National Agricultural Marketing Council (NAMC) and Perishable Products Export Control Board (PPECB) on their 2014/15 Annual Report

Meeting report

National Agriculture Marketing Council (NAMC): Responses to audit outcome briefing by Auditor General on 2014/2015 Annual Report
Ms Sarah Muvhulawa, Chief Financial Officer, NAMC, took the Committee through the responses to the audit outcome briefing by the Auditor General South Africa (AGSA) in relation to the Annual Report for 2014/2015. She added that there were two major issues that were raised.  The Auditor General indicated that NAMC recognised the deferred revenue on a project that NAMC had undertaken with the Department of Rural Development and Land Reform (DRDLR), a National Revenue Project, without the conditions of the contract on project assets. Management had taken action on how to address this issue of the deferred revenue. An audit finding matrix had been developed in order to address the issue of the deferred revenue, where it would record all the findings of internal and external audit. The report was then presented to the audit risk committee, on a quarterly basis, who would in turn, request the internal and external auditors to ensure that the issues had been attended to by management and the appropriate corrective action taken. The auditors would then submit a report back to the audit risk committee, also on a  quarterly basis.

The second corrective measure that management had developed was the detailed graph compliance check list for all the standards that are applicable to NAMC, in order to ensure that the correct accounting treatments for all the transactions have been adhered to.

NAMC also  had a system in place for monthly reconciliations to check the amounts that are supposed to be deferred, and those that which are supposed to be recognised as revenue.

NAMC interacts with the Auditor-General South Africa (AGSA) as well as National Treasury (NT), prior to audit, in order to get clarity on any issues that NAMC might have, and make sure that they would be dealt with appropriately, before audit takes place.

Other findings that were raised on the audit report included that the planned targets were not in line with the SMART principles, because they were not specific, verifiable, and measurable; and the targets were not time bound. Some of the issues that were indicated by the Auditor General had already been attended to and resolved appropriately. However, the changes made in the 2014/15 financial year, in the NAMC's Annual Performance Plan (APP) and strategic plan were not approved so it did not submit those documents and changes. The issues would be addressed in the next year, with technical indicators guidelines in order to counteract the issues.

The Chairperson noted that Members had no questions and asked for the next presentation. She noted that within the agriculture portfolio, the NAMC had produced one of the best audit outcomes.

Food Prices Annual Report
Mr Tshililo Ramabulana, Chief Executive Officer, NAMC, took the Committee through the annual report on food prices, and noted that recommendations had been made on what could be done in order to address some of the challenges that were encountered by the Department of Agriculture, Forestry and Fisheries (DAFF or the Department).

He reported that food prices between 2008 and 2014 had decreased when seen against inflation, especially towards the beginning of June and July of 2014. A comparison of costs of food in South Africa (SA) as against other well-developed countries would show that, for instance, food price inflation in Russia was much higher than in SA. Rural households paid less for some of their food than the households in the urban areas. However, products such as white sugar and super maize meal cost more in the rural areas than they did in the urban areas. NAMC was interested in conducting a survey of the poorest districts to determine and understand the impact of food inflation among households that are destitute. Hopefully, it would be able to do so and report back to the Committee
He commented that these findings were interesting because it had been assumed that the same basket of products that a normal household would consume would cost more in rural areas. Another point that the NAMC wanted to consider was the impact of the change in prices and how they affected the most destitute

Policy Recommendations
Mr Ramabulana pointed out that administered and regulated prices make a significant contribution, and the increase in the cost of electricity, diesel and water had played a significant role in determining the cost of commodities and food prices. Addressing some of the challenges, various stakeholders including the DAFF and NAMC have been debating how to ensure that the agricultural sector should be subsidised, or not pay as much for water as other industries, because water generally played such a significant role in the production of commodities. This was a long drawn and complex argument and there was no finality yet. There was a line of thinking that in general, farmers need to be assisted with the costs of production, given the rise of water, electricity and fuel prices. 

One of the issues that DAFF had been working on was the proper implementation of food and nutrition plans. He pointed out that a lot of households had access to food but not necessarily to good  nutrition. He assured the Committee that in the districts were poverty was particularly prevalent at higher levels, NAMC wished to ensure that all small holder farmers located in those districts were assisted to produce more. DAFF had been looking at different countries that had been practising the same thing and had found that their results were quite impressive and that system had provided households that would not otherwise have been food secure with the necessary access to food, meaning that the numbers of destitute households had been significantly reduced.

The infrastructure that distributed and made sure that people had access to food was generally well maintained, but there were a few bottlenecks that needed to be addressed.

