The committee interrogated the board of the South African National Road Agency (SANRAL) on the R1.1 billion in expenditure for the current financial year which did not comply with the Preferential Procurement Policy Framework Act (PPPFA), despite the Auditor General of South Africa (AGSA) having found that between the years 2002-2013 SANRAL had not used the PPPFA and had instead used a methodology of its own choice developed at the University of Pretoria. SANRAL informed the Committee that all contracts which did not comply with the legal requirements would expire in 2017.
The committee had a problem with SANRAL outsourcing its internal audit function at a cost of between R15and R20 million, given that this function was meant to be done in-house, especially since AGSA had identified problems with the organisation’s financial reports.
The Committee asked that it be provided with the details of the 68 cases investigated after being brought to SANRAL’s attention via the hotline. Clarity was also sought on the disciplinary case against a member of staff who had not declared a conflict of interest. SANRAL confirmed that the disciplinary process was still under way, and the money involved was going to be recovered through legal action.
The Committee probed why there had been a 685% in increase in SANRAL’s asset valuations from the year 2009 to 2010. SANRAL explained that this had mainly been due to provincial roads being transferred to SANRAL.
The committee questioned the financial sustainability of SANRAL especially given the R11.4 billion in uncollected E-toll debt. It cast doubt on the possibility of the debt being collected, although SANRAL insisted that every attempt would be made to recover the outstanding amounts, and they would be working closely with government to achieve this.
The Committee emphasised the point that SANRAL did not operate and have the feel of a public institution. It needed to get in line with public practices, and increase its internal capacity. By the end of next week, SANRAL should provide all additional information requested by the Committee.
The Chairperson opened the meeting by explaining that the purpose of the meeting was to identify what was going wrong at the South African National Roads Agency Limited (SANRAL), and to ensure that it was corrected.
Ms N Mente (EFF) said that on the spreadsheet provided, R1.1 billion had not been in compliance with the Preferential Procurement Policy Framework Act (PPPFA). This had been picked up by the Auditor General of South Africa (AGSA). AGSA had stated there were serious issues relating to compliance with legislation, especially with regard to procurement and contract management. She asked what AGSA had said about measures to be put in place to prevent irregular expenditure.
Mr Roshan Morar, Chairperson of the Board: SANRAL, responded that the particular process of awarding contracts mentioned by Ms Mente had been stopped in 2013. The reason why these contracts had appeared in the 2016 AGSA report had been because those awarded in 2013 were generally three year contracts, but since then no contracts had been awarded using the old practice.
The Chairperson said that there were sections in the AGSA report that pointed to irregular expenditure for the current financial year and which did not relate to the previous process of awarding contracts, and asked if this was true.
Ms Inge Mulder, Chief Financial Officer (CFO): SANRAL, confirmed this. She said that the supply chain management (SCM) unit had been strengthened.
Ms Mente asked how long the contracts had been in place.
Mr Morar responded that usually the contracts were a minimum of three years, with a two year extension. This practice had been in place from 2002 until the findings of AGSA in 2013.
The Chairperson said that this meant that SANRAL was run according to practice and not the law, and in the process had contravened the law.
Mr Morar admitted that SANRAL had used the practice previously.
Ms Mente asked if any of the current board members had been on the board in 2002. It was concerning that SANRAL considered the PPPFA ineffective and had decided to use its own practice. It was a serious concern that was nothing had been done to address the irregular expenditure, and the PFMA had not been properly adhered to, often under the pretext of practice.
Ms Mulder responded that when SANRAL had engaged with Treasury on the lowest acceptable price, they had agreed that it was non-compliant, but that the contracts had not been awarded illegally, and therefore the contracts had not been cancelled and were allowed to be concluded.
Mr M Booi (ANC) demanded that Mr Morar answer questions and provide the Committee with facts.
The Chairperson mentioned that irregular expenditure was being looked at in totality, and not just the previous practice.
Ms Mente asked why after 2013, when AGSA had determined that the procurement practice used by SANRAL was wrong, had SANRAL extended certain contracts using the previous practice, instead of using the PPPFA as guided by Treasury.
Ms Mulder responded that all contracts had an extension period based on the performance of the contractor, so if they performed the contract had to be extended.
The Chairperson pointed out that when one contracted a person, they were expected to perform, so were they being rewarded for performing, which was the minimum expectation?
Ms Mulder explained that SANRAL had wanted to use the new methodology, but had not been able to do all of the contracts at the same time, so they had been spread out over a period of time. Therefore, some had been extended for the two year period. It was not possible to get out of all the road maintenance contracts at the same time.
