State-Owned Entities: analysis of 4 Quarter 2015/16 and 1 Quarter 2016/17 performance

Standing Committee on Appropriations

30 August 2016
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The Committee researchers briefed the Committee on a list of 12 state-owned enterprises (SOEs) and other public entities. Strategic roles and major challenges received attention. Challenges were centered on procurement; expenditure, finance and consequence management; leadership and governance; financial and operational sustainability; human resources, and non-compliance with the Public Finance Management Act (PFMA).

The Passenger Rail Association of South Africa (PRASA) procurement of new locomotives had declined from 88 to 70, while the budget had increased by R1.3 million. South African Airlines (SAA) needed R5 billion to remain an ongoing concern. The airline had appointed BNP Capital to help restructure its R15 billion debt. BNP had no licence, and the R250 million contract had had to be terminated. The researchers concluded that irregular expenditure had to be prevented at the planning stage. The implications for government guarantees had to be considered.

The researchers also briefed the Committee on identifying departments to be invited for hearings on their 2015/16 fourth quarter and 2016/17 first quarter expenditure outcomes. Departments prioritised were Basic Education; Health; Public Works; and Water and Sanitation. In Basic Education, the poor performance on the Accelerated Schools Infrastructure Delivery Initiative (ASIDI) grant to deal with the backlog was cause for concern. The Department of Health had to consider ways to improve infrastructure planning and coordination. In the Department of Public Works, challenges of the billing system had to be discussed. The Department of Water and Sanitation had to consider transfers of expenditure by both receiving municipalities and provinces. The under-performance of the Rural Household Infrastructure Grant had to be explained, as well as slow spending on the bucket toilet eradication programme.

In discussion, the Committee expressed strong sentiments about the need for the Standing Committee to give close attention to the expenditure performance of the SOEs. A Member opined that the portfolio committees could attend to departments, but the role of the Standing Committee was to follow the money in the SOEs “to the bitter end”, as it was phrased. There were critical remarks about managerial competence in the SOEs. Oversight of SOEs had to be strengthened.
There was concern about the instability of leadership, criminal conduct and transgression against procurement regulations. The role of Accounting Officers was discussed. Consequences for non-compliance with the PFMA and Treasury regulations needed attention. There were questions about the status and solvency of the South African Post Office. Members wanted clarity about deductions from the child support grant for funeral schemes. Systemic, operational and leadership challenges had to be addressed. Strict controls were needed for the SOEs to fulfill their strategic role.

Meeting report

Introduction by Chairperson
The Chairperson said that it was an important meeting. The Committee researchers would brief the Committee on selected departments who would possibly be invited for hearings on their 2015/16 fourth quarter and 2016/17 first quarter expenditure outcomes. They would also provide a review of State-owned Entities (SOEs) for prioritisation during the 2016/17 oversight period. The Committee could familiarise itself with areas of intervention identified.

The National Treasury (NT) had briefed the Committee on national expenditure. Key issues emanating from that would be engaged with. There had been a lot of noise about SOEs. If issues were identified timeously, the Committee could intervene. Government was a key stakeholder in the SOE environment. Government had to drive a strategic economic agenda. Several nations had improved the effective management of SOEs. It was not to be seen as a panacea for South Africa. It was a catalytic state instrument to transform and aid growth and development, service delivery and job creation.

The National Development Plan (NDP) and Medium Term Strategic Framework (MTSF) objectives had to be realised. The briefings would touch on strategic issues that had to be addressed, going forward. The Standing Committee had a key role to play. Economic growth potentials had to be unlocked and poverty reduced, together with employment creation.

Ms S Shope-Sithole (ANC) asked for a copy of the Chairperson’s introduction, which she said was an excellent summary.

Review of SOEs for prioritisation by Standing Committee during 2016/17 oversight period

Mr Musa Zamisa and Mr Phelelani Dlomo, Committee researchers, presented. The Committee was briefed on a list of 12 SOEs and other public entities, including the Passenger Rail Association of South Africa (PRASA); South African Airways (SAA); the SA Broadcasting Corporation (SABC); the Independent Development Trust (IDT); the South African Post office (SAPO), and the South African Social Security Association (SASSA).

