Home Affairs Unauthorised Expenditure: National Treasury briefing

Meeting report

National Treasury on the Department Of Home Affairs Unauthorized Expenditure
The Chief Director of the National Treasury, Ms Gillian Wilson introduced the two-man delegation from the National Treasury and handed over to her colleague from the Accountant-General’s office to give the Committee a brief explanation on the Public Finance Management Act (PFMA).

Mr Beerson Baroojee, Chief Director: Risk Management, National Treasury briefed the Committee on the PFMA. Unfortunately, both the hard copy and soft copy of the presentation was unavailable for Members.  The Chairperson asked him to go ahead and that the presentation could be sent to Members later on. Mr Baroojee noted that the purpose of the presentation was to inform Members of the Committee on the unauthorised expenditure incurred by Home Affairs as disclosed in the 2010/11 and 2012/13 annual reports, and to request Members to consider whether or not to approve the expenditures based on the National Treasury’s recommendations. Section 1 of the Public Finance Management Act (PFMA) defined unauthorised expenditure in two ways: as overspending of a vote or main division within a vote; or expenditure not in accordance with the purpose of a vote for which it was appropriated. Overspending could be referred to as: expenditure under the vote that exceeded the amount appropriated for that vote; or expenditure under the main division which exceeded the amount appropriated for in that main division subject to Section 43 of the PFMA. In terms of Section 34 of the PFMA, unauthorised expenditure would not become a charge against a Revenue Fund except when the  expenditure is an overspending of a vote and the Parliament or provincial legislature, as may be appropriate approves, as a direct charge against the relevant Revenue Fund, an additional amount for that vote which covers the overspending; or the expenditure is unauthorised for another reason and Parliament or provincial legislature, as may be appropriate, authorises the expenditure as a direct charge against the relevant Revenue Fund. If the Parliament or provincial legislature does not approve in terms of subsection (1) an additional amount for the amount of any overspending, that amount becomes a charge against the funds allocated for the next or future financial years under the relevant vote. This Standing Committee therefore has a role to play in recommending to the Parliament whether the unauthorised expenditure should be approved or not.

Ms Gillian Wilson expatiated on the unauthorised expenditure from 2010/11. In August 2010, the Department informed the National Treasury (NT) of the outstanding debts incurred in previous years amounting to R534 million which were not catered for in the 2010/11 baseline budget. The NT advised the Department to immediately take the expenditure on budget even if it meant over spending on its budget at the end of the financial year. The Department was also requested to inform both the Office of the Accountant-General and the Auditor-General on the matter. The final over spending disclosed in the 2011 Annual Financial Statements amounted to R687.304 million. In a letter dated 06 May 2014, the NT informed the Committee that it had since assessed the report submitted by the Department with respect to the unauthorized expenditure and its assessment was in line with the opinion of the Auditor-General which stated that “contrary to the requirements of section 38 (1)(g) of the PFMA, the accounting officer did not immediately report in writing, the particulars of the unauthorized, irregular and wasteful expenditure to the relevant treasury”. The 2010/11 unauthorized expenditure was broken down into eight broad aspects. They were: FeverTree/AT Keaney Consulting – R79 745 million, Legal services for litigation fees -  R12 024 million, Security services -  R7 456 million, IT related contractual commitments – R31 430 million, . Leases office accommodation -  R45 495 million, Shortfall on the costs for printing of passports – R160 716 million, HANIS ID Infrastructure - IT related contractual commitments – R97 640 million and the Cost of living allowance (COLA) foreign offices – DIRCO –  R 252,798 million ( see presentation for details). National Treasury was unable on the basis of the Department’s submission to favorably recommend to SCOPA to condone the expenditure in part or as a whole with additional funding. NT is aware that such a recommendation would put pressure on the Department’s future baseline budget which had already been over stretched with no room to generate sufficient savings to fund the unauthorized expenditure. The total unauthorized expenditure for the year was R301.036 million of which; R160.394 million related to over spending on the vote; and R140.642 million related to unspent funds from payments of capital assets for the Information Systems Modernization Project for which the Department did not receive NT’s approval as required by the 2013 Appropriation Bill. In 2010, discussions were held between the National Treasury and the Department on the options for retaining the revenue collected by the Department, in order to defray the expenditure related to the modernisation of information and systems’ equipment and supply of official enabling documents. In letters dated 25 November 2010 and 3 March 2011 respectively, both the Department and NT agreed that a trading account or entity might be established for this purpose. The Department on the strength of the NT’s advice, sought to establish a trading account on 1 April 2013, in which revenue derived from issuing official documents would be retained and expenses incurred in generating this revenue would be defrayed from the account. However, the Auditor-General, in reviewing the audit plan for the operations of the Department and the trading account, identified various concerns. It appeared that there were insufficient clarities at that stage about the specific activities and associated costs to be accounted for within the trading account. There were also uncertainties about the legal status of these arrangements, as no specific legislative authority existed for a dedicated trading revenue account as envisaged in the discussions and correspondences of 2010 and 2011. The Department thus approached the Office of the Auditor-General (AG) for advice on how to proceed and on how to address these issues. After careful analysis and assessment of the issues raised by the AG, the Office of the Accountant-General (OAG), advised that a full resolution of these issues would take some time before formally establishing a trading entity further preparatory work would need to be undertaken, which might include legislative amendments. It was therefore agreed by all parties involved that the envisaged trading account should not be implemented in 2012/13. In practice, this meant that; all expenses incurred with respect to the issuing of all enabling documents should be expensed against the vote as in the past; all revenue generated through supply of official documents be paid to the National Revenue Fund; final accounts should be prepared only for the vote and not for a separate trading account; and the resulting over spending on the vote should be disclosed as unauthorized expenditure in the annual report as required by the PFMA.