Ms Mente asked if SANRAL did not have the capacity to review all the contracts in their entirety.
Ms Mulder said that in terms of the capacity of the industry, if one put out all the tenders at the same time, the contractors had to tender at the same time. This would be a huge amount of work for the industry, which would put it under pressure. SANRAL had enough project managers. That was why only a few were extended.
Mr Morar said that the details of the contracts that were renewed and not renewed could be provided to the Committee.
Ms Mente said she was not satisfied. When were all the tenders ending?
Mr Morar responded that it would be in 2017, and the value of those contracts would not exceed R200 million.
Ms Mente asked if there was an internal audit unit at SANRAL, and what it was doing to identify and address the irregularities picked up by AGSA.
Mr Morar responded that there was an internal audit function which was outsourced, with assistance from internal auditors.
Ms Allyson Lawless, Board Member: SANRAL, said that many of the items picked up in the AGSA report had been picked up by the internal audit. Capacity and systems needed to be strengthened. This would be put in place over the next few months through appointing staff and establishing control measures.
Ms Mente asked why there were no serious consequences applied for those who were found to have transgressed.
Ms Lawless responded that disciplinary letters had been sent to all staff in terms of the findings.
Mr Koos Smit, Acting CEO: SANRAL said disciplinary letters had been sent to address the transgressions.
The Chairperson asked why they had not been addressed before AGSA’s findings.
Mr Smit responded that it had been in the making at that point, and investigations were still in process.
Ms Mente asked when the letters were issued.
Mr Smit said some were issued this week and in May, and there was still one case under investigation.
Ms Mente asked if SANRAL agreed that they were dragging their feet, as at the meeting last week the Committee had been informed that all cases were under investigation.
Mr Morar confirmed that the letters were sent only in the last two weeks.
Ms Mente said that this confirmed AGSA’s findings, that there was management which could not act proactively, and only acted when told to, and which used an outsourced internal audit that could not even find that people were allowing irregular expenditure. She pointed to a section in the AGSA report that suggested that SANRAL could have financial problems in the future.
Mr Morar said that there was an ongoing investigation by the Public Protector into the E-toll contracts.
Ms Mente said that there was a Moody’s rating review of SANRAL which was meant to have taken place in June. Clarity was sought on the progress of this review, and if SANRAL was looking at liquidation.
Ms Morar responded that SANRAL was not looking at liquidation.
Ms Mente demanded that information be given on the financial sustainability of SANRAL, especially given the issues related to E-tolls in Gauteng.
Mr Morar responded that there was growing concern at SANRAL on the ability to recover money on E-tolls. In the next 12 months, there would be coordination with national government to recover the money.
Ms Mente pointed out that in the report there was money that had not been condoned by Treasury. Why did treasury not condone that money?
Mr Morar responded that National Treasury had not reported back to SANRAL on the condonement of the money, and that SANRAL was still waiting for a reply.
Ms Mente asked why SANRAL had called for a forensic investigation into a staff member who had not declared a conflict of interest, given that SANRAL already knew that the staff member had not disclosed the conflict of interest.
Mr Morar responded that the purpose of the investigation, when management was made aware of the contravention of the staff member, was that they wanted to ensure that the findings of AGSA were conclusive. This was so that the disciplinary process could be carried out with the correct information, and the other parties involved identified, including the supplier.
The Chairperson asked if the process was complete.
Mr Morar responded that it was, and a disciplinary process was under way, which would be followed by legal action against both the staff member and supplier.
Ms Mente asked how the R1.2 million would be recovered.
Mr Morar responded that it would be recovered through the legal action against the staff member and supplier.
The Chairperson pointed out that all disciplinary processes, legal action and criminal investigation could happen in parallel, and did not have to happen one after another.
Mr Booi referred to a statement of page 125 of the report, and suggested that it pointed to the blind leading the blind. He pointed out that SANRAL had a hotline, which had led to a lot of complaints being made by the public. This contradicted SANRAL’s report, as there were so many cases investigated by SANRAL, yet there was no disciplinary action taken and no referrals were made to external investigation units, which contradicted the claims made by the public. He said that the problems with the credit rating were partly a result of SANRAL not being able to hold itself accountable and act as a credible public institution, while also not complying with legislation.
The Chairperson sought clarity, as one paragraph in the report stated that many cases were reported and investigated, with SANRAL then taking appropriate action, while a second paragraph said things were reported and investigated, with nothing being found. Was this not a contradiction, or was the Committee misunderstanding these two paragraphs.
