Department of Economic Development & Competition Commission on their 2013/14 Annual Report with Deputy Minister in attendance

Economic Development

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

The Department of Economic Development (EDD) had delivered on the 206 business key performance indicators (KPIs). Of the 22 administrative targets, it underachieved on one. Planning and recruitment of staff had to improve. Governance was improving through risk management; internal audit; ICT governance; security management, and audit committee oversight support. The Committee was taken through financial performance per programme and per economic classification, and audit outcomes of the Auditor-General report. A heat map had been compiled to rectify audit findings, especially with regard to repeat findings. The new Annual Performance Plan (APP) and identification of clear outputs for delivery would lead to a more focused use of resources. There were improved quality controls overly quarterly reporting and submission of evidence. The budget programme had been aligned with the revised strategic outcomes. Review of the organisational structure was at an advanced stage. The EDD was implementing a human resource management turnaround strategy.

In discussion, there were various questions about the human resources turnaround strategy. There was concern over financial management. There were questions about jobs lost, compliance of other departments, and revenue performance. Members were interested in the financing of the Presidential Infrastructure Coordinating Council (PICC) publicity campaign. There were a number of questions around revenue proceeding to the fiscus, or being retained. Repeat findings from the Auditor-General caused concern. There were strong sentiments about those in acting capacities for longer than six months. It should not be condoned. The strengthening of internal auditing was discussed. Human resource issues were at the forefront of discussion.

To promote competition, the Competition Commission, the Competition Tribunal and the Competition Appeal Court had tackled cases on a broad front over the preceding 15 years. Areas engaged with included bread, maize and baking flour; steel, cement and construction bid rigging; basic chemicals and polymers; banking and telecommunications, and the health sector. The Committee was taken through achievements in the dismantling of cartels and in taking cases of dominance abuse. There were various achievements related to advocacy and stakeholder relations. The Competition Commission noted its staff complement was 165, with 17 graduates. The majority of the staff were African, with 94 percent under 40 years of age. More women than men were employed.

In discussion, there were questions and remarks about medical industry prices, and collusion in the copper cable and steel business. HR issues were prominent, including a question about the appointment of the Commissioner, after he had left the Commission. There was a question about mergers in the fish industry, and the effect on small and medium enterprises (SMMEs), and about the dominance of South African breweries (SAB) in the liquor industry. The Commission was asked if it was motivated to proceed from an unqualified to a clean audit. There was a question about capacity. Members asked if amendments to the Competition Act were needed to help the Commission with its work. The Chairperson pointed out that the conditionalities set had to be monitored and did the Commission have capacity to follow up? The Committee needed updates on  Walmart, the bread cartel and the milk cartel. Also there had to be a consistent supply of information to the Committee about new investigations.

Meeting report

Economic Development Department (EDD) presentation on 2013/14 Annual Report
The Committee was briefed by Ms Jenny Schreiner (Director General), Ms Semphete Oosterwyk (CFO), and Ms Hayley Rodkin (Chief Director in the DG Office). The EDD had delivered on the 206 business key performance indicators (KPIs). Of the 22 administrative targets, it underachieved on one. Planning and recruitment of staff had to improve. Management systems were settling. Governance was improving through risk management; internal audit; ICT governance; security management, and audit committee oversight support.

The Committee was taken through financial performance per programme; financial performance per economic classification; improvement of spending year on year; performance per programme for 2013/14; transfers to entities; revenue performance; ensuring appropriate human resource management, and the outcomes of the Auditor-General (AG) report. A consolidated heat map to rectify audit findings was compiled. The heat map process would grant particular attention to repeat findings.

The new APP and identification of clear outputs for delivery would lead to a more focused use of resources. There were improved quality controls over quarterly reporting and submission of evidence. The budget programme had been aligned with the revised strategic outcomes. Review of the organisational structure was at an advanced stage. The EDD was implementing a human resource management turnaround strategy. There was ongoing work on monitoring controls.

The Chairperson noted that the EDD had spoken about a new structure and a turnaround the year before. The Committee wanted a deadline in December for the Department to report on that.

Mr P Atkinson (DA) remarked that trend analyses had shown an improvement in managerial performance. But there were still concerns around finance management. There were seven findings against financial accounting, which indicated a move backwards.

Mr Madala Masuku, Deputy Minister of Economic Development, agreed that financial management had to improve. More time had to spent on intervention in the programmes.

