Economic Development Department 2014/5 performance: Auditor-General; DPME and FFC briefing

Meeting report

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

Mr Ahmed Moolla, Senior Manager, AGSA, said the scope of the audit did not include service delivery, the Department’s budget or legislation and the audit was not responsible for fraud identification and prevention.

 

The overall audit outcome for the Competition Commission (CC) was unqualified with no findings while the Competition Tribunal (CT), ITAC and the Department received an unqualified audit with findings. With regard to the six key focus areas, ITAC required intervention on the quality of submitted financial statements. The CT required intervention on compliance with legislation while Information Technology was of concern for all the entities as there had been a regression amongst the entities in issues of IT service continuity and IT governance. The financial health of the portfolio was good. There had been a decrease in irregular expenditure from R30.9m in 2012/13 to R7.6m in 2013/14 and to R712 580 in 2014/15. There had been a decrease in fruitless and wasteful expenditure from R227 000 in 2012/13 to R84 000 in 2013/14 and to R10 000 in 2014/15. The senior management and the accounting officer/authority level had provided only some and not full assurance in the assessment of assurance providers. Key controls where intervention was required was in IT governance of the CC by the leadership and in compliance with financial and performance management requirements by the Department. The AG was of the view that there was a slow response by management in addressing the root causes of poor audit outcomes and that action plans had to be implemented. Improving controls in Human Resource management and effective monitoring of the action plan were still in progress and these commitments by the Minister had not been implemented.

 

Discussion

Mr J Cardo (DA) wanted to know more about where the R700 000 in irregular expenditure went. On the issue regarding employees being appointed without following proper processes, he wanted to know how many employees were involved.

 

Mr P Atkinson (DA) asked whether the Department was part of those who provided assurance. In addition, he asked the AGSA to clarify what the difference was in providing full assurance and providing some assurance.

 

Mr I Pikanini (ANC) said there was an issue of a lack of controls particularly in relation to human resources and on the issue of irregular expenditure, in particular getting three quotations submitted.

 

Mr M Mabikha (NFP) said the AG should clarify the reasons for the Department making action plans that were failing. The AG had mentioned that people were responsible for controls. Why did the internal audit committee not identify what needed to be done and why were they continuing to do so and how could they be punished.

 

Mr S Tleane (ANC) noted that the report said that the leadership culture of the Department was good yet in another instance said that the Department had weaknesses in its action plans and IT governance and IT controls. Could this be expanded upon?

 

Ms C Matsimbi (ANC) said the report noted the Department’s lack of internal controls and issues were only picked up via the external auditors. Yet it notes that the internal audit was classified as good. Could this be explained further?

 

The Chairperson said the AG appeared concerned about the financial leadership, performance management, governance and intervention was needed regarding compliance issues. The CC had a different explanation regarding its IT governance issues. How could this be resolved because the CC operated from a server in a building controlled by the dti?

 

Mr Moolla addressed the concern around the irregular expenditure of R700 000, and said that the best course would be to look at the financial statements of those entities where they disclosed the irregular expenditure and gave the detail regarding it, including actions to address it.

 

The Chairperson asked whether the plans in place would assist in addressing the issues.

 

Mr Moolla said it was up to the entities to implement the recommendations and improve the amount of monitoring that took place. This aspect could still improve. He recommended that the entity improve the monitoring of compliance with laws and regulations.

 

On the Human Resource issue at the Department, he said employee verification checks were not followed for 13 appointments by the Department.

 

Regarding assurance providers, the AG had criteria for no assurance, for some assurance and related it to their assessment of controls in the environment and the audit outcome and matters reported in the audit report. Both the Department and ITAC had senior managers providing some but not full assurance because there were still issues of non compliance. In both instances it was also a case of being repeat matters.

 

Mr Moolla said that the Department had an historic issue with human resource management and staff turnover. There was inadequate monitoring to ensure compliance with laws and regulations. The DG was better placed to talk about plans to improve the situation. The Department had action plans but the root causes were not being addressed in the action plans nor were the issues being continuously monitored. Increased assurance was needed on the action plan.