Mr Morar said they referred to the same thing. The first paragraph related to the tip-off hotline, which was looked at by the Chief Risk Officer and then turned over for internal audit or forensic investigation if it warranted. The details of the 68 investigations could be given to the Committee.
The Chairperson asked that this be done.
Mr Morar said the internal audit function for 2016 had been outsourced to two firms which were completely independent of the internal audit.
Mr Booi questioned the capacity of the internal audit unit, given what the report hadsaid.
Mr Morar said that the internal audit and internal control measures operated effectively.
Mr Booi said this contradicted the report, especially since the audit was outsourced.
The Chairperson said that the internal audit capacity of SANRAL must be strengthened, and that outsourcing of the audit must only be transitional and not permanent. He emphasised that SANRAL was a public entity and could not be run like a private enterprise.
Mr Morar said the SANRAL would work towards this, and report to the Committee.
Mr E Kekana (ANC) asked if SANRAL was aware that a contract worth R1.3 billion had been allocated to one company, and did this not contradict SANRAL’s claim, as shown in a letter sent to the committee on 4 July 2013, that SANRAL aimed to promote small, medium and micro enterprises (SMMEs). Did SANRAL consider this empowerment?
Mr Morar responded that 80% of the work that was awarded to the main company had to be awarded to sub-contractors, all of which were SMMEs.
Mr Kekana asked if this related to all the main contractors used by SANRAL.
Mr Morar confirmed this.
The Chairperson asked whether SANRAL employed the SMMEs, or if this function was outsourced to the main contractors.
Mr Smit responded that the main contractor was a management contractor, who sets the work aside for the smaller contractors, but this was still done through a competitive tender process.
Mr Kekana asked if the main contractors operated on a regional basis.
Mr Smit said this was generally true, with sub-contractors always being local or regionally based.
Mr Kekana pointed out that a number of main contractors had up to 30 contracts, and sought clarity on this. He asked if the person who was being investigated for a conflict of interest was still employed by SANRAL.
The SANRAL Compliance and Risk Officer responded that the employee was still employed. The forensic investigation was being carried out to determine if there were further illegal contracts.
Mr Kekana asked for the status of the contract.
The SANRAL Compliance and Risk Officer responded that following regulations, the contractor was informed of a motion to bar, and that the contract was still continuing.
Mr Kekana asked for the details of the directors of the main contractors.
Mr Morar confirmed that this would be sent to the Committee.
Mr Kekana asked what progress had been made on the court summons application regarding the collusion of construction companies, which had led to a loss of R760 million.
The Minister Ms Dipuo Peters, Minister of Transport, said that there had been engagement with the companies implicated in collusion and irregularities. This had resulted in an agreement where all affected entities, besides the City of Cape Town, would act as one, so SANRAL would not act in isolation in this regard.
Mr Morar said that there had been an out-of-court settlement.
The Chairperson sought clarity on this settlement.
Mr Morar said that the Office of the Minister would give the committee the exact details of the settlement agreement.
Mr M Hlengwa (IFP) asked how much was being paid for the outsourced internal auditors.
Ms Mulder responded that it was between R15-20 million per year, at a tendered rate per hour.
Mr Hlengwa asked if there had been any skills transfer to the entity.
Mr Morar responded that there had not.
Mr Hlengwa asked what the level of interaction between the outsourced auditors and the financial statements had been, given that the financial statements were not in accordance with the Public Finance Management Act (PFMA) format.
Ms Mulder responded that they were not directly involved in drawing up the financial statements.
Mr Hlengwa asked who drew up the financial statements, and at what cost.
Ms Mulder said Deloittes, at a cost of less than R500 000.
Mr Hlengwa asked if the outsourced internal auditors got a chance to interact with the financial statements.
Ms Mulder responded that they were present at the audit and risk committee meetings, where all financial statements were approved.
Mr Hlengwa asked if they signed off on the financial statements.
Ms Mulder responded that they did not.
Mr Hlengwa said that the financial statements pointed to the financial health of an institution and if one was an auditor, one ought to be privy to the final product of what one had been auditing. He sought clarity on the extent to which the outsourced auditors, which were being paid R20 million, were part of the reporting which had not been done within the prescribed framework. He asked if the audit committee had picked up on the material misstatements found in the financial report by AGSA, especially given that R20 million was being paid.
Ms Lawless responded that the internal outsourced auditors did not have the function of looking at the financial statements, as this was the responsibility of the external auditor, which was AGSA. The financial statements were prepared by SANRAL itself, with the assistance of an outsourced company, and the mistakes had not been picked up.
