortable. This need not be an issue; the centrality of the question was on setting unachievable targets. Whether they were 35 or 56, the question was why these were not achieved given that the entity had set these targets. The Committee need not be bogged down by the numbers.

Ms Chiloane asked why the board did not approve management's request to adjust the targets.

Mr Buthelezi replied the board did not want to set moving targets. When targets were set at the beginning of the year, the intention was to hold management accountable to what was agreed to. It would not be good management if unachieved targets were moved.

The Chairperson asked why the targets were not achieved. He asked that the entity speak generally on the reasons that led to it not achieving its targets.

Mr Montana referred Members to page 47 and went through the specific outcomes and outputs. Two things came out, and the question the entity asked was whether it had delivered on its mandate. Under achievement was around 20%, and two issues were challenging. The first one was safety. On page 49 of the report, safety was on the bus side, and there were quite a lot of accidents. On rail, there was one major accident that involved a lot of people in Tshwane last year. A lot of people got injured. The entity had reduced fatalities per million passengers by 5%. Besides this, another challenge was those people who crossed the railway lines. There were a number of informal settlements built next to railway lines. The entity did not do well in the area of property as well. Thirdly, the entity dealt with infrastructure. There was the Bridge City project due for completion during this financial year. Towards the end of the project the contractor had a major strike; the bridge was burnt and the bridge had to be started from scratch. Management was satisfied that it had done well.

The Chairperson interjected and said today was about meeting the satisfaction of the Committee.

Mr Buthelezi said when the targets were presented to the board, it intended stretching them. If it was a tickbox thing, the easiest route would be to lower the targets. The board did not have control over some of the targets such as people crossing railway lines. This was a bigger social problem.

The Chairperson observed that the people crossing railway lines was not even mentioned in the report.

Procurement and delegated authority
Ms Chiloane sought clarity on who awarded contracts, without three quotations as required by law, that amounted to R14 million of the R17 million irregular expenditure. This was done without prior approval of the Group CEO. This was contrary to the requirements of the PFMA. Where was the person?

Mr Montana replied PRASA policy dictated that where deviation had occurred from normal procurement process, approval would be sought from the CEO. The quoted incident regarded two employees in the rail division, but the money did not amount to R14 million, rather R1.3 million. The entity took action against the transgressors, but often employees challenged such decisions through the Commission for Conciliation, Mediation and Arbitration (CCMA) and the Labour Court. The challenge was when the entity lost such cases. It paid lump sums of money and this was one of the issues regarded as irregular expenditure.

Ms Chiloane sought clarity on whether the official said the amount where the three quotations rule was not followed was R1.3 million and not R14 million.

The Chairperson commented this was what the official was saying. He requested that the R14 million be spoken to. He asked if the officials agreed that the deviation was R14 million; if PRASA disagreed what were the figures?

Mr Montana asked to provide the breakdown of the R17 million.

The Chairperson clarified that the question talked to R14 million and not R17 million.

Mr Montana agreed that indeed R14 million was an amount of deviations, where the three quotations were not sought.

Ms Chiloane said there were four companies involved in the deviation of R14 million, and asked how much each of the four – Spanish Eyes Logistics, Vetkefllo, Manual Securities, and Promokid and GearFCC - got from the R14 million. The deviations were awarded in the nature of an emergency; could the Committee be provided with the breakdown?

Mr Mosengwa Mofi, CEO PRASA Rail, replied the appointment of Manual Security happened in Cape Town during the security strike in December 2011. At the time there was a spike in sabotage and vandalism incidents on the operating equipment. This posed a threat to Metrorail’s operations and the safety of the passengers. The regional executive management took a decision to appoint a security company on an emergency basis. The supply chain manager was tasked with the responsibility to enforce the decision. It was later realised that the right course was not followed. In the supply chain management (SCM) policy the regional management should have written to the CEO and inform him of the matter. An investigation was conducted, a disciplinary process ensued. The official concerned had since been dismissed for the transgression.

Procurement policies were not followed on the Spanish Eyes Logistics contract as well, amounting to R3.8 million. One official had been fired, and there was another pending disciplinary process. The contract had since been terminated.

