Department of Public Enterprises response to Committee questions; Auditor-General on DPE 2015 plans

Meeting report

Office of Auditor-General on Department of Public Enterprises Strategic & Annual Performance Plans
Mr Sybrand Struwig, Senior Manager; AGSA, explained that an annual audit of reported and actual performance period was done against pre-determined objectives; indicators and targets as contained in the annual performance report of a department.  This was an integral part of the annual regularity audit process which confirmed compliance with laws and regulations; usefulness of the performance information and the reliability of performance reporting. An audit report needed to reflect an opinion or conclusion on the performance of the auditee against predetermined objectives.

Legislative requirements and the framework of an audit include: the Public Finance Management Act; Treasury Regulations; Guidelines and instruction notes issued by National Treasury; the National Treasury Frameworks for managing programme performance information and that for strategic plans and annual performance plans. All governmernt entities must submit the annual performance report for audit purposes with the annual financial statements by 31 May to enable the auditors to perform the necessary final audit procedures. Targets should be Specific; Measurable; Achievable; Relevant and Time bound (SMART). The resulting audit reports contained material audit findings; not audit opinions.

An audit conclusion will be expressed for all departments; constitutional institutions; trading entities and public entities in the management report; on the usefulness of the reported performance for selected programmes or objectives and on the reliability of the reported performance for the selected programmes. Chapter 5 of the Framework for Managing Programme Performance Information (FMPPI) stated that effective management of performance information required a clear understanding of different responsibilities as well as the structures and systems involved in managing performance.  Understanding and monitoring the accounting officer’s mandate were key to improving the internal control environment. The role of the accounting officer was critical in ensuring timely; credible information; accountability; transparency and service delivery.

He explained that the role of internal audit was to:
- Monitor internal controls relating to performance information process
- Examine the usefulness and reliability of performance information
- Review critical performance management activities
- Review compliance with laws and regulations relevant to performance planning; management and reporting
- Manage risk.

Mr Waleed Omar, Audit Manager, AGSA, indicated that no significant findings were identified regarding performance findings from the AGSA review of the DPE Annual Performance Plan for the 2015/16 financial year. With regard to oversight responsibilities of the Committee, its role included conducting oversight over the executive authority and consulting with any other executive organ of states and to make recommendations, and to consider and approve budgets and monitor expenditure of the departments and the entities reporting to them. He said some of the aspects which the Committee needed to consider when dealing with performance monitoring were the alignment with the National Development Plan (NDP); whether there were adequate resources; whether the targets were SMART; evaluating performance contracts and how they would contribute to the achievements of the APP; reviewing quarterly progress against APP targets and reviewing annual targets against APP targets.

AGSA was committed to ensuring transparent and stable reporting systems and developing strong internal audit capabilities. AGSA also had the responsibility of oversight where the necessary consequences would be applied for transgressions and poor performance. AGSA was committed to remain independent and relevant and to adding value to departments and entities through the input provided by AGSA.

Discussion
Chairperson Letstatsi-Duba indicated that the presentation from AGSA seemed to raise the same concerns as those previously raised by the Committee. What was AGSA’s opinion on the DPE Strategic Plan which was not aligned with the programmes of DPE. What complications would the DPE Strategy face?

Mr Struwig responded to the question around timelines and explained that in terms of the requirements to submit to National Treasury, the DPE was late but there were approvals give for the late submission. It was an additional requirement that AGSA looks at the Annual Performance Plan a year in advance in order to provide the Committee and the DPE with a view from AGSA in terms of the usefulness of the Plan. This was not legislative, and it would not be reported as non-compliance that the DPE submitted the report late. On the question around SMART targets, he said the framework required that if a department had a strategic plan it would have the five year projections which would include targets for the immediate term and for the long term. He said based on the previous years the DPE has received clean audits.