 

Regarding the driver of key controls, he said internal controls were split into three categories, leadership, financial and performance management, and governance. Leadership concerned effective leadership, on whether there was a code of ethics, oversight responsibility, human resource management and policies and procedures. In financial and performance management the AG looked at record keeping, reconciliations, financial statements, compliance with laws and regulations and IT security systems. In governance, he had said they were rated green but there were internal control deficiencies. Internal audit was separate from internal control deficiencies. Internal audit was a specific unit in the Department and they were an assurance provider. They were assessed as green because they were in place, they did have plans and provided reports to management. Internal control talked to the processes that management had in place to ensure they had complete and accurate records and this was where some attention was needed.

 

The Chairperson said that if internal audit was doing its work why would there be this situation as it currently was regarding compliance issues. Did the AG come up with risk control measures? Was there any risk policy? Did internal audit members sit in on management meetings?

 

Mr Matsimbi said the internal audit unit was rated green but it did not pick up on issues, issues were picked up by the AG.

 

Mr Moolla said the AG’s assessment of the internal audit committees was only according to compliance with legislation. It was true that internal audit should look at areas that had been identified by the AG and at areas of risk.

 

The Chairperson said the issue was that the AG was still the body finding issues whereas the internal audit committees were supposed to identify the issues so that management could propose solutions. In the AG interaction with the Department, did they give the assurance that these matters were happening. These matters had occurred previously and the issue was about how the internal audit unit was structured.

 

Mr Moolla said his recommendation was that the Department ensure the implementation of the action plan to address audit findings until it was assured that all the findings were resolved and that the internal audit unit had the right to follow it up and interrogate it.

 

Regarding the CC and its view on the IT matter, Mr Moollae said the AG had a different view on the matter and the CC appeared to be doing well despite the server being controlled centrally. This matter needed to be taken up and discussed again and feedback could be given later to the Committee. While the server was centrally controlled, control still needed to be maintained by the CC and it should have an IT governance framework.

 

Briefing by the Financial and Fiscal Commission (FFC)

Mr Bongani Khumalo, Acting Chairperson and CEO of the FFC, said the FFC had been requested to look at the role of the IDC with respect to the NDP and it had been identified as a critical player in promoting the industrial policy of the country. The Department was in a crucial position to influence the broader objectives of the country and to interact with the microsector of the economy of the country.

 

The global economic crisis and issues that arose from that were external factors that would impose constraints on the growth prospects of the community and result in a lowered outlook with growth slowing and the fiscus tightening its belt. China and the African countries were also experiencing slower growth. Internally the risks were the construction of electricity infrastructure and unrest in the labour market.  There was a need to look at the Department and how it used its resourced in this context. The FFC had observed an improvement in the Departments spending patterns. The FFC had previously raised issues about vacancies but this had been resolved.

 

Dr Hammed Amusa, Programme Manager for the Macroeconomics & Public Finance Unit, FFC, said that when the Minister of Finance gave the medium term outlook recently he had noted that SA would be navigating headwinds. When the 2015 budget had been announced the growth expectation had been 2.1%. An IMF report had noted that growth would be lowered by between 0.6 to 0.8%. This was a big difference from the budget forecast and would have serious implications for the economy which would now only grow by 1.5%. Advanced economies were in a recovery phase and he anticipated a lift in interest rates by the US which would have an impact on capital flows leading to a tightening in financial conditions and borrowing costs. Currency depreciation was on the horizon.  He then spoke to the challenge of the public wage bill, to an analysis of the budget and programmes of the Department, the spending of the Department by economic classification, the composition of the budget and the capacity to support the Department’s mandate, and analysis of the entities, the role of the SEFA, export growth ad the role of ITAC, economic reforms and the CC and to measuring the Department and the entities performances and the audit outcomes. The presentation concluded by commending the government for tabling a stable budget and that policies should prevent the growth from falling too far and entering into a debt trap. (See attached document)

 

Discussion

Mr Tleane said there was a perception that SOCs were not profitable but there was also the developmental aspect to be considered. There were continuous requests for bailouts by these companies. Would stopping the bailouts be the best thing, given the developmental outlook as an emerging economy? How big was the emerging African market opportunity given that China was already deep into this market?

