The Standing Committee on Public Accounts (SCOPA) requested the Department of Public Enterprises (DPE) to ensure that the National Treasury had full access to all financial documents and contracts that they needed in order to finalise its review of certain contracts, and to submit its report to SCOPA as soon as possible to enable it to further evaluate the finances of state entities.
The hearing with Transnet arose from irregular expenditure amounting to R25m, and fruitless and wasteful expenditure amounting to R3.9m, during the 2015/16 financial year. Members of the Committee queried the rapid and dramatic decrease in the state-owned company’s (SOC’s) reported irregular expenditure, and were provided with full details of its control measures. They were informed that Transnet had instituted internal investigations that had led to R229.8m being accounted for properly. SCOPA requested Transnet to submit a detailed breakdown of the R229.8m amount subtracted from irregular expenditure, and to provide a report indicating why the items included in that amount did not constitute irregular expenditure. The report, which had to include all companies and amounts that were being investigated, had to be forwarded to Scopa by 22 March 2017.
The matter of advance payments was discussed after it was discovered that a company to which Transnet had given an advance payment had gone into liquidation, and the money had been not been repaid. Transnet provided an explanation of how certain mechanisms were used to support small, medium and micro enterprises (SMMEs), particularly black owned and black women owned companies.
Employee misconduct and sanctions were discussed, as only R2.4m of the R60m Transnet had lost because of employees’ alleged criminal conduct and theft had been recovered.
Several questions were raised regarding the leadership issues raised in the audit report, and the need for the executive to show leadership and take decisions was highlighted by the Committee.
Despite these issues, SCOPA said it was nonetheless satisfied with the financial health, viability and general management of Transnet. It provided a good example of how a state-owned company should work, having shown a good turnover of more than R60bn, and profit of almost R400m.
Chairperson’s opening remarks
The Chairperson welcomed the Minister of Transport, Ms Lynne Brown, and thanked her for her attendance even though she had a Cabinet meeting that morning. The Minister introduced her team, which included the Chairperson of the Transnet Board, Ms Linda Mabaso, Mr Siyabonga Gama, the Group Chief Executive (GCE), and Mr Garry Pita, Group Chief Financial Officer (CFO)
The Chairperson explained that the engagement with Transnet had been sought in the light of the Committee’s constitutional responsibility to oversee executive action. The intention was not to talk to the generalities contained in the annual report of Transnet, but to address specific issues related to irregular, fruitless and wasteful expenditure, as well as accruals. Transnet was a very important and strategic state asset and the little footprints that the state had in the economy were represented in no small measure by Transnet. Any thoughts by government to transform the economic landscape would start with the work done by SOCs, so the Committee had a great strategic interest in their health. A number of them tended to be in the news for all the wrong reasons, and this did not propel the government forward. He strongly believed that there was a need to have a capable state that could ensure entities discharged their duties. There seemed to be a sense that in Parliament the departments were scrutinised, while state entities sat in a dark corner on their own without scrutiny. However, through practice, it was intended to change that situation by paying close attention to the work done by the entities. It was in that context that Transnet had been called to the Committee.
Following the release of annual reports last September, departments and entities had been engaged with on how they had managed their funds. The current engagement was not unusual, but a continuation of the process. The Chairperson asked for transparency and complete answers. He did not want “alternative facts,” but requested that challenges be highlighted and addressed so that there could be progress. If something was wrong, the mistake should be admitted so that they could correct it together. Candid talk would ensure that things could be resolved. Mr C Ross (DA) and Ms N Khunou (ANC) would lead the Committee in the discussion. Afterwards, political questions could be raised. Ordinarily, the GCE and the Chairman of the Board would present the case. At the end of the engagement, the Minister would be welcome to make some comments.
Outstanding review reports
The Chairperson asked Mr Solly Tshitangano, National Treasury Chief Director: Supply Chain Governance, whether he had the outstanding review reports, including the Transnet report. Mr Tshitangano responded that the review of some Transnet contracts had been completed. The drafts were complete, but they required some quality checks and the Director General (DG) of National Treasury had requested information from Transnet so that they could undertake these checks. The DG had been informed that the Department of Public Enterprises (DPE) had the documents, but they had not been received by Treasury so it had had been unable to do the quality checks. The Chairperson asked Transnet for a response.
