Audit outcomes of Economic Development Department and its entities: AGSA briefing; Department on its 2013/14 Annual Report, with Minister in attendance

Economic Development

14 October 2014
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Auditor-General of South Africa (AGSA) stated that the Economic Development portfolio had received an unqualified audit opinion. Stagnation in audit outcomes was related to compliance with legislation, and due process. The AG had advised that there had to be a stronger review of the actual achievement of targets. There was a lack of monitoring controls for human resources. Besides human resources, the quality of submitted financial statements was also a risk area. There was a lack of internal controls. There had to be daily and monthly controls. Financial statements had to be prepared more regularly and reviewed properly. Reviews had to be done by management, internal auditing and the audit committee. Root causes had to be identified to prevent stagnation. There had to be action plans to address the AG’s findings.

In discussion, the AG was asked about the commitment of the Minister to attend to repeated transgressions. The AG was questioned about its authority. There was concern about the qualifications of EDD staff, and internal controls. There was a feeling that the AG was not entirely consistent in its evaluation of management and leadership. There was a need for an effective leadership culture that could set up stronger controls. Unverified documents that went out presented a serious challenge. There was interest in supply chain management and due process.
In his briefing on the EDD Annual Report for 2013/14, the Minister stated that the performance of economies was a dominant concern worldwide. There was slower growth in the economies of Europe, the United States and Asia. The EDD did not shape the economy, but provided the key dashboard. Support for the Presidential Infrastructure Coordinating Council (PICC) had resulted in the preceding five years witnessing the largest infrastructure spending in history. Infrastructure spending was a countercyclical measure in the context of slow economic growth. The Industrial Development Corporation (IDC) had provided twice as much financing credit approval and disbursement during 2009 to 2013 than in the five years before that. The Small Enterprise Financing Agency (Sefa) had disbursed R362 million to women-owned businesses, and R157 million to youth-owned businesses. The competition authorities had earned nearly ten times as much in remedies and fines, compared to the previous administration. There had been a settlement with Telkom that could save consumers R875 million. The Competition Commission had concluded its investigations into collusive behaviour among the major construction companies. A trade policy directive had been issued to the International Trade Administration Commission (ITAC) on the export of scrap metal, which required the introduction of a price preference system. The IDC had set aside R1 billion, and Sefa R1.7 billion, for youth empowerment enterprises in the following three to five years. The Department had met all its frontline key performance indicators (KPIs), except for one in administration.

In discussion, the Committee agreed that infrastructure development was critical. Private sector money was available, but was not being invested. It was asked how funds could be unlocked. There was concern over job losses in agriculture, mining and manufacture. There was interest in the possibility of learnerships being turned into internships, to support youth employment. There were questions about the role and achievements of Sefa and ITAC. Water shortages, especially in rural areas, received attention. The work of the competition authorities was commended. Finalisation of the structure of the Department was called for. There was also concern about staffing. It was asked if the settlement with Telkom by the Competition Commission had had any impact. Cable theft caused concern. The Department was congratulated on the fulfillment of its coordinating role. The Minister emphasised that it was crucial for the private sector to be willing to take risks with infrastructure investment. The public sector was also risk averse, which did not augur well for the development of an entrepreneurial culture for small business development.

A Committee matter discussed was the absence of opposition parties at a capacity-building Committee workshop. There were some exchanges between the Chairperson and DA Members on austerity issues, as the DA had decided to stay away when it became known that the workshop would be held on a game farm. It could have been done inside Parliament, with taxpayer money saved. The Chairperson was disturbed by the fact that the DA had taken the decision at a point when bookings had already been made. An ANC Member expressed disappointment that the DA had rejected a hand of friendship extended by the ANC, and had made itself into a de facto majority by not attending. The DA in turn felt that its bona fides had not been accepted.

Meeting report

AGSA briefing on audit outcomes of the Economic Development Department for 2013/14
Mr Ahmed Moola, Senior Manager, Auditor General of South Africa (AGSA), said that the Economic Development portfolio had received an unqualified audit opinion. There were no issues related to performance reporting against predetermined objectives. Stagnation in audit outcomes were related to compliance with legislation. He advised the Portfolio Committee (PC) to monitor progress. The Department could be brought in to report on actions taken to address 2013/14 AG findings.