 

Mr Cardo noted that that the FFC had said that growth projections would be dampened by structural limitations, infrastructure challenges and labour market productivity but that surely the Department’s role was to address these constraints. How well were they addressing these issues? Were there other alternative sites of economic policy coordination within government, for example the NPC?  Did the Department constitute a rival structure, with reference to the implementation of the NDP? The presentation had referred to ‘mandate overlap’, could this be clarified. How did the figure of 12.5% for compensation of employees compare with other departments figures?

 

The Chairperson asked about the Department’s budget allocation which would recover by the end of the medium term. In he FFC’s opinion, would that increase the impact of the work the Department was doing? Did the FFC think it important that the increase happened in the medium term or did it think the challenges would remain in the medium term? Could the Department utilise the whole of the complement of its workforce? What was the FFCs opinion on the IDC being split between the EDD which had oversight responsibility and the dti to which it related to more closely on implementation of trade and industry issues the IDC is involved in and similarly with regard to ITAC. The Committee was battling to understand the impact ITAC was making outside of SADC countries in terms of regional integration. What could ITAC do to improve regional integration?

 

Mr Khumalo said discussion around bailouts for SOCs should start at what was meant by a bailout.

The support currently given to SOCs was in the form of guarantees to borrow money. It had not reached the point where the fiscus had to act on those guarantees. The conditions surrounding access to guarantees should be tightened. Given the nature and history of the SA economy, there was a role for the state, in an indirect way through SOCs, to focus purely on the objectives of government on redress or access to public services which the private sector would otherwise not provide and this linked in to the issue of the role of the IDC. The price of electricity was regulated so Eskom could not do what it liked. Electricity had to be affordable. The issue of SOCs was not a simple issue which could be reduced to bailouts. None of the guarantees have been called and hence the state had not given a bailout. To maintain developmental objectives the state still needed to support SOCs.

 

On the question of the emerging markets in Africa, he said these were economies that were growing fast but from a very low base. Some of these economies had not taken off after the growth shown in the aftermath of the global economic crisis and was reversing, most likely because of the decrease in commodity market prices. The biggest challenge was that the biggest consumer of those commodities was China. The lack of depth of this market meant that one should not rely on laying all ones eggs in this one basket.

 

On the question of the Department’s budget, he said everybody’s allocations were going down, especially at a national level where the growth in public spending was being controlled. One needed to see a change in the composition of government expenditure. The key driver to realise the goals of the NDP and to kick-start the economy to grow was infrastructure development. If the Department was not capacitated, it would not be able to play the role it was supposed to play.

 

On the issue of overlapping mandates, the NPC was to draw up the National Development Plan which it then shared with all clusters to see what their role would be, so these should not be construed as negative overlaps, rather they were complementary. One could not have departments doing their own thing and there was precedent for the overlap in the form of cooperative governance and the intergovernmental relations framework. The Department, by virtue of it being the secretariat of the PICC, was at the centre of this key pillar and therefore played a key role. Hence the increase in its allocation was in recognition of the role the Department must play.

 

The FFC had identified that most of the targets of the Department had been met and 50% were above expectations. The question to be asked was whether the targets could be upped.

 

Regarding the internal challenges the FFC had identified and the role the Department could play, especially on labour issues, he said there was a process underway on the wage bill and productivity service delivery. Questions that had to be raised were what the service delivery norms of the Department were and this service delivery would require an accountability framework.

 

His opinion on the IDC and ITAC’s relationship with the dti and the Department was a very complicated question. What was important was the common objective and the cluster’s objectives. It boiled down to how the outcomes based delivery model because the entities were all instruments to implement government policy. Stats SA and the Development Bank were other entities facing similar questions. Did it matter where they were located? A key area that had not been discussed was the Department and its interaction with local government.

 

On the impact of ITAC with relation to SADC, he said he would not answer that immediately but would go back to the office and research it. The FFC was holding a conference with the HSRC and UWC on the impact of BRICS on multi-level governance. In one of the papers to be presented, there was an opinion that for a country like South Africa, the biggest benefit would be around the areas of trade and so ITAC became an important player.

 

Regarding the budget for the compensation of employees, Mr Amusa said that the FFC had not done a comparison but had just noted that, outside of transfers, 12.5% compensation was not high and this meant the Department was doing well. Other departments had a higher percentage figure.

