SA Express 2014/15 audit: hearing with Deputy Minister of Public Enterprises

Meeting report

The Chairperson welcomed Deputy Minister of Public Enterprises, Mr Bulelani Magwanishe, and Mr Mogokare Seleke, DPE Director-General and thanked them for leading the delegation from the department responsible for monitoring and assisting the entities in its portfolio. The Committee had engaged with a number of public entities, after engaging with departments. Attention was now being given to public entities, especially due to the financial management challenges identified in most of these entities. The aim of this engagement was to understand the challenges being faced by SAX under review, for SAX to understand Parliament’s concerns arisen from their audit report, and to jointly come up with solutions to the challenges.

There were no major concerns on the safety record of South African Express (SAX), unlike the issues around the finances of SAX. The latter was the focal point of the Committee’s concerns. Deputy Minister Magwanishe was informed that he would be given time to respond at the end of the engagement with SAX.

Mr V Smith (ANC) started the hearing by noting that SAX had a disclaimer in 2010/2011, and in 2011/2012. It had qualified opinions in 2012/2013, 2013/2014, and 2014/2015. Reference was made to Note 52 on page 98 of the Annual Report, where the Auditor-General stated: “I experienced difficulties, delays in submitting, and the unavailability of requested information during the audit, due to poor record keeping in certain areas and lack of adequate reconciliations that are reviewed by the entity”. The statement summed up the real problem that SAX was faced with. This was probably the basis of the difficulty that DPE faced. SAX was advised not to mislead Parliament. Mr Smith asked about the period when the internal audit unit was established, and whether the unit was capacitated.

Mr George Mothema, SAX board chairperson, said that as far back as 2006, SAX had an outsourced internal audit service but as the years went by, an in-house internal auditor was appointed. It also had an external internal auditor. As far as capacitation of the internal audit, SAX was in the process of employing people. The board had decided that based on the number of audit findings in the 2014/15 audit report, a senior person had to be employed into that unit. The board was not satisfied that the weaknesses in the internal controls could be identified on only a quarterly or monthly basis. The management was making sure that a process existed to ensure that key concerns relating to the audit opinion were resolved.

Mr Smith highlighted audit findings around inventory, property plant, and more importantly, SAX as a going concern. SAX expressed confidence about it being a going concern, noting that it had sufficient financial reserves, as reflected in paragraph 8, page 89 of the Director’s report. It was reflected that it had sufficient resources for borrowing purposes and no issues with it not being a going concern. However, the comment of the AG on SAX’s property, plant and inventory, on page 91 the Annual Report was as follows:

“I was unable to determine whether any adjustments to the corresponding figures of [inaudible] balance accounts counted for as part of property plant and equipment stated at R287 million was necessary”. Similarly, Page 92, number 7 reflected the AG’s comment on inventory: “I was unable to confirm the balance of inventory, which was stated as R175 million and the previous year, R85 million. My audit opinion on the financials for the periods through 2014 was modified accordingly. My opinion on the current period’s financial statement is also modified because of the possible effect of this matter on a comparability of the current period’s figures”.

The implication of the AG’s comments was that the SAX balance sheet did not reflect an accurate position in terms of its inventory and property. If SAX was unsure of what its assets were, then it could not be confidently said that it was a going concern. The implication of liabilities exceeding assets was that SAX was in serious financial trouble, and the possibility of the entity’s progress was questionable. Mr Smith wanted to know what the accurate position on its position as a going concern was, seeing that SAX had a different opinion from what the findings of the AG were, which led to the above statements.

Mr Mothema referred to the AG’s comment in paragraph 11, page 92, which read as follows: “In my opinion, save for the possible effect on the matters described in the basis of the qualified opinion paragraphs, the financial statements represents fairly in all material respects the financial position of South African Express”. As far as the AG’s comment on page 89 was, he pointed out that directors made assumptions on the going concern based on some factors already outlined in the Annual Report, which were all in accordance with the Companies Act. These factors were used in analyzing the issue of SAX as a going concern. However, the assumption was that there was no going concern, except in respect of the rotables and the inventory.

The Chairperson noted that the two items (rotables and inventory) were responsible for questioning SAX’s confidence on the issue of going concern. The AG’s statement confirmed this position, as the phrase ‘Save for” meant that the two items affected the financial position depicted by SAX.

Mr Mothema replied that the basis of the directors’ opinion was based on the extension of the government guarantee and the new guarantee that would be provided.

The Chairperson asked if SAX implied that its going concern satisfaction would be based on the guarantee.

Mr Mothema replied in the affirmative, noting that the two items to be addressed would serve as the exception.

Mr Smith remarked that the Committee was reluctant to accept the position of SAX, seeing that its inventory was unable to verify the assets used in generating profit or income. The basis of the guarantee raised by Mr Mothema was a problem in itself. It was unacceptable to have a state-owned entity that relied on government guarantees. Such an entity should be self-sustainable.