Mr Chris Mbatha, Chief Procurement Officer (CPO), said there was no information on the other two companies but that information would be provided to the Committee.

Ms Chiloane asked if there were measures in place to avoid future occurrence of irregular expenditure, and to recover the money from the officials even if they had been fired.

Mr Buthelezi replied no was money was lost because the company got the service. The only issue was that the proper SCM procedures were not followed. The company’s policy was to subject all officials to an induction, but humans would always be humans. The employees would continually be educated on policies, and there would be continuity with combinations of interventions in trying to bring employees into line. Dismissing a person from employment was possibly the harshest sanction any company could mete out.

Ms Chiloane asked if any of PRASA employees had interests in the four companies.

Mr Montana replied he was not aware of anyone based on the declarations submitted.

Ms Chiloane asked for the names of officials who extended contracts of six companies without approval from the delegated official.

Mr Chris Mbatha, PRASA Chief Procurement Officer (CPO), replied the contracts fell within the delegation of the officials who extended them. In arriving at the finding, the AG consolidated all of them and got to a figure of over R40 million. If one did not add up the contracts, each and every one of the officials had delegation authority.

Ms Chiloane commented, “Another dispute.”

The Chairperson said it could not happen that way. He asked the AG official to clarify 2.2 in the briefing note. This might be the root cause of all the variances contained in the report.

Ms Mukhudwani replied the briefing note referred to the fact that the Office of the AG had not reviewed the final draft Annual Report at the point it signed the auditor’s report. This meant at the point when the auditor’s report was submitted, the Annual Report was still a draft. Therefore, the AG had not made sure that there were no inconsistencies between what PRASA reported and what the auditors had found.

The Chairperson requested that the briefing note be clarified in the context of what the entity had said about the officials having delegation of authority to extend contracts, and the finding by the AG that the officials needed approval. The AG followed this up by giving the names of companies, but the official disputed this and said the AG made its finding on an aggregated figure; if one disaggregated, it all fell within the delegation of those officials. Were Members missing something?

Ms Mukhudwani replied no. The finding was correct that those officials did not have the delegated authority to extend those contracts based on the evidence that was reviewed.

Mr Fenton Gastin, PRASA Group CFO, said after the audit report was written, he personally had met with the AG. It was agreed that the briefing note was incorrect, but the AG argued the information had arrived late. He said he insisted at that point that the AG should write a letter to the DoT and National Treasury (NT). He was promised at the meeting that this would happen but the AG reneged, after saying it received the documents late.

Ms Mukhudwani commented the official was correct that there was an engagement after the audit process. He had said there was evidence that the approvals were done at the correct delegated level. The AG’s view stood that during the audit process, based on the evidence reviewed, the delegated level did not have delegated authority to extend those contracts, aggregated or not. The report was discussed with management.

The Chairperson sought clarity on whether the evidence to contradict the finding was subsequently availed.

Ms Mukhudwani replied that AGSA had not received documents that contradicted the finding made on the reviewed evidence, but the CFO had indicated that evidence existed.

The Chairperson asked if the CFO had the evidence in document form at the meeting.

Mr Gastin said there was an agreement with the AG that they would write a letter to the NT and DoT stating that the briefing note was incorrect.

The Chairperson asked if it was true that the final draft Annual Report was not submitted for review.

Mr Gastin replied the portions of the Annual Report were not directly related to this particular item. All the documentation relating to the item had been submitted. He had evidence of emails even prior to the signing of the audit report. AGSA was alerted to the fact that they were wrong and they agreed, hence they committed to write a letter to NT and DoT. And the AGSA business executive had promised to deal with that, and had also promised to back PRASA when it came to answering to Parliament.

The Chairperson asked if there was no basis to allege that the contracts for the six companies were approved by officials without the delegated authority.

Mr Gastin replied this was “exactly correct”.

Mr Buthelezi, PRASA Board Chairman, commented that this was not just any official in the company but a CEO of one of the divisions.

The Chairperson said the issue was whether there was delegation or not; and not their position. He asked that the point be left at that stage. It was problematic when officials wanted to debate the contents of their audit report in Parliament. The clients and users of the reports who were not represented at the meeting, what story they should have in their minds, he rhetorically asked.

