Unauthorised Expenditure: Department of Trade and Industry briefing

Public Accounts (SCOPA)

27 August 2014
Chairperson: Mr T Godi (ANC)
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Meeting Summary

The National Treasury (NT) was supposed to brief the Committee on unauthorised expenditure, as requested by the Department of Trade and Industry, the Department of Home Affairs and the Presidency.   However, the National Treasury did not come to the meeting, and no information was provided to the Committee about the reason for their absence.  The Committee was very concerned about the situation, but decided to proceed with the briefing from the Department of Trade and Industry (DTI).

The DTI reported that the matter related to unauthorised expenditure in the 2004/5 annual report of the DTI.  A request had been made by the NT to the Standing Committee on Public Accounts (SCOPA) in 2010 to approve this unauthorised expenditure, and to charge it to the National Revenue Account.  In 2011, the Department had appeared before the Committee and the Treasury had dealt with all the matters, with the Department supplementing.  That was why the matter was before the Committee again.

 The total amount of unauthorised expenditure was R37 379 505, and was related to four items:

-  A R25 000 arbitration award issued by the Commission for Conciliation, Mediation and Arbitration (CCMA) for the Department’s dismissal of two employees;

-  Compensation in terms of a Bilateral Investment Treaty (BIT) of R6 154 213.

-  R31 million related to claims made in terms of the General Export Incentive Scheme (GEIS). This scheme provided companies with incentives to export; and

-  R125 000 related to staff debt.


Members could not understand why companies could not be traced, if all companies were registered on a database to which the Department of Trade and Industry had access.  They questioned the five-year delay before inspections had been carried out to ensure the GEIS incentives had in fact been properly used.   Members sought more information about GEIS, and asked why such a huge payment had been made to the Pumlani Lodge, and what the provisions of the Bilateral Investment Treaty (BIT) were. With regard to the payments made to the CCMA, what were the individuals disciplined for, who were the debtors owing the R125 000, were they still in the employ of the Department and had due diligence been carried out?

The Committee was appalled that the one of the reasons for writing off the debt to the government was that it would cause individuals undue hardship. Members said most South Africans suffered undue hardship and struggled to pay their debts. The Committee heard that the DTI had improved its operational procedures and had an inspectorate to ensure that payment of GEIS incentives was made only after construction had been verified.

The meeting was adjourned to allow the Committee to regroup and discuss an appropriate way to move forward on this issue.

Meeting report

The Chairperson expressed concern that the National Treasury (NT) had not arrived. The Committee initially decided to wait until the NT arrived, but after waiting for 37 minutes decided to start the meeting in the hope that they would arrive. The Chairperson said that there was possibly some misunderstanding, because the Committee had hoped that the NT was going to lead the discussion. The presence of the Departments was merely to provide clarity and assist the Committee when decisions had to be made.  The Directors-General from the Department of Trade and Industry, the Department of Home Affairs and the Presidency were welcomed.  

In terms of the law, this Committee had to process all unauthorised expenditure. This was being done in this the Fifth Parliament, because it had to be processed once and for all.  The Committee had the presentation from the National Treasury with their recommendations, and the NT was supposed to lead this discussion. The Departments concerned had to assist the Committee to make a decision, so they would be given the opportunity to explain the figures, background and circumstances.  The Director-General (DG) of the Department of Trade and Industry (DTI) was asked to be the first to brief the Committee.

Department of Trade and Industry (DTI) briefing

Mr Lionel October, Director-General, DTI, said that the matter related to unauthorised expenditure in the 2004/5 annual report of the DTI.  A request had been made by the NT to the Standing Committee on Public Accounts (SCOPA) in 2010 to approve this unauthourised expenditure, and to charge it to the National Revenue Account. The unauthorised expenditure amounted to R37 379 505,54.  There were four items related to this unauthorised expenditure.

The first was for R25 000 -- an arbitration award issued by the Commission for Conciliation, Mediation and Arbitration (CCMA) for the dismissal of two employees. The two employees had challenged the Department and had received an award regarding a labour relations dispute.

The Chairperson asked if this was the last amount referred to in the document from the NT.

The DG confirmed that it was in the letter from the NT.  The first amount shown, related to compensation in terms of a Bilateral Investment Treaty (BIT).  South Africa had BITs with a number of countries, where it undertook as a country to protect and preserve the property of that country. This award had been granted to Pumlani Lodge against the South African government, when the police and security services had failed to protect that property. The award amounted to R6 154 213.

The biggest cost written off was R31 million. This related to a General Export Incentive Scheme (GEIS). GEIS was introduced in South African in1990. It provided companies with incentives to export.  At the time it was introduced, companies could get this incentive on the basis of a claim supported by an audit report.  In terms of the procedures available at the time, five years after that payment was made, the Department would send inspectors to verify that the incentive had been properly given.   At that time, a number of companies listed were found not to have sufficient documents available to prove that they were entitled to that level of incentive.  R31 million had therefore been written off.