He pointed out that the Minister of Agriculture, Forestry and Fisheries would release the food cost review in November, and this review document had just touched on some of these challenges and provided feasible recommendations.
 

Discussion
Mr M Filtane (UDM) pointed out that a lot of food was produced in the rural areas, sold to the towns and purchased back from there by those living in rural areas, with the result that there was actually less food security than should be expected in the rural areas. He asked what was the main cause of the price difference between rural and urban areas, and why did it seem that so little produced in the rural areas was being directly sold from there.

Mr Filtane asked about regulated prices and their impact  to push up inflation, asked if deregulation was the answer, or whether there were other alternatives.

He referred to the capitalisation of farmers by government. In New Zealand there was very little capitalisation from the government yet the agriculture sector had been quite efficient over the years. He disliked over reliance on government, and asked NAMC if it had done any comparisons with other countries, such as perhaps New Zealand, and looked into alternatives.

Lastly he noted that China, a prime trading partner of South Africa, ranked South Africa only at number twenty eight, and he asked why China's economic variations affected South Africa so significantly, especially as a country that was seeking food security.

The Chairperson pointed out that his second and third questions had been answered by the President on the previous day,and work was being done to ensure the issues were attended to; the Director General of the DAFF had also answered that.

The Chairperson also spoke to the implementation of the food nutrition plans. The Financial and Fiscal Commission (FFC) said that the impact of this, as raised by the Department of Planning, Monitoring and Evaluation, came mostly from the Department of Social Development, and that DAFF had no impact because production was not happening on the ground. The question was how to ensure that hunger in communities was substantially reduced?  Grants provided by Department of Social Development were not sufficient to cater for nutritious food but only staple food and she wondered then how DAFF could ensure that positive impact was seen.

The Chairperson added that the FFC had said that the issue of transformation needed further research and more information in order to come up with the appropriate solutions.

Mr Ramabulana answered the questions on sector transformation, noting that industries using the Marketing Act would mentor and report on the work that had been done in terms of transformation, and NAMC had been working with DAFF to measure the transformation. There was a specific focus n board composition, and employment equity. The studies would look at private companies, how they spend their money on transformation, and the contribution to small enterprise development. NAMC publishes a report on the transformation issues, also covering points raised by DAFF. However, he was aware that it was not all-encompassing and would welcome suggestions on more issues to be covered.

Ms Elaine Alexander, Deputy Director General: Economic Development and Trade and Marketing, DAFF, noted that she worked with NAMC closely and agreed fully with Mr Ramabulana on the transformation issues. In regard to the levies and the statutory levy requirements, DAFF had approved the use of a plan to encourage transformation within the sector and therefore expected companies that required the services of DAFF to reflect upon their transformation efforts, and also furnish DAFF with the equity plans, to ensure that transformation would be addressed appropriately in the sector.

Mr Ramabulana next addressed the deregulation question and said that NAMC must, every five years, publish a report addressing what had been done in terms of deregulation within the sector. When South Africa implemented deregulation, this happened simultaneously with similar moves in New Zealand, which, instead of deregulating the sector entirely, had set up semi-private companies that would continue enjoying government assistance. Those semi-private dairy companies that were set up had been doing very well and continued to dominate around the world, although government has been continuously assisting them. He further stated that the most of the countries “sugar-coat” their deregulation, because their governments still in fact continue to assist farmers. People should not expect complete deregulation from the South African government. Furthermore, in relation to New Zealand he cited the example of the kiwi fruit, and said the fruit had been enjoying government funding to assist farmers in order to position it well in the market and continue to create new markets for it. It was therefore not always correct or true that other countries did not receive government support. For new and upcoming industry, the role of government support was critical because it would contribute significantly to ensuring that the sector could continue to grow and that new farmers or products in the market could become competitive.

Ms Alexander stated that a report was given every year by the OECD, and suggested that DAFF should share this with the Committee as it contained useful information. It showed the level of support that were given, around the world, by various countries to support the agricultural sectors, and compared those countries with South Africa.

Adding to this, Mr Ramabulana said that, in terms of market access, there was a lot of work that the DG Cluster was undertaking. It was looking at the size of the government markets and considering how best to use that strength – he believed it was around R6 billion – to support small holder farmers. There were other departments that were part of that cluster, and the Department of Trade and Industry (dti) was playing a major role.

The work that was now ongoing and being carried out by the cluster linked to the whole food and nutrition plan, and NAMC believed that this was a very good plan, as it would brings government as a whole together. The point was how to make sure that government would fully implement that plans.