Mr Montana replied this was unfortunate because the issues that were raised in the management letter were responded to. Significant matters were raised and they spoke to the controls environment. Discussions were held on these matters.

Mr Montana said he felt aggrieved and said management went to the audit committee and tabled the report. The committee accepted the draft and the AG was requested to engage; the documents were available. The final audit report included in the Annual Report was never seen by PRASA; it was never presented to the board. PRASA submitted on time to both the AG and National Treasury. The entity was reporting on an audit report - of which the final product it had never seen. All the issues that were raised had not been included. The audit report contained in the Annual Report also went to the users such as Parliament, DoT, and investors. PRASA had been dealt with unfairly.

The Chairperson said that the point the official failed to make was that the final draft report was not submitted, to ensure that the inconsistencies were dealt with before the report was published. He suspected this was where the challenge was.

Mr Montana replied PRASA had submitted the evidence before the report went to print to both the auditors and NT. The issue was the audit report was signed off without management changes. If the auditors had indicated they had heard PRASA management but disagreed on sound professional consideration; that would have been respected. He found it discomforting that an audit report would be signed off without the entity seeing it, and yet it be expected to defend the contents.

The Chairperson asked how the entity compiled, and submitted the report to Parliament with all the major flaws.

Mr Montana replied there were no major flaws in the Annual Report, but in the audit report. The entity could not interfere with an opinion of the AG.

Ms Chiloane sought a comment from the Deputy Minister, Ms Sindi Chikunga. It would seem that the AG and the entity could not agree. One could alert the Speaker to these challenges, with a view to requesting non-tabling of the Annual Report until the disagreements were dealt with. She wondered if continuing with the audit report would not be a waste of time.

Deputy Minister comments
The Deputy Minister, Ms Sindi Chikunga, said the ministry was aware of the issues that had been raised. Obviously the executive leadership could not interfere with the work of the AG, and could therefore not instruct that the audit report not be included in the Annual Report. The entity was steadfast in saying it had the evidence. This might have been a flaw either from the side of the AG or the entity. The invitation to the Committee would seek to clarify the matter.

She pleaded with Members to understand that the leadership could not instruct the AG to effect changes. There had been meetings with PRASA to clarify the matters. The Department had anticipated that there would be changes in the final audit report, but there were none. The leadership accepted the audit report of the AG, but would also like to highlight the challenges in the report. There was no way the AG’s audit report would have been excluded from the Annual Report. That would not have been proper in terms of legislation. The challenges had put the Ministry in an awkward position. This was something that would be taken up with the AG to avoid such things in the future.

The Chairperson sought clarity on whether the Deputy Minister was saying the situation resulted because the AG could not find the requisite evidence during the audit, or was it a matter of the AG seeing evidence but choosing to ignore it. What was the Committee dealing with here?

The Deputy Minister replied she was not suggesting the AG saw facts and chose to ignore. Auditing was a process, and went through stages until it was agreed that this was a final product. If the process was not followed to the point of agreeing with management on what had occurred, then that became a problem. There had been meetings between the CFO and the AG, and the situation was stated. It was agreed that the mistakes would be corrected. But the final product did not include the agreements that were arrived at with the CFO. Until such time that all the steps of the process had been followed, there would be these challenges. The executive management of PRASA was saying it did not get an opportunity to look at the final product. This was a shortcoming that ought to be corrected.

The Chairperson said the Committee would not have a situation where anyone misled Parliament; that would be a serious matter. Members struggled to understand what actually happened, and this was set against the fact that they had always relied on the professionalism of the AG’s reports. Rarely had there been disputes of this nature; this needed to be resolved. It could not be left hanging.

Questioning continued
Ms Chiloane asked why had the contracts of the six companies been extended?

Mr Mbatha replied the contracts were referred to in the rail industry as original equipment manufacturers (OEMs). These were people who supplied certain parts they had certain rights to. Generally, when the contracts expired and one went out on tender, the same companies would participate. This was the reason the contracts were extended.

The Chairperson interjected “so tendering would be a waste of time, just renew.” He expected a substantive response than what had been alluded to.