The other matter related to the staff debt of R125 000. This was money owed by staff who had resigned. The money owed was in the form of bursaries, tax, subsistence and transport claims. This money had been taken off their pensions.

The major item of authorised expenditure was the one related to GEIS. The other huge expenditure was the compensation award for Pumlani Lodge, which was under BIT.  This amount was written off in the 2004 Annual Report.  There were insufficient funds in the DTI budget and that was why it was classified as unauthorised expenditure, and a request made to SCOPA to write it off from the National Revenue Fund.

Mr E Kekana (ANC) asked for clarity about companies who were part of GEIS, and could not be traced.   All companies were normally registered in a database, but the Department was saying that the companies could not be traced. What did this mean?

Mr T Brauteseth (DA) asked if there was a regulation in GEIS that stipulated that businesses would be inspected only after five years, or was it just an oversight that brought about the inspection after five years. He asked if this illegality was reasonably unavoidable.

Mr V Smith (ANC) asked about the R25 000 CCMA arbitration award, and what the individual was disciplined for.

Mr Smith said that with the R125 000 staff debt, the reasons given were that the recovery of debt was uneconomical -- the debtor could not be traced and the recovery would cause undue hardship to the debtor.  The last reason -- of undue hardship -- should not be accepted by Parliament. All South Africans suffered undue hardship. The Committee needed more information from the DTI. He asked who the debtors were and if they were still in the employ of state.  What was the disciplinary hearing for?   Was due diligence carried out to see whether the case was winnable?   If the Committee approved, the approval had to be based on whether there was a sound case.  More information was required.

Mr R Lees (DA) said that this matter was written about by NT in 2010 regarding something that had happened in 2004/2005.  There had been a three year hiatus, and it had arrived at the Committee now. There was no motivation from the DTI. The information given was far too limited. There had been a huge delay in this matter and NT would have to speak to the Committee about this. He agreed with Mr Smith that more information was needed regarding the R25 000 and the personal debt. He asked why payment was made to the union, and not to the person involved.

Mr Lees said that the DG had said that money was written off in 2004. He asked if it had been unauthorised because it was not budgeted for.

Mr Lees said that more information was needed about the GEIS incentive scheme and the R31 million. Not a lot of time had been spent on recovering the money.  More information was also needed about the award made to Pumlani Lodge.   Where had this award been made, and on what basis? More detail was required before agreements could be made.

Mr M Booi (ANC) said that Parliament had to take responsibility first.  The reports had to be considered first, and then they had to be reflected upon afterwards.

Ms N Khunou (ANC) agreed with Mr Booi.  She was also seeking clarity at the moment.  She wanted more details about GEIS and whether the Department had mechanisms to trace companies.

Ms K Litchfield-Tshabalala (EFF) said that more information was needed. Like Mr Smith, she could not believe that when the government had to pay, it was considered “undue stress” and the money was unrecoverable. When ordinary people could not pay their debts, the money was pursued relentlessly. 

She asked why the person was dismissed, and if it was an unfair dismissal.   She did not understand the GEIS debt, and asked for clarity about this. Regarding the claim involving Pumlani Lodge, she asked if it was not the task of the business to protect itself.

When Mr Smith started to say that the Treasury was asking for the Committee’s approval, he was interrupted by Mr Booi, who said that Parliament had to take responsibility for this situation.   Mr Smith said that he was just seeking clarity.

The Chairperson said that the Treasury was just asking the Committee to approve the unauthourised expenditure from the National Revenue Fund. In terms of the Treasury explaining their recommendations, this was a problem because they were not present. He asked the DG to answer the questions.

Director-General’s response

The DG apologised for not being comprehensive enough. In 2011, the Department had appeared before the Committee and the Treasury had dealt with all the matters, with the Department supplementing.  That was why the matter was before the Committee again.

With regard to the GEIS payments, the companies could not be traced.  Many of these incentives were given to the companies more than 20 years ago, and many had closed or had relocated.  Some of the companies were in the former decentralised areas, like Botshabelo and Atlantis. A few were owned by the Taiwanese.  Some of the companies had settled their claims.

The DG said that a question had been asked about procedures and why businesses were inspected after five years. The DTI had amended its operational procedures.  The operational procedures of the DTI were not legal at that time.  GEIS was introduced in 1990 and the first Minister of the DTI had closed down the scheme because it was fraught with corruption, fraud and maladministration. New operational methods had been instituted.  Currently the DTI did not pay out before inspections were done. The DTI now had an inspectorate which ensured that the company first undertook the investment for the building of a factory. Once construction was completed, the inspection took place and then the payment was made.

The situation, where documents had to be searched for, no longer existed. There had been instances before, when inspectors went round to verify an already paid claim, many said they did not have proof or records.  Some of the matters were difficult to pursue because permission had been obtained from the State Attorney, who had then written off the debt because there was no proof and no records.  Some payments were received. The scheme was closed after 1994, and the Department was busy with those matters. It was committed to spending more time trying to recover the money.  Currently the DTI had much clearer operating procedures and did not pay before doing inspections. It also used an independent inspectorate sometimes if it was not sure about certain companies. It then conducted extra inspections.