A track record of audit opinions and irregular and fruitless and wasteful expenditure was supplied. Strategic roles and major challenges were identified for each entity. Challenges generally centered on procurement; expenditure, finance and consequence management; leadership; governance; financial and operational sustainability; human resources, and non-compliance with the Public Finance Management Act (PFMA).

Major challenges that were cause for concern were especially prevalent at PRASA and SAA. The number of new locomotives to be procured by PRASA had declined from 88 to 70, whilst the budget had increased from R3.5 billion to R4.8 billion. Suppliers were not being disqualified, despite not submitting all bid documentation. SAA needed R5 billion to remain an ongoing concern. The airline had appointed BNP Capital as a transaction advisor to restructure its R15 billion debt, BNP Capital did not have a licence, and the contract had had to be terminated. BNP Capital had expected to earn R250 million from the deal, while there were other service providers that would have cost R85 million.

The researchers concluded that irregular expenditure had to be prevented at the planning stage. Staff turnover levels were a great concern. The implications of government guarantees had to be considered. The Presidential Review Commission had recommended an inter-borrowing mechanism for SOEs.

Discussion
The Chairperson remarked on the instability of SAPO leadership. SAPO needed a R3.7 billion bailout. She wondered if the bailout could be handled within groups of subsidiaries, who could subsidise each other.

Mr A Shaik Emam (NFP) asked if the train accident costs referred only to the loss of assets, or whether it included claims by the families of people who had been injured or lost their lives.

Mr Dlomo responded that it was not yet clear whether the R22 million included claims for injury or the death of passengers. It could refer only to damage to rails and trains. The list could get longer. On the business side, the entity might have to respond about how it was broken down. The question had to be clarified. It was essential that the situation be monitored, especially if the accidents were due to negligence or human error.

The Chairperson said that the briefing had to assist the Standing Committee to identify SOEs that needed immediate attention. The Committee had teeth, and could make an impact. It could intervene if problem areas were identified timeously. Economic growth and job creation could be assisted.

Mr N Gcwabaza (ANC) advised that only questions of clarity should be asked.  The researchers could not be expected to answer on behalf of the SOEs.

Mr A McLoughlin (DA) asked the researchers if their source of information about the IDT was only the Auditor-General (AG), or whether they had consulted other sources.

Ms D Senokoanyane (ANC) referred to slide 7. She asked what the criminal conduct referred to entailed. She referred to the payment for medical serevices to people who had suffered from occupational injuries and diseases. She asked what happened if the hospital insisted that the patient had to pay. It was a serious concern. She asked about the meaning of compensation, in terms of the Diseases Act.

Dr C Madlopha (ANC) said that she appreciated the briefing, and relevant questions had been asked. She referred to the appointment of BNP Capital by SAA as a transaction advisor to restructure its R15 billion debt. BNP did not have a licence. The contract had been terminated. She asked if BNP Capital had been paid the money quoted, and why the contract had been terminated. When had it been discovered that BNP did not have a licence?

Mr Zamisa responded to Mr McLoughlin that different sources were used for different sections. The dashboard on audit opinions and irregular expenditure was obtained from the Auditor General (AG). When a report for the AG was not submitted on time, the relevant Annual Report (AR) was consulted. Strategic roles and challenges were mainly taken from audited information, which was supplemented by disputed issues in the media. Facts were based on audited information and Annual Reports. The Annual Report did not give details about misconduct, as matters were under investigation. Information on criminal conduct could be obtained when the entity appeared before the Committee. The AG had to be present at hearings, in case it wanted to dispute facts. All parties had to be together.

He answered Ms Senokoanyane about the situation with the Compensation Fund, when hospitals wanted the patient to pay for medical care as result of an occupational injury or disease. He did not know if this could lead to a standoff between Medicare and the Compensation Fund.

Mr Dlomo added that the Standing Committee on Public Accounts (SCOPA) reports were also consulted, as well as the Public Service Commission reports.

He answered Dr Madlopha that BNP Capital had given financial advice. Such an entity had to have a licence, to give it credibility. Airline finances were not only looked at on the domestic front, but also internationally. The question was how the service had been procured and how the service provider had been appointed. Clearly the requirements for the work had not been met. The R250 million had not been paid. The contract had been terminated before the work was completed. Money had been spent on the appointment process. This translated into financial misconduct, wasteful expenditure, and non-compliance with supply chain management principles. There was noise made by other stakeholders, including competitors. The market was busy, and competitors knew each other. Everyone wanted a slice. They had started mobilising. The airline had fallen into the trap, and the contract had had to be terminated before the work was completed.

