Department of Mineral Resources on its 2015/16 Annual Report with Auditor General input & analysis

Meeting report

Auditor General on audit outcomes of Mineral Resources portfolio for 2015/16
Ms Margaret Seoka, AGSA Senior Manager, noted the three areas the annual audit examines: fair presentation and reliability of financial statements, reliable and credible information for predetermined objectives, and compliance with key legislation on financial performance and management. This was followed by a brief description of what constitutes a clean audit and what does not. All entities within the department fell into the categories of unqualified opinion with no findings (clean audit), and financially unqualified opinion with findings. No entities within the department fell into the categories of qualified opinion, adverse opinion or disclaimed opinion, indicating that the DMR is moving in the right direction.

She presented an analysis of the overall audit outcomes for 2015/16. South African Diamond and Precious Metal Regulator (SADPMR) and MINTEK received a clean audit. The DMR, CGS, MHSC and SDT received unqualified audit with findings, meaning SDT regressed as last year it had a clean audit. Three entities remained unchanged as a result of them being unable to implement the designed controls that would ensure compliance with legislation, and to prepare financial statements that are free of material misstatements.

On compliance with key legislation, SADPMR and MINTEK had had no material findings while the remaining four entities had material findings, mainly relating to non-compliance with section 41 for the department and section 551 for the entities. Although there has been an improvement from the last two years, the area of focus needs to be on the controls for the review of annual financial statements and compliance with legislation.

She turned to performance management. Annual performance plans were generally good for 2015/16 except for the CGS which had material findings. This was due to entities correcting all misstatements identified during the audit. This can be avoided by management verifying all information included in the annual performance reports, and providing valid evidence.

On the status of internal control and assurance providers, DMR and CGS need to work on oversight responsibility, with the DMR also needing to focus on effective Human Resource (HR) management. Financial and performance management is the area where the portfolio needs to improve; the key issue is financial statements and non-compliance. Controls relating to record keeping, daily and monthly controls, accurate financial performance, and review and monitor compliance need to be improved. There are no issues with governance. Controls on the preparation and review of annual financial statements needs to be strengthened however.

Assurance providers generally performed well. However senior management needs to improve review and monitoring of compliance with legislation, as well as reviews of financial statements. Focus of governance structures must be intensified for compliance with legislation. The Portfolio Committee was found not to be lacking in its ability to execute its responsibilities.

The quality of submitted annual performance reports regressed slightly as three entities submitted reports with errors which had to be adjusted to result in no material findings. The entities corrected them once the errors were identified. This is general movement in the right direction with regards to performance information reports.

Improvement in compliance with key legislation highlighted that DMR, CGS and MHSC submitted annual financial statements with material misstatements. DMR, CGS, SDT and MINTEK feature when looking at problems relating to prevention of unauthorised, irregular and/or fruitless and wasteful expenditure.  No entities had challenges with procurement and/or contract or consequence management. Findings on compliance with key supply chain legislation, saw CGS and SDT featuring when it came to uncompetitive or unfair procurement processes, while no entities had challenges about awards to other state officials, inadequate contract management, and limitation in planned scope of audit awards. DMR, CGS and MHSC had to correct material misstatements during the audit.

The Department incurred no unauthorised expenditure and no fruitless and wasteful expenditure for 2015/16. On irregular expenditure, R1 million was irregularly spent in that a request for quotation did not specify that functionality will be used as evaluation criteria. This points to major improvement since the previous financial year.  Following an audit, AGSA does a follow-up with management to find out what steps have been taken to investigate if there was any negligence or if disciplinary action needs to be taken due to unauthorised, irregular, fruitless and wasteful expenditure. All entities which had unnecessary expenditure carried out investigations, none of which resulted in the dismissal of an official. However it is noted that the MHSC official responsible for irregular expenditure in 2014/15 resigned.

She highlighted that root causes to be addressed are inadequate reviews of the annual financial statements and insufficient review of compliance with legislation. An additional root cause is the slow response by management to audit findings thus resulting in the previous year's findings recurring.

On the status of key commitments by the Minister:
- relooking at the structure of support provided to the Director General has been addressed.
- there had been an improvement in the quality of information and daily discipline of junior staff.
- governance structures review the financial information produced: implementation was still needed.
- monitoring of compliance with legislation by management: implementation was still needed.
- filling of key positions to facilitate effective monthly reporting: implementation was still needed.
It was recommended that leadership implement the remaining commitments by the end of 2016/17.

