Economic Development Department 2016/17 Annual Report: briefing by Auditor-General & Financial Fiscal Commission

Meeting report

The Chairperson in some ways there has been much regress in the Department and its entities. She said that this briefing is very important since the budget is one of the tools that Committee uses for oversight.

Auditor-General South Africa (AGSA) on the Economic Development Department 2016/17 Audit
Mr Andries Sekgetho, Senior Manager for AGSA, said that this is an important briefing for Members to inform themselves in order to make important decisions on the Department’s budget review to ensure that the money spent is aligned to the expectations which were set for the portfolio.

As far as actual outcomes are concerned, fortunately, none of the entities in the EDD received any unfavourable audit opinions. However, none of the entities had been successful in sustaining the achievement of clean outcomes either. All of the entities had, at some stage, received a clean audit.

Some of the issues that entities should consider is management being unable to maintain a holistic view. Management had done very well in addressing their audit action plans but sometimes in doing so, this hampers them from focusing on or even identifying other issues.

Given the nature of the EDD, there are no complex accounting matters that the portfolio deals with and therefore, from an accounting point of view, there is no reason why any entity within the EDD should not be receiving clean audits. The entities need to focus on proper internal controls and structure to allow for a clean audit.

The question then is why clean audits were not achieved. The one reason is compliance where none of the entities were successful in 2015/16. The evils in the portfolio are two-fold. First, the entities are struggling to maintain proper systems of financial discipline to produce reliable and complete financial statements. This means that come 31 May when auditors come and ask for the final set of financial statements for audit, material adjustments have to be made to the financial statements. Those adjustments have to be processed first for them to be financially unqualified. This was the position of the EDD and ITAC.

The Competition Commission and the Competition Tribunal had specific challenges in non-compliance with supply chain management legislation where deviations were approved but upon further scrutiny were found unreasonable and accordingly unjustifiable in context. For example, in the Competition Commission there was an issue concerning an undeclared conflict of interest and the deviation was approved without checking the conflict of interest. AGSA picked up that the person given work had a conflict of interest with an official at the Competition Commission which resulted in the irregular expenditure.

There was regression in compliance as a result of a lack of systems with financial statements. Perhaps there should be a cut back on deviations because the reasons given for these deviations are found wanting. For example, some entities will say that if it decides to deviate, it is a “management decision”. National Treasury, however, requires that the reasons must be justifiable and reasonable for deviation in cases of emergency or if it is a sole provider there are criteria stipulated by National Treasury.

He cited an example of case law from June where SASSA engaged in fair process but then deviated. It did not succeed in the litigation because the deviation was found not to be justifiable. This shows that the argument of a “management decision” is weak. It is necessary to show that the deviator applied themselves, had gone through the process and that there was really no other alternative than to deviate. One should seek to move away from the culture of deviation because it leaves one at risk of non-compliance.

In terms of performance information, AGSA looks at three criteria. First, is there a plan as required by law? Second, does the plan contain the minimum requirements as set out in National Treasury templates? Last, was the plan approved by the delegated authority? Over and above this the plan is assessed for its usefulness and whether the targets and indicators are relevant to the respective mandate. AGSA then looks at how accurate the reporting on the performance is in the annual performance review (APR).

There was a slight regression reported in the Annual Performance Plan (APP) of the EDD. The EDD’s plan was not measurable and well defined because some of the targets were quite open ended.

On the performance report, EDD and ITAC experienced certain challenges with how accurately and reliably they reported. With ITAC there is no system to accurately and completely collect and collate information for their inspections so one will never know how they obtain numbers or how accurate those numbers are.

The message here is that there is a lack of processes to sustain a clean audit because of deviations, a lack of systems for financial management and statement compilation, and a lack of systems to ensure the accurate and reliable reporting of performance information.

Overall it is not looking bad. It is just EDD and ITAC with their financial statements, which had it not been for the material adjustments made to them, would have been qualified.