He explained that if a target was not achieved this was not necessarily an audit finding because targets could be non achieved for various reasons. What would be an audit finding would be whether these non achieved targets were explained in the annual performance report. In terms of the framework every deviation must be explained, and AGSA would look at this. If there was a majority of the targets not met, AGSA could emphasize on the matters in its audit report. He responded and agreed that some targets were physical and some were not, therefore if there were targets which were physical, AGSA’s audit procedures would include an inspection of whether these physical targets were met or not. In the reliability assessment, which took place during a normal audit, AGSA would select a sample and then inspect whether what was reported was there or not. He explained that AGSA’s current assessment on DPE’s Annual Performance Plan did not touch on reliability because this still needed to be reported at the end of the audit. In terms of the Public Finance Management Act (PFMA), a department needed to provide AGSA with its financial statements and annual performance report two months after the financial year came to an end. AGSA would then audit this within two months. If an entity did not provide the AGSA with its Annual Performance Plan by 31 May AGSA would report this to the accounting officer and this would be escalated to the Minister. If after that the plan was still not provided, AGSA would report that as a material non compliance. AGSA has not had such a situation before.

On the questions around the DPE and its state owned entities he clarified that AGSA’s responsibility was to audit all entities, in some cases, AGSA allowed private sector auditors to audit the entities, but AGSA provides the regulations on how to conduct the audits. The Corporate Plan of a state owned entity would be audited consistently throughout the portfolio; this would be based on a specific entity. In the general report, AGSA would consolidate these reports to give a reflection on the status of the portfolio. As it was reported in October 2014, the current portfolio, with the exclusion of SA Express, AGSA did not have any material findings.

He explained that AGSA did not wait until the end of a financial year to audit a department or entity’s financial plans. AGSA would provide input before the end of the financial year. On the question around DPE’s internal audit, he said internal audits contributed to the internal processes of ensuring that performance management was properly managed. AGSA generally relied on internal audits to audit in-year audits of quarterly results. Internal auditors therefore looked at the reliability of the information reported and whether the quarterly results were supported by the matching documents. AGSA would then rely on the work of internal audits. He said there have not been any instances within the portfolio that there were material differences between the findings of internal audits and those of AGSA.

Mr Omar explained that AGSA has considered the work of internal audits for the first two quarters of the financial year for 2014/15. AGSA followed a process according to international standards. AGSA would look at the programmes which absorbed a lot of the budget more closely. With regards to compliance aspects, AGSA’s results did not differ from those of the internal audit.

Mr Struwig said the difficulty was that performance information and the actual performance against the target were influenced by a lot of factors, especially in the DPE portfolio which had a commercial and developmental mandate. The developmental mandate was easier to monitor because the targets are clear. On the commercial front it was very difficult because commercial objectives were often influenced by factors outside the control of the departments and entities. It was often found that the commercial targets were not met in most cases because of economic factors. He indicated that there were concerns from AGSA around the timing of DPE’s Strategic Plan, which was a four year plan and not a five year plan. This was the only material matter which AGSA has noted.

Chairperson Letstsi-Duba asked what the implications of the DPE’s four year plan would be.

Mr Struwig responded that the implications would be that the DPE would still have time to amend the plan. There was no compliance deviation.

Interactions with the Department of Public Enterprises (DPE) on Strategy and Annual Performance Plan
Chairperson Letsatsi-Duba indicated that the DPE was invited to respond to Members’ questions raised during the previous meeting with due to time constraints, could not be replied to. She raised a concern that the DPE had five acting executives.

Ms Matsietsi Mokholo, DPE Acting Director-General, said what AGSA was saying to the Committee was Members need to assess DPE’s compliance according to AGSA’s matrix. Firstly the APP and the Strategic Plan needed to align with the National Development Plan (NDP). The contents of the NDP were characterized into Medium Strategic Frameworks (MTF) over the period of 2014 -2019; the DPE was on track with regards to this alignment. The DPE’s operational plans were also compliant. With regard to the DPE’s relationships with state owned companies and other government departments, the DPE’s strategy highlighted these collaborations. With regards to collaboration between state owned companies within the portfolio itself and collaboration of companies outside the portfolio, together with the role of the DPE regarding oversight, these were all highlighted in the DPE’s Strategic Plan.