She proposed that the Parliamentary Committee should obtain feedback from management on commitments made to address audit findings and to monitor progress quarterly. Also it should obtain feedback on the achievement of performance targets and the completeness, accuracy and validity of evidence. The Committee should obtain reasons for the non-achievement of targets by the entities and find out what are the plan of action is to ensure that those targets are achieved in future.

Discussion
The Chairperson liked the recommendations especially the last recommendation given to the Committee.

Mr J Lorimer (DA) asked whether the DMR not preparing financials in compliance with the Public Finance Management Act (PFMA) was a result of key positions not being filled. He asked by the audit committee did not pick this up, yet the audit committee was given a good assessment.

Ms Seoka replied that problems relating to financial statements were not a problem of vacancies, but of insufficient time allocated meaning that reports are rushed to meet the timeline. If sufficient time was provided, most likely those financial reports would comply.

Mr Lorimer wanted to know who is supposed to set those timelines and are they being adjusted.

Ms Seoka explained that the timelines are set by PFMA legislation for 31 May, which cannot be adjusted. On the audit committee not picking up issues, this also related to insufficient time given to look at the inputs. MHSC was struggling to supply information when it comes to proper record keeping, which talks to their filing process. Generally, MHSC can improve on controls for financial and performance management.

Mr Lorimer sought a reason for the diminished financial performance of the MHSC. He asked for details on the unfair procurement processes at both the SDT and CGS. He asked for insight into the MHSC official who resigned, was there any follow-up, are there any details as to what went wrong and was this corrected. He asked about the Accounting Officer vacancy, and what other positions in the department are vacant.

Ms Seoka replied on SDT’s unfair procurement that SDT did not indicate when requesting quotations that functionality was going to be used to evaluate those suppliers, so they decided on functionality after requesting the quotation. CGS's unfair procurement was for goods and services procured from a sole supplier without approval from the board or accounting officer for deviation, which is required when only one supplier can be found. No information is currently available on the MHSC employee who resigned but a written response will be given. On the vacancies at the DMR, there is currently an acting Accounting Officer.

Mr S Maluleke, Audit Manager: AGSA, added that some of the other positions that are vacant include Director of Internal Audits, Director of Financial Administration, and Director of Supply Chain. 

Mr F Mokoena (EFF) raised concern about the number of key controls on financial and performance management which were ‘of concern’.

Ms Seoka reported that performance control challenges in the DMR are similar to MHSC except there were no issues with record keeping. Improvement is needed on daily and monthly controls, as well as regular, accurate and complete financial and performance reports, particularly on transactions between DMR and mining companies. Better compliance with frameworks and legislation is also needed by the DMR, but not to the extent of the other entities recorded in the audit report.

The Chairperson questioned if the mechanisms used by the Committee are appropriate, for the purpose of the Committee doing its work. On the resignation, the basis for the resignation must be known, so we do not automatically assume. We do not want issues to be carried over from one year to the next. Another critical item is whether there is a mechanism that measures target and performance objectivity, to ensure targets and measurement are not manipulated to meet audit expectations.

On the question of senior posts versus critical posts, is there a way to measure if the posts filled allow for the core activities of the DMR to be addressed. Increasing the number of people you employ may allow you to fill all the posts but may not lead to the core activities of the department being addressed. This is an issue of compliance versus capacity.  

Ms Seoka took the point made by the Chairperson about senior versus critical positions.

Analysis of DMR’s 2015/16 Annual Report
Dr Martin Nicol, Committee Researcher, said the point of reference for the discussion is the series of reports placed before the Committee: the DMR Strategic Plan 2014-19, Budget (Vote 29) passed in 2015, along with the DMR Annual Performance Plan which is the most important for the discussion today. Very little time has been given to evaluate the Annual Report, as it was only released on 3 October.

Dr Nicol said that achievements for this last year are: unqualified audit opinion, the DMR achieving 82% of performance measures, One Environmental System being put in place including 60 inspectors trained to deal with the increased environmental responsibilities of DMR, and 38 trained mine inspectors now hired (after year end) to address vacancy and safety issues.

Dr Nicol said the summary of performance measures noted that DMR used 104 indicators to measure its performance. It had a high overall score, with only one branch below 80%, which is the acceptable benchmark set by the AG for the achievement of performance indicators. Particular targets which were not achieved were the vacancy rate stayed unchanged at 14% from the previous year, additionally not all invoices were paid within 30 days during the year, and several human resources targets were missed by the administration branch. Indicators are pretty much the same between last year and this year, only in the administration branch was there a dip below the 80% benchmark.