The AG was concerned about contracts awarded without tax clearance certificates. There had to be attendance to due process, and a stronger review of actual achievement of targets. There was a lack of monitoring controls for human resources. The Committee could focus on HR action plans. Besides HR, the quality of submitted financial statements was a risk area. There was a lack of internal controls. There had to be daily and monthly controls. Financial statements had to be prepared more regularly and reviewed properly. Reviews had to be done by management, internal auditing and the audit committee. Financial health was not a concern. Root causes had to be identified to prevent stagnation. There had to be action plans to address the AG’s findings.

Mr S Marais (DA) thanked the AG for the robust auditing done. Supply chain management was sometimes the root cause of corruption. There were practices like increasing the project bill in procurement. Due process for service providers had to be looked at, especially with regard to tax clearance certificates. Some tax clearance certificates would not pass the test if submitted. Money lost due to dubious contractors had to be estimated. There had been a key commitment by the Minister. He asked about the Minister’s reaction to repeated transgressions. It had to be ascertained which past transgressions had not been remedied.

Mr Moola replied that there had been control deficiencies in the past with regard to tax clearance certificates. The Department had not collected tax certificates in previous years, and that had fallen through the cracks. There had been a key commitment from the Minister to address areas of no improvement. Areas of concern were pointed out to the Minister in July 2013, and he himeself was concerned about HR management. The Minister was committed to paying more attention to issues that caused findings. Action against transgressors could be taken in terms of section 38 of the Public Finances Management Act (PFMA). It was generally the responsibility of the Accounting Officer. A first report on irregular expenditure was sent to the National Treasury, who would try to see who was responsible. The PFMA prescribed disciplinary action against officials for irregular or fruitless and wasteful expenditure.

Mr Marais noted that AGSA reported to the PC and the Minister. He asked if the AG had any authority. The PC had an oversight role, but did not have authority.

Mr P Atkinson (DA) noted that the Minister of Local Government had referred to the number of unqualified people. He asked if the EDD had enough qualified people. There were high levels of non-compliance.

Mr Moola replied that the AG was independent, and could not directly intervene. The AG pointed out root causes. There were quarterly meetings with the Minister, and more frequent meetings with the Accounting Officer. There were meetings with the Chairperson of the Portfolio Committee. Intervention took the form of assessment of the status of findings on a quarterly basis. The AG could write to the Director General (DG). The surprise element had to be eliminated. Management and audit committees were engaged with. Controls had to be strengthened. There was no specific procedure to audit qualifications, but the AG assessed the appointment environment, and reported on that.

Mr S Tleane (ANC) thanked the AG for simplifying matters. There was reason for concern about developments since 2010/11. The same mistakes continued to be made. The briefing had indicated that elementary mistakes were not being corrected. Documentation was being released too quickly. There had to be some internal assistance before it was released. Measures to that end had to be put in place. Oversight had to be objective, frank and constructive.

Mr Tleane felt that the briefing had not questioned levels of leadership. He asked about responses to problems pointed out by the AG. What were the real challenges?

Mr Moola responded that he did not think there were problems with leadership. Problems were related to cracks in the control environment.

Mr I Pikinini (ANC) noted that internal auditing and the audit committee were repeating mistakes. Operations had to be in terms of plans. He asked about non-negotiables and recourse.

The Chairperson remarked that the AG was an ally of the Portfolio Committee. It was important to understand things from the perspective of the AG and its mandate. There were issues of consistency. Leadership was said to be a driver of internal control. The AG had at first stated that the leadership culture was 100 percent, but later it had indicated that there were problems with management. There had to an effective leadership culture that could set up controls to ensure that the left hand knew what the right hand was doing. The issues were subtle, but still weighty. If unverified documents went out, it was a serious challenge. She asked why that happened.

Mr Moola responded that he had indicated which areas were satisfactory, but his real focus had to be on the negative. The EDD had committed itself to no findings in all areas. An action plan would deal with obstructions to a clean audit. He was trying to unpack areas that could be improved, like HR and financial statements, and to recommend an action plan to address deficiencies.