The Chairperson said that the items stood as stumbling blocks, and until they were resolved, SAX could not confidently say it was a going concern. Nevertheless, the response from SAX that the state guarantees enabled it to remain a going concern, had been noted. However, there was a need for certainty on the position of SAX as a going concern.

Mr Smith said that the issues around certainty were based on the unavailability of sufficient audit evidence on the part of SAX. Explanation was requested on why SAX had no supporting documents or, if it did, why such documents were not presented to the AG at the time he carried out his audit.

Mr Mark Shelley, SAX Chief Financial Officer , referred to the paragraph on rotables and inventory on page 91 and 92, and noted that the statement started with “During 2014, I was unable to…” The statement on note 7 also stated “During 2014, I was unable to…” The implication of these statements was that the auditors were satisfied with the closing balances of both property plant equipment (PPE) and inventory as at 31 March 2015, and the figures disclosed on the balance sheet were correct in all material respects. However, due to historical issues reflected in the disclaimers made in 2010, 2011 and 2012, which related to the revaluation that happened on inventory and PPE, processes had been put in place to identify and correctly value these items, to the extent that the numbers were fairly represented as at 2015. The wording in the statements was specifically referring to 2014. The qualification therefore revolved around the valuation as at 2014.

As far as record keeping was concerned, all details were on the system. Nonetheless, there were issues with getting independent market valuations on certain spares and rotables. Delays in obtaining documentation were caused by SAX’s reliance on an outsourced system provider for jet fuel and other services, and there were delays in obtaining documentation from this source. The audit process demanded the delivery of documentation within a specified timeframe. SAX was late in submitting the required documentation as and when due. It was however working towards ensuring that such delays did not reoccur in the current year.

Mr Smith said that SAX’s closing balances could not be verifiable, since its opening balance was also unverifiable. This was due to the closing balance being the addition of the opening balance plus activity. Unless the AG could say that the opening balance at the beginning of 2015 was verifiable, the position made by SAX on its closing balance would be incorrect. It was also noted that SAX knew that the AG had to present his financial reports to Parliament by a certain date. The excuse of not having all documentation for submission at the required time was not tenable. The concern was whether systems were in place to ensure that all support documents needed by the AG for verification were made available.

Mr Mothema said that once weaknesses in the system had been identified, measures were put in place to ensure that the quarterly monitoring would yield the required positive results. The finance department was not appropriately resourced, and it comprised of a number of junior staff. A demand was therefore placed with the management to develop a new structure for the finance department, so that more senior staff could be employed. Based on that demand, the CFO employed a specialized reporting staff in that department. A senior finance operations staff with a ten-year aviation experience was employed, along with a management account specialist in the department. This was in a bid to ensure that there were appropriate people in the department that could deal with the issues identified by the AG.

Mr E Kekana (ANC) emphasized the need for SAX to explain the reason for the non-existence of a record keeping system at the moment, as opposed to presenting its future plans to the Committee.

Mr Smith said that the composition of the board had a direct implication on the tax obligation of SAX. The AG was concerned about the adjustments that had been referred to earlier. A tax obligation of R222 million for 2015/16 reflected on page 99 of the SAX balance sheet. Were the board and senior management of SAX doing anything to ensure this deferred tax was close to the reality? What has SAX done to satisfy the AG and the Parliament that the tax figure reflected the real tax figure or had been adjusted accordingly?

Mr Mothema replied that SAX requested and implemented a system where management employed a service provider, known as Gecko (that specialized in inventory counting). The tax issue was impacted upon by both the rotables and the inventory. Unless those two items were resolved, the computation for tax purposes would be inaccurate. A verification of all assets was therefore embarked upon, to assure the board that there was a proper and independently verified accounting. The verification process was still ongoing, and a report addressing the two items would be produced.

Mr Smith wanted to know the time frames for the outcome of the verification process; and whether it would be reasonable for Parliament to expect that verification for 2015/16 had already been processed.

Mr Mothema replied that a report on the verification process for the current financial year was expected by the end of May. It was an ongoing process because the AG was currently busy with the 2015/16 audit process. It was therefore necessary to kick-start the verification process for the current financial year immediately. The audit report under review was for the past financial year. The board did not have the verification report yet but it was expected that the report would be ready by 31 May when the board reports to the shareholder.

The Chairperson wanted to know if the report would impact on the 2015/16 audit process, since the audit was currently being done for 2015/16. In essence, would the information that would be reflected in the May report be used to answer the questions for the purpose of audit on the just concluded financial year?

Mr Mothema replied in the affirmative.