Transnet indicated that National Treasury (NT) had had access to, and had checked, the documents and thereafter boxes of documents had been taken to the DPE.
The Treasury representative contended that some of the NT officials had been given the requested documents to write reports while at the offices of Transnet, but they had not been allowed to make copies or take the documents away from the Transnet offices. In order to do the quality review, Treasury needed the original documents, and so Treasury was awaiting documents.
Transnet responded that the Department of Public Enterprise (DPE) had the documents to which Treasury had referred and therefore the documents would have to be accessed from the DPE.
The DDG from DPE explained that a Directors-General meeting had taken place at the DPE the previous week, and there had been an agreement on the processes to be followed. There was a need for NT to follow it up.
The Chairperson asked that the process be speeded up.
Ms Khunou pointed out, in order to put matters into perspective, that NT should be given any documents that they requested. It should not be necessary for its DG to have to chase documents. She requested that the Treasury representative be allowed to leave the meeting briefly to arrange access to the documents so that there was no mistrust.
The Minister commented that she had only just heard the story about the documents, although the matter had been going on for almost a year. As a shareholder of Transnet, she could have requested the documents and handed them to Treasury, but she had found that there was a problem about the lack of access to NT’s officials. The DPE had repeatedly asked for a meeting with Treasury’s DG. The review documents were critical for the Committee to perform its oversight visit, because fruitless expenditure incurred in the past financial year by Transnet was perhaps the lowest ever, but certainly the lowest in her time. The oversight responsibilities would be informed by those documents. She indicated that she and her team were happy to return to SCOPA once the Committee members had read the documents.
The CEO of Transnet added that, for the sake of clarity, National Treasury had requested the documents in February 2016, and further to that they had requested information in relation to contracts which they had been given, but thereafter documents had been sent to the DPE.
The Chairperson accepted that it was an administrative matter, and the issue lay between the DPE and National Treasury. As the DGs had already met, the process should be under way.
Discussion: Irregular Expenditure
The Chairperson asked Mr Ross to present the questions on irregular expenditure on behalf of the Committee.
Mr Ross thanked the Minister, the Board Chairperson and the GCE for being present, as it made the Committee’s job easier to have senior management available to answer some of the questions touching on senior management. Noting the importance of the health of the organisation, he pointed out by way of introduction, that Eskom, Transnet and Sanral accounted for 42% of the public sector capital formation, showing the importance of Transnet in that regard. The public sector borrowing requirement for the past financial year (2015/16) had been R254 billion, or 5.8% of gross domestic Product (GDP), which was why the Chairperson had stressed the importance of healthy state entities. The borrowing requirements by state entities had increased by R32.8 billion in the past financial year. The Minister was asked if she would like to respond to that.
Mr M Booi (ANC) objected to letting the Minister speak, as it was not the correct procedure and would start setting precedents, as they did not want to start interrogating issues.
The Chairperson said that he would ask for comments at the end.
Mr Ross elaborated on the massive amount of capital in the state entity. Turnover at Transnet had increased from R38 billion in 2011, to R62 billion in 2015/16, with total expenditure being R42 billion. The loss in 2015/16 had been R85 million.
Mr Pita, (CFO), confirmed that turnover in Transnet had increased from R38 billion in 2011 to R62 billion in 2015/16. The total Public Finance Management Act (PFMA) exposure, which included fruitless and irregular expenditure, as well as criminal conduct, had been R108 million in 2011, but was only R85 million in 2016, or 26.6% lower than 2011. The loss was 0.2% of total expenditure of the group’s earnings. R60.3 million (71.3%) of the loss was the result of criminal activity such as cable theft.
Mr Ross asked about the status of the annual report. The auditor’s report showed a consistent trend of being unqualified, with findings. What were the losses in terms of the normal audited report -- what did the financial statements indicate as loss and profits for 2015/16?