 

The meeting was adjourned for lunch.

 

Department of Planning, Monitoring and Evaluation (DPME)briefing on the performance and evaluation of the Department of Economic Development (EDD) for the 2014/15 financial year
Mr Rudi Dicks, DPME Deputy Director-General, briefed the Committee on the EDD’s performance and evaluation for the 2014/15 financial year. His presentation would focus on the monitoring and evaluation of the Medium Term Strategic Plan, during government's first five year implementation plan of the National Development plan, in the financial years 2014 to 2018.

Mr Dicks highlighted the key achievements. Government agencies invested over R1 trillion in infrastructure between 2009 and 2013 in key areas such as energy, water and higher education infrastructure. Significant investments, both foreign and local, in key manufacturing sectors such as auto, agro-processing and electronics took place – Mercedes Benz (R5 billion), Ford (R3.6 billion), Unilever (R4 billion in four plants over the four years). There had been a strong turnaround in manufacturing and exports, and auto exports in 2014 amounted to R115 billion (12.7% total exports).

The investment of the Passenger Rail Agency of South Africa (PRASA) into new rail rolling stock was estimated to cost R51 billion and it would spend R4 billion on new hybrid locomotives over a ten-year period. A factory would be established in Nigel, Ekurhuleni for the manufacture and assembly of locomotives and trains. This could result in direct and indirect jobs.

The Renewable Energy Independent Power Producer Programme (REIPP) was the first large scale private sector procurement in electricity generation industry in South Africa and one of the largest renewable energy programmes in the world. Due to this programme South Africa was now considered amongst the top ten renewable energy investing country leaders in  REIPP projects, which translated into approximately R193 billion in private sector investment.
Four bidding windows had successfully been launched, resulting in the procuring of 92 renewable energy projects.

At the level of supporting regional infrastructure initiatives, President Zuma was the political champion of African Union (AU) Presidential Infrastructure Championing Initiative which had resulted in a number of regional infrastructure projects.

Mr Dicks highlighted a number of key challenges. Investment in the productive sectors had lagged behind investment in the tertiary industries. Progress on investment on other elements of the National Infrastructure Plan was steady. Progress towards the 75% local procurement target had been slow, largely due to conflicting views on the implementation of the policy. Electricity supply constraints were a significant impediment to economic growth. High risk of frequent and major load-shedding over coming months could last up to three years. Load shedding came with a high cost to the economy, on average it cost between R9 – R15 kWh compared to running diesel generators (R4 – R5 kWh).

He also noted the delays in building Medupi and Kusile plants, because of poor planning, skills shortage, poor contractor performance, strikes and weaknesses in contract management. A large amount of existing generating capacity was not available due to breakdowns, and average plant availability had dropped from 85% to 68%. The use of diesel was costly and unsustainable in the medium term (costing R10 to 12 billion annually since last year) but remained a short term necessity.

Distribution infrastructure was not adequately maintained and thus there was also decaying expansion and growth of new connections to the network, but more importantly the quality of supply was causing disinvestment. Resolving the electricity supply constraint would require a mix of energy options including coal, gas, renewables, shale, nuclear as well as oil and gas.

Mr Dicks informed the Committee on the interventions that were under way. The focus on the nine Priority Areas was gaining traction. He described the efforts as including the following:

- Unlocking increased private sector investment would require using the infrastructure programme to crowd in the private sector investment
- There was a need for improving regulatory efficiencies at all levels of government
- South Africa must expand exports especially outside of Europe and China (and focus especially on Africa) by using new opportunities
- South Africa must focus on trade promotion measures, combined with more efficient regulation and possibly export-import financing in Africa
- There was a need to implement key initiatives of the Agriculture Policy Action Plan to support growth and employment in agriculture and agro-processing. There would have to be increased support for existing smallholder farmers, and exploring ways to substantially expand the number of agricultural producers.