Mr Smith raised the audit finding on receivables on page 92, paragraph 9 of the 2014/15 Annual Report. This issue also impacted on SAX as a going concern. Receivables referred to assets in excess, which could impact on the going concern nature of an entity. The AG however opined that SAX overstated these assets (trade receivables) by R46 million. SAX was asked whether it agreed with the AG’s position; and to explain how it deviated from standard calculations of receivables, and what was being done to ensure that such deviations did not occur in future.

Mr Mothema replied that the overstatement was in relation to the maintenance reserve. The maintenance reserve was the money that sat with the lessor. The AG’s statement was to the effect that SAX already accounted for the money without putting a claim forward, which should not be so. There was a difference of opinion between SAX management and the AG on this issue. The management however, accepted the provisions made by the AG’s audit opinion. The suggested solution for resolving the issue was to reach an agreed process with the AG, to the effect that every lease should be looked into.

The Chairperson noted that there was a process on ground, which provided that unless a claim had been made, the claim accepted, and the money had been paid to SAX, the entity could not claim a receivable which was still with the lessor. SAX was advised to balance the books, to suppress the suspicion that it was aware of the processes, but deliberately ignored such processes and went ahead in making adjustments to its accounts.
The receivables could not be recognised as assets when the process required was yet to be procedurally and legally followed.

Mr Smith clarified the question he asked earlier – if SAX was now confident that its assets would reflect accurately in future, to avoid any query from the AG on the recording of its receivables. The Committee would await the AG’s report.

Strategic planning and performance, being a direct co-responsibility of the board, was raised. Mr Smith referred to page 81 of the Annual Report. Annexure B spoke to operational performance, while annexure C focused on social impact. 45 key performance areas were highlighted on page 83. The page on operational performance reflected 13 deliverables, and SAX had achieved only five targets, which amounted to 38% achievement. 11 targets were reflected on the next page, and only four were achieved, amounting to 36%. SAX also noted that for all its 45 targets, it had achieved 56%. Explanation was requested on the 56% achievement by SAX, especially because it set the targets and developed the strategic plan for achieving the targets itself.

Mr Mothema replied that after targeted objectives had been agreed upon, consideration would be given to factors that would impact on the inability to achieve the set targets. However, this was not a tenable excuse for not achieving set targets. SAX therefore, acknowledged that it fell short in achieving its set targets. A consideration of the key strategic objectives, which were mainly commercial in nature, showed that a number of factors impacted on access to the airline business. Quite a number of cost factors were depended upon to drive the business. Some of these factors included fuel, and load factors as a result of competition.

The Chairperson suggested that the factors affecting the achievement of each target should be highlighted in sequence. A broad and general explanation was not needed in answering the question at hand.

Mr Kekana asked for the persons responsible for determining the strategic objectives.

Mr Mothema replied that the strategic objectives were determined by the shareholder, agreed to by the board, and implemented by management.

Mr Smith said that the Committee was raising the issue because Parliament did not want to see a 56% achievement. Otherwise, the board would be removed. It was assumed that the Deputy Minister’s acceptance or generosity in granting the budget put forward by SAX would have been based on what it had promised to deliver. When underachievement such as this arose, the solution would be to either cut the budget or request that SAX return the money. The questions that would arise from such underachievement would be to enquire whether it amounted to fruitless expenditure. The Committee needed to be able to monitor the progress of SAX in achieving its targets on a quarterly basis. The entity also had to report its progress to the Deputy Minister on a quarterly basis. The Committee was not impressed with the performance of SAX.

The late submission of the financial statements and Annual Report were considered next. The AG complained of the late submission of financial reports by SAX; and non-compliance of the financial statements with laid down procedure. According to the AG, “the financial statements contained in it some material misstatements which were subsequently corrected. The financial statements submitted for auditing were not prepared in accordance to section 55(1)(a) of the Public Finance Management Act (PFMA) and section 29 of the Companies Act of South Africa”. The SAX report also noted that the CFO had run his own accounting and consultant practice before joining SAX. This pointed to the existence of competent people in SAX. Nevertheless, the AG opined that the SAX financial statements did not comply with the laid down procedures in the PFMA and the Companies Act. Explanation was requested on the reasons for such non-compliance, seeing that qualified individuals were employed in SAX.

Mr Mothema replied that the failure of the board to submit its financial statements by 31 May, in compliance with section 55 of PFMA, was purely an administrative matter. The new board chaired by Mr Mothema was appointed on 22 May, with only two retained board members, while the other members were new. This led to a situation where the approval required before the AG looked at the financial statements, could not be obtained within the specified deadline. The board was appointed by 22 May, while the statements were due for submission by 31 May. Mr Mothema had to induct the new board members, and the audit committee. The audit committee was usually appointed by the shareholder. When this appointment was made on 22 May, the board had to expedite the entire process of inducting the audit committee. This administrative fact led to the inability of the board to approve the financial statements within the specified period.