Mr Montana replied the crucial issue was business continuity. He cited an example of a train-brake manufacturer. This company supplied brakes for trains. When the train fleet required servicing, the company with rights to trade on brakes would be awarded the tender. There sometimes would be no point in going out on tender; it was the same company and the specifications would be with them. This was done for business and operational continuity. He cited another example of the provider of train doors and windows for the current fleet.

His job as an accounting officer was to look at whether the extensions were justified, and look at whether the cost variations were within 10%. If they exceeded the threshold then questions and explanations would be sought. Even if the policy said the group CEO should approve, it did not mean that the group CEO took a decision to extend. It simply meant the people who did that, in line with the policy, would then motivate to the relevant committee who would then make a recommendation. Then the CEO would apply his mind and sign off, and in some instances would indicate: not approved. There was an emergence of other players in the industry and opening up would be required. But the key consideration was whether the operations would be disrupted if the entity did not continue with a particular contract. This was what largely informed the decisions that PRASA made.

The Chairperson reminded him that the AG's point was whether those who extended had authority to do so.

Ms Chiloane accepted the response and said compliance with legislation was crucial. An entity as huge as PRASA should have systems in place to deal with supply chain. Contravention with legislation was on the rise, and that could not be a normal thing. There was a need to respect the laws.

Mr Montana commented that the entity supported the principle. But it was part of legislation that deviations and variations happened. This was particularly the reason companies had policies and systems to regulate this. Entities did not engage in these things merely to break the law.

Mr N Singh (IFP) sought clarity on why board surveys meant to be commissioned in 2012 were not done.

Mr Buthelezi replied there was fluidity in the board. Board members came and went. The finding was correct, and the entity undertook to correct it.

Mr Singh sought clarity on the retirement fund solutions relating to buses. The AG had noted that the project was around 50% complete and the target date was September 2012. What was the latest position on this?

Mr Montana replied retirement funds were a sensitive matter. The majority of employees at PRASA fell under the Transnet Pension Fund and various other funds within the entity. The board took a decision to consolidate those because of the exposure that was there. Negotiations were entered into with the unions. For the fund to work, one needed the numbers so that it could be in a far better position. Three months ago PRASA moved further to do detailed analysis of the funds. All processes needed to be complete by March 2013.

Mr Singh sought clarity on the bus fleet for Autopex and the licensing challenges that were there.

Mr Montana replied the entity bought 520 busses during the 2010 Fifa World Cup, 50 of which were leased. Funding for R1.4 billion was received from various stakeholders. Government availed R750 million, the rest was financed through a debt by Mercedes Benz. A number of options were agreed to that after the World Cup 18 buses would be given to the Premier Soccer League (PSL); 110 buses would be given to municipalities. There were currently about 720 buses in the fleet, but some of them did not have operating licences and remained standing. Last year a decision was taken to dispose of some of the fleet.

Late payments and fruitless and wasteful expenditure
Mr Singh sought clarity on the fruitless and wasteful expenditure of about R3.4 million. He wanted to know why no disciplinary proceedings were taken against employees, and also requested that the officials speak to the issue of late payments.

Mr Gastin replied the fruitless and wasteful expenditure was made up of a few issues. There was fleet vehicle hire (R1.7 million) used for purposes of maintenance of trucks. Penalties were incurred for failure to pay on time. He highlighted that PRASA had submitted a budget with a deficit. From time to time the entity had cash-flow challenges. When one operated on a deficit budget, then one needed to generate enough cash. If the cash was not there one was bound to struggle in settling some of the obligations. This was nevertheless being managed.

The next one was electricity rates and taxes. The rates went up extensively higher than the entity could set adjustments. The entity was in negotiations with municipalities for longer payment terms. PRASA incurred well over R3 million on this aspect. Another one was Wesbank where about R2 million was incurred. The entity had gone for centralisation of the payments to manage them entirely because sometimes it was not entirely the case that there was no money. The rest would be small suppliers where PRASA had failed to pay on time due to cash-flow challenges.

Mr Montana commented that the government directive was clear to pay small businesses within 30 days, especially those who were owed a million rands or below. These were businesses that started from a low base low. When it came to cash-flow challenges, the question was whether PRASA was a fully funded. There was a shortfall on both the full subsidy and recovering the money that was there. Management needed to ensure that it collected as much as it could. The long distance rail service had been particularly challenging to the financial position of the entity. The service was not fully funded. When due diligence was done it was discovered that R1.2 billion was required per annum to run this service.