The Chairperson noted that maize prices were expected to increase in the next quarter, due to the exchange rate, and to adverse weather conditions in the United States. The Chairperson asked how it was that maize would be affected although it was a staple crop in South Africa.

Ms Z Jongbloed (DA) asked that Mr Ramabulana should discuss the effect of drought in so many parts of Africa.

Mr Filtane also added that he had not yet heard an answer to his question on the reason for price differences in urban and rural areas.

Mr Ramabulana said that the data used by NAMC and others came from Statistics South Africa (StatsSA) and the indications were that in order to explain some of the issues, it was necessary to do very specific investigations. He provided an example of a project that NAMC and DAFF ran, around four years ago. Officials had visited the poorest regions and went to their spaza shops but not only would they get the prices per unit, but also ask owners to measure the size of the bread or pre-packs, recording the price. This provided far more specifics than the broad data by package size would have done, and indicated how one spaza shop might differ from another. NAMC, getting the data as it did from StatsSA at the moment, was having a discussion about the fact that when looking at the poorest households and their cost of food, it was also necessary to know in what region they were situated. People tended to buy in small rather than large quantities, because they could not afford the bulk packs. That meant that the price, per kilogram, was higher.

Mr Andries Cronje, Councillor, NAMC, added that the NAMC could not argue with the factual data but would hope to find better solutions in the future.

Mr Ramabulana spoke to regulated prices and said that VAT was to be charged in the five biggest inputs in Agriculture. This was done to try to combat the abuse of the system happening in the past. It was felt that it was better to charge VAT for everyone, then those farmers who genuinely qualified for exemptions could claim it back. Although this could be done, the reason it had not yet been implemented was that the farmers had not been able to figure out the impact of VAT on the cost of food, and viability of commercial agriculture yet it did know the impact on the small holder farmers was likely to be dire. NAMC did not want to implement a policy without being fully certain of the consequences, particularly unintended ones. South African Revenue Services (SARS) and DAFF were doing some work in order to understand all the consequences, including unintended ones, once a system like this had been implemented. He alluded to the fact that that a lot of the farmers would get rebates on diesel but the system did not encourage smallholder farmers to have rebates. He stated that diesel was one of the biggest costs to farmers, as well as electricity. Another issue related to water, and how increased water prices would put a lot of smallholder farmers out of business; that was something that would still have to be addressed.

Mr Ramabulana said that several places were impacted upon by drought, and in North West and Free State some of the farmers did not harvest anything. In addition to this, some farmers were experiencing lower closing stock under the current weather and water price conditions, and if not enough stock overall was produced in addition to this, this would affect the cost of the product to the consumers. That was why the price of maize was not going to decline any time soon, and would probably be between R2 500 to R3 000; under those conditions, South Africa would not be likely to produce the usual 14 million tonnes of maize. South Africans consumed white maize whereas the yellow maize that was produced locally mainly went into animal feed. If some of the white maize consumed by people were to go into feeding animals that would play a significant contributory role to pushing up the price of maize. He commented that South Africa was usually compared to countries similar to it. China was a very big economy, but many of its people remained very poor. There were many lessons that South Africa could learn from China in terms of supporting smallholder farmers.

Ms Alexander added that in fact South Africa was importing a lot of maize this year, in order to meet domestic demand, and this was where the rand exchange rate distortion came in, in the agricultural inputs. Because the rand was weak, South Africa would pay more in terms of production costs for the maize. If the worldwide demand exceeded supply, prices would increase. When China was not growing, then the issue was really around the movement of money and that was when emerging markets took a huge knock. That explained why China had such a significant impact on the South African economy.

Mr Filtane provided some additional remarks, and said that projects that enjoyed government support should look at government as their market. There was a process of double-dipping, where a person might get support from government to start a project, and government responded positively. However, government might seem to be shutting down others who wished to establish a project privately. He pointed out that merchandising was largely about marketing and people were attracted to shops such as Shoprite or Pick'n'Pay by the environment that they created. He asked how rural shops could be helped to create an environment where people would feel comfortable to shop at the spaza stores. He was not expecting an immediate answer but wanted NAMC to think about this.

Mr Ramabulana stated that projections in this year and next year were much lower, as well as the expected yield. However, accurate data was yet to be provided.

Mr Cronje stated that the country needed a lot of rain to have sufficient grain crops and whilst rainfall continued to be at low levels, then prices would remain stagnant or higher.

Ms Alexander added that she had recently been told by the Chief Executive Officer of Grain SA that the country would need over 200 mm of rain in the next month or so to get good crops.