She said the DPE currently was responsible for six state owned companies (SOCs). The challenges currently faced by Eskom should not be seen as a reflection on the performance of the entire portfolio. Eskom was the only SOC which was facing serious challenges; the others were doing well overall. The DPE was aligned with AGSA’s requirements. On whether the DPE was deviating from National Treasury requirements, she said the deviation was a deviation in respect of a template. The provisions of Treasury regulations set the content of a strategic document, and everything contained in the DPE’s Strategic Plan covered those content requirements. Provisions of the PFMA required SOCs to submit their corporate plans a month before the end of the financial year. There was however challenges with aligning the deadlines of the SOCs and the departments, the DPE’s strategy document however tried to deal with this issue.

The DPE has identified key challenges and risks which could materialize if the DPE was not putting measures in place to ensure that the SOCs were not in crisis. With Eskom ,the DPE has identified that the tense situation of load shedding needed to be carefully managed and monitored in order to avoid a blackout. Currently the country has moved towards stage three of load shedding in order to avoid a blackout. However there were questions still being asked about how Eskom would prevent stage four which would lead to a total blackout. This was one of the issues the DPE addressed in its strategy. The unrest in Medupi has also been addressed. Another issue covered in the strategy was how a further downgrading of Eskom could be averted from a shareholder perspective; however it was important to note that some of the challenges would be outside the DPEs control. With regard to the collapse of government guarantees she said this was an area the shareholder needed to improve, starting with addressing the reliance of SOCs on government guarantees. On transport and the reliance on road transportation, she said there was an agreement in place which was imbedded in the Minister’s performance agreement.

She indicated that there were a number of questions which Members posed to the DPE during the last meeting and these would be engaged by the various heads of divisions.

Ms Orateng Motsai, DPE Acting Deputy Director-General: Legal and Governance, replied to the question on the Government Shareholder Management (GSM) Bill. This was drafted around 2009, but because of the recent developments of the Presidential Review Commission (PRC) recommendations and the Cabinet legotla resolutions of January 2015, there was agreement that the Bill needed to be aligned with the PRC recommendations. Of key importance was that the DPE needed to establish an overarching legislation and determine an appropriate shareholder management model. The DPE was working on the GSM Bill to take into consideration what the appropriate model would be. This would entail the DPE going back to do a benchmarking exercise. The DPE was consulting with various departments, including National Treasury so that the DPE could better determine an appropriate model. SOCs also need to be classified to determine the strategic nature of these companies and what contribution they were making towards the economy. Then work which has already been done would need to be brought back to the Committee. The DPE had a very aggressive project plan around how to proceed with the Bill. The draft would be available for Cabinet approval around February 2016.

Chairperson Letsatsi-Duba asked who was supposed to implement the recommendations of the PRC; was it the DPE or the Presidency?

Ms Motsai responded and said it was the Presidency but the DPE was working hand in hand with the Presidency. The DPE would still be responsible for championing the Bill and coordinating all activities related.

Ms Tintswalo Mofokeng, DPE Acting Chief Executive Officer, replied to the questions on budget constraints. The DPE itself had a budget of R250 million, but was managing a R700 billion oversight responsibility. DPE has tried to align Programme 3 and Programme 2, which were core business, to capacitate these programes looking at whether the resources in Programme 1 could be utilized for core business in order to ensure that the strategy was achieved. From a finance perspective, the DPE was in a process of finalizing the demand plan together with the procurement plan, mainly focusing on the APP targets, addressing the risks outlined in the strategy. The DPE was hoping to finalise the process by mid June 2015, so that by the time the DPE did the adjustment estimates in August the DPE would be able to shift the funds to Programme 3, making sure that the financials in Programme 1 were reduced.

Mr Mzwandile Radebe, DPE Acting Deputy Director-General: Corporate Management, explained that from a corporate management perspective, the DPE was looking at re-organsing its structure; this would include three processes which include business process mapping, automatic systems to improve efficiency and to quickly identify challenges arising from SOCs, and to identify current vacancies within the structure, especially within corporate management. Of the 27 vacancies, the DPE had core sector teams which were being prioritised to improve their capacity. In the medium to long term the DPE was looking at implementing a work study which would assess the competencies of all employees, especially those in corporate management. The DPE was also looking to move away from a programme-specific structure towards a matrix structure which would allow the DPE to be more flexible in its utilization of resources, especially human resources.