With the Medium Term Budget Statement (MTBS) there was a positive move where the Finance Minister (Mr Pravin Gordhan) had approved the shifting of R650 million into the long distance side. The only concern was that the money was shifted from capital to operations. Nevertheless, the money would put the entity into a much better financial position. The entity had taken a decision to negotiate with bigger suppliers whether it could be allowed to pay within 60 days. The main issue was to maximise revenue collection, but at the same time be mindful of the fact that the long distance mandate was unfunded.

PRASA delivered a major service to municipalities, and failure to do so would result in challenges in those municipalities. Yet municipalities had been raising the way they evaluated railway properties. In the past railway properties were valued at zero to make sure the cost was not increased. The cost of running the service kept increasing, and the ability to raise funds from ticket fares was limited given the market that PRASA catered for. The cash situation impacted negatively on the entity and in some instances the entity would have to make decisions. This was what had been done.

The Chairperson voiced discomfort with the statement that the entity had cash-flow challenges. He failed to understand how PRASA would, on any given month, not have money to pay small suppliers. The accumulated interest of over R3 million could not have been in one month, but rather over a period of time. The company performed a lot of transactions on a daily basis.

Mr Buthelezi agreed and said the interest was accumulated over a period of 12 months. Shosholoza Meyl was handed to PRASA with a deficit from Transnet.

The Chairperson said there were gaps in the payment system. He requested more information on the interests incurred on three contracts.

Mr Buthelezi agreed there were gaps in the system.

Mr Singh commented that it was preferable if the Deputy Minister could also comment on the issue of the unfunded mandate. PRASA had a loss of R156 million at the end of March 2013; 53% of their money came from government and it would appear that government was being used as an ATM here. The Committee was interested in the efficiency of PRASA to run as a profit making organisation without relying on state subsidies in the long term. He asked if PRASA was technically insolvent. The notes in front of Members indicated liabilities (R6.7 billion) far exceeded the current assests (R5.3 billion). This was technically insolvent.

Mr Montana replied the over R600 million loss was cut to R156 million. This was a positive performance. The due diligence put the cost of operating the long distance service at R1.2 billion; but the actual cost had been around R870 million. The board chairman had written to the shareholder (DoT) to say, either the service was closed or the shareholder funded it.

The Chairperson interjected and sought clarity on whether the loss resulted from Shosholoza.

Mr Montana replied “primarily”. He did not commit to saying “only” as Metrorail was also not fully funded. PRASA would always rely on subsidies given how expensive operating the railways was. If that cost were to be passed onto the commuter a lot of people would be pushed into using cars. He cited the Gautrain, that Government put R24 billion into. If this money was to be recovered from the user, then the Government objective of promoting public transport would be defeated.

Mr Singh said there was a difference between subsidies and injection; private companies received subsidies from government as well. He took the point that Shosholoza was the main contributor to the losses that PRASA made.

Mr Gastin disputed the suggestion that PRASA was technically solvent. The current ratio for PRASA was 1.07, and debt ratio was 0.17. In terms of the benchmark, one could not say whether this was the right one to determine whether one was technically insolvent or not. Another issue was how entities accounted for certain liabilities. In terms of IAS (International Accounting Standard) 20, PRASA was required to account in terms of the deferred income method. Certain portions of the government subsidy were recorded as a liability, but this was not a real liability. From these audited numbers, PRASA was technically solvent, not insolvent.

Mr Singh sounded confused and said if the official “said so.” Given the figures that had just been quoted, what inference could be made, if someone had limited understanding of accounting.

Mr Gastin replied that PRASA’s current assets sat at R31 billion and liabilities were at R29 billion for the year ended. He pointed out that the Member was looking at current assets and current liabilities. What was used to determine technical insolvency was a debatable matter.

Mr Singh requested a written report on the matter.

The Chairperson said the item would be noted as one of the grey areas. To start debating the AG in Parliament was concerning and should not happen. It was desirable that the entity do things the right way.

Internal controls
Mr Singh sough clarity on the financial misconduct cases that had not been report to NT.