The Chairperson noted that the IT system was rated 100 percent. The question was why, in terms of security systems, a document could go out without a final verification. IT was about information, but the information that went out had not been satisfactory. Information had to indicate what the Department was doing on a daily basis. The question was whether oversight of the Department was possible. There had to be a common perspective to engage with the Department. Things were not adding up. There had to be internal controls for risk management. The total picture looked satisfactory initially, but then it became confusing. It had to be ensured that the EDD attended to root causes. She asked if issues were checked with the Department.

Mr Moola replied that the Annual Performance Report (APR) was produced through IT. But financial statements were often based on manual records. He recommended daily and monthly controls. The AG looked at the code of ethics and positions filled, and tried to determine the nature of non-compliance.

The Chairperson noted that the AG looked at averages. It seemed that the level and extent of the cracks referred to, had not been determined.

Mr Moola replied that root causes were looked at in every instance, in financial and performance matters. Leadership became an issue when the Department did not respond to issues identified.

The Chairperson asked that the AG recommend what could be done if the issues were related to compliance, and not leadership. The Committee was happy about the unqualified audit opinion, but did not want to celebrate prematurely. She hoped that the cracks referred to were small cracks.

Briefing by the Minister on the EDD Annual Report for 2013/14
Mr Ebrahim Patel, Minister of Economic Development, noted that the Annual Report was backward looking. It concluded the work of an administration. The performance of economies was a dominant concern worldwide. The context of economic development was that Europe was caught in a no-growth trap, the USA was growing more slowly, and the Asian economies had also slowed down. The EDD did not shape the economy completely, but it represented the key dashboard.

The EDD had spent 99.9 percent of its budget. The GDP was R3.5 trillion. Investment had grown by R73 billion. Infrastructure spending stood at R233 billion. The Industrial Development Corporation (IDC) had been asked about its employment impact. R1.7 billion had been made available for young people. IDC funding was R13.8 billion for the year. R5.2 billion had been approved for black economic empowerment (BEE).

The Minister noted core EDD achievements. Under support for the Presidential Infrastructure Coordinating Council (PICC), it was stated that the preceding five years had seen the largest infrastructure spending in history. It was a countercyclical measure in the context of slowed down economic growth. The EDD had worked with the South African Local Government Association (SALGA), the Treasury and other departments to overcome under-spending of infrastructure budgets at provincial and local government levels. The work of the PICC had been communicated to the public.

With regard to industrial financing, the credit approvals and disbursements of the IDC were twice as high from 2009 to 2013 as in the preceding five years. The Small Enterprise Finance Agency (Sefa) supported 46 400 enterprises. It had disbursed R362 million to women-owned businesses and R157 million to youth-owned businesses.

With regard to competition authorities, the Minister noted an almost tenfold increase in the value of remedies and fines, compared to the previous administration. A settlement had been concluded with Telkom that would reduce prices to customers by R875 million. In 2013, the Competition Commission had concluded its investigation of collusive behaviour by major construction companies. In April 2013, amendments to the Competition Act came into force that empowered the Commission to undertake market enquiries.

A trade administration achievement was a trade policy directive to the International Trade Administration Commission (ITAC) on the export of scrap metal, which required the introduction of a price preference system.

The Youth Employment Accord was signed in April 2013 by the National Economic Development and Labour Council (NEDLAC) constituencies and leading youth organisations. The IDC had set aside R1 billion, and Sefa R1.7 billion, for youth empowerment enterprises in the following three to five years. The EDD had convened the government task team with Eskom and the Department of Energy, charged with providing solar water heaters to low income households. The Minister convened the Economic Development MinMEC, together with the Minister of Trade and Industry.

Over the Medium Term Strategic Framework (MTSF), infrastructure would remain a key tool for the state to support growth and job creation. The environment for new investment would be improved, especially towards generating employment.

