Auditor-General on use of Audit Reports as an Oversight Tool; Financial & Fiscal Commission on Department of Mineral Resource's past performance & future projections

Meeting report

Chairperson’s opening remarks

The Chairperson welcomed the presentation by the Auditor General of South Africa, together with that from the Financial and Fiscal Commission (FFC). He said the presentations were as a result of the Budgetary Review and Recommendations Report (BRRR) process, and the two institutions were invited to assist in this regard. Members were therefore encouraged to thoroughly interrogate the presentations.

Briefing by Office of the Auditor-General of South Africa (AGSA)

Mr Carl Wessels, Senior Manager, AGSA, thanked the Committee for the invitation. He explained that the purpose of the presentation was to provide Members with the necessary information and guidance with regards to the role of the AGSA, and to enable Members to effectively execute their oversight function. The presentation would include information on audit outcomes and provide guidance on how to read and interpret audit reports.

Mr Yaseen Jeewa, Senior Manager, AGSA, said Section 55(2) of the Constitution governed the AGSA nationally. The National Assembly provided the mechanisms to ensure that all executive organs of the state were accountable to it. Oversight entailed the informal and formal, watchful, strategic and structured scrutiny exercised by legislatures in respect of the implementation of laws, the application of the budget, and the strict observance of statutes and the Constitution. In addition, and most importantly, it entailed overseeing the effective management of government departments by individual members of Cabinet in pursuit of improved service delivery for the achievement of a better quality of life for all citizens.

Some of the oversight functions included:

•Detecting and preventing abuse, arbitrary behaviour or illegal and unconstitutional conduct on the part of the government and public agencies. At the core of this function was the protection of the rights and liberties of citizens. Holding the government to account in respect of how the taxpayers’ money was used. It detected waste within the machinery of government and public agencies.  Thus it could improve the efficiency, economy and effectiveness of government operations.

•Ensuring that policies announced by government and authorised by Parliament were actually delivered. This function included monitoring the achievement of goals set by legislation and the government’s own programmes

•Improving the transparency of government operations and enhancing public trust in the government, which was itself a condition of effective policy delivery

Accountability was the hallmark of modern democratic governance. Democracy remained clichéd if those in power could not be held accountable in public for their acts or omissions, for their decisions, their expenditure or policies. Accountability referred to institutionalised practices of giving account of how assigned responsibilities were carried out.

Some of the functions of accountability were to:

•Enhance the integrity of public governance in order to safeguard government against corruption, nepotism, abuse of power and other forms of inappropriate behaviour

•Improve performance, which will foster institutional learning and service delivery

•Enable the public to judge the performance of the government by the government giving account in public

He explained that according to National Assembly Rule 201, the role of Portfolio Committees were to legislate, consider and approve budgets, consider progress reports from line function departments with regard to their mandates, ensure that all appropriate executive organs of state are held accountable for their actions (oversight) and conducting oversight over the executive authority and to consult with liaise with other executive organs of the state and make recommendations. The role of independent assessors was to review and monitor quarterly progress on the implementation of action plans to address deficiencies. Public accounts committees were exercised specific oversight on a regular basis on any report which they may deem necessary.

With regard to the Regularity Audit process, he said the AGSA provided assurance that Annual financial Statements (AFS) were free from material misstatements, that usefulness and reliability of the information in the annual performance report were reported on, that material non-compliance in the annual report were reported on and that key internal control deficiencies  were addressed. However these audits did not guarantee completeness and accuracy of all information. They further did not identify fraud and could not provide assurance that service delivery has actually been achieved.

With regard to investigations, the Investigation Business Unit assisted audit teams in the areas of;

•Fraud risk assessments

•Special forensic engagements

•Fraud research and training

•Peer quality assurance support

He explained that there were four audit opinions; Unqualified opinion, Qualified opinion, Disclaimer opinion and an Adverse opinion.