Mr S Marais (DA) remarked that the core business of the EDD was economic growth and job creation. He was concerned about the comments of the AG on human resources. There had to be a human resources turnaround. He was concerned about the fact that the EDD as a younger partner already talked about a turnaround. The question was what had been wrong with the original strategy. Repeat findings were unacceptable. He was glad that the audit opinion was unqualified, but he wondered if the report by the CFO correlated with what the AG was saying.

Ms Schreiner replied that a systematic look at HR was needed. Attention had to be focused on the matter. The Annual Report indicated that two people with disabilities were employed. Men were in the minority. Details were in the Annual Report. The EDD was funded for 166 staff members over the MTEF. It was realised in 2013 that there could not be a jump from 142 to 166. 136 were appointed, so that it would be possible to appoint where capacity was needed for a short time. Three people were employed in the internal audit section.

Mr Marais said the approach to KPIs was quantitative, but in the process a qualitative sense was lost.

The Deputy Minister replied that KPIs were looked at in more depth in the Annual Report.

Mr Marais reminded the DG of his previous comments about Programme Four: Economic Development and Dialogue. He had asked about jobs lost, and how the problem was being tackled. It seemed that nothing had been done. The EDD had to intervene to unlock and retain jobs.

The Deputy Minister replied that the beginning of the year was skewed towards infrastructure, but the EDD could currently look at other job drivers.

Mr Marais referred to cooperation with other departments. There had to be social accords with other departments, but there was a lack of support. He asked if there was a force or agency that could make other departments comply and render support in terms of the National Development Plan (NDP).

The Deputy Minister replied that the EDD had no choice when it came to the compliance of other departments. There was a delivery forum which included the Department of Trade and Industry (DTI), the small business sector, the Department of Minerals and Energy (DME) and agriculture. The Department engaged with the forums, and when there was no compliance, it went to Cabinet. He saw improved compliance as a collective effort.

Mr Marais asked about money given to IDC to assist agri processing. He asked what the process entailed. It was a job driving sector.

Mr Oupa Bodibe, EDD Chief Director: Sector Specialist, replied that the Agro-Processing Competitiveness Fund supported the entry of new business in agriculture. Funds were transferred from the Treasury to the Industrial Development Corporation (IDC). There would be a report on how the fund was performing. The Competition Commission and the Tribunal had to finance appropriations from the budget. Operations were funded from penalties. Unrealistic targets were set up to finance the competition authorities from penalties.

The Chairperson asked why money was sent to the National Revenue Fund (NRF). It could be saved.

Ms Oosterwyk replied that money could not be retained.

The Chairperson asked if the entities could apply for funding.

The Deputy Minister replied that the Minister could comment if not enough was allocated, so that money could be taken from elsewhere.

The Chairperson said that it would be more feasible to retain money from penalties for funding.

Mr Marais asked how fines, penalties and forfeits of assets were dealt with.

Mr Marais how much had been identified by the internal audit.

The Chairperson asked Mr Marais to refrain from asking further questions, as he had already been granted five minutes.

Mr S Tleane (ANC) said that Mr Marais had been allowed time to speak, but when asked to stop, he groaned. Mr Marais had been around longer than the rest of the Members. He asked that Mr Marais show respect. Questions were asked to help the Department grow, not to condemn them.

Mr Tleane asked if the entire amount for the PICC publicity campaign was from the EDD budget. The amount would properly have to be shared by the Department of Communications (DOC). The Office of the Presidency could also contribute.

Ms Schreiner replied that the Department of Communications could not get a budget for the publicity. There had to be an integrated communication strategy.

The Deputy Minister replied that gaps in funding had to be looked at in the middle of the year. It was not filled by any department.

Mr Tleane noted that there was money moved through the Competition Commission that was handed to the fiscus. There were costs involved in handling the money. Cartels were fined and the money went to the fiscus. A certain portion could be retained to cover costs.

Mr Tleane referred to HR management. The Department had to explain conditions of employment. The towel was thrown in quickly with regard to people in an acting capacity. After six months they were no longer paid. People had to know after six months if they were employed or not. Government money was saved, but there had to be a strategy to prevent confusion. The question was whether such people were really seen as belonging to the EDD.

Ms Rodkin replied that acting beyond six months could be seconded through a process. But the executive authority had to ask why the recruitment process was not concluded in time.