With regard to the Annual Performance Plan (APP), the Minister noted that the EDD was essentially a policy and coordination department. Much of its work could be captured only through targets that set up categories, rather than specific aims. The EDD had 206 targets for its frontline work, and achieved 253 deliverables. The EDD met all its frontline key performance Indicators (KPIs), but it did not meet one administrative target.

Mr Marais remarked that infrastructure development was critical, as government could stimulate the economy by means of it. There was private sector money available, but it was not being invested. There was uncertainty as a result. He asked what could be done to unlock funding, especially with regard to construction, roads and railways. Sefa provided industrial finance through direct lending. He asked if the R225 million loan from the African Bank was secured or unsecured, and what collateral there was.

The Minister responded that infrastructure was a critical driver to stimulate the role of the private sector complex. Private sector funding could help. The private sector could be taken on board as an equity partner, or in public/private partnerships, or through supplying goods and services to infrastructure by setting up factories. The private sector used water, roads and electricity and paid for it. It was important to secure commitments from the sector that the infrastructure would be used. At Lepalale, there was an agreement with the private sector that electricity would be used, and money could be loaned against that guarantee. Direct private investment in infastructure held potential, but there were challenges. The private sector wanted the state to carry the risk. There was a reluctance to put shareholders’ money at risk. The sector wanted guaranteed income and profits. There had to be a change of mindset. The private sector had to be encouraged to take risks. Contracts with opt-out clauses had to be avoided. Funding was unlocked when the private sector used infrastructure like electricity to open productive enterprises. At the Standerton enterprise, energy security needed to proceed, and had to be specified. It was necessary to combat corruption and poor management to unlock funding for new investment.
Mr Marais referred to job creation. A labour survey report had indicated that there were job losses in agriculture, mining and manufacturing. 460 000 jobs had been lost. He asked what was being done to intervene and correct the situation. Jobs had to be retained in order to also create more jobs.

The Minister replied that South African agriculture was productive, but not labour intensive. Small scale farming had to be stimulated. Agro-processing had to be stimulated, as it was at the interface between farming and manufacture. There was a growing demand for agricultural goods. The state maintained a light touch, but supported farmers. Agriculture was critical for job creation. Countries like Brazil, India and China had many more farm jobs, compared to South Africa. The EDD looked at the value chain, at competition and at mergers, like the Walmart and Massmart merger. It worked with agricultural smallholders. Massmart had developed suppliers of tradeable products. Companies had to work in the tradeable area.

Mr Atkinson noted that the AG had pointed to a lack of financial skills in Sefa. He asked who would take responsibility.

Ms C Matsimbi (ANC) asked how progress with local procurement could be tracked. She referred to the employment of young people. There were only internships, and not learnerships, that could start straight after matric.

The Minister replied that 12 years of training young people in schools was not being properly utilised. There was no tight fit between learners, interns and permanent employment. Permanent jobs could not be guaranteed. What could be done was to guarantee an interview when there was a vacancy, so that people could chase a vacancy and compete. The problem was risk aversion. The fear of being taken to the Commission for Conciliation, Mediation and Arbitration (CCMA) had to be overcome. It would not do to create guarantees. People had to compete.

Ms Matsimbi remarked that the issue of women had not received much attention.

The Minister responded that the next AR would state what had been done for women. The bulk of women in manufacturing were in textiles. The Industrial Development Corporation (IDC) had development programmes for women.

Mr Tleane asked how many small enterprises and co-ops were supported by industrial financing through Sefa. He asked if the status of small enterprises was being monitored. It had to be checked whether commitments were being adhered to.

The Minister replied that Sefa provided direct lending disbursements. Commercial banking required belts and braces for loans. Private shareholders wanted dividends. It was difficult for small businesses to access capital. Public small business lending gave easier access. Loans were cheaper, or the state took higher risks. Long term company growth required assets for collateral. Young businesses did not have that. The Sefa collateral requirements were not high. A car could stand as security. It was necessary to have a five to ten year vision. The client base of companies had to be known. A company could grow without collateral and hang on long enough to secure that. Risks had to be taken with new players, especially young people and women. Sefa had to build institutional capacity. It had to be known which projects were not viable, but not only safe options had to be played. When a success story was set on its path, there were returns to society. In the USA, bankruptcy was not seen as the end of the world. People started over. There was a culture in which people did not fear failure. Challenges were posed to the Department. The public sector was risk adverse. People worried that if they failed, they would lose their jobs. That was not the kind of entrepreneurial culture needed for small business. Sefa was built with the knowledge that the impairment rate would be higher than that of commercial banks. Risk appetite had to be cultivated.