Mr Smith said the explanation given was a timing issue which would be put into consideration for the appointment of a new board in future. The explanation was nonetheless sufficient to justify the misstatements in the financial statements. The misstatements amounted to pure incompetence and negligence on the part of the board. He wanted to know why there were no competent personnel in place at the time of preparing the financial statement, and why the DG gave money to people that were unreliable custodians of such money, without consequences attached. It was pointed out that there was a need for things to change under the watch of the new board .

Mr M Booi (ANC) wanted to know how much was being spent by SAX on outsourcing; and what the SAX board chairperson thought about the cost expended on outsourcing.

Mr Kekana asked why the targets set by SAX were not achieved, since the strategic objectives were determined by both the board and the shareholder. At the time of setting such targets, the board believed they were reasonable and could be achieved based on its capacity.

Mr Mothema replied that no specific amount could be given for outsourcing at the meeting. The entity did not outsource its services. The cost drivers relating to the business were for things such as fuel and IT services (which was provided by South African Airways). One of the austerity measures agreed to by the shareholder was to ensure that most services were internally carried out. Outsourcing only arose for limited services, such as the external internal audit, mentioned earlier.

Mr Booi asked for the cost of outsourcing the inventory which was carried out by the Gecko company.

Mr Mothema replied that the outsourced services undertaken by SAX was for the rotables and inventory, in order to come up with an independent verification on those items.

Mr Inati Ntshanga, SAX Chief Executive Officer, said that the cost of the Gecko contract was R267 000, out of a budget of R350 million. The contract was for three months. The company commenced its work at the beginning of March, and would work with SAX until all issues in the system had been fully reconciled.

In response to the question on targets, it was noted that the bulk of the operational performance was cash. Making a profit was linked to meeting the net profit line. The reason for not meeting the profit line was linked to the entrance of new airlines into the market, which operated with the space of SAX. This led to a drop in the number of passengers that SAX normally carried, and it impacted on the profitability of the business.
Austerity measures were implemented afterwards, to help with improving the profit line of the business. The review conducted in September 2014, showed that SAX was falling behind in profitability, due to new entrants in the business, and the price of fuel. The austerity measures had been put in place to address the inefficiencies in the system, and it covered 16 deliverables that were being monitored on a weekly/monthly basis since September 2014.

Mr Kekana asked when the austerity measures were implemented. The reason for this was the AG’s opinion that SAX could not achieve its objectives due to the absence of standard operating procedures, and non-monitoring.

Mr Ntshanga replied that the austerity measures were effected on 26 October 2014, and it had helped to improve the numbers realised between October 2014 and March 2015.

Ms N Mente-Nqweniso (EFF) observed that the SAX organogram had only three women represented in it.
As far as the internal audit of SAX was concerned, it was assumed that SAX had a centralized system. It was therefore, not expected that documents would be unavailable when required by the AG. She wanted an explanation for the unavailability or nonexistence of needed documents, since SAX had a centralized system of documentation and operations.

Mr Shelley replied that SAX had a centralized system. However, the refueling of aircraft occurred at every single station, and the paper work would go through the pilot of each aircraft that signed the fuel uplift slip, back to Johannesburg, and back to SAA. SAA was responsible for fuel procurement. A matching process and a payment process would then take place, and all slips would be stored by SAA. A number of delays were linked to getting the fuel slips and the backing documentation for that. SAX had addressed this issue by moving all documentation to its own offices. It would no longer need to request the documentation from SAA.

Ms Nqweniso raised the capacity and management style of SAX, and referred to page 81 of the Annual Report, on operational performance. There was a KPA on improved operational efficiencies that was split into three. Two out of three efficiencies were yet to be achieved. A practical example was raised in terms of the passenger load factor and daily block. She boarded an aircraft to Cape Town from the East London airport, with less than ten passengers on it, while there was another airline also going to Cape Town at the same time. The question that arose was whether SAX could liaise with other airlines to enable it load its passengers in instances where there were few passengers, even if such airline was not within the SAA company. This experience led to the assumption that SAX had a huge amount of wasteful expenditure. For that reaso, it was uncertain that the KPA could be achieved.

The Chairperson asked for an explanation about incident of few passengers on board the SAX flight as described by Ms Nqweniso.

Mr Ntshanga replied that the explanation for such an occurrence was that the leg that flew to East London was full, while the leg going back was empty. There was nothing that could be done in such instances, because placing the passengers onto another airline would not change the fact that the aircraft in East London had to return. This necessitated the need to achieve the next target on utilization of daily block hours. Having an aircraft remain at a particular airport because it was waiting for passengers that were nonexistent would amount to a wasted aircraft. The aircraft had to be rotated in a way that ensured their operation above their load factor. The load factor was determined by trip, price, and a whole lot of other factors. SAX had a team that worked on network planning, yield management, revenue management, scheduling, and so on. If it realized that this flight was consistently empty, it would make adjustments where necessary. All these logistics were monitored on a daily basis. SAX utilized a model referred to as the FAT principle, which stood for frequency, availability and time. This was one of the models used by airlines that had to be honoured.