The Chairperson remarked that the fundamental rights of persons were being affected. It was not being taken seriously. It had to be corrected, as it was wrong. People had been in acting positions for a long time, but the Committee was hearing for the first time that they were not being paid for work done. It was not fair to employ a person in an acting capacity when that person did not have what it takes. It could not be condoned.

Mr Tleane referred to 16 repeat audit findings from the AG. There was much that was incorrect. At that level of management, it showed that there was something wrong. The Committee would not ask for names of people responsible, but would appeal to the EDD to correct errors. Repeated failures were embarrassing. Overtime issues were simple. There had to be remedial action. Internal audit had to be strengthened, and then the audit committee had to do its part. There had to be two opportunities to correct before financial statements went to the AG.

Ms Schreiner replied that repeat findings would be attended to. There were mitigation plans.

Ms Oosterwyk added that if there were no material findings from the AG, the Department would not know about shortcomings. Findings arose from the AG. Management controls would be put in place.

The Chairperson said that there would not be challenges if monthly reconciliation was done.

Ms Oosterwyk replied that it was indeed done. There were material misstatements because some work had to be done manually.

Ms C Matsimbi (ANC) remarked that HR issues affected procurement, financial management and accounting. The Minister had said that employment looked good, but the EDD was running out of time. The unqualified opinion looked good, but there were findings that were not being addressed, especially the issue of employment. There were many qualified people in the country. Overtime, senior management and the position of acting people after six months, had to be rectified.

Ms Matsimbi asked why Treasury had cut funding to the Small Enterprise Finance Agency (SEFA).

Ms Oosterwyk replied that a plan for African identity was shelved. There was cost sharing with other agencies.

The Chairperson remarked that there had been budgeting for what was not needed. A virement had been done within a virement.

Ms Oosterwyk replied that the shift was approved by the Treasury.

Mr A Cele (ANC) asked how consultants could be vetted when relevant documents were not supplied.

The Chairperson asked about the logic behind the establishment of the internal audit unit vis a vis the risk management committee. Structures had to be in place to do the work. There were external people claiming money for attending meetings. There had to be value for money. She asked why a permanent audit section could not be employed, composed of people who were there all the time.

The Chairperson noted that it was a challenge that some things had to be done manually. It was a problem if controls were lacking. She asked how the EDD was responding to the matter. There had to be monthly meetings to check and consolidate statements. She asked if that was done, and if so, where the information went.

The Chairperson noted that revenue collection had to appear in the books of the relevant entity. She asked why that had to be an issue. Money from the entity could be recorded there in case rollovers were needed, and the Treasury could track the money. It helped entities to function better.

The Deputy Minister confirmed that the agency who collected had to account directly.

The Chairperson asked where the virement of R15.5 million in Programme Four had come from.

The Chairperson asked how the budget for foreign trips was increased.

Discussion could not continue because of time constraints.

The Chairperson concluded that the Department could do more to fast track service delivery. The EDD could not do so directly, but through coordination. She asked that the organogram be finalised and that feedback be given on the turnaround strategy. There had to be an update of the progress made.

Competition Commission: briefing on the 2013/14 Annual Report
Mr Tembinkosi Bonakele, Commissioner, briefed the Committee. Before 1994 there were high levels of concentration of ownership control in the economy. There were state sponsored firms, subsidies, tariffs and cooperatives, with restrictions on full and free participation. It was fertile ground for cartels and abuse of dominance. The legislative mandate of the Commission issued from the Competition Act 89 of 1998. The purpose of the Act was to promote and maintain competition. The Commission had a staff complement of 165 and 17 graduates, with 94% of the total staff under 40 years of age, and more women than men were employed. The majority of the staff were African. The Commission, the Competition Tribunal and the Competition Appeal Court had tackled anti competitive conduct on a broad front during the preceding 15 years. Areas engaged were bread, maize mail and baking flour; steel, cement and construction bid rigging; basic chemicals and polymers; banking and telecommunication, and the health sector.

A financial performance overview indicated variance with regard to revenue, expenditure and surplus. Key highlights for 2013/14 included the construction services cartel dismantled; the private health care market inquiry initiated; consumer savings through the dismantled cement cartel; structural remedies in the Foodcorp/Oceana merger; abuse of dominance and cartel cases in the steel industry; abuse of dominance prosecutions in the telecommunications industry, and a new penalty calculation methodology.