The key role players within the portfolio such EDD accounting officer, the accounting authorities of its entities and the senior managers should provide assurance because of the lack of internal controls and challenges with supply chain management processes. The accounting authorities are the ones we have found to be providing only partial levels of assurance

On the performance plan, the targets and indicators were not useful. He gave the example of KPI 5 Support the development of the Green Economy and jobs through implementing the Green Economy. The Green Economy Accord is a high level strategic document with about twelve outcomes. The KPE is not clear in articulating what individual role players must do. When one looks at the technical indicator description, EDD actually says it will only monitor and produce a report on how well the Green Economy has been implemented. In the APR, two initiatives were reported. One of which was a fashion show where green material was used, which is quite a far stretch to call it the development, implementation or growth of the Green Economy. It is unclear what purpose the EDD achieved in attendance of this event. This is just one example of a target not being measurable.

On irregular expenditure, the biggest contributor was the Competition Commission and the conflict of interest process.

The reason the portfolio has achieved these outcomes is slow response by management and the instability and vacancies in key positions. The Competition Commission, Competition Tribunal and ITAC have had the same findings for the past three in regards to material misstatements in the financial statements. Management does develop plans to rectify some of the matters raised by the AG but sometimes it is late which results in repeat findings in subsequent years. Therefore, AGSA requests a bit of haste in the implementation of audit action plans and to ensure that upon follow up, that a holistic view is maintained in terms of internal controls.

Regarding instability, the Director General position at the Department has been vacant for about a year. Despite capable people in acting positions, the challenge is that the acting person does not assume the full responsibility as accounting officer. Senior management positions within the EDD are not being filled but they should be filled as soon as possible. There are also deputy commissioner vacancies at ITAC and tribunal member vacancies at the Competition Tribunal. While these entities are able to function at a financial level, it poses significant operational challenges because sometimes the tribunal is not able to meet to adjudicate cases. There is a bigger strategic impact in respect of these vacancies and the sooner they are sorted, the better the prospects are for those entities.

On the status of commitment from the executive, this is the commitment from the Minister to address recommendations from the Auditor-General. In the prior year the executive was ensuring management did monthly financial statements, although not the full statement, increased focus on recruitment and doing away with non-compliance and minimising irregular expenditure. In 2015/16, the Minister committed to compiling an action plan to address the new findings which had been reported.

As part of strategic objective of AGSA, it looks at what is called the sector outcomes. It looks at the national department and all the provincial economic development and asks whether they are working consistently as a sector to meet the economic growth mandate. AGSA is currently conducting a feasibility study with a specific focus on the strengths of each region. North West, for example, is a mining region, Kwa-Zulu Natal is an agricultural region so their department objectives will never be the same as the ones elsewhere.

In conclusion, AGSA requested that the Committee ask management to provide feedback on the implementation and progress of the audit action plans so that when they report quarterly to the Committee, feedback is given on the status of internal controls, the filling of vacancies and a list of deviations.

Discussion
Dr J Cardo (DA) asked about the finding of non-compliance with legislation.

Mr Sekgetho replied that this relates to the conflict of interest in the Competition Commission. Both direct and indirect interest need always to be declared. What was found was that the Commissioner had a company with another person. The Commissioner declared his interest but the person with whom he was in business did not. Treasury legislation is quite clear on disclosure because to wants to do away with the perceptions of favoritism and nepotism. The Commissioner must actively engage in the requisite processes to resign form that company and make sure that there is no connection.

Mr S Tleane (ANC) said that concerns had been raised by AGSA about the oversight provided by leadership over policy and procedures. He said that while the recommendations were appreciated, he is wanting an opinion from the AGSA as to what needs to happen at that level.

Mr Sekgetho pointed to the diagram in the presentation and said that yellow (as opposed to red or green) was given for oversight, policy and procedures. Leadership is responsible for ensuring that the people, policies and necessary processes are in place and as well as for reviewing and monitoring.  AGSA has identified certain shortfalls on the monitoring aspect but it is not that the leadership is dysfunctional. Yellow means a certain area is concerning while at the same time meaning that it is a work in progress.

Moreover, policy and procedures speak directly to performance information. The performance information, technical indicator description in the policies and the standard operating procedures (SOP) were identified as avenues where the Department could give more effect or detail to make their plans more measurable. It is acknowledged that a strategic plan is a high level document. One does not want to see a lot of detail in such a document. One wants to see the key issues and goals that the Department wishes to address and achieve. In the current financial year the EDD did not even have approved SOPs, hence it was only on the technical indicator descriptions and SOPs that the EDD was found wanting in terms of policy and procedures.