Mr Pita said that net profit was R393 million, and R1.468 billion was the profit before tax.
Mr Ross commented that the unqualified status was commendable, but asked for the CFO‘s comment on the findings. Were the findings severe, and did they implicate senior management?
The CFO responded that matters had been highlighted, as one would find with any set of financial reports. Management had agreed with some of the areas and had put in place corrective action where there were risks that needed to be mitigated.
Mr Ross referred to a presentation sent to SCOPA by Transnet, noting the financial engineering that had taken place. Irregular expenditure had totalled R254.9 million.
Mr Pita agreed with the figure.
Mr Ross found it strange that items under investigation had been subtracted from the total irregular expenditure, as this appeared to him to be financial engineering. He found it a very strange deduction.
The CFO defended the practice, saying that they had checked it with their external auditors, as well as the Auditor General, who had proposed that Transnet should not present the less irregular expenditure under investigation. Since the financials had come out, the entity had followed a process with National Treasury and the South Africa Revenue Service (SARS), where those amounts were not irregular expenditure. They related to a procurement preferential regulation, where a tax clearance was required by a foreign vendor and most of the foreign vendors could not acquire one, as they did not have a tax jurisdiction or were not liable for tax in the country. That had since been confirmed with Treasury and in the new Preferential Procurement Policy Framework Act (PPPFA) that was released in January, effective 1 April, this would no longer be a requirement. The items under investigation were zero irregular expenditure.
Mr Ross queried whether the R229.8 million was mostly related to tax clearance certificates.
Mr Pita responded that it was all to do with tax clearance certificates.
The Committee was asked to note that, to a certain extent, this was not compliant in respect of procurement, but that the Auditor General would be consulted. Nevertheless, Mr Ross accepted the CFO’s explanation.
The Chairperson said that when an issue was under investigation, it had to be included under irregular expenditure and could be deducted only after the investigations were concluded and there had been approval that it was not irregular. The point was that they were investigating precisely because it was irregular. He would seek an explanation from one of the other role players, the Auditor General or Treasury.
Mr Booi interjected that it might be considered collusion between Transnet, the Auditor General and National Treasury, when people got together to hide taxpayers’ money.
Mr Pita said that the matter had now been cleared.
Mr Ross said that it was an important point, because the Committee had to know whether they were talking about R20.6 million or R254.9 million of irregular expenditure. If one looked at the prior year’s irregular expenditure of R487 million due to employee dishonesty, in terms of the trend the Committee could not accept the R20.6 million, but would look at irregular expenditure of R254.9 million. He recommended that they take the full amount and not the reduced amount. What did the CFO and Committee Members recommend?
CFO recommended that the audited and agreed number of R20.6 million would be the appropriate number to work on, based on the trend. As pointed out previously, there had been an agreement between Transnet, the Auditor General and Treasury. There had been no collusion, but meetings to clarify the tax clearance certificates, as that was an issue that related to many organisations including other SOCs. It was agreed that that would be the most appropriate way to disclose that it could be irregular, but that there had been a particular agreement about it.
Mr Ross proposed that the meeting accept the explanation.
The Chairperson said that the CFO should have stated that it was being investigated as potentially irregular expenditure.
Mr Ross referred to a SCOPA research document which indicated a declining trend -- in 2013/14, irregular expenditure had been R49 million; in 2014/15 it had been R32 million; in 2015/16 it was R25.1 million. Would the CFO agree with the Committee’s research that there had been a decline in irregular expenditure year-on-year?
Mr Pita agreed.
Had the CFO noted that irregular expenditure in 2015/16 should be R20.6 million, and not R25.1 million?
The CFO agreed.
Mr Ross said that for the record, there was a difference in the amount of irregular expenditure -- R25.1 million versus R20.6 million -- but taking into account the huge turnover and regular expenditure, he would recommend that for discussion purposes, the Committee accept it.
He queried the total financial loss which, after all the irregular expenditure, amounted to nil. Was it possible to be zero?