Advocacy and stakeholder relations included engagements with FEDUSA, COSATU and NACTU. There were bid rigging training workshops with Eskom and Transnet procurement staff, among others. There was collaboration with BRICS partners.

The Chairperson noted that the Commissioner had spoken simply, which was appreciated. The Committee had been dealing with some very technical matters. She asked how previously disadvantaged groups would be integrated, and how the gap between established concerns and new entrants would be bridged.

Mr Marais complimented the Commission on the consistent high standard of their work. He referred to the medical industry. Medical aid members had to pay three or four times more than medical aid tariffs for specialised services.

Mr Marais asked for clarity about the review of merger activities. There was collusion in the copper cable and steel business, with huge increases in exports. Permit applications had to be looked at. The economy was suffering internally.

Mr Bonakele replied that copper cables were cause for concern. There was collusion among big suppliers in tenders to Eskom. Issues of ethics and regulation had to be addressed.

Mr Marais referred to HR issues. The Commission had to have four people with disabilities employed. He asked about the high staff turnover, especially of specialised people, and how the situation could be stabilised. A stable pool of specialised people was needed.

Ms Khanyisa Qobo, Head of Strategy and Planning, responded that many managers were new appointments, including the Commissioner. The organisation was being rebuilt from within. There would be investment in human capital for sustainability. Organisational culture was being reviewed. There were talks with staff at all levels. The HR review looked at performance management, recruitment and retention.

Mr Marais noted that the surplus for 2010/11 had been small. He asked how surplus was retained. The AG had indicated repeated findings of non-compliance.

Mr Marais remarked that the appointment of the Commissioner after an absence from the Commission could be seen as controversial. It could affect the image of the Commission.

Mr Bonakele replied that he had been with the Commission for a long time, and had then left and later returned. There had been problems with interpersonal relations. The Commission had to improve. It had to provide a good work environment to compete. If work conditions were bad the Commission would lose all. There was a willingness to create a culture that could inform how people worked and related. It was for that reason that he returned to the Commission. The Commission could not compete with the private sector but it had to be professional.

Mr Atkinson asked about fines paid with regard to cement.

Mr Hardin Ratshisusu, Divisional Manager: Mergers and Acquisitions, replied that four companies were implicated. Leniency was granted to PPC. Lafarge settled. The total was R274 million. The NPC-Cimpor decided to defend before the tribunal.

Mr Tleane commended the clear presentation and good work done. The prevented merger between Lucky Star and Glenryck also prevented harm to small enterprises. Small enterprises had complained in the past about their position in the fish market. He asked about the current situation.

Mr Bonakele replied that it was a big issue. The Commission had met with the Minister of Agriculture, Forestry and Fisheries, towards a transformation of the industry. Niche markets were partly addressed through licensing, but the licensing management was not helpful. It was meant to protect consumers. Canned fish was an important source of protein for poor people, and monopoly practices put it out of their reach. Firms that did not get a large enough quota could rely on others. The market structure had to be kept intact.

Mr Tleane referred to intoxicating beverages. Alcohol was being imported. He asked if the local situation allowed for people to become brewers, to produce whiskey locally, for instance. SAB dominated the beer market.

Mr Bonakele replied that there had been an appeal against SAB for monopoly of distribution. If SMMEs could not gain access to the distribution network, they could not compete. The SAB used bullying tactics. Work had to be done to open up the situation. The SAB claimed that it was empowering taverns. There were schemes to give taverns shares in SAB. The SAB claimed that it was good for BEE. There were huge opportunities for SMMEs, as beer was very much a local product.

Ms Matsimbi expressed appreciation for the briefing. She asked what steps were being taken to avoid repeat audit findings by the AG.

Mr I Pikinini (ANC) remarked that there were unintended consequences related to the settlement with Telkom. People were being retrenched.

Mr Bonakele replied that there was no link between retrenchment and intervention. The CEO of Telkom had even said that the Commission had helped them to be more efficient. Walmart had said that interventions helped it to develop local suppliers. It was good for the company. Telkom had legacy efficiency problems and could not compete with the likes of Vodacom.

Ms D Rantho (ANC) asked if the Commission was motivated to move from an unqualified audit opinion to a clean one. She asked about plans towards achievement of a clean audit.

Mr Bonakele replied that key performance indicators were a moving target for the Commission. The Commission was criticised for involving things outside its control. Performance objectives had to be controllable from the Commission side. Objectives were negotiated with the Department.