Mr Ratha Ramatlhape, DPE Director, added that the new strategy triggered a need to reorganize and look at the needs of DPE and what the available resources were. The core entities were energy, manufacturing and transport enterprises. The capabilities of the DPE needed to be augmented to deal with the challenges which some of the companies were facing within the portfolio, bringing in technical experts from the outside where needed.

Mr Kgatatso Tlakhudi, DPE Deputy Director-General: Manufacturing, responded to the question around SAFCOL and explained that SAFCOL had 13 social compacts it has entered into with communities which live close to its plantations. The challenge with these social compacts were that they were still focusing on Corporate Social Investment (CSI), building classrooms, issuing bursaries to students and building homes among other initiatives. The DPE however has received a new strategy from SAFCOL where communities would become strategic partners with SAFCOL, and a process was unfolding, specifically around rural development. SAFCOL mainly operated in Limpopo and in Mpumalanga, and they also had a small plantation in KwaZulu Natal. SAFCOL plantations in the Western Cape, Eastern Cape and in KwaZulu Natal were sold off around 2004.

Ms Ntsiki Mbono, DPE Deputy Director-General: Economic Impact and Policy Alignment, responded to the question of balancing of the commercial mandate and the developmental mandate and how the DPE and its entities were contributing towards skills development. She explained that DPE was of the view that it was important that SOCs be differentiated from private companies through a developmental mandate, but also ensuring that the SOCs were still financially viable. The DPE has therefore identified four strategic pillars which included procurement, job creation and enterprise and supply development, and skills development. The DPE had a transformation framework which provided guidelines to the SOCs about what was expected. However it was also important to differentiate between the license to operate, which informed all the key pillars because there were issues which were not licensed to operate but were rather developmental initiatives. The DPE therefore encouraged government to consider additional funding to assist aligning entities. The DPE was also exploring partnerships, particularly around collaborations other departments which had access to funding such as the Department of Higher Education and Training where the DPE had a Memorandum of Understanding with the department for additional funding through the National Skills Fund. Another department which the DPE was forming partnerships with was the Department of Small Business Development.

Regarding skills contribution, the DPE was approaching this through a government wide approach; there were targets expected of SOCs based on the accords reached with the private sector around skills development targets. In responding to this, the DPE was working very closely with other departments. In addition the DPE had a responsibility to ensure that once the skills were developed, people did not sit without a job, therefore job creation was one of the main pillars of the DPE. The DPE was dealing with issues holistically in an attempt to find strategies for the absorption of skills. The DPE was also looking at partnerships with the private sector. Part of the strategy of the DPE was to emphasize collaboration among SOCs and with their suppliers and customers.

Ms Kgomotso Modise, DPE Deputy Director-General: Transport Enterprises, responded to the question around Transnet’s 94% Black Broad Based Economic Empowerment (BBBEE) target which was at 94% however Members raised a concern that the targets for the empowerment of black women and youth was low. She said the 94% was an achievement of the wider BBBEE targets therefore taking into consideration that Transnet still had a lot to achieve in terms of empowering black women and youth in respect of skills development and that all previously disadvantaged groups were able to respond to the needs of the SOC’s procurement. SOCs were urged through the targets they were given and programmes were put in place to ensure that up-skilling previously disadvantaged groups.

Ms Jacky Molisane, DPE Deputy Director-General: Strategic Partnerships, responded to the question on how the SOCs would be reducing reliance on the fiscus and the question on private sector participation framework. She said the DPE would not only be looking at debt in the form of bonds issues on the SOCs in the local market but the international market would also be looked at. Transnet and Eskom have been quite active in the market with regards to raising funding; both domestically and internationally, in an attempt to reduce reliance on the fiscus. The DPE has also been looking at equity instruments from institutional and other investors. Project finance investment was also another area of focus. DPE has been working closely with SOCs in the development of the private sector participation framework, especially Transnet. There has been agreement on the framework.