Mr Hlengwa said the financial misstatements and irregular expenditure were a result of there being a lack of in-house capacity. What had been picked up by the audit and risk committee?
Ms Lawless said that the audit and risk committee had picked up many things, but the financial statements came to the audit and risk committee many months after the financial year which was being reported, but actions had been recommended. There was a capacity problem, however, which was slowly being addressed.
Mr Hlengwa asked how the Department processed a tender which had not been advertised in the allocated time of 21 days, as well as not getting the necessary quotations. This suggested that there was an absence of internal controls and capacity, underscoring the recommendation that what should be internal could not be outsourced.
Mr T Brauteseth (DA) asked SANRAL if they were aware that there were 11 SMMEs on the list provided by SANRAL of companies given tenders which did not exist on the Companies and Intellectual Properties Commission (CIPC) register, or the internet.
Mr Morar noted the observation, and said he would check the record.
Mr Brauteseth said he found it insulting that SANRAL were basing their entire hiring and tendering model on the University of Pretoria model, which had not even been given to the Committee to analyse and test. Why was a spreadsheet not given to explain why each company was chosen for each contract, as there were over 500 contracts? This was the kind of information the Committee wanted. The details were important, for therein lay the justification as to why the University of Pretoria model was chosen over the PPPFA.
Mr Smit said that before 2002, when the model was not used, many SMMEs had said they could not undertake contracts at the given prices. The model was to give smaller contractors who could not compete a chance to compete against bigger contractors.
Mr Brauteseth said that what SANRAL was saying was that they were not going to follow legislation --they were going to follow their own model. Details on every contract needed to be given to show that the claims made by SANRAL were in fact true and could be tested.
Mr Smit responded that this had not been done to change the rules, and that the model had been audited since 2002.
Mr Brauteseth asked why the University of Pretoria model used was the prescribed Construction Industry Development Board (CIDB) model.
Mr Smit responded it was used to make sure that work was done by small contractors, but on a tendering basis.
Mr Brauteseth said what this implied was that SANRAL basically did what they wanted, without any regard for the law.
Mr D Ross (DA) said he would like to address the issue of SANRAL going forward and the growing concerns, especially when one looked at the financial statements. There was also the issue of the over-evaluation of assets. What was the current outstanding E-toll debt?
Mr Morar responded that it was approximately R11.4 billion, as of September 2016.
Mr Ross pointed out that R90 million and R123 million of E-toll debt had been written off in 2016 and 2015. Why had the amount written off been so low, given the large amount of E-toll debt?
Ms Mulder responded that according to the PFMA, if one had debt owed to the state, one must do everything in one’s power to collect the debt, until all possible legal means had been used.
Mr Ross said he accepted this, as it also occurred in the municipalities. This raised the issue of whether SANRAL could be sustained and its liquidity. He was concerned that in 2008 and 2009 there had been a 146% increase in the total value of assets. These were excessive evaluations, and did this not warrant an external evaluation as to whether SANRAL was a viable entity?
Ms Mulder said the assets were the land on which the roads were built, and the roads themselves. The roads were evaluated by AGSA and external evaluators, which was standard practice.
Mr Ross asked if the operating loss for the previous year was close to R1 billion, linking this to irregular expenditure of R1.1 billion in the current year, and R2.7 billion in the last two years. He concluded that SANRAL had allowed grossly different costs for tenders and projects of a similar nature, perhaps in that context was there something related to irregular expenditure. This had been cited by SANRAL as being due to Broad Based Black Economic Empowerment (BBBEE) projects, but the Committee’s information pointed to it not being in BBBEE projects, but also in non-BBBEE projects. The losses and irregular expenditure were similar -- if the irregular expenditure had not occurred, SANRAL could have had a profit.
Ms Mulder responded that SANRAL consisted of two businesses -- toll and non-toll. The non-toll was based only on the ring-fenced budget given by government. The losses came from the toll side. In terms of irregular expenditure, there was no correlation between the losses and the irregular expenditure, as irregular expenditure cut across both the toll and non-toll. The valuation of assets could be provided to the Committee.
Mr Ross asked if SANRAL agreed that R10 billion had been overspent in terms of the E-toll project, being grossly over-priced by up to 150%.
Mr Morar said that that was incorrect.
Mr Ross asked if it was in-line with normal accounting standards.
Mr Morar agreed it was.