Mr Thomas Kgokolo, CFO, added that the Commission wanted a clean audit. Tax clearance certificates were insisted upon. The services of internal audit was engaged to review procurement every six months. There was a monthly review of irregular expenditure.

Mr Ratshisusu added that with regard to matters notified and finalised, the challenge was that cases overlapped in the financial year. What was notified did not always match what was finalised. There were finalised cases and withdrawn cases.

The Chairperson advised that it be dealt with on a quarterly basis. The Committee had to know how many cases were recorded, finalised and withdrawn, to get an idea of how busy the Commission was. It had to be known what had fallen off the system.

Ms Rantho asked if cooperatives benefitted and developed because of cartel divisions. She asked how cooperatives were faring.

Mr Bonakele replied that support of cooperatives was not directly within the ambit of the Commission. A lot of work had been done with the IDC on agro processing funds targetted for cooperatives and SMMEs. Historically agricultural markets were a problem. There was control by marketing boards. There had been research on poultry in the past, and currently the focus was on red meat. The Commission did not have the capacity to take on all cases. Agricultural markets were a huge problem. Municipalities determined who could sell fresh produce at their markets. It was done through agents related to established farmers. It was clear that the agent system frustrated people.

The Chairperson noted that the competition authorities recruited young entrants. At a previous meeting the Commission had said that the competition authorities were under capacitated, which affected turnaround time. She asked if progress had been made, and whether the authorities were currently fully capacitated.

Mr Bonakele replied that the Commission employed 18 trainees. Outreach to universities was emphasised.

The Chairperson noted that there was a focus on the University of Cape Town in previous engagements. The Committee would recommend that the net be cast wider.

Mr Bonakele replied that the Commission had found gems among people rejected by law firms, because black people had problems with expressing themselves in English. It had been assumed in the past that black graduates from UCT would be more fluent in English. Yet people rejected by law firms had turned out to be excellent investigators.

Mr Kgokolo added that the Competition Commission worked with the South African Institute of Chartered Accountants to assist graduates on the finance side.

Ms Qobo added that strategic planning for capacity was an ongoing process. An HR review of organisational structure looked at the number and type of posts required. There were skills audits to recruit appropriately. Salaries were benchmarked.

The Chairperson remarked that exemptions were not finished. The competition authorities had powers to summon for market enquiries. She asked if lack of capacity was an impairment. Things were taking too long with the building industry. One would have expected the Commission to have come up with a method to fast track. There had to be impact on tendering and public sector bidding processes. She asked if the legislation needed amendment.

Mr Ratshisusu replied that there had been successful fast tracking to settle contraventions in construction. Cartels were dismantled. Phase two of the process required a lot of litigation.

Mr Bonakele replied that the Commission was working on amendments to the legislation. South Africa needed to review provisions related to abuse and dominance. Tests were difficult to meet. If one benchmarked local law against Europe, the South African requirements were stringent, which was strange in a country with dominance problems. There were huge problems of dominance and abuse in key sectors. Excessive prices were not well defined in the law. Courts were not resolved. A serious look was needed. The system of getting cases through the system had to be quicker. There were challenges of litigation. The Minister asked that proposed amendments to law be submitted to him. Remedies were needed for abuse of dominance. Sometimes it was not possible to impose a fine unless it was a repeat offence. A remedy could not be enough, and a fine had to be imposed. Remedies had to be identified. Naked abuse had to be broken up. People who had been found guilty on bidding were not supposed to get state contracts. But sometimes such companies were the only ones big enough to do the work. Some firms asked to be re-admitted because they were capable of doing the work. A resolution had to be found for the future.

The Chairperson noted that in the previous year Tribunal revenue had been lumped with that of the Commission.

Mr Kgokolo replied that the question was whether to retain or to use surplus. The project on the enquiry into the health industry had started late. The Treasury allowed the surplus to be retained.

The Chairperson concluded that the conditionalities set had to be monitored. She asked if the Commission had follow up capacity. Information was needed on Walmart and the bread cartel. One had to know how the milk cartel had ended up. The Committee would call the Commission back for an update. The Committee had to be kept abreast of new investigations. Sometimes such information was first encountered in the media, which put the Committee at the tail end. She encouraged Members to look at the Commission website, which was a good one.

The Chairperson adjourned the meeting.

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