Perishable Products Exports Control Board (PPECB) Annual Report 2014/15 briefing
Mr Angelo Petersen, Chairperson of the PPECB Board, said that in the 2014/2015 financial year, the board member representing the fishing industry had resigned and so the PPECB was currently awaiting nominations for appointment of a new member.

He noted that the last financial year had been challenging for the agricultural sector at large, but notwithstanding the challenges, the PPECB had responded well to the industry, and has delivered well on its performance mandate.

The PPECB focused on cost containment in this year. Its budget had been R270 million and it was funded by its customers. This point was regulated by the legislation. The PPECB regulated trade in excess of R20 billion, and this represented largely foreign exchange for its customers. The second area of focus had been to change the corporate culture so that it would become more customer-focused. The third area of focus was on technology; especially with the launch of the new tablets, and the PPECB had made tremendous investments in the Information and Communication Technology (ICT) infrastructure to keep up with relevant developments. The fourth area of focus was transformation, would be enhanced. The fifth area was to ensure a good continuation of corporate governance and financial management. The PPECB had received a clean audit with no findings.

Some of the challenges of this year had been the citrus black spot, which remained an area of concern because it had quite a broad impact. The other challenge was to develop a sustainable strategy for the PPECB laboratory. He said the CEO would explain this strategy further. One thing that still remained outstanding, and which would need to be concluded in the future, was the legislation that would allow the PPECB to move towards a more risk based auditing and inspection service. He added that it has been a privilege to serve as the Chairperson of a focused organisation with a competent team.

The Chairperson said she knew it would be difficult to summarise the presentation, but the Committee was very interested in hearing the action plan of the PPECB in relation to the responses to the comments of the Auditor-General.

Mr Lucien Jansen, Chief Executive Officer, PPECB, said PPECB had highlighted five significant risks in the organisation. These were to do with insufficient information technology infrastructure, insufficient information technology disaster recovery, and the core business of the PPECB. Part of the PPECB business was covered by the strategy and operations department which had a certain culture of management around food safety. With regard to the product quality side, there had been some challenges. He noted that, for instance, the PPECB budgeted for doing an inspection of 58.2 million cartons, and it would have received an extra one million only the conditions were not favourable.  PPECB managed to export  one million cartons of palm fruit. In terms of the perishable foods, citrus fruit still remained South Africa’s biggest export product. There had been a lot of challenges when it came to the sale of this product, but despite this, the PPECB had still managed to show some growth, around a 2% increase in exports from the previous year. Grain export had increased, due to demand, and the export of nuts had increased but not to the level which was expected by the organisation, as some exporters could not secure contracts for the products.

Onions and potatoes comprised the biggest quantities of vegetables that were exported, mainly to other African countries, and they would be exported by way of road transport.

In relation to the corporate affairs, the Board had managed to conclude the process of drawing the PPECB Bill and it was hoping that it could start a public consultation process. PPECB had a programme which helped to train small farmer developers in the sectors of food safety and good agricultural practice, and this was done in partnership with the Agricultural Industries Confederation (AIC) and the DAFF.

On the Human Resources side PPECB managed to train 150 of its staff members, and of them, 139 came from the previously disadvantaged groups. The budget for the training programme was R2.8 million, but only R2 million was spent, due to the cancellation of registered students. It had introduced a PPECB leadership programme, with twenty internal staff members. In relation to employment equity, PPECB had 5% coloured males, but was lacking 5% white females.

It had an analytical laboratory in Centurion. The DAFF had extended their stock and now included Mycotoxin analysis on grain and animal feed. The laboratory had passed two internal audits and both audits proved that PPECB had maintained its accreditation. The PPECB had initiated an internal infrastructure upgrade for ICT.

Mr Johan Schwiebus, Chief Financial Officer, PPECB, said the PPECB has shown a shortfall of R9.7 million, but that was R1 million less than had been expected. The income of the Board had increased,  due to the citrus and export industry, but the interest was slower in coming than budgeted, because of  reduced interest rates, cash holdings and surpluses which PPECB had encountered from the shortfall of the previous three years. PPECB managed to save on expenditure, due to cost saving initiatives and cost containment initiatives. It had seen some over expenditure but this was mostly related to increase in volumes in citrus black spot. 65% of PPECB’s income related to the Agricultural Product Standards (APS) Act, Inspection Services and Food Safety Act, and 24% to the PPECB Act and the PPC Act, which monitored the culture and reduced risk in the expenses. 83% of the expenses related to HR costs, and there were growing expenses in the ICT, because of the growth in the industry. 