Ms N Kunou (ANC) said that in terms of the PFMA, SANRAL had to have an internal audit function. What was the organogram of SANRAL, to see if the mistakes had been corrected and what the vacancy rate was? There was a problem of transformation in road construction, judging by the spread sheet of contractors. What was the Construction Industry Development Board (CIDB) level of sub-contractors, specifically black ones.
Mr Morar responded that the SANRAL organogram would be provided to the Committee. In future, the demographic nature of the sub-contractors would be investigated and provided. An attempt would be made to provide the CIDB grading of the sub-contractors.
Ms Kunou asked if SANRAL had a transformation plan of supporting and upgrading the sub-contractors.
Mr Morar replied that there were initiatives by the contracts committees to ensure transformation. Information on this could be provided.
Ms Kunou said that this would be of assistance. When E-tolls were envisaged, how much revenue was expected?
Mr Morar said that previous financial projections could be found and given to the Committee.
Mr Brauteseth pointed out that there have been massive jumps in the valuation of the roads system by SANRAL. Were SANRAL artificially padding their asset base, given that SANRAL had indicated there was a collectible of R11 billion in asset tolls, despite this not being a collectible, as the people of Gauteng had said they would not pay their toll fees? It should not be reflected as asset. Why had there been a 685% jump in asset evaluation from 2009 to 2010.
Mr Morar responded that the working paper on the evaluation would be supplied to the Committee.
Ms Mulder said that as more provincial roads were incorporated into the national roads, the overall value of SANRAL’s road assets increased.
Ms Khunou thanked the Minister for being present. It was disturbing when there were people who did not take accountability seriously. How can one give companies contracts without doing due diligence?
Ms Mente sought clarity as to whether Senza Konke Cleaning Services were providing services to clean offices or to clean the roads.
Mr Smit said that they did cleaning related to road maintenance.
Ms Mente asked why this was being outsourced, as it was an essential service, and they were paid R74 million. Why was a contract with Mr Kobus van der Walt still reflected in the costs at R6.5 million, despite it being cancelled for fraud.
Mr Smit responded that the details and information regarding the contract would be supplied to the Committee.
Ms Mente said there were a number of cases where contracts had been cancelled, but there was no indication as to whether the money had been recovered.
Mr Hlengwa pointed out that SANRAL was not an island in terms of public accounts. It must and would report in terms of the PFMA regulations. The concerns raised by AGSA pointed to this not being the case. The capacity to ensure this must be built.
Mr Kekana asked what SANRAL’s relationship to other institutions of the state was. Did it second guess their decisions, or did it implement them?
Mr Morar responded that SANRAL interacted, respected and had a very healthy relationship with other institutions of the state.
Mr Kekana asked whether the board received performance bonuses.
Mr Morar said that the board did not receive performance bonuses.
Mr Booi said that the chairperson of the Board’s attitude was problematic. He had no respect for the law, and it had been hard to get answers from him regarding irregular expenditure. His procurement process had undermined black empowerment, and instead of following the law, SANRAL had chosen its own practice. The Hawks should take up these matters, as SANRAL had not respected the law. He asked if the chairperson would resign when the Committee came to its conclusions with the Hawks.
Mr Brauteseth asked for an honest answer as to whether SANRAL was capable of collecting the outstanding E-toll fees.
Mr Morar responded that SANRAL would use every effort to ensure it collected the outstanding fees.
The Chairperson asked what the trends were in terms of the collection of outstanding fees.
Mr Morar said that in the last few months there had been a slight increase in the collection of fees, which was positive.
The Chairperson asked that SANRAL interact with the Hawks on the case of the conflict of interest, to ensure that nobody thought it was possible to do wrong. Spreadsheets on the cases brought forward on the hotline must be given to the Committee. He said to the Minister that as SANRAL was a public institution, the outsourcing of various duties should end. What was public should be public. SANRAL should have its own internal functions. There was no feeling that SANRAL was a public entity that operated in the realm of the public sector. One of the main problems relating to E-tolling was that there were a lot of wrong practices, yet somehow the Public Protector had taken no real interest in her investigation on this matter. There was no indication as to whether there was progress or not, with no follow-ups being made. It was something that needed to be taken up, and followed-up on, and SANRAL must approach the new Public Protector.
The Minister thanked the Chairperson and the Members of the Committee. There were areas that needed urgent attention. SANRAL should have a unit for road maintenance, and not outsource it. There was a need for an in-house internal audit function, and for a focus on project management. Consequence management needed to be addressed. SANRAL was being given responsibility of more provincial roads, so the capacity and ability of SANRAL needed to be increased.
The Chairperson asked that the information requested by the Committee be made available by next week.
The meeting was adjourned.
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