DMR’s performance achievements were endorsed by AGSA who found that reported performance is consistent with the planned programmes. AGSA found that indicators and targets were well defined, verifiable, specific, measurable, time bound and relevant (SMART), as required by the Treasury framework. He has a reservation, however, about the lack of progress with regards to policy and legislation, given that the DMR is the custodian of the mineral wealth of South Africa. This comprised, an amendment of the Mineral and Petroleum Resources Development Act (MPRDA), the revision of the Mining Charter which is almost two years after its expiry date, and a delay in the launch of the Mining Phakisa which was scheduled for launch in the first half of 2016, a delay in tabling amendments to the Mine Health and Safety Act (MHSA), a lack of legislation on illegal mining despite being raised by the Committee since 2009, a lack of proposals to change the diamond legislation, and delay in implementing the Geoscience Amendment Act. This lack of policy certainty impacted negatively on mining investment, but also on the attitude of communities to mining.

Dr Nicol found that the Annual Report raised three general concerns. More details need to be given on the number of Section 54 and Section 55 instructions under the MHSA as was done in the past, the need of performance measures on the granting of rights to minerals, and finally the need for an annual report from the Environmental Mineral Resources Inspectorate - this could follow the excellent model of the Mine Health and Safety Inspectorate. The Committee has made these recommendations in the past, which have not been taken forward. The next step would be that the Committee consider recommending that these issues be included in the 2017/18 Annual Performance Plan, to be tabled in March 2017.

For DMR entities, there were 289 measures of performance and 80.3% of those measures were achieved. Over the last four years, the achievement rate has gone from 79% in 2012/13 to above 80%. Although the number of measures shrunk, the percentage improved. This is not bad as many have been better formulated and refined to reflect the performance of the department. The DMR met 82% of its measures of performance. When looking at the individual entities MINTEK led in its performance against its objectives, the MHSC, the MHSI, the Regulator and the SDT all achieved levels above 75% and in most entities there has been improvement. The entity that stands out is the CGS. It is unfair that it stands out, as its non-performance is greatly related to the money it is allocated by Parliament to do the tasks it is mandated to do. It is very questionable that such a scientifically orientated organisation is denied funding while money is found to fund deficits in other institutions such as the SABC.

Mr Nkosinathi Kweyama, Committee Content Advisor, said performance indicators for the CGS declined in 2015/16, with CGS only meeting 48% of its performance indicators. This must be put into context and does not reflect on the quality of work the entity is doing, or in its ability to execute on its mandate. CGS is the entity which is most sensitive to the current economic conditions. The main reason for concern in the performance of the CGS is its reduced capacity to perform its mandate. The proportion of total scientists to total staff has also fallen, and its MSc and PhD bursaries declined marginally, but it is important to flag. CGS adopted the ‘business unusual’ model in the previous financial year. This has forced the institution to redirect resources into MTEF projects, overall this speaks to a reduced capacity in the CGS to ability to fulfil its mandate. Given that the CGS sits at the beginning of the value mining chain, anything that happens to the CGS has a ripple effect throughout the chain. Less exploration leads to less extraction. The Committee is strongly requested to consider counter-cyclical funding for the CGS.

Discussion
Mr Mokoena asked if Dr Nicol would support a recommendation that the DMR increase its capacity to investigate finances in the mining sector to tackle matters such as transfer pricing.

Dr Nicol replied that it was not for the researchers to decide but for the Committee.

Mr E Nchabeleng (ANC) asked how much money does the CGS generate, and how much of that generated money goes to Treasury and how much goes to CGS.

Dr Nicol replied that CGS needs to report on this themselves.

The Chairperson noted that the financials reflect CGS has a surplus of R54 million plus. He asked how you can ask for more money when there is a decline in academic interventions in the form of bursaries and yet you have a budget surplus.

Mr Kweyama replied that the CGS would be more competent in their response, but the reaction has been to not tap into the current surplus.

Department of Mineral Resources 2015/16 Annual Report
Mr David Mpiza, Acting Director General: DMR, apologised that the Minister and the Deputy-Minister were unable to be present due to prior commitments. He noted the findings and reports of Auditor General South Africa and the Committee Researcher on the Council for Geoscience and the need to invest more into this body in order for  mining to continue to be a key contributor to the country’s GDP and the achievement of the NDP. He also noted the current global conditions and how this had a negative impact on commodity prices, despite their being a slight turnaround in recent months.

Mr Mpiza presented a sectoral overview, the annual financial statements, and performance per programme.