Ms C Matsimbi (ANC) wanted clarification on the status of key controls. She questioned why leadership was reported as being in good standing despite vacancies.

Mr Sekgetho responded that he tends to concur with Ms Matsimbi but that one does not want to quibble with the entities. If one looks at the way in which AGSA reports, it has already given ‘red’ on the ability to produce accurate financial statements. At least there it is alluding to the fact that there are some challenges. The challenge that AGSA has found is that that entities do go and develop audit action plans and began implementing them. It then becomes a factual or legal issue in saying that the entity cannot be given ‘red’ because there is an action plan in existence which is already being implemented. From that point of view, ‘red’ has been given in the areas that are not functioning.

Last year HR was a focus area for  AGSA. In 2015/16 it is not reported on the face of the audit report. When the AG reports, it has the materiality and significant frameworks. An example of which is that if the AG counts that there are ten positions and five are vacant that is 50% which the AG will escalate because it is a large number in proportion to the total structure. If, however, the AG counts one or two vacancies then it is at least not significant enough for AGSA to escalate it. From the departmental management point of view, it is perhaps important that those vacancies are filled but from the point of view of AGSA, it acknowledges that at least the Department is trying to do something about it in the form of acting persons.

Mr A Cele (ANC) asked from a layman’s perspective, is it that if one does not have Director General for three years, one can still qualify for ‘green’.

Mr Sekgetho said that it is not just whether there has not been a person in the position for a certain time period. The assessment is not just whether a person is in the position but also about the workflow and whether things are still being done. We need to take into account the challenges mentioned by the Minister. The Minister did mention that the recruitment process is in place but that the right caliber of person cannot be found. The view of AGSA cannot be enforced on the Minister to make an appointment. He said that, furthermore, vacancies are looked at from an overall percentage point of view.

Mr Tleane followed up by saying that if AGSA continually makes certain recommendations then their key function is thus to ensure that things are done properly. If recommendations are made for several years in succession, then entities should bring about these changes. What is it that AGSA can do to ensure these changes and objectives are met.

Mr Sekgetho replied that AGSA engages in an operational process and then also at a high level. At the operational level, the audit is a very retrospective process which means that auditors only come in at the end of the financial year and only then report on what is wrong. At this point it is already too late in the financial year. In the past, AGSA engaged in a process called the Key Controls Review. On a quarterly basis, all entities are assessed and given feedback on their status. This served as an early warning tool. In some instances, this has borne good fruit. Some entities have even taken this on themselves and even on a monthly basis.

Another initiative AGSA has implemented is the interim review of annual performance plans (APP). The APP for 2016/17 was reviewed by AGSA in March this year and it made recommendations so that they could be implemented. Another challenge is that AGSA cannot be too close to the process and should maintain independence and objectivity.

Mr Cele, Committee Whip and Acting Chair, thanked AGSA.

Financial Fiscal Commission on the Economic Development Department 2016/17 Annual Report
The Chairperson returned to the meeting and welcomed the Financial and Fiscal Commission (FFC). She expressed appreciation for their role and work.

Mr Ghalieb Dawood, FFC Programme Manager, explained the mandate of the FFC as an independent, permanent, statutory institution established in terms of Section 220 of the Constitution. Its focus is primarily on the equitable division of nationally collected revenue among the three spheres of government and any other financial and fiscal matters.

South Africa is experiencing one of its greatest economic declines which is impacting on growth. The low fragile growth below the National Development Plan (NDP) targets substantially constrain Government’s ability to address the triple challenges of unemployment, inequality and poverty. It is currently unable to meet the growth target of 5%. There are other competitors close to our borders who are starting to attract investors because of the growth of their economies. Sluggish growth will see South Africa’s external competitiveness lag behind those of its peers.

Despite the improved growth performance in the second quarter of 2016, the domestic economy remains weak. The South African Reserve Bank (SARB) projection for the South Africa’s growth in 2016 has been revised upward from 0% to 0.4%.

South Africa’s weak economic outlook is a result of escalating external and internal headwinds.