Discussion

Mr J Lorimer (DA) complimented the AGSA on the comprehensive presentation; however there were still a couple of areas he was unsure of. First, with regards to performance audits; who decided whether or not there would be one? Has the Department of Mineral Resources (DMR) undergone a performance audit recently, if not, would there be one? Secondly, when it came to recommendations by the Committee, was there a mechanism to ensure that these recommendations are implemented?

Nkosi Z Mandela (ANC) thanked the AGSA for the presentation. He raised a concern that a lot of money was being lost and/or returned unspent in terms of the budget allocations. What were some of the contributing factors for this and how could Committees assist by putting in place checks and balances which would ensure that all funds were fully utilised? With regard to accountability, he said in many cases, there was still a lack of transparency within departments. How could transparency in spending be monitored? In many cases where employees had been found guilty of fraud and squandering, the penalty would be a suspension or a fine and no measures were put in place to hold these individuals accountable. How would these issues be curbed?

Mr H Schmidt (DA) also thanked AGSA for the comprehensive briefing. He asked that the AGSA provide some clarity on how the regulatory audit was different from the AGSA audit; where these two different reports? On the regulatory audit process, he referred to the presentation and said one of the shortcomings with the process was that the process did not identify fraud and it could not assure that service had been provided.

Mr M Matlala (ANC) asked about departments that utilised their budgets for unbudgeted projects; how would this be classified? Would this be classified as unfruitful expenditure or fraud?

The Chairperson referred to Mr Schmidt’s questions and asked whether it was the law which limited the AGSA in dealing with issues. The audit was done to bring about confidence in the departments and in some cases this was currently not the case. He asked whether it was difficult to find clean audits. What is the difference between a clean audit and an unqualified audit without findings? What is the difference between wasteful expenditure and fruitless expenditure? He asked that the AGSA provide the Committee with assistance by providing a framework with basic guidelines for the BRRR process. What were some of the guidelines for conducting oversight?

Mr Wessels thanked Members for engaging with the presentation. He agreed that the presentation was quite comprehensive and the initial plan of the AGSA was to conduct a workshop over a number of days with various Committee groups, however this did not take place. There were two ways in which performance audits were initiated. The first was when the AGSA identified that there was a specific need in the sector. This focused on the “major concern” areas such as infrastructure, education, housing and water and sanitation. The AGSA was currently conducting such performance audits on various municipalities around the country. The second time performance audits were initiated was when there was a certain request for one. Currently, there had not been a performance audit on the DMR. On the question of unspent monies, he explained that when a department sat down to discuss its objectives for the year, they also needed to allocate resources to the departmental aspect, such as people and how money would be used. Strategic plans would therefore be tailored to fit in with the outcomes of national government. Also interesting to note was that accounting officers assessed departments on their outcomes and whether or not they had been achieved, on an annual basis. Therefore, during the quarterly performance reporting, if a department was way off its targets, Members could like this to the departments spending.

Mr Wessels further explained that when a department spends money on an item which was not originally authorised, this was referred to as unauthorised expenditure. This was money which was not spent in accordance with the approved in terms of the department’s strategic plan. Members of the Committee were in a very privileged position because they could call in any department or official to come before the Committee to give an account. Members could also request any document they wanted from any entity. He agreed that it was a challenge that an employee was simply redirected to another department instead of facing serious disciplinary action. However, once an individual exited the public service, criminal charges could be laid against them. An accounting officer was responsible for recovering money; therefore if the individual was found guilty of reckless spending or wasteful expenditure, this could be recorded as a criminal offence. The AGSA blacklisted companies and not individuals, and this was a very touchy subject.

Mr Wessels addressed the question of the different types of audits. The regulatory audit was the annual mandated audit of financial statements, which included looking at the reports and compliance with laws and regulations. If the AGSA had any findings on these, internal controls measures were implemented. Discretionary audits were separate reports. The terms clean audit and unqualified audit with no findings were used interchangeable; they were one and the same thing. He suggested that Committees needed to indicate a preference to AGSA. He said a handbook was provided to AGSA by the previous Chairperson of the Committee, which dealt with oversight and accountability in government. This handbook was where AGSA got most of its information on pertaining to Members’ responsibilities around oversight. The handbook would be made available to the Committee.