Mr M Hlengwa (IFP) asked if it was the first time the AG had complained about the unavailability and late submission of requested information.

Mr Shelley replied that it was not the first time. However, SAX had improved on this matter from previous years. In the previous year, it had changed premises, but improvements had continued, and there would be more improvement in the current year.

Mr Hlengwa reacted that the fact that nothing had changed was a difficulty that bothered one's systems. He referred to targets in Item 43 on page 97 that said “the corporate plan did not include the strategic objectives and outcomes agreed upon by the executive authority in the shareholder's compact for key performance measures and indicators for assessing SAX’s performance in delivering the desired outcome and objectives as required by Treasury Regulation 29.1.1(c).” The board chairperson had explained the process used in determining the targets, but the AG stated that the factors used to determine the targets were not included in report. He asked why the determining factors were not included, and if the 56% took into account the findings of the AG.

Mr Mothema replied the shareholder compact was a negotiated document, which was ordinarily negotiated between business and the shareholder of SAX. The delays signing the compact were traceable to the negotiations. Other reasons that existed for the delays could have occurred before the tenure of the current board chairperson.

The Chairperson asked if Mr Mothema queried the Annual Report after his tenure commenced, and the answer that was given to the queries made.

Mr Mothema replied that he queried the report and reached the conclusion that the delays in signing the shareholder compact was the reason for the non-inclusion.

Mr Hlengwa asked whose targets were included in the report, if there were delays in signing the compact.

Mr Mothema replied that the comment on the targets reflected the fact that the strategic objectives were agreed upon between the board and the shareholder, and were contained in the shareholder compact. The AG’s comment from a performance point of view, only noted that the agreement reached on the strategic objectives was not included in SAX’s corporate plan in compliance with Treasury Regulations.

The Chairperson asked why the strategic objectives were not included in the corporate plan since they had been agreed upon.

Mr Booi said that the Committee needed straightforward answers on questions asked.

Mr Hlengwa repeated that the comment showed that the key performance measures and indicators did not reflect in SAX’s corporate plan. He asked whose indicators were used if those of the shareholder were absent. It was expected that the board chairperson would take responsibility for this omission, seeing that he signed the report.

The Chairperson requested an explanation on what the corporate plan entailed, in terms of where the strategic plans should have been located.

Mr Seleke said that based on the briefing he received since joining the department last year, the issuing of the guarantee was the key issue, because the guarantee determined whether or not SAX would be in business. The issuing of the guarantee occurred in March. It was only after this that the negotiations leading to the shareholder compact occurred. The shareholder compact usually came with a package of deliverables, which included consequences in instances where the deliverables could not be achieved. This process also had to go through the Minister of Finance. The briefing received by the DG was that the process lasted till November 2015, and the printed corporate plan was not updated due to financial difficulties facing SAX. The submission of the corporate plan was usually done in February. At the time SAX was going through financial difficulty, it needed a guarantee to continue its business.

The Chairperson asked what the source of the performance objectives under review was; whether those objectives were the outcome of the negotiations between the shareholder and the company that were implemented retrospectively; or whether SAX developed its own performance objectives in the absence of the shareholder compact.

Mr Seleke replied that the performance objectives were designed on the basis of the earlier compact. The compact was normally reviewed on an annual basis.

The Chairperson asked if the old compact would be used in the absence of a review.

Mr Seleke answered in the affirmative.

Mr Hlengwa asked if the 56% achievement was on the basis of the old compact or the reviewed and new compact.

Mr Seleke replied that the achievement was based on the old compact. However, the new compact was largely based on the conditions. In other words, the conditions that should have been added were those which came with the government guarantee.

Mr Hlengwa referred to the last sentence on paragraph 2, page 83: “SA Express had targeted a profit of R69 million. Due to operational and funding challenges, the airline achieved a net loss of R132 million.” He remarked that this was an anomaly that should not be accepted, as it reflected the problem of planning. Those responsible for setting the target should look into the factors that informed those targets, as there were more losses than expected.

Mr C Ross commented on the ability of SAX to continue as a going concern. The Committee had taken note of SAX’s dependence on state guarantees, as well as the material misstatements in the financial statements and the AG’s findings. However, it seemed SAX was currently busy with negotiations (as reflected on age 89 of the Annual Report) with funders and it intended to pursue more negotiations in future. Further information on the specific negotiations was requested.

Mr Mothema replied that the negotiations with the funders were about the working capital. After guarantees were received, SAX embarked on fund raising in the open market, for its working capital.

Mr Booi asked if the AG could verify the statement made by SAX on the negotiation process. The board chairperson was advised to check the accuracy of his statements with the information presented to the AG.

Mr T Brauteseth (DA) asked questions on accountability.