The Minister said that Sefa responded to funding requests. Cooperatives were small in number, and there was a skills gap. The Department of Trade and Industry (DTI) was considering a cooperative academy. The partnership had to be strengthened so that Sefa could get applications for cooperatives. The cooperative principle had to be introduced into the core economy.

Mr Tleane remarked that the Industry Trade Administration Commission (ITAC) was a critical component for development. There had to be localisation, with own entrepreneurs creating markets. Regional integration and trade cooperation were essential. There were blockages in the Southern African Development Community (SADC) environment. Some members had dual membership. There were reports about a US military base to be established in Botswana. The question was how that would fit in with South African priorities. Life had to be made easier for ITAC.

The Minister replied that the question was how to integrate economies better. 70 percent of trade in the EU was between countries within the union. Germany sold more to France, Italy and Belgium, for instance. Among the developing Asian countries, regional trade accounted for 45 percent. The figure for Africa, historically, was 12 percent. There was more trade with non-African countries because of the lack of infrastructure. It was easier to travel to London by air than to travel elsewhere in Africa. There were infrastructure blockages. ITAC could not do what was necessary. The PICC could help establish regional integration, to connect Africa within, also with regard to energy. Trade regulations were obstacles. There had to be free trade regulation talks. Industrial policy was affected by the fact that South Africa’s neighbours did not have well-developed manufacturing sectors, and were dependent on global copper prices, for instance. However, since the last SADC conference, everybody was buying into industrialisation.

The Chairperson said that there had to be a service delivery focus in the budget review and recommendations process.

She noted that there was a treaty with the DRC to build dams, and asked when the treaty would become effective. Why were there still water shortages in the country, when there were many dams? It was a problem of resource management. There had to be a general plan for water in the rural areas.

The Minister replied that it took more than dams to get water to communities. The water had to move through pipelines. Municipalities were responsible for connecting pipelines. The EDD could not take over that responsibility. There were costs and delays. Pipelayers waited until dams were finished, not wanting to take long term risks. There were instances were older asbestos pipes had to be connected to newer plastic pipes, which caused water pressure problems.

Mr Madala Masuku, Deputy Minister, added that there had been years of disinvestment during the apartheid period. Currently every effort was being made to create stability with regard to water and electricity.

The Chairperson referred to the agreement between the competition authority and Telkom. She asked about impact up to date, and going forward. The competition authority had to be congratulated. Funds were disappearing into coffers and did not reach the people who had been robbed.

The Minister replied that the EDD had monitored the impact. Telkom operated in a competitive market. It was not restricted to fixed lines. It operated on a mobile platform and hence could not force price increases.

The Chairperson congratulated the EDD on its coordinating role. The work of the Department had an influence on financial resources and public investment. It had to talk to administrative issues of governance.

The Chairperson referred to finalisation of the Departmental structure. The strategic plan had to be aligned to the MTSF. Structures in the Department had to give effect to policies.

The Minister replied that an initial draft of the EDD strategic plan was available. It was indeed aligned with the MTSF, and would be finalised in January/February 2015. The key recognition was that the state had to be reinvented. There were parts that did not work well. The design had to be right. The strategic plan had to answer how to effect savings in the long term. ITAC analysis might be required. Problems had to be seen in advance. What was needed was efficient and lean government. ITAC functions could not be duplicated. The Department would connect trade intervention with competition intervention. It was not so much necessary to build a bigger Department, as to create a government that worked. There were many public servants, and yet there were delivery challenges. The EDD was geared towards the coordination of skills. It had to be filled with people who had an entrepreneurial spirit. It would not do to employ people to just sit. The Department had spent 99.9 percent of its budget. Part of that had been savings. Money was put into Sefa. Twentieth century state models were changing. The key insight in the National Development Plan (NDP) was the need for a capable state. Public officials had to have skills to contribute to development, not just the ability to tick boxes. The Department had to be structured that way. Public spending had to be shifted to infrastructure spending and investment. Infrastructure spending was the new mantra. The PICC could help with effective spending.