Mr Gastin replied it was an error not to have done so, but the majority of the processes were still underway. This would be corrected in future and the cases, once finalised, would be reported to NT.

Mr Singh asked how efficient the internal controls at PRASA were. Was management satisfied with the internal controls? Were there issues that the entity was able to pick up on its own other than what the AG had found?

Mr Buthelezi replied there were systems and controls in place. The entity performed the internal audit function regularly; the function had been outsourced to an external company as PRASA was still a new company. The intention was to build capacity.

The Chairperson asked until when would the function be outsourced? He asked if a cost-benefit analysis had been done on the use of consultants as opposed to appointing internal staff.

Mr Buthelezi replied could not say until when the function would be outsourced.

Mr Montana replied cost-benefit had been done and different companies were roped in every year. The previous year the function was outsourced to Deloitte; this current year Sizwe Ntsaluba Gobodo had been roped in.

Mr Singh commented that he trusted that the Sizwe Ntsaluba Gobodo person who had recently been shot dead was not as a result of any of these investigations.

Mr Montana replied that in fact when PRASA did its rolling stock, that person had been the probity officer. Controls were one of the central things that related to management reviews on both the financials and other things. These were done monthly. There had been a criticism that the entity was reactive in its approach, and that had been accepted. The systems were brought, and the security of the IT systems was good.

The Chairperson emphasised that the Committee was interested in building internal capacity in public sector entities. Unless timeframes were provided on the use of consultants, value for money would never be achieved. The entity should initiate a process to build internal capacity.

Investigations
Mr Singh sought clarity on the number of investigations that had been done, including the one conducted by the Public Protector.

Mr Montana replied a number of investigations had been instituted last year. One was undertaken by Deloitte. It was found that the entity lost a lot of revenue especially with tenants at stations. Project managers were found not to have applied correct procedures in the building projects. There had been variances on what conduct was construed as collusion. The report was taken seriously. The CEO of PRASA CRES (the property division) was put on suspension, and was subsequently fired. When one spent R16 million on investigations that was an indication that something was not normal. There were people inside the business who worked for their personal benefit. Such individuals were being thrown out.

Ms Tara Ngubane, CEO PRASA CRES, elaborated and said the investigations that were conducted looked at revenue leakages and the conduct of programme managers. Deloite conducted the investigations and the report was compiled and recommendations were acted upon. Staff were given final written warnings. There were five pending cases at the Commission for Conciliation, Mediation and Arbitration (CCMA) for those found to have contravened procurement policies. There were a lot of resignations during the year. But the entity would try and recover the money from the officials even if they had left. The team in the CRES environment had changed.

Mr Singh asked if criminal charges had been referred against anyone. He requested the officials to quantify the alleged contraventions. It would seem one of the reasons this occurred was lack of internal controls. This emphasised the point that the AG was correct in identifying internal controls as a concern. He asked if the reports had been availed to the Portfolio Committee or the Minister.

Ms Ngubane replied indeed the reports were availed to authorities and were given to the AG as well when the audit process started.

Mr Montana replied the contraventions could not be quantified on the revenue side. At all times the entity looked at the adequacy of the internal controls, hence it was found that in areas of major activity people tended to take advantage. The question ought to be whether the management was effective or whether there was a tool. He assured the Committee that most of the things were identified by management. The weakness was that financial misconduct cases should be reported. The investigations on fuel were with the Hawks. Also the police had been involved in situations where people stole cables. It was found in some instances that those who stole cables were people working within syndicates.

Mr Singh commented that the Committee hoped all checks and balances were put in place for the R51 billion tender that was being considered. Members would not want a situation where the tender came before the Committee on account of lack of transparency. He asked if there was cooperation from PRASA on the Public Protector investigation about allegation made by the National Transport Movement union of tender irregularities and management. What had PRASA management been informed about the investigation?

Mr Montana replied that PRASA had provided all the documentation required and that it fully cooperated with the PP. There were legal issues involved in the investigations but the cooperation was even commended by the PP. He indicated that all the allegations made were found to be untrue.