Ms E Louw (EFF) said that her questions cut across the various entities. There were some questions that could not be asked of the researchers. She referred to the role of the accounting officer (AO), as set out in the PFMA. There was clarity about what had to be done about unauthorised expenditure, but there were no consequences for those who did not comply. Everyone was in agreement that SOEs had to be built under the state, but state capacity could not be built if things continued in that manner. She asked how much money the state had lost through unauthorised expenditure.

The Chairperson asked to which period Ms Louw was referring.

Ms Louw replied that it had to be 2014/15, as it was the current period, and changes could still be made.

Mr Shaik Emam referred to financial sustainability and liabilities. It had been said that SAPO was technically solvent. He asked if there had been a reduction in its solvency. Had there been a downward trend over the preceding three or four years, and could liabilities eventually exceed assets? Solvency might be endangered.  He asked about the possibility that UNISA students, who had suffered material loss as a result of non-delivery by SAPO, could sue the entity.

Mr McLoughlin responded to the question about SAPO’s technical solvency by Mr Shaik Emam. Total assets still exceeded liabilities, but there had been a huge drop in solvency. The net loss in 2013/14 had been R406.671 million, which had increased to R1.5 billion in 2014/15. That represented a 268% increase. SAPO could go insolvent within one more year.

Ms Senokoanyane commented that the internal function of SAPO was no longer known. It seemed no longer to be a post office that sent parcels and other mail. Sustainability was doubtful. She asked why post offices were added to new shopping malls, when there was hardly a queue to be seen. If it was not used for motor and TV licences and Telkom, it would have no value. The question was why post offices were still everywhere.

The Chairperson remarked that it was still a post office, but a dysfunctional one.

Dr Madlopha noted that she still received posted letters. But it was not like before. E-mail had taken the place of letters to a great extent.

Mr Gcwabaza said that post office functions had been taken over. The question was what steps could be taken for SAPO to remain relevant. It could not remain stagnant.

Ms Shope-Sithole remarked that her comments and questions cut across entities, like those of Ms Louw. She told Ms Senokoanyane that at her post office in Acornhoek, she had had to stand in a queue until she asked for a chair. It had been congested. She had told the staff that she was going to report them, and they had answered that they were understaffed. Other functions had been added. The post office was still relevant in rural areas, where many people did not have access to e-mail. There were always queues.

She wanted to take the Committee down memory lane. She had come up with the slogan that it was the duty of the Committee to follow the money. The Standing Committee was not a portfolio committee. Its duty was to follow money. After engagement with the Departments of Trade and Industry, Public Works, Energy and Water and Sanitation, she had asked them why they were messing up with the money. They had answered that they had transferred money. If money left a department, it had to be tracked down. The Standing Committee (SC) had to find the money and had to make sure that it was properly used. It did not matter if PRASA transferred to nine subsidiaries. Money had to be followed to the bitter end. A money holiday could not be given.

The Standing Committee was the opposite of the Standing Committee on Public Accounts (SCOPA). A history could be obtained through Auditor-General (AG) reports, but SCOPA reports also had to be read. The Portfolio Committees did enough as far as departments were concerned. The Standing Committee would do well to concentrate on SOEs. That was where the bulk of the money went. Entities declared that they had audit committees, but money was just freely spent. When SOEs were called, the Accounting Officer (AO) had to be called. The PFMA stated that the onus of accountability rested on the AO.

When she was finance chairperson for Limpopo in the old assembly, Trevor Manuel had called a workshop for the finance chairpersons of each province, on each chapter of the Bill. He said that if accountability was desired, it had to be the AO who was held responsible. The Act did not refer to Commissioners. The spirit of the Act was to allow AOs to manage, but they were to be held accountable. Everyone under the AO had to account to him, but he finally had to account for everything. Parastatals had to be called with the Director General (DG) and the National Treasury. The Constitution placed the responsibility for state assets on the Treasury.

The Chairperson said that it was necessary to also involve the AG.