National Treasury recognized that the revenue collected was intended to cover the over expenditure, and the over spending against the vote. On that understanding, NT condones the over spending and recommends to the Committee that the unauthorized expenditure be approved with additional funding of R160.394 million. It is recommended that the 2010/11 unauthorized expenditure should not be authorized and be recovered from the Department’s future baseline budgets over a number of yearss. The Department, in its submission had failed to provide detailed information as to what happened and what steps were taken with respect to the unauthorized expenditure as required by the PFMA. It is therefore recommended that the 2012/13 unauthorized expenditure of R160.394 million with respect to over spending on the vote be authorized with additional funds and the unauthorized expenditure of R140.642 million with respect to the utilization of payments of capital assets without the National Treasury approval be authorized as NT had already provided approval for its utilization on current payments.

The Chairperson asked the Director General, Department of Home Affairs for comments regarding the unauthorized expenditure and acknowledged the Committee’s receipt of the very detailed documentation from the DHA together with the additional documentation from both the National treasury and the Auditor General. 
 
Mr Mkuseli Apleni, Director General Department of Home Affairs (DHA) appreciated the Chairperson for the opportunity given to comment on the matter and proceeded to provide the Committee with a background to the R687 304 million unauthorized expenditure. The DHA was at the brink of collapse and as such, the Government took a decision and introduced a Support Intervention Team which comprised of representatives from the National Treasury, the Department of Public Service and Administration (DPSA) and the Public Service Commission (PSC). These officials were deployed to the DHA in order to stabilise and identify the reasons for the weak management, poor service delivery and widespread corruption. In 2007/08, the Department returned R279 171 million back to the National Revenue Fund, in 2008/09, a sum of R150 048 was returned whilst in 2009/10, and an amount of R68 375 was returned. However in the same period, the Department incurred a debt of R687 304million, this situation therefore necessitated an intervention. The management of DHA before embarking on the unauthorised expenditure or overspending consulted with the NT and the decisions taken were as a result of the guidance given by the NT. The Ministers’ Committee on Budget (MinComBud) realised that the DHA could not sustain itself with its current baseline, hence the decision was taken to get a vehicle to assist the DHA with the expenses. In essence, the R687 million could not be financed through the baseline amount, hence the DHA’s recommendation that the vehicle which had been previously used by the Department be used again to defray the R687 million. It is important to note that R653 million was not the overspent amount for 2010/11, but an accumulation from previous years. Furthermore, a report had been submitted on the disciplinary process that was initiated in the Department where the CFO and the Head of Legal Services were fired. The cases were presently in the Court.

The Chairperson opined that simply put,  from the documents submitted by the DHA and the explanations given ,there was a solution that did not warrant the National Treasury to go hunt for money; however, , instead of the money generated by the Department being deposited into the National Revenue Fund, it would be appropriated to finance the Department’s overspending. The Standing Committee however needed to approve this suggestion before it could be effected; the self-financing vehicle could clear all the debts.  
 