The Chairperson said as much as the AGSA was not accountable to the Committee, on the basis of the audit work it did, Members would have appreciated an outline about the basic requirements for the BRRR process. What were some of the expectations that the AGSA had of the Committee? He thanked AGSA for the presentation.

Breifing by Financial and Fiscal Commission (FFC)

Mr Bongani Khumalo, Acting Chairperson and Chief Executive, FFC, thanked the Committee for the invitation. He explained that the FFC was a permanent statutory body that was established in terms of Section 220 of the Constitution. It was independent and subject only to the Constitution and the law.The FFC functions in terms of the Financial and Fiscal Commission Act. The mandate of the Commission was to make recommendations, envisaged in Chapter 13 of the Constitution. The Commission was concerned with intergovernmental fiscal relations.

With regards to the evolution of mining and its contribution to the economy, he explained that commercial mining had its origin in the 19^th century with the opening of Kimberly Diamond Mines in 1860s followed by Witwatersrand gold mines in the 1880s. The discovery of gold and diamonds induced rapid structural change from predominantly agriculture and rural economy toward urban economy centered on mining and supporting industries. Shares of agriculture in employment dropped from 75% to 33% between 1865 and 1921. Exports grew rapidly with the decline in agriculture share matched by an increase in mineral exports and profits from diamond and gold became the main source of revenue for government and a source of finance for private investments. Mining enabled South Africa to be the most industrialised African country. Mining was therefore a significant contributor to transformation in the economy. The mining sector accounted for 8.6% of GDP directly on a nominal basis. Mining was responsible for 93% of electricity generation via coal power plants.

The key policies in the mining sector were the Charter for South Africa’s Mining Industry, also known as the Mining Charter and the Mineral and Petroleum Resources Development Act (MPRDA) of 2002. The Mining Charter sought to bring about redress with respect to: ownership, procurement, beneficiation, employment equity, mine community development, housing and living conditions and sustainable development and growth in the mining industry. Every mining company therefore needed to report its compliance with the Mining Charter annually.

He explained that some of the recent sectoral developments and challenges were around production declines. Year on year growth overall mining production fell further in July, to -7.7%, from -5.4% in June and an average of -2.7% for the first seven months of the year. There was a minimal recovery in production of platinum group metals (PGMs) despite the ending of the strike.

Ms Sasha Peters, Manager: Budget Analysis Unit, FFC, said the DMR had received a budget of R 1.4 billion for the 2014/15 financial year. This represented an increase of R102 million from the previous financial year. The largest programme in the DMR was the Mineral Policy and Promotion Programme which spearheaded the rehabilitation of 150 derelict/ownerless mines. The DMR was stable to maintain relatively stable cash flow with July, September, November and January being the months with high spending. The following five entities fell under the DMR:

•Mine Health and Safety Council

•Council for Mineral Technology Research

•Council for Geoscience

•South African Diamond and Precious Metals Regulator

•State Diamond Trader

All five entities obtained unqualified audits in 2011/12, 2012/13 and 2013/14. The DMR played an effective monitoring role over its entities and agencies. Some of the challenges faced by the DMR were around attracting and retaining key staff, especially inspectors and mineral economists, the high levels of staff being poached by the private sector at salary levels which government could not compete with. Maintaining mine health and safety also remained a serious challenge.

Discussion

Ms M Mafolo (ANC) thanked the FFC for the informative presentation. She asked about the nine provincial representatives the FFC had - were they elected and where they spread out across all nine provinces within the country?

Mr Lorimer asked whether the DMR had asked the FFC for an assessment of the MPRDA on the mining sector.  Has the FFC done an assessment of the MPRDA? If so, what was the FFC’s opinion in this regard? He asked whether the confusion between the role of municipalities and that of traditional leaders was a serious one at local government level. Will the FFC be performing an analysis of the impact of possible changes to the Mining Charter? What was the impact of illegal mining currently? He asked whether the strong technology drive by the FFC would not have the direct impact of job losses. Who should be responsible for long term development planning; the state or the mining sector?