Externally, these are the global growth implications of Brexit. The immediate aftermath of the decision was a high degree of volatility in the financial markets and downward revision of global growth forecasts as there are concerns over how this decision may influence the long-term investment outlook. There has also been a marked slump in global commodity prices, subdued economic performance across major industrialised nations and concerns regarding the growth trajectory of the Chinese economy. As part of BRICS we have major trade faith with the competing economies, especially Brazil and India, and if any one of these goes through a decline our economy will be impacted.

Internally, it is South Africa’s worst drought in 30 years. The drought has seen a contraction of near 5% in the first three quarters of 2015 in contrast to average growth of 1.5% in normal years 2013/14. South Africa is set to become a significant net importer of grains with an estimated 5 million tons of maize and 2 million tons of wheat between May 2016 and April 2017. These are significant costs of R11.5 billion for imported grains plus increased pressure on timeous and efficient delivery of imports due to constrained infrastructure capacity for agricultural bulk operations at Transnet. Further, there is increased uncertainty over the country’s investment credit rating as well as its plans to reform laws governing investment in property and mineral exploration. Existing supply-side constraints in power and bulk transport infrastructure have contributed to holding back South Africa’s return to levels of economic activity enjoyed prior to the 2008 global financial crisis.

On the departmental analysis of the EDD, it has been found that allocations to the EDD budget has been erratic over the period reviewed. Following a real increase in EDD budget, the EDD experienced real decline of 28.55% in its allocations for its 2015/16 budget as a result of Cabinet approved reductions due to vacancies between 2011/12 and 2013/14 and fiscal consolidation. Over the rest of 2016 MTEF period, allocation for EDD declines further, albeit a marginal decline of under 1%. The concern is how the erratic trend of allocations affects the ability of the EDD to plan and execute programmes.

In terms of spending by economic classification, transfers and subsidies is the largest item and also the only item to show positive, albeit marginal, real annual average growth over the 2016 medium term expenditure framework (MTEF) period. There has been consistent decline in goods and services, relating to reduction in travel and subsistence. Moreover, compensation of employees is projected to decline significantly over the 2016 MTEF period as a result of Cabinet’s decision to lower the national aggregate expenditure ceiling.

On capacity to support the EDD’s mandate, it was found that over half of the staff complement falls under the Administration programme. Proportion of staff under this programme increased from 54% in 2014/15 to 56% as of 2016/17. A similar trend was recorded for the Growth Path and Social Dialogue programme in which the proportion of staff increased from 23% in 2014/15 to 26% as of 2016/17. The converse is, however, the case for the Investment, Competition and Trade programme where the proportion of staff declined from 22% in 2014/15 to 18% as of 2016/17.

Four entities report to the EDD: Competition Commission, Competition Tribunal, ITAC and Industrial Development Corporation (IDC). They receive financial transfers from the EDD but the IDC generates the bulk of funding required for investment through internal profitability and borrowing funds. The IDC also manages some funds on behalf of the EDD’s Agro-Processing Competitiveness Scheme.

Looking at the allocations and real growth that these entities received from the EDD it was noted that the IDC receives the largest allocation despite the fact that it generates a big chunk of their own resources. It was also noticed that there has been a constant decline in allocation to the IDC agency, the Small Enterprise Finance Agency (SEFA), which can negatively affect the supportive role that this entity plays in the SMME sector and entrepreneurship.

Furthermore, the Competition Commission shows massive decline in allocation in 2016/17 with marginal recovery towards the end of the MTEF period. The deteriorating growth outlook of this entity could impact negatively on its critical role of enforcing competition and boosting economic growth.

On the achievement of the departmental performance targets the EDD reported 100% achievement of its indicators, however, this is questionable in light of AGSA’s assessment of performance information. AGSA reported material findings in the usefulness of reported performance information in that the targets were not specific, measurable or well defined and accordingly unreliable when compared to source information.

On the performance of the entities, the EDD reported significant overspending of transfers by public entities but there are no explanations for these variances. It is also unclear whether the overspending was compensated for by the entities’ own income as budgeted or from EDD transfers. The Competition Commission spent 128% of the planned budget, the IDC spent 79% of its planned budget, the Competition Tribunal spent 184% of the planned budget and ITAC spent 104% of the planned budget.