Discussion
Mr M Booi (ANC) commended the DHA on the responses given and the documents submitted to the Committee. It was quite clear that after the engagement the DHA had with the Committee last week, both the NT and the DHA had interacted and as such, clear explanations as to what had occurred regarding the unauthorised expenditure had been given. A satisfactory response had been given which would enable the Committee make informed decisions on the matter at hand.

Mr E Kekana (ANC) shared the same sentiments with Mr Booi. However, it was obvious based on the reports and presentation given by both the DHA and the NT, that there were a number of areas that had been incorrectly dealt with in the past. What then was the plan of the DHA to deal decidedly with such issues in the future? Was the DHA confirming to the Committee that there is a plan of action to deal with the irregularities on ground? Were the dismissals of the Senior Management Staff finalised or could there be a comeback in terms of them challenging the dismissal decision? There were a number of areas that the supply chain processes were not adequately followed, how would the DHA ensure that there would not be related repeated issues and that the systems that had been set up were properly placed and were adequate?

Mr M Hlengwa (IFP) appreciated the Department for the comprehensive response they had produced after last week’s engagement with the Committee. The detailed response was indeed a 180o turn in comparison to what the DHA had presented the previous week. Was there an engagement with the Portfolio Committee of Home Affairs and the relevant Standing Committees as indicated in Section A of the document submitted by the DHA, i.e. a letter written by Ms Wilson dated 30th November 2010, paragraph 3: “All the relevant Parliamentary bodies i.e. (Portfolio Committee on Home Affairs, Standing Committee on Appropriations and Standing Committee on Public Accounts) should be informed of the situation leading to overspending.” What interventions did the Committees make?

Mr T Brauteseth (DA) raised queries regarding the Department of International Relations and Cooperation (DIRCO) expenditure - R252 798, which was the largest amount in the schedule given. How does the DHA intend to fix the DIRCO issue? Could the DHA comment on the Home Affairs - DIRCO relationship and how it aimed to implement internal controls to get the DIRCO debt off its books once and for all?   

Responding, Mr Apleni said that all the comments made by Members were noted. In terms of the dismissed Senior Management staff, the DHA may not be able to categorically say that there would be no comeback. To fire an individual in the Public Service usually took a long process and even after all the disciplinary processes have been finalised, the individual could still take the matter to court to challenge the decision as it was in this case. Currently, the case was in court and the DHA would not know whether it would win the case or not. However, all the individuals have been officially dismissed. Going forward, the key expenses that would be financed through the self financing vehicle were related to the revenue collection as the National Treasury does not want the Department to service other items through its revenue other than the stipulated expenses. For example, the NT had already approved R600 million for the estimates of 2014/15 and this amount would be used for IDs, Smart Cards, renovating offices and the likes. Since this self financing vehicle had been introduced, there had been no more over expenditure in the Department. The agreement reached regarding the DIRCO which had been approved by the NT was that DIRCO should be given an advance payment which would cover the payment of DHA’s employees allowances and rentals abroad. The recommendation by the NT to the DHA is that it should go to the baseline amount and transfer all the amount relating to employees abroad to DIRCO and DIRCO would administer it. This approval had been included in the letter submitted to the Committee. The DHA had also been consulting with the AG and the office of the Accountant General regarding this. If this is implemented, the previous debt incurred to DIRCO would be easily sorted out. The Department had appointed a Supply Chain Management Unit and no problem is envisaged. The DHA engaged with the then Portfolio Committee on Home Affairs – 2010/11 as the NT indicated, however, SCOPA had just being notified recently.  

Ms K Litchfield-Tshabalala (EFF) expressed her concerns regarding the DHA going forward. Admittedly the comments and responses given looked satisfactory enough and there was some certainty that the DHA’s officials were not taking the issue lightly. It was essential that the issues of the past must not repeat itself; because the state of things at the Department around 2009/10 proved that the DHA was really in a bad shape, it was not surprising the DHA almost fell apart. In cleaning up its mess therefore, there were bound to be inconsistencies in it financials. Officials were not to be held responsible but the Senior Management that were directly involved.

Mr Brauteseth requested clarification on who the dismissed staff were. Which items on the schedule included in the report related specifically to the dismissed staff. Has the business of the Department improved since they were dismissed? What were the legal costs at the moment for the Department regarding the two dismissed Senior Management Staff?