Mr Singh indicated he received correspondence from the Public Protector the previous day indicating that delays occurred in the investigations as a result of capacity constraints, but also lack of cooperation from PRASA. It was indicated that the report had been finalised, and was quality assured. The Public Protector could not say when the report would be tabled but they would advise the Committee.

General points
The Chairperson sought on why the Group CEO had become chairperson of two PRASA subsidiaries. The Chairperson requested clarity on contingent liabilities and the R30 million stated for pending cases in the report.

Mr Gastin said additional information and breakdown of cases would be provided on these. Some of these were in court, and some had been taken for arbitration.

The Chairperson commented that had the liabilities been done away with, the shortfall in the budget would have been covered.

Mr Buthelezi replied this was purely for continuity, and alignment of the programmes of entities with PRASA strategy and vision. It was realised that there was a lot of disconnect between what the PRASA board and other boards were doing. Conflicting decision were even arrived at and a lot of time was spent reconciling. This was done also in other companies; it was not an uncommon action.

The Chairperson advised that whatever the entity did as a temporary measure, it needed to set timeframes. This assisted officials to work towards a goal. In the absence of timeframes such an arrangement could be problematic. But also it was not desirable that the Group CEO was placed in a difficult situation where whilst managing everything, he also had to manage other entities on the side. He struggled to understand the arrangement from a governance side of things.

The Chairperson suggested that when PRASA came to Parliament again, it was crucial that financial statements of subsidiaries be brought along, so that Members could compare what each brought to the total group performance. As things stood the Committee did not have a sense of what Intersite, Autopax and PRASA Corporate Real Estate Solutions (CRES) were contributing.

Portfolio Committee on Transport Chairperson input
Ms R Bhengu (ANC: Chairperson PC on Transport) said her Committee was satisfied with the engagement. When the Committee looked at the performance of PRASA, it was satisfied that there was value added, particularly given that it had not been long since PRASA was established. This was an entity that added value, pushing for railway transportation to be the backbone of transport in SA. The Committee was mindful of the fact that PRASA was still in the development phase. It had not reached maturity as an entity.

The Committee was satisfied that the entity positively responded to issues pointed out to them, especially on rebuilding the manufacturing industry in the country. The entity stuck to the 65/35% local procurement policy in producing components used for locomotive infrastructure. Everyone could learn from PRASA when it came to innovative ideas. It was concerning that the entity was given an unfunded mandate on Shosholoza Meyl. If the need for Shosholoza Meyl was important, funding had to be availed for a sustained service. Lastly, the entity maintained a healthy relationship with Parliament.

Concluding remarks
Mr Mawethu Vilane, DoT Acting DG, said the Department was satisfied with the performance of the entity. DoT would want to push the envelope (increase the outputs) to say the entity should achieve more. The entity was committed to cleaning up the environment and this was reflected in the DoT Annual Report. An issue was raised with the AG that it was important that the environment within which the entity found itself in should be contextualised. The entity operated in a network and infrastructure environment. It was important that the audits did not undermine the ground that had been covered. The Department would meet the AG on this, it was crucial that what got reported was the true reflection of events.

The Deputy Minister said the unfunded mandate was indeed the concern at DoT and that NT had been engaged on this. The Department was certain that this was the kind of service that was required. Improvements on much of the services would happen with speed when there was funding. The Department welcomed the engagement and this could only sharpen management when dealing with these issues. There were issues that DoT and PRASA would respond to. The executive believed that it needed to meet with the AG and PRASA to iron out differences. It was true that PRASA inherited a very fragmented railway service.

The Chairperson said the entity should not get the impression that the Committee was blind to the work it had done over the years. Officials should never be satisfied with their work. He hailed PRASA as a shining example and said all other entities ought to follow suit. The Committee knew that in terms of business development four years of existence was a short space of time. But the Committee wanted things done. The entity should be  extremely extra careful with every cent. The Committee appreciated how the DG had engaged the Office of the AG. Some of the issues that were raised, it was good that they were pursued. Officials needed to stick to the timeframes for evidence submission to the AG because once the audit process started it was not easy to stop them. He instructed that PRASA meet with the AG on Note 21 (delegated authority); the targets; and the annual financial statements. He requested that both parties provide a written report to the Committee indicating that issues had been reported.

The meeting was adjourned.