Mr Ntshanga was asked how long he had been in the position of CEO, to which he answered six years.

Mr Brauteseth asked if the post of internal audit at the senior management level was still vacant.

Mr Mothema replied that it was still vacant. However, interviews for the position had been finalised and the management was awaiting approval from the board.

Mr Brauteseth asked for how long the position had been vacant, to which Mr Ntshanga replied that it had been vacant for nine months.

He asked if SAX was already aware of the questions it would be asked by MPs before attending the meeting. Mr Mothema replied that SAX had not been briefed on the questions to expect, except for the discussion on the Annual Report. However, SAX was aware of the compliance issues reflected in the Annual Report.

The absence of the SAX General Manager for Legal, Risk and Compliance was queried.

Mr Ntshanga replied that the practice had always been to bring the directors of the company to Parliament, and not the executives.

Mr Brauteseth advised that the head of compliance should be brought before the Committee in future.

He referred to page 77 of the Annual Report, which reflected the termination of Mr Zanele Ngwenya on 31 March 2014, and the appointment of Mr Shelley on 1 February 2015. He asked for an explanation for the delay in finding a replacement CFO and who acted in that position before the appointment of Mr Shelley.

Mr Mothema replied that Mr Shelley joined SAX on 16 April 2014, as an acting CFO. He was confirmed as the CFO after a process of recruiting and interview.

After confirming that the Annual Report under review was for the 2014/15 financial year, Mr Brauteseth asked why the report contained a figure from the 2013/14 financial year, particularly Mr Ngwenya’s salary and remuneration to the tune of R1 million. He asked if the amount constituted a settlement payment to Mr Ngwenya, which was carried over to 2014/15.

Mr Mothema replied that there was no settlement payment made to Mr Ngwenya.

Mr Ntshanga replied that the company policy required that Mr Ngwenya be given a three-month notice before termination. He was however, in the system till 31 March 2014. The money reflected constituted an exit package.

Mr Brauteseth asked for the events that led to Mr Ngwenya’s termination, as the report did not mention his resignation. He also asked if Mr Ngwenya had anything to do with the disclaimers and qualified opinions that were alluded to at the start of the meeting; and if the termination served as the consequence of his actions.

Mr Mothema replied that the irregular expenditure related to an extension of the scope beyond the normal procurement process. The findings of the business was that the former CFO did not take due care in ensuring that the scope of a particular service provider responsible for balance optimization to the finance department during the period when applications were made for the guarantee, did not go beyond the normal process. It was therefore agreed that the CFO should exit the business for failure to comply with the corporate governance system in place. The payment referred to by the CEO was for the purpose of Mr Ngwenya’s exit from the business.

Mr Brauteseth confirmed that Mr Ngwenya was terminated on the basis of irregular action in terms of contract management. He asked if any of the amounts listed under irregular expenditure on page 135, had anything to do with Mr Ngwenya’s termination.

Mr Mothema replied that the R3.4 million on the opening balance for 2014 was the only amount in relation to Mr Ngwenya’s termination.

Mr Brauteseth asked for an explanation on how SAX worked, to the extent that it could give Mr Ngwenya an exit payment of R1 million, despite the fact that Mr Ngwenya had an unaccounted amount of R3.4 million to his name.

Mr Ntshanga replied that the investigation revealed that the services were rendered. It did not amount to a fruitless and wasteful expenditure. The only issue was non-compliance with the procedure.

Mr Brauteseth said that it should not be assumed that since value for money had been achieved, non-compliance with the PFMA could be excused. Questions on the dismissal of Mr Ngwenya bordered on the reason for this dismissal; whether or not disciplinary action or criminal action was taken against him; and whether or not he was dismissed in terms of a disciplinary process.

Mr Mothema replied that Mr Ngwenya was neither disciplined, brought before a disciplinary panel, nor did he have a criminal action instituted against him. His exit however constituted an initiation of the disciplinary process.

Mr Brauteseth asked if he was threatened with a disciplinary action that motivated him to resign.

Mr Mothema replied that Mr Ngwenya was not threatened. He noted that he was not the chairperson at the time of the incident.

Mr Booi raised a point of order for the Chairperson to intervene in the dialogue between Mr Brauteseth and Mr Mothema.

The Chairperson intervened by asking the CEO to explain the issues around Mr Ngwenya’s exit from SAX.

Mr Ntshanga replied that Mr Ngwenya’s tenure as the CFO started on 1 December 2012. He worked for SAX until a certain board meeting where the CEO was informed of the issues around the scope of one of the procurement processes. The matter was taken to the board and a thorough investigation was carried out, with the help of a legal firm. The board took a decision and the CEO’s responsibility was to proceed with disciplinary action. The disciplinary process was prepared, but Mr Ngwenya requested his exit from SAX. The risks of a protracted legal battle were considered and a letter was drafted to state that if any criminal offence was discovered at a later time, SAX had the right to bring up such matter for prosecution. The entity held a discussion with the service provider, and with the internal people that made use of the service provider. It was agreed by these parties that the matter against Mr Ngwenya would not be pursued further after his exit.