Mr Mpiza said it was important to highlight the financial indicators as they have an impact on the work of both the DMR and mining sector. This impact can be both positive and negative. There was a sustained commodity price increase between 2005 and 2012, particularly gold, platinum and iron. Since then there has been a sharp decline in commodity prices, particularly iron. However in the last few months there has been a recovery. This has been helped by the weakness of the Rand. Mining is also a key contributor to tax revenue.

Mr Mpiza said that since the introduction of the MPRDA there has been a significant increase in money that goes into the mining sector. On average the contribution of mining to the GDP has been around 10% but for the last quarter there has been an 11.8% contribution. Employment has been a major challenge to the mining sector, mainly due to the drop in commodity prices. From 2008 there has been a reduction in the number of diseases reported, particularly in the gold sector. In 2014 and 2015 there was an increase in the platinum sector of 32%, is attributed to previous under reporting. Close to 50% of reported diseases are TB or TB related. The gold mines for 2014 and 2015 reported most of the fatalities and accidents. Major contributors of fatalities are rock falls and transportation accidents. There has been an 11% decrease in the fatality rate per every million hours worked. This year there was regression in terms of fatalities, however the number of injuries improved by 17%.

Ms Irene Singo, DMR Chief Financial Officer, said that the DMR was given an unqualified audit report, moving from qualified audit opinions due to revenue management. There has been a significant improvement in application of Supply Chain Management principles. An area which requires improvement is adjustment of financial statements. Management action plan has been put in place which the internal audit and audit committee will review to ensure reliable financial accounting. Matters noted are misstatements on contingent liabilities, lease commitments, leave entitlement and accruals.

Ms Singo said that R1.65 billion was spent of the R1.68 billion budget allocation. The small variance related to the capital assets which cannot be shifted, which was a result of the delayed relocation which was not finalised. There was virement of R50.197 million to cover shortfall in operating expenses. Looking at performance per programme, all programmes spent the budget linked to their required performance.

Ms Singo gave an overview of financial performance. Revenue collection of the DMR decreased to R29.7 million due to royalties’ income not being included as part of Department revenue. Expenditure was in the form of R526 million paid to employees, and R279 million paid for goods and services. Transfers to entities accounted for the vast majority of the remaining expenditure.

Ms Patricia Gamede, Deputy Director General (DDG), Corporate Services: DMR, outlined the achievements of the corporate services programme, which included, the communication of DMR programmes and policies, contributing to skills development, the development and reviewing of internal processes, guidelines and policies, ensuring the implementation of national strategies, the sustainable development of vulnerable groups, and ensuring the compliance with legislation particularly relating to health and safety. Outcomes of these achievements included, the implementation of a communication strategy, the award of 21 bursaries to youth to study towards mining related qualifications, the screening of all new employees, service providers and contractors, Skills Development Programme for youth at Sishen Mine in Khathu, Limpopo, and the building of the Balfour Stimulation Centre for children with disabilities. Additionally all health, safety and wellness programmes were implemented. 

Ms Singo said that 92.5% of suppliers were paid within 30 days.

Mr Xolile Mbonambi, Acting Chief Inspector: DMR, said that 7539 inspections and 466 audits were conducted relating to mine health and safety. 100% of accident inquiries initiated were completed, and 85% of accident investigations were completed. Additionally a total of 239 appeals, in medical appeal disputes between employees and employers were finalised within the timeframe.

Mr Xolile, gave an update on Lily Mine where a new plan was being devised to sink a new decline and ventilation shaft. The business was also put on business rescue due to financial problems. Additionally some of the Lily Miners were deployed to other mines, while others accepted severance packages. 

Mr Joel Raphela, DDG, Mineral Regulation: DMR, said that 120 Social Labour Plan (SLP) projects were implemented, creating 6528 new jobs. Additionally state liability and financial risk was reduced by issuing a 129 closure certificates. He also explained how the monitoring and enforcement of regulations was achieved, with 502 legal compliance inspections and 1889 mining environmental inspections.

Mr Raphela, outlined the strategies used to address challenges faced relating to Mineral regulation. This included the implementation of the Stakeholder Declaration on saving jobs, the finalisation of the Mining Charter, implementation of the One Enviroment System, and develop and implement support mechanism for small scale miners.

Mr Andries Moatshe, Acting DDG, Mineral Policy and Promotion: DMR, outlined how investment was promoted in the mining sector, by supporting 125 Small, Medium and Micro Enterprises (SMMEs), and the implementation of operation Phakisa. Additionally to facilitate transformation in the sector, the reviewed Mining Charter was gazetted for public comment. While to promote sustainable resource use and management, 50 derelict and ownerless sites were rehabilitated.

The Chairperson adjourned the morning session.

[Afternoon session to follow on 17/10/16]