- In addition, there was a need to realise the enormous potential of South Africa’s ocean economy, to contribute to growth, job creating and poverty reduction
- South Africa must implement the Mining Phakisa to double investment. This must be coupled with advancing beneficiation to add value to our mineral wealth. In addition, South Africa should finalise the Minerals and Petroleum Resources Development Amendment Bill, and review the Mining Charter to set targets for local manufacturing of capital goods
- South Africa must continue to implement the New Growth Path to promote growth and employment from new opportunities such as the green economy, exports of goods and services to growing African markets and shale, and offshore oil and gas
- There was a need for increased support for cooperatives, particularly in marketing and supply activities to enable small scale producers to enter formal value chains and take advantage of economies of scale
- It must put in place a more focused project-managed initiative to comprehensively eliminate unnecessary regulatory burdens which impeded growth and investment, and to make necessary regulations more efficient.

The Socio-Economic Impact Assessment System (SEIAS) was being implemented, following Government approval in 1 July 2015. It was to be implemented from 1 October 2015.

He added that urgent intervention was required to immediately assess the impact of the new immigration regulations on tourism and scarce skills, and to provide recommendations to Government on how to address any unintended consequences. Government had appointed an Inter-Ministerial Committee, led by the Deputy President, to deal with the unintended consequences in the implementation of the immigration regulation.

Continued implementation of the One Stop Investment centres; the co-location of SMME support agencies by DSBD; and the Strategic Environmental Assessments (SEAs) would also be important.

Management Performance
Mr Dicks then discussed four key performance areas: Strategic Management; Governance and Accountability; Human Resource Management; and Financial Management. Overall, the performance in Strategic Management has declined. Strategic management was comprised of the Strategic Plan, the Annual Performance Plan and Monitoring and Evaluation.

In Governance and Accountability performance was mixed. There had been significant improvement in some areas, other areas have seen a significant decline in performance, and some areas had maintained the same level of performance.

There has been a decline in performance in Human Resource Management, as most areas had either stayed the same or declined.

Financial Management had also seen mixed performance. Some areas had improved, some areas had maintained the same level of performance and some areas had declined.

Discussion

The Chairperson thanked Mr Dicks for his presentation. She commended the fact that Mr Dicks thoroughly and genuinely knew what was going on in the EDD, and this was not just information he received from someone else to present to the Committee. She asked that the Committee questions should focus on the outcome of management.

Mr Atkinson made reference to part 4 of the interventions underway, and point number 3, relating to the interventions required to assess the impact of the new immigration regulations on tourism and scarce skills. He asked what was meant by the “unintended consequences” referred to in the description of the Inter-Ministerial Committee brief. :

Mr Dicks explained that there is a need to protect the country’s borders; for security reasons, to reduce child trafficking and to retain the skills that were in the country. There was a need to establish a balance between protecting the borders and security, and maintaining the flow in and out of the country.

Dr Cardo stated that what the DPME had done was very useful, as it monitored the implementation of the NDP. The MTSF was the basis for the NDP implementation across government departments, and monitoring the implementation of the NDP. He asked if it was likely that the country would meet its goals of a 5.5% GDP by the year 2030 and the creation of 11 million jobs. He asked what the EDD would be expected to do if these goals were not met; it would play a significant role in achieving these goals. He asked what role the EDD played also in ensuring that the MTSF would achieve coherency and coordination of economic policy. He asked whether the EDD’s economic policy goals conflicted or complemented those of the National Planning Commission’s economic policy and development. He asked Mr Dicks to unpack the methodology behind performance measurement. He was sceptical of the “amber rating”, saying that this merely indicated that a report had been submitted but not what it contained.

Dr Cardo noted that the presentation spoke of a significant turnaround in manufacturing, but he also doubted this and questioned whether that was true, particularly in view of the number of jobs over the last few months. He noted that Mr Dicks mentioned conflicting views in local procurement policy, and asked what the nature of these conflicts were.

Dr Dicks sought clarity on the dates for the SEIAS, since the presentation mentioned both 1 July 2015 and 1 October as implementation dates. He asked whether the project was fully capacitated, how many people were working on it, whether it would look at the controversial Private Security Industry Registration Amendment Bill and the Business Licensing Bill, and what other rules, bills and regulations the project would be looking at.

Mr Dicks stated that in the current economic environment of the country, the likelihood of achieving the goal did not look promising but he did believe that it was possible. He explained that the government needed to play a more active and supportive role in economic development. He explained that mining was a critical catalyst in economic development. The EDD was still on track to achieving these goals, it just needed to stick to what it was doing. He thought that adequate engagement with the private sector was taking place, that the government was playing a greater role in economic development, and core infrastructure was in place. He told the Committee that compared to the other Brazil, Russia, India, China and South Africa (BRICS) countries; South Africa was in better standing.