Mr Brauteseth asked if SAX was aware of Mr Ngwenya’s current work status.

Mr Mothema replied that Mr Ngwenya currently worked with the Sishen Iron Ore Company, a community development trust (SIOC-cdt).

Mr Brauteseth referred to the issue of SAX as a going concern from a different perspective. Reference was made to page 89 where the board said SAX was a going concern, and page 100 that reflected a loss of R132 million. The entity was asked if would not be a going concern in the absence of the guarantees, to which Mr Mothema agreed.

Mr Shelley said that it would have been more difficult to raise funding from banks. The entity’s funding was only procured from commercial banks, to which it paid interest. No budget was allocated to the company. There was a requirement to renew the existing guarantees, and SAX determined that it needed the guarantees to meet working capital requirements.

Mr Brauteseth referred to the fruitless and wasteful expenditure, as reflected on page 134 of the Annual Report. The fruitless and wasteful expenditure, which was for penalties and interests, amounted to R23 million for the year under review. He suggested that this expenditure intensified the issues raised about whether SAX was a going concern. The fruitless and wasteful expenditure in 2014 was R33 million, but it went down to R23 million in 2015. An explanation was requested on the causes of the cash flow challenge, as well as the factors responsible for the reduction in wasteful expenditure.

Mr Ntshanga replied that if SAX had sufficient cash resources and utilized an overdraft, the fruitless and wasteful expenditure would have formed part of normal interest. However, the cash flow constraints led to the picking up of penalties and interests from suppliers. In other words, the expenditure was comprised of late payments with levied interest. It did not exacerbate the going concern issue, as the interest would have still been incurred nonetheless.

In terms of cash circle, SAX’s revenue was processed by SAA, and cash was received on the 18th of every month. Fuel was circled directly; all services were received from SAA directly; and net cash was also received. Creditors were thereafter paid. Items such as load factors on certain routes would impact on cash generating capabilities. The reason for the drop in expenditure was traceable to the austerity measures that had been put in place, in terms of the operating profit line where there was a profit loss of R25 million in 2014. More cash had been generated, and used to settle more creditors.

Mr Brauteseth asked if SAX’s foreseeable future would be better in that regard.

Mr Ntshanga replied in the affirmative, noting that the final results for the end of March were not yet available. But early indications were that the result would be better than the previous year. Their creditors' book had reduced significantly, when considered from a cash factor perspective. This was a result of lower expenses, due to austerity measures in place, and managing the cash flow.

A comparison between the end of September and December 2015 would showed a positive swing of R150 million bottom line and operating line. The austerity measures had influenced the business positively. The market had become tighter and continuous monitoring was in place. Some of the causes of the negative variance included excessive spending on food, high labour bill, low load factors, and so on. The austerity measures provided methods for identifying low flights, combining flights, and reducing the number of flights per day, where necessary. Meals were reduced. The amount spent on food was reduced from R53 million in the previous year to R25 million.

Mr Brauteseth asked if there was a particular person responsible for SAX’s fruitless and wasteful expenditure. Reference was made to paragraph 8 of page 89, where it was stated that “the directors are also not aware of any non-compliance with statutory or regulatory requirements of any pending changes to legislation which may affect the company”. He asked how the board could say that it was not aware of any non-compliance when all the irregular expenditure to the tune of R6.5 million (as reflected on page 135) was due to non-compliance.

Mr Mothema conceded that there was a need to adjust the statement made on the directors not knowing of any non-compliance to the statutory requirements.

The Chairperson advised that SAX should ensure that documents were drafted in a way that the public could easily understand.

Mr Brauteseth asked for a breakdown of the matters that made up irregular expenditure, as noted in point 39, page 135 of the Annual Report; those responsible; and whether disciplinary action was taken against them.

Mr Ntshanga replied that appropriate action was taken in cases of tender irregularities. Details of those responsible for the irregular expenditure, the disciplinary action taken by SAX, as well as the content of the contracts involved would be provided to the Committee.

Mr Brauteseth also requested a full description of what transpired with regard to an expired contract.

The Chairperson said that SAX should provide detailed information on all the components of the irregular expenditure, including the condoned factors, the amounts that constituted each contract, those involved, and the decision taken by SAX in each case, before the end of next week.

Mr Brauteseth referred to the AG’s comment on asset management on page 97 of the Annual Report: “Proper control systems to safeguard and maintain assets were not implemented throughout the financial year, as required by sections 50(1)(a) and 51(1)(c) of the PFMA”. He asked who was responsible for asset management in the period under review.

Mr Ntshanga replied that asset management was under the finance department.