The Chairperson announced that she had to leave the meeting, and asked the Whip, Mr A Cele (ANC), to chair further discussion.

Mr Tleane remarked that the EDD was a young department. Posts had been created under the old strategic plan. Human resources had to be maximised. The left hand had to know what the right hand did.

Mr Tleane said that cable theft was undermining energy supply. It would be well to develop a kind of cable that would prevent thieves from stealing it. He wondered why thieves were not electrocuted. There was the possibility of syndicate involvement.

The Minister replied that cable theft had at first been small, but was currently a massive business made up of syndicates and larger businesses. Scrap metal export was big business. Metal was collected in the rural areas and taken to the ports. The PICC had set up a task team. The security and the economic clusters had to come to the PICC with concrete proposals. There were problems around the classification of cable theft. It was currently classified under “other crime”, which did not classify it as serious crime. If the classification changed, more detective resources could be brought to bear on the problem. He had visited a factory that was developing technology to deal with the matter. It would be reported on in the first quarter report. Unless the market demand for stolen cables was reduced, it would have to be dealt with on the back foot. Government could be bolder to combat demand through restrictions. The economic harm to the country was massive. Talks would be held with nine premiers and metro mayors.

Committee matter: attendance at Committee workshops
The Chairperson noted the absence of opposition parties at the capacity-building workshop. It had caused wasteful expenditure, because arrangements had been made for Members. Bookings had been made, and the last minute cancellation was disturbing. Workshops were for the growth and development of Members. It provided insight to understand issues, so that oversight could result in the right questions being asked. Parties had to make it clear in future if they would attend or not. It set a precedent.                                                       

Mr Atkinson said that the DA did not support workshops outside Parliament, on account of the austerity directives.

Mr Marais said that he was in favour of workshops. He had raised questions about the cost of having the workshop at a game reserve, and had received no written response from the Chairperson or the Secretary. There had been requests for austerity measures. It could have been done inside Parliament, with taxpayer money saved.

Mr Tleane said that it was heartbreaking, because all Members were South Africans and Portfolio Committee Members. Decisions taken by the majority had to be adhered to. It should have been made clear that people were going to stay away.

Mr Marais interjected that he had made it clear.

The Chairperson called Mr Marais to order.

Mr Tleane said that a minority could not make itself into a de facto majority. The ANC had invited other parties to work together towards a developmental state. It had been a majority decision to go to an outside venue. It was necessary to engage in a different environment. The ANC had extended a hand of friendship.

It had been opportunistic that Mr Marais had written to her at the last moment, questioning the decision to have the workshop on the outside. The reference to austerity measures was noted. However, the leadership of Parliament would have informed the portfolio committees if such measures applied to having workshops outside Parliament. The PC was not meant to suspend its activities. The letter from Mr Marais was received at the last minute. Mr Atkinson seemed ready to attend, but he was then recalled from the workshop. The DA position was communicated to Mr Atkinson at a very late stage. Parties had to be honest and open. Party positions were respected, but there had to be openness and transparency. The Committee stayed in hotels and spent days on the road and hired cars. The ANC was in power and knew about the money available for that. Nothing that was used had not been budgeted for.

Mr Marais said that he would forward his initial letter again. He had sent it when he was informed that the workshop would be at a game reserve. The DA had a right to be in Parliament, and that right had not been granted by the ANC. The ANC had to accept the DA’s bona fides.

The Chairperson said that she respected his position, but asked that he be more open in the future, and that he place matters on the table, rather than write a letter about it. She asked that he not engage with her as Chairperson alone in that manner. She asked Mr Marais to be open and not take up an ideological position when he did not agree with a decision. It had to be accepted that the ruling party took certain decisions. The integrity of the Committee should not be jeopardised. Things had to be done by the book.

The meeting was adjourned.

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