In conclusion, given the constraints of the current economic environment, the 2016 medium term budget should reiterate policies that will help prevent the economy from falling too far and the country from entering into a debt trap.

Discussion
Mr Tleane asked whether the FFC had an opportunity to engage the EDD on the reported overspending since it concluded that there are no clear explanations as to how the overspending arose. He wanted to know how this was possible if there had been interaction as had been reported.

Mr Ramos Mabugu, head of the FFC delegation, responded by saying that overspending by entities has not been discussed with the Department. The main issue was whether the overspend was funded by the entities themselves.

Dr Cardo asked the FFC, given that it has oversight of other departments in the economic cluster and given the constraints in economic environment, if there are not perhaps overlaps in the economic cluster in respect of their mandates and if so, what would the FFC recommend to avoid such duplication. He added that many of the entities under the EDD used to fall under the DTI and questioned whether a move could be made to merge such entities.

Mr Mabugu responded that broadly speaking, there is nothing unique about how the executive is structured for economic growth. It is not so much how we are structured but rather what the mandate is for economic growth and whether everyone is working toward the common goal. Economic growth is driven by a multitude of factors so it is near impossible for one department to solely say that they are responsible for economic growth. The thinking is that the EDD is best placed to play the coordinating role to ensure that everyone has a clear and defined mandate that looks toward economic growth. It would therefore border on a miss on his part if he made any recommendations in absence of any informing research to say that there should perhaps be a merger between the DTI and the EDD. There is, however, nothing stopping the EDD from looking into a collaboration and the prospects of such.

The Chairperson said that the information was helpful but admitted that she was not sure what was meant in saying that the EDD experienced erratic trends of allocation, especially taking into consideration that it is a fairly new department. In her own opinion from 2010 to date, she would not say that this is a clear trend.

Mr Dawood responded that with respect to the trend observed, the department is relatively new and because it is not properly formalised there are going to be inevitable variations in allocation because the department is still finding its feet. He said that the important thing is how the Department formulates plans, but the size of increase and declines is significantly different which compromises the Department’s ability to plan its implementation strategy. The FFC assessed the performance targets for 2015/16 and looked at the targets and indicators and it was found that the findings of FFC matched the findings of the AGSA. The performance indicators did not comply with the SMART principle of strategy formulation. It could not be ascertained what exactly the EDD was responsible for.

The Chairperson said that they have not received any response on the financing of the overexpenditure which would have to come from the entities themselves. She said that one of the entities has already passed its time with the EDD. She said that looking at the IDC transfers, it has had quite a detrimental effect for SMMEs which would mean that SMMEs are not being adequately funded.

Ms Sasha Peters, FFC Programme Manager: National Budget Analysis Unit, said that it came to the same conclusion that given that the SEFA is a subsidiary of the IDC, any delays in transfers will affect the mandate of the entity. When the FFC was doing its analysis in terms of what was driving this delay, it was not very clear. It was a key avenue that needed to be explored and part of the Committee’s relationship with the entity.

The Chairperson said that obviously SEFA has its own board and they can follow up in this matter themselves. She said that SEFA is no longer part of the EDD but rather the IDC so if ever the EDD is given a response on this matter it will be from the one sided perspective of the IDC. She asked what the EDD’s role ought to be on this, whether it is a transactional matter or if it is one of the control measures that the IDC is implementing which is causing delay. 

Mr Mabugu said that when they met in Soweto Hotel two years ago, the FFC was mandated by the EDD to look at the IDC and the Competition Commission. The FFC found this mandate to be extremely useful. As a follow up from this meeting the FFC has interpreted the mandate to look more closely at the relationship between SEFA and the IDC and what the EDD could do. He said that the main issue is whether this is having an impact on entrepreneurship and SMMEs which are a core outcome for the EDD. With reasonable time frames, the FFC will be able to come back with advice and recommendations.

The Chairperson said that in terms of the internal growth issues there is nothing that they could do about that.

Mr Mabugu said the issue was being used as an example about how the indicator could be better defined. The issue to raise with the Committee was to request the department to define their indicators even more so that there is somewhat of checklist which can be used for tracking progress.

The Chairperson thanked the FFC for the presentation and the professional way in which the issues were presented to the committee.

The meeting was adjourned.