The personnel expenses were over budget and this was due to the increase in volume which had led to the increase in income. Computer technology was upgraded to support mobile technology. He noted that PPECB had to be conservative about the budget but there had been a high investment into computer technology. PPECB had R82.2 million reserves, which would be observed by the Auditor General as sufficient to sustain the business into the future, despite the current shortfalls.

There had been fruitless expenditure, which was mainly due to the unreasonable flight costs, but there was no irregular expenditure.  The entity had received an unqualified audit report. The observation made by the Auditor General regarding the shortfall of the previous three years was true but the Board had developed a policy to govern the use of reserves. As mentioned before, it had planned for the shortfall and PPECB generated its own income, and therefore could make use of past reserves to fund programmes such as the upgrade of technology.

Mr Jansen concluded that the organisation's performance, accountability and responsibility of monitoring the organisation rested with the Board. He said that he was also pleased to say that PPECB received an unqualified audit relating to organisational performance for the 2014/2015 year. There were nine programmes on which it reported, with 76 targets. Only 13 of the targets were not achieved.

Discussion
The Chairperson congratulated PPECB on its clean audit. She asked what implication the extension of DAFF’s mandate would have on PPECB.

Mr Filtane said he welcomed the report and it was always inspiring to have a positive report. He made reference to paragraph 2, and the last paragraph on page 12, and he complimented the PPECB on its milestones and on not having any irregular expenditure. He assumed that when the grain demand decreased, this might mean less work for the PPECB, and hence less revenue. He asked for more details on the amount by which the revenue had declined, how safe the food in South Africa was, and whether there were any reasons as to why PPECB did not achieve all of its targets.

The Chairperson said the PPECB had tried its best to eradicate the black spot. She wondered why this had not been done and whether this was linked to capacity problems. She asked how PPECB was helping farmers to deal with the issues of the citrus black spot?

Mr C Maxegwana (ANC) said that many people were not aware that a fruit infected with the black spot was unhealthy and people might tend to cut away that portion and eat the rest. He wondered if the PPECB had implemented a strategy to discourage exports of citrus black spot.

Mr Jansen replied that the PPECB had estimated the loss of grain income to be around R11 million. The PPECB could not renew some of its temporary staff members' contracts who had been employed to specifically monitor the grain. Food safety had increased by 10% and this was due to the new entrants into the market, which were not planned. The PPECB, in collaboration with DAFF, had an plan for the new oversight audit, which was an unannounced audit on anybody who exported. He added that the PPECB had not failed to reach its targets, but most of the targets were in fact partially achieved. Some of the targets that were not achieved had been out of the control of the PPECB, and this included the training.

He noted that citrus black spot is a complicated matter. The citrus black spot had always been found in the fruits coming from the Eastern Cape, and the European Union feared that the black spots would be carried to their shores and would affect the EU's fruit. South Africa had been audited by the Food and Veterinary Office and the report was comforting to read as this report commented that “the South African system which was developed to monitor citrus fruit is adequate and robust”.

Mr Mono Mashaba, Deputy Chairperson, PPECB, said whether a country was exporting to China or Germany, money would be subject to exchange. The markets have become very competitive and the export agents would send their products to countries which they knew would result in the best deals and exchanges. The South African apples were mostly being sent to Nigeria. That was an indicator that government had to try to source other markets to which to export products. 

Ms Alexander said she had worked in the food industry before working for the DAFF. It was becoming more competitive, and governments of other countries were beginning to move towards containing their markets due to security issues and biodiversity issues. They are bringing more rules to compliance.

Mr Filtane said the response to the issue of food safety was not as comprehensive as he would have liked. He rephrased his question and asked if the methodology which the PPECB used to test the food is holistic, or whether it was only meant to meet the requirements of the other countries.

Mr Jansen replied that he would start by explaining the PPECB mandate with regard to food safety. PPECB’s mandate was only on exported produce, as the local market was monitored by the Department of Health, and some by the DAFF. The 10% growth on the food safety audits was to do with the fact that the PPECB mandate was split into two parts. The food safety audits would declare a premises as being fit to produce food for export and comply with the food safety requirements. The other part was the laboratory, who had mandates to declare food that had certain specific requirements to be fit for export.

The Chairperson said the Committee would have more discussion around the issues of food safety during the workshop. She thanked the Committee members, the Director Generals and the organisations who presented their reports. She regretted that the Parliamentary programme did not unfortunately allow for the Committee to engage with all entities on a quarterly basis, for the purpose of assisting the organisations to do their work better.

The meeting was adjourned.