Discussion
Ms Ranto asked whether the DPE had done research on the instruments they would use to make SOCs more viable? Would the same instruments be used across all SOCs? SA Express was one of the entities which was experiencing problems as a domestic flight carrier, how would it thrive as an international carrier? She argued that the proposed DPE instruments were quite worrisome. On SAFCOL she asked why the plantations in the Eastern Cape and in KwaZulu Natal were sold off and why they were not viable. She said the targets for the draft Bill were not clear.

Mr Luyenge asked about the community empowerment programmes and the private public partnerships within SOCs; what efforts were in place to ensure that local communities were empowered with skills they would be able to make use of when competing in the job sector more broadly?

Mr Marais said Eskom and Transnet had major capital; what plans were in place to ensure that these capital plans were properly monitored and managed? How would these two entities specifically be contributing to economic growth and skills development?

Ms N Mazonne (DA) asked about Eskom bonuses for executives. She said not one of the executives achieved 100% of their Key Performance Indicators (KPIs), the problem within Eskom was that the KPIs given were actually not relevant to the actual job specifications, the KPIs were too easy and the DPE needed to step in. Eskom had a responsibility to keep the lights on, and the targets needed to be set in alignment with this. She acknowledged that the DPE was in fact working hard to keep the lights on and the current load shedding was a bad reflection on the department. The extent to which SOCs went about doing their own thing was very worrisome. During the last meeting, the Minister of Public Enterprises indicated that the level to which the DPE could intervene with SOCs was limited; the DPE could only play an advisory role. She said the state and the Minister needed to be made more accessible to solve problems within SOCs, the blame currently being put on the DPE was unfair. There needed to be legislation in place to resolve this.

She argued that there was no way the DPE could deny that the electricity sector was in a crisis. The country was currently at stage three of load shedding. At what point would the DPE advise the Minister to inform the public about what was going on through a national broadcaster or a national press conference? The country needed to be informed about what stage three of load shedding meant and the current communication within Eskom was very poor. The Minister had a responsibility to diffuse the mounting atmosphere of panic around the country. 

Ms Mokholo agreed with Ms Mazzone that communication has been a problem. The DPE has advised the Minister and the war room to release a statement, and Eskom was being engaged as well. The DPE realises the seriousness of the situation at Eskom and the DPE’s strategy was on track in tackling these challenges should it be approved and implemented. 

Ms Mbono responded and said there was a variety of funding options within the DPE. From a funding perspective, neither Eskom nor Transnet has had a failed bond auction ever since the build programme had been undertaken. The DPE has also been looking at strategic equity partners. The DPE was looking at both the public and the private sector for funding options.

Mr Tlakhudi responded to the question on national impact and said SAFCOL’s products were a strategic natural resource. With the way things were going within the forestry industry, there was an increase in furniture being produced within the country. SAFCOL was committed to revive investment in forests in the Eastern Cape and in KwaZulu Natal in an attempt to revive their economic impact.

Chairperson Letsatsi- Duba asked whether SAFCOL was also hampered by national legislation.

Mr Tlakhudi said unfortunately the way the shareholder model was structured meant that for DPE to intervene it would need to intervene through the Minister or through the Board and this has proven to be quite a challenge. The DPE still did not have a direct role or impact on SOCs.

Ms Motsai responded to the question around the timelines and targets imposed on the Bill and said the DPE’s project plan was very aggressive and ambitious. However this was broken down in phases.

Ms Mokholo said the DPE has already started working on giving Ministers the power to intervene based on the Companies Act. For example the DPE had a meeting with the Eskom Board to deal with interventions which were not necessarily based on legal prescripts; an example was the signing of the co-generators. Interventions were already in place parallel to the development of legislation.

Chairperson Letsatsi-Duba thanked the officials from DPE and those from AGSA for their engagement with the Committee.

The meeting was adjourned.