Mr Schmidt said the FFC’s mandate was prescribed by finance and fiscal issues; what does this exactly mean seeing that it would not mean giving economic advice to government or to the departments. He said statistics from Statistics South Africa indicated a 45% reduction in PGN’s and 7% output reduction overall. He said a briefing of balance of account payments was supposed to be part of the presentation. How did one arrest the issue of a spiraling shortage on the balance of account payments, which had a very negative impact on the economy?

Mr Khumalo thanked Members for the questions. He explained that the composition of the Commission was in such a way that each local government could nominate two people to the Commission. This was done through organized local government. The SALGA would ask for five names who met a certain criteria and these names were submitted to the Minister of Finance. Similarly, the premiers of all the nine provinces nominated six people and submitted the names to the Minister of Finance. At national level, the Ministry of Finance, through the National Treasury would nominate people and send them to the Minister of Finance who made recommendations to the President. The President then made the appointments. Once these national commissioners were appointed, they no longer represented the spheres which appointed them, they became independent. The Commission represented the mandate stipulated in the Constitution. On the question on the MPRDA, the FFC was not approached to look at the Act. However if the Committee felt that the Commission should make an assessment on the Act, the FFC was obliged respond to the request in terms of the Constitution,

Mr Khumalo accepted that one of the weaknesses within the FFC was that the performance of the mining sector was not linked to the broader macroeconomic aspects. The FFC however would supply all this information to the Committee. He agreed that as the biggest contributor to the economy, the mining sector was not doing as well as it should, and this was a serious concern, and the impact was felt across the economy. Mining was a very key sector in its contribution to foreign exchange; shortages on foreign exchange were therefore a serious problem. On the question on technology, he said the type of technology used would take into account the environment in which South Africa’s economy finds itself in. This was not just about looking at technology for minimising the cost of production, but it was about finding a space which suits your circumstances as an entity. On the development plan, he said the DMR was a core department; anything which happened in the sector had to have the DMR providing the framework for how every other player in the sector would contribute. The local government fiscal framework was solely focused on local councilors; therefore in rural municipalities were traditional leaders were also acknowledged, an Institutional Component took care of the salaries and benefits for councilors in poor municipalities. Traditional leaders perform similar functions as councilors; therefore coordination between the two was still a challenge. Traditional leaders need to be consulted about matters of local governance. National departments such as the Department of Economic Development need to be at the centre of all economic activities at community level.

Mr Ramos Mabugu, Research and Recommendations Director, FFC, responded to the question on illegal mining and said a lot of the FFC’s analysis was on incorporated mining. Non-incorporated mining was an area which required more focused case studies for a stronger and more comprehensive understanding of illegal mining. This would be an area where the FFC would look at upon a specific request. On the question of the current account deficit, having looked at the most recent figures, the figures were too big. The FFC had been trying to assess the causes of this escalation. From a mining perspective, the struggle was not a straightforward one. The challenges of the platinum strike might have also contributed significantly to these figures. When the strike ended, there was a reduction in the stock piles; production did not kick back quick enough to reach the original levels. He said another contributing factor was that manufacturing also took to a decline and this contributed to the drop in foreign exchange.

Mr Schmidt reiterated that the deficit was too high and this was a concern which needed to be addressed. Another concern was that of the MPRDA and whether the impact of this legislation has been assessed. He argued that this legislature may have contributed to the deficit decline. Regulatory uncertainty had serious impacts on investments.

Mr Mabugu said the spirit of investment did not only apply to mining, but it applied across board.

The Chairperson said the MPRDA was with the President and all the necessary procedure would be followed. He suggested that Members await the outcome of the process. He said the matter on mining communities was a debate which the Committee had not seriously undertaken; what role did traditional leaders play in this regard? What role did the Mining Charter play with regard to its social development responsibilities? The Committee was impressed with both submissions.

The meeting was adjourned.