The DG clarified that the dismissed staff were the CFO and the Head of Legal Services. Sequel to the collapse of a unit in the Department, the officers responsible for those units were held accountable for it. The CFO was dismissed because the needed internal controls were not implemented. On the legal side, there were contracts entered into that were not valid.  The Head of Legal Services was therefore dismissed because it is expected that legal services must make sure that all processes were duly followed before contracts are entered into. The DHA is resolute that going forward, it would no longer overspend it’s budget or go into debt and would comply with all the necessary processes before entering into a contract.  It would even manage its budget on a monthly basis. The amount of the legal costs incurred so far was not available at the time of the meeting but the details could be supplied to the Committee.

Mr Kekana wanted to know the view of the National Treasury on the recommendation given by the Department to utilise its self financing vehicle.

Ms Gillian replied that the Department’s recommendation was permissible. The budget office had previously advised that the NT must dialogue with the Department so as to determine the activities that would be funded through the self financing vehicle and the recommendation of the Standing Committee would also assist to strengthen the agreement. There were however concerns regarding the removal of the unauthorised expenditure from the Department’s budget; it could impact on the activities of the DHA and on service delivery but with the aid of the self financing vehicle, there would be a counter effect that would not impact negatively on service delivery.    

Mr R Lees (DA) admitted that the self financing issue was still unclear. Was it not more appropriate to take the revenue of the DHA into the National Revenue Fund and then increase the baseline to cover the cost of servicing the debt? Were there other Departments that also employed the self financing method to fund their activities? If there were other Departments utilising this method, why was the DHA’s case so peculiar and proved difficult to implement? What happens if the Trading Account reflected a surplus, would that be transferred to the National Revenue Fund at the end of the year? Who are the people behind the FeverTree Consulting Firm? What connection did they have with the DHA or with politicians?

Mr Hlengwa having being prompted by the response given by Ms Gillian on the impact of the removal of the unauthorised expenditure from the budget on service delivery inquired about the parameters being used to assess items that could constitute a hindrance to service delivery. This information would assist the Committee to effectively apply its mind and understand the rationale of the National Treasury.

Mr Alpeni replied that the trading account was easy to implement when it had a distinct function and acknowledged the peculiarity of the DHA regarding this- when first time applications are made, like the ID book or birth certificates, it would be given free until the second application is made. However since expenses were still incurred on those applications, and the expenditure associated with those 1st time applications or maintenance of offices all have to be paid for, they have to be charged to an account . The best decision would be for the National Treasury to increase the baseline budget, however, the MinComBud said that with the current economic situation, it could not make that decision. Therefore, the Department was advised that the self financing vehicle should be used in the meantime until things stabilised, then the decision to increase the baseline budget of the DHA could be considered. It is therefore an interim process until the necessary funding of the DHA was clarified. For example the smart card would be issue free to young people and older people aged 60 and above and since the number within this age group could not be ascertained as yet, the NT decided that if the self financing vehicle was utilised, the Department could at a later date approach the NT on what its budget was is in this respect. There was nothing wrong with the FeverTree contract and the people behind the consulting firm were people who were not involved with politicians. The only snag was that the firm carried out some service for the DHA but had not been paid.

The Chairperson reiterated the question asked by Mr Lees. Was there any other Department that was utilizing the self financing vehicle to meet its expenses?

Ms Gillian replied that the only department that she could recall was the Department of Public Works which has a Property Management Trading Entity that pays the baseline for accommodation from its account. They also utilise the funds to pay the Municipal Services and to maintain the Government’s building. If there is a surplus on the account, it would be carried on to the next financial year with the approval of the National Treasury. The money would not have to be paid to the National Revenue Treasury. The self financing vehicle was a more flexible structure and it could be set up in the right way. On service delivery, DHA is a huge department with huge ongoing projects. They currently had a huge ongoing ICT modernisation project with a baseline budget spent of about R3 billion. The DHA is also a resource intensive department but with high turnover. This issue should be critically reviewed. A lot of money had been and is being spent on staff training. If the unauthorised expenditure must be funded from the baseline, the ongoing projects must be reduced. For example, the amount spent on the ICT project, compensation of staff or staff training must be cut as it would have an impact on service delivery. 

The Chairperson thanked all in attendance especially the DG of the DHA who had a previous engagement elsewhere but still made it a point of duty to be physically present. He assured the DHA and the NT that now that the Committee had heard both presentations, it would assist it in making informed appropriate decisions.

The meeting was adjourned.