Ms Shope-Sithole said that she differed with the Chairperson about the AG.  There was an Act of Parliament that insisted on the independence of the AG. The AG did not have to be called in, but it would write a report. The Standing Committee report had to be based on interaction between the SOE, the DG, the NT and recommendations by SCOPA. The Committee then had to write a report, and after that he AG could be asked to do a forensic audit of things the Committee was not satisfied with.

Dr Madlopha commented that she agreed with Ms Shope-Sithole about the independence of the AG. But there were time constraints. The Committee had a lot of work to do. It would be better to have the AG present, if it wanted to dispute. She agreed that the AO could delegate tasks, but not responsibility.

Ms Shope-Sithole responded that it should not be expected of the AG to answer, when present. The AG’s way of doing things should not be violated.

The Chairperson commented that the Committee had to work professionally.

Mr Dlomo responded that most inputs from Members had been comments, rather than questions. Some questions had been answered by Members themselves. Unauthorised expenditure had not been presented because it was mostly managed well. It was necessary to brief only about irregular and fruitless and wasteful expenditure.

He agreed with Ms Shope-Sithole that SOEs had to be invited. SOEs received transfers from the State, but some created their own revenue. The amount of transfers they received from departments was only a small portion for operational purposes. It had to be broken down. Some SOEs, like SASSA, received large transfers. Others, like the Development Bank of South Africa (DBSA) and ESKOM, received little. Municipal and provincial reports had to be looked at. Transfers to municipalities took the form of direct and indirect grants for infrastructure. It had to be examined. A lot of money went in unnoticed.

Mr McLoughlin commented that judging by what had been presented on the day, and the week before, if SA were a developed nation, every SOE manager would have been fired. The green compliance block was not to be seen among 20 departments the week before. There were failures to comply and follow rules, but no consequences. People did not get into trouble for doing the wrong thing. This had to be taken on board by the Committee. There had to be consequences for criminal and negligent acts.

It was the task of the Committee to follow the money. PRASA had R70 billion under its control. The Committee had learnt too late about the locomotives, when they had already been bought. He had written to the Minister about broadening the scope of the Committee. Entities had to ask beforehand about money it intended to spend. There were computers in storage that had not been needed when they were bought. Expenditure had to be checked before it happened.

Ms Shope-Sithole said that she agreed with Mr McLoughlin about being proactive. People had laughed at her in the debate to pass the budget. All corruption was blamed on Members of Parliament. Ways had to be improvised to prevent it. Parliament approved budgets. There was a need for self-examination. If need be, the Standing Committee had to work on Fridays and until eight o’ clock at night, as the Trade and Industry Portfolio Committee did. Departments were spending throughout the week. It was not sufficient for the Committee to spend 30 minutes looking at that. The Constitution allowed the Committee to call anyone. The SOEs were trading in the name of the state. They had to come and account.

The Chairperson agreed that this had to be done. She liked the input that money had to be followed. When money was transferred to municipalities, they had to be called in to account and answer questions about their expenditure.

Ms Louw commented that going forward, the Committee had to agree on what to do when SOEs were called in. SAA had not submitted a financial statement, yet things continued as normal. It had to answer about financial management. She asked if funeral cover was managed by SASSA or another company. She asked where the money went to when a child turned 18, and no longer received the child support grant. She asked about amounts for 2014/15, so that money could be tracked and it could be established what went out by the back door.

Ms Senokoanyane referred to slide 14. There had been a decline in the procurement of new locomotives, from 88 to 70. The Audit Committee had to deal with such matters, and report by the time the AG was called in. She referred to deductions for funeral cover from the child support grant. She had never heard of a child who had to pay for that. She asked about SABC performance information, and what went wrong that had caused predetermined objectives not to be measurable. Predetermined objectives were sometimes not implemented.

Mr Shaik Emam commented that BNP Capital had acquired a new director as from 2016. He asked for an explanation about the Audit Committee not being directors. There were serious challenges, but no consequences. It was perhaps necessary to get the media to come in more often. Offenders had to be named and shamed. People who did not perform were hiding, without being exposed. When the Committee visited PRASA, the entity had declared that everything was fine. A visit to the locomotive factory had been arranged, but it turned out that production of the locomotives had not even started. There had been only an open field, but no factory. The matter had not been followed up since the deadline had been given. He asked how sheltered employment worked, and whether people were placed directly with companies, linked to incentives for employing them.