Mr Dicks explained that there was coherency, alignment and coordination taking place between the different departments and between the NPC and the Department.

In relation to the SEIAS, the DPME asked that it be implemented, after a transition period, from October 2015 and officials were being trained to implement the new systems. The DPME would be meeting with the relevant department to discuss and work on the Private Security legislation. It was currently working with the Department of Small Business Development on the licensing bill.

The Chairperson complained that the EDD was referred to in the presentation as the “NDED” and noted that the DPME should have been consistent and correct. She was particularly interested in hearing about management performance, and acknowledged that generally management performance was doing well, and she was very impressed with the results and the interventions taken by the Department. She stated that it was pleasing to see that jobs were being saved and more input into the GDP was being done. She noted that EDD was doing a lot of work that had not been spoken about and she appreciated it.

The Chairperson asked whether the performance in terms of the Promotion of Access to Information Act (PAIA) was not good, or whether DPME did not have information on it. She asked why governance and accountability was lacking. She noted that in some areas there were significant improvements, but in other areas the decline in performance was significant. She was not happy with strategic management, as she felt that it was key to government performance. She noted that financial management was doing well and had improved despite there still being challenges. She sought clarity on why the payroll certificate performance had declined. She asked what sort of disciplinary cases were being spoken of in the report. She asked what was meant by ‘PMDS HOD’ and who it included. She asked what the human resources management challenges were for the future. She was interested in the Human Resources Development Plan and noted the improvement from 2012, but asked why it declined in 2014.

Mr Dicks explained that “HOD” referred to Heads of Departments and that included Director-Generals and Chief Finance Officers.

The Chairperson asked that Mr Dicks explain the SEIAS project to the Committee.

Mr Dicks responded that the SEIAS replaced the existing impact system, which had not been aligned with the NDP. The system had been designed to help manage the risk and cost of implementation of bills. Mr Dicks explained that a common problem and challenge that occurred with many department was that they did not want to implement a bill because of the costs and risks associated with it. The SEIAS would assist with this problem and challenge. It forced departments to analyse the risks of the implementation of a bill and come up with ways to mitigate these risks, as also helping them to find ways to cut the costs of implementation. He used an example of the new financial insurance legislation, estimated to cost the insurance industry R2.5 billion to implement, but SEIAS recommended that it be implemented over time in order to mitigate costs. Mr Dicks explained that the SEIAS was about methodology and being strategic.

Mr Dicks explained that the DPME had a one week turnaround time period, after a department had submitted its plan, after which the DPME would send the department recommendations and feedback. Every policy, bill and regulation had to be signed off by this unit, so a SEIAS had to be completed before a bill, policy or regulation was approved. Mr Dicks explained that the DPME was trying to ensure that the SEIAS was in the public domain - for open public scrutiny, comment and recommendation - unless it posed a security threat.

The Chairperson asked if people could submit retrospectively,and Mr Dicks confirmed that they could. He said that there had been little resistance to SEIAS by the departments as most departments had found it very helpful. The DPME did not want the SEIAS to be completed by consultants as the DPME wanted the departmental officials to take responsibility. In order to avoid use of consultants, the DPME was training officials.

The Chairperson suggested that an official stamp stating that the piece of legislation had been SEIAS approved should be included on the final version of the legislation submitted to Cabinet. 

Mr Dicks told the Chairperson that the DPME did have a stamp.

Mr Dicks apologized to the Committee for the error in nomenclature in the presentation; and explained that “NDED” was used to distinguish between national and provincial departments.

He suggested the Committee should try get the impact team to present in depth about the measurement tools used for performance management because he was not an expert in the matter. He explained that the “amber” rating indicated that whilst there had been progress, it was not impressive or significant. Yellow rating would indicate progress that was progress that had been either impressive or significant, or both.

PMDS was the system that looked to whether Annual Performance Plan requirements and targets have been met and whether they were met within the stipulated period. He furthermore explained how disciplinary hearings were dealt with.

The meeting was adjourned.