Mr Shelley said the key word in the statement was ‘throughout the year’. What SAX did was to fix the inventory and the rotables. A third party was used to value them, and a systems account was used to verify them. This resulted in a closing balance that the auditors were happy with in terms of PPE. Systems had been put in place to track the rotables and inventory. Another count, after the third party count, was currently being conducted again to ensure that processes were updated timeously and adjustments made where required.

Mr Ntshanga added that this process was conducted together with the internal auditor, who offered oversight to ensure that the process was properly done. Feedback was given to the executives and the auditor’s committee in order to avoid past occurrences.

Mr Brauteseth noted that the internal audit position within SAX was currently vacant, but there was someone acting in the interim. He asked when the appointment for that position would be finalised, and how SAX intended to capacitate the internal audit unit.

Mr Ntshanga replied that the internal audit unit had already been resourced. In the past, the unit only had one employee. However, an additional person had been employed to assist the acting internal auditor. SAX had also requested that the co-source should increase its co-source internal audit functions to assist, pending the time a proper candidate would be appointed. The internal auditor would be appointed at the next board meeting, and it had been envisaged that the auditor would resume on 1 June 2016.

Mr Brauteseth asked if two employees under the internal auditor amounted to sufficient resourcing for a second-tier department under the CEO, which should be the watchdog of the company.

Mr Ntshanga replied that SAX started with outsourcing the internal audit completely. It was however agreed that the internal audit should be done internally, through a phased approach. There would be more people employed into the unit as time went by.

The Chairperson said that the point raised was for SAX to commit to capacitating its internal staff.

Mr Ntshanga replied that SAX would commit to capacitating the internal audit unit.

Mr Brauteseth said that SAX should send, along with the list of contracts and details on irregularities, measures that would be taken to avert the occurrence of such contracts and irregularities in future.

Ms T Chiloane (ANC) wanted a follow-up on the former CFO who incurred tender irregularities to the tune of R3.4 million, and SAX still let him go.

Mr Ross asked the CFO to comment on the complete integration of SAX into SAA.

Mr Hlengwa referred to item 49 on page 97 of the Annual Report, on asset management. The details surrounding the departure of Mr Ngwenya remained a concern, because he presided over the audit findings from 2012 till now. A proper response on the circumstances surrounding Mr Ngwenya’s conduct, his work as the CFO, and the justification for letting him go despite the charges brought against him, should be submitted to the Committee.  

Ms Nqweniso referred to the government guarantee, as highlighted on page 93 of the Annual Report. She asked SAX to undertake to give a guarantee that money that could have benefited poor people would not be taken from them and spent carelessly on other things that would lead to wasteful expenditure.

Mr Kekana requested information on the employees affected by the Supply Chain Management (SCM) issues, and the actions that were taken. Details of the guarantees, as well as the terms and conditions binding them should also be submitted to the Committee.

Mr Mothema replied that details would be provided about the questions on irregular expenditure, and the action taken by the board in dealing with those responsible. As far as giving an undertaking on the guarantees was concerned, it was noted that the board had an obligation to provide this guarantee. This would assist SAX’s internal control in playing its role appropriately.

Ms Nqweniso said that SAX should note the AG’s comment that the accounting authority did not take effective steps. SAX should therefore ensure that all its staff adhered to the regulations provided, and be penalized in cases of non-compliance.

Mr Booi asked if the CEO was willing to give the guarantee based on his salary.

The Chairperson said that the major challenges faced by the Committee was ensuring that officials in charge of departments and entities conducted their activities in the national interest, and had a sense of duty and responsibility to the state and the people. Although the Committee acknowledged the fact that SAX had improved from having disclaimers to qualified opinions, there were still issues to be addressed. Concerted effort should be put into having proper and rigorous monitoring processes and mechanisms. The internal audit should be strengthened and adequately capacitated.

Deputy Minister Magwanishe said that there was a need for entities to have proper governance and financial management that would enable them to interact properly with financial institutions. The rigorous interaction with the Committee was appreciated. All matters that had been raised in the course of interaction with the MPs had been noted, and they would form part of the address to the annual general meeting (AGM) to the Minister. A project plan would be developed from the questions and answers that had arisen from the engagement with the Committee.

The Deputy Minister said that DPE was working with National Treasury to explore the possibility of merging SAX, SAA and Mango. The process was led by the Deputy President, along with the Minister of Finance and the Minister of Public Enterprises to look at the holding structure. It was expected that the process would be completed soon, as it would help to create better opportunities of leverage among the state-owned assets, streamline governance systems, and benefits in consolidated technical expertise, which were issues that the Committee had raised. A form of competition had developed overtime among the state-owned airlines, which was often times not constructive. There was a need for better coordination and management of state-owned assets. A report would be given to the Parliament once the process was completed.

The meeting was adjourned.