With regard to the Pumlani Lodge matter, the Bilateral Investment Treaty was with Spain.  Article 3 in the BIT – it was a reciprocal treaty - protected investors from the other country involved. South Africa was protected similarly when it had investments abroad.  Article 3 stated that a country had to take reasonable steps to protect and secure property. The police were supposed to detect and prevent criminal activity. This was all about ‘reasonable’ steps being taken for protection. It was the responsibility of every state to provide that level of protection. One foreign company had claimed, in terms of Article 3, that they had not been given that protection. They had gone to the South African courts and used that article to say they were entitled to a reasonable level of protection. They had claimed for their loss of profit against the state because of the criminal activity. They had not been given ‘reasonable’ protection, so they had taken action and the court had found against the South African government.   The Minister of Trade and Industry had been obliged to pay the award of R6 million.

Due process was followed in relation to the misconduct of the two employees. The CCMA had ruled against the Department because disciplinary action was taken. There could have been procedural grounds for the dismissal being found unfair. The arbitrator ruled against the Department, which was obliged to pay. These awards could be sent to the Committee. The Department had had a few cases of dismissals.  Most cases were for fraud and the Department had pursued them vigorously. There were long-standing disciplinary procedures in place.

Mr Kumaran Naidoo, Group Chief Financial Officer (CFO): Department of Trade and Industry said that claims against employees could involve bursaries, leave or pension. If the person resigned, then monies owed to the organisation would be deducted from their pension, for example.  If the person was unable to raise the money to pay off their debts, then it would be deducted from their leave pay or pension.

The DG said that as a last resort, debt was raised only on the advice of the State Attorney. The process has been tightened up so debt came off the salary. If a person resigned, then money was taken off outstanding payments, and only if the State Attorney saw fit.

The Chairperson asked how staff debts were considered as unauthorised expenditure.

The DG replied that when a debt was an issue, advice had to be taken from the State Attorney.

Mr Naidoo replied that the reason it became unauthorised expenditure was because there was not sufficient money in the budget.

Mr Lees expressed concern about the robust approach of taking money out of a person’s pension. He had thought this had been outlawed.

The DG said that this was money that was owed to the state.  

The Chairperson said that perhaps the DG was not aware of the law regarding this matter, so it should not be pursued.

Mr Lees said that what was at issue here was that measures had to be put in place to ensure it did not happen again. The DTI did have measures in place, but measures attached should be legal.

Mr Booi reiterated his feeling that Parliament had not done its job.

Mr Smith said that it might have been premature to have Departments here, because the Committee had not processed the issues with Treasury first. He proposed that this meeting be adjourned to another date so that the Committee could be sure that it was able to deal with Treasury and the Departments.  He asked if it added value to have this discussion, just for the sake of discussing.

The Chairperson said that the responses from the Department had assisted the Committee to better understand the situation. He did not think that the Treasury was able to provide better answers than the Department. His understanding was that after the discussions with the Department, it would not be necessary to call the Treasury again because the Department would have provided enough clarification to the Committee to enable it to make a decision on the resolution the Committee should send to Parliament. The Committee had the recommendations from Treasury, and they were the best people to explain unauthorised expenditure. The DTI had clarified the issues and would bring additional information if required.

Mr Kekana expressed agreement with Mr Smith about adjourning the meeting and getting more information. Some of the Members were new to Parliament, and therefore needed more information.  He agreed with the proposal to adjourn the meeting and discuss the approach to take.  Then a decision could be made on how to move forward. At some stage, Treasury could be invited to verify the information.

Ms Litchfield-Tshabalala agreed that the meeting should be adjourned, and the Committee should discuss thr matter among themselves.

Mr Booi said this was the Fifth Parliament, and people had different experiences and a balanced approach should be ensured. The Committee should give each Member the opportunity to learn something so that everyone could be on a par. The Committee should work together as a collective. Treasury needed to be here.

Mr M Hlengwa (IFP) said that he appreciated the responses from the Department, but he was really interested in having the National Treasury present for a proper conversation, so that they could  explain their recommendations.

Mr Lees proposed that the expenditure incurred in getting all the officials to the meeting today be charged to the National Treasury, given that they had called the meeting.

Ms Khunou agreed with the proposal that the meeting should be adjourned

The Chairperson said that the sentiment seemed to be that if Treasury had been present, they would have agreed or differed with what the Department had said. There was a need to be able to sit down as a Committee and agree on how to approach this matter as a collective.

Mr Hlengwa said that there was a need to find out why Treasury was not present.

The Chairperson said that this was the first meeting as a Committee, and it had to be conducted from the correct foundation. The Committee had to unite around these challenges. He expressed certainty that the Committee had done everything it needed to do, and it would decide on how to take the matter forward.

The meeting was adjourned.



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