Dr Madlopha remarked that according to her personal experience, the child support grant had never been linked to a funeral scheme. She had relatives who received grants. The issue of pensioners had to be unpacked. There was concern about funeral arrangements for pensioners. When pensioners got older, they received R2 000 at some stage. It seemed possible that it was happening locally in some places, but not nationally. Where she came from, there was no funeral scheme linked to the child support grant. She asked if the funeral scheme was related to the child support grant or to the pension scheme.

Ms Shope-Sithole referred to a document by the Institute of Chartered Accountants -- a guide to financial records -- which stated that it was required of SOEs to retain documents for 15 years. Researchers and the Parliamentary Budget Office (PBO) could look at records for the last ten years. A lot of state money was going into people’s bank accounts.

The Chairperson said that copies of the PFMA, with Treasury regulations, would be distributed to Members.

Mr Dlomo said that the number of new locomotives had been revised down from 88 to 70, while the budget had been increased by R1.3 billion. It was a cause for concern. The question was what had not been done in the first place. Something had been left undone when the 88 production estimate had been made. Predetermined objectives were linked to a combination of issues. They had to comply with a wide range of SMART principles.  The AG would say that 67% of objectives were not reliable and measurable. The researchers could focus on a specific entity or department, or identify general trends.

Sheltered employment was an entity under programme 4 of the Department of Labour. The objective was to facilitate employment in mainly textiles and woodwork, to bridge the gap between the disabled and the able. Under normal circumstances, the disabled were not given much attention in terms of employment. He did not know whether factories were owned by the government.

There had been no information from PRASA since the oversight visit, except for what could be picked up from reports. The Treasury was concerned about the funding of the rail modernisation programme.

The researchers would double check with the portfolio committee on the funeral scheme. The Social Assistance Act did allow for a 10% deduction. The researchers could go back and verify. It was not good that beneficiation of the child was being tampered with. The child had to have the opportunity to enjoy the money granted.

The Chairperson commented that it was not necessary to wait for PRASA to come. It could be written to. There had to be a progress report on the Committee’s recommendations. After the presentation, it would be possible to come up with the top ten entities that needed attention.

Selected departments to be called for hearings on their quarterly expenditure outcomes

The researchers noted that not all departments had performed badly. Departments selected for attention were Basic Education; Health; Public Works, and Water and Sanitation.

In Basic Education, the poor performance on the Accelerated Schools Infrastructure Delivery Initiative (ASIDI) grant to deal with the backlog was cause for concern. The Department of Health had to consider ways to improve infrastructure planning and coordination. In the Department of Public Works, challenges of the billing system had to be discussed. The Department of Water and Sanitation had to consider transfers of expenditure by both receiving municipalities and provinces. The under-performance of the Rural Household Infrastructure Grant had to be explained, as well as slow spending on the bucket toilet eradication programme.

The Chairperson said that matters could be taken to new heights from there. The briefing on the SOEs could thoroughly equip the Committee for oversight. There were systemic, operational and leadership challenges, and non-compliance with the PFMA and Treasury regulations that affected infrastructure delivery and economic growth, and impacted negatively on the achievement of NDP goals. There was a need for the Committee to impress the importance of consequence management, in accordance with the PFMA, to AOs. Oversight of SOEs had to be strengthened. They had to be included when there was engagement with national departments, to see if they were acting on AG recommendations. The ongoing trend of transgression against procurement regulations had to be addressed. Committee interventions had to assist in that regard. Irregular and fruitless and wasteful expenditure caused concern. SOEs had to contribute strategically to development, without draining national resources. They were in a strategic position. There had to be strict controls in place for the SOEs to fulfill their role.

Researchers could pronounce on which departments to invite, to account for fourth quarter 2015/16 and first quarter 2016/17 expenditure. The Committee secretary had an updated programme list circulated to Members, based on presentations and sentiments expressed by Members. The list of SOEs to invite would be finalised.

Ms Shope-Sithole asked if a copy of the Chairperson.s summary could be made available. The Chairperson replied that she did not want to overload Members with paperwork.

The meeting was adjourned.


 

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