Mr Pita responded that fruitless or wasteful expenditure was expenditure made in vain, and which could have been avoided had care been exercised. The irregular expenditure in the Transnet financials related to policy or procedure not followed, but value had been obtained for company – for example, a roof had collapsed and was repaired, but retrospective authority had not been applied for according to policy and procedure, although the value of the repaired roof was derived for the company. Hence there was no loss. That was the case in respect of all the items.
Had the disciplinary actions taken been fruitful? Did they enhance the organisation and had they come to conclusions, or were they still hanging?
The CFO said that for all the matters presented, the disciplinary process had been completed and sanctions applied, but the disciplinary process was not perfect and needed to be improved. The Board had guided management regarding continuous improvement in the time that it took to conclude the process, and to ensure that the root cause was fixed within the organisation through the control frame. The person’s name and grade were included in the document, as well as the sanction.
The GCE and the CFO were informed that the Committee’s intention was to prevent of irregular expenditure. It was disconcerting to note that in terms of expenditure management, the independent auditor’s report had found that the executive had failed in respect of their responsibilities to take adequate steps to prevent irregular expenditure. Was Transnet aware of Section 51 1 (b) and 2? Could the company give some guidance in terms of their preventative steps?
Mr Pita replied that the company was well aware of the requirements of PFMA. All the qualifications were included in the auditor’s report, no matter how small, and the number of preventative measures that they had in place. Transnet had a procurement system based on the principles of the constitution and all other relevant Acts to ensure a fair, equitable, transparent, cost-effective and competitive procurement process which was procedurally fair as well. It submitted a presentation which highlighted all the actions taken to manage a procurement control framework. It had manuals for everything, including procurement manuals which were used by other SOCs, and which had won awards.
Various delegations of authority meant that only certain people could approve procurement. Transnet had a high value tender process, where internal auditors actually checked all of their tenders and stopped any tenders that did not pass muster from a governance point of view. Transnet had implemented a critical financial reporting control. In 2012, 1 500 controls had been tested and found to be effective, and only 96 had required improvement. In 2016, 1 800 controls had been tested and not one was found to be ineffective, and only 37 required improvement. Year-on-year, the control environment had been improved.
Mr Ross commented that the document clearly showed that there had been a good improvement in control measures. The SCOPA research document showed that suppliers who had tax issues with SARS had put Transnet in a peculiar position as regards PFMA Regulation 14. Had the company had any discussions with Mr Human from the National Treasury Procurement Office regarding their requirement, specifically Regulation 14 of the PFMA?
The CFO pointed out that there had been a variety of discussions, because it had not just been a Transnet issue, but had applied to all government departments and Schedule 2 companies. Transnet had spoken to the National Treasury Procurement Officer, SARS and the Auditor General, and in November 2016 it had been agreed that affidavits would be acceptable from foreign vendors confirming that they were not liable for tax in the country, until the PPPFA had been changed as from 1 April 2017.
Mr Ross requested the Chairperson to take up the issue of SARS and have an investigation with regard to the tax compliance needed by vendors. From research conducted by SCOPA, it had been noted that the independent auditors had found that the executive management of DPE did not exercise adequate oversight responsibilities regarding compliance with applicable laws. As this was a leadership issue, he asked the DDG from the DPE if they were aware of that issue, and whether they had dealt with it from a leadership perspective.
The DDG said that the Department was aware of the issues and had looked at the issue of delegation of authority. The DPE used the logical monitoring framework that indicated the threshold, together with the materiality and significance framework. Issues escalated to the Department were dealt with for the Board, and the DPE had a chairpersons’ forum with all the chairpersons, CEOs and CFOs of the entities, where the Minister highlighted issues that related to controls within state-owned companies, procurement matters and issues that would have to be escalated to the Minister.
Discussion: Fruitless and Wasteful Expenditure
Ms Khunou commented that every cent counted, and complained that the CFO had talked of “only” R85 million as if it were not much, but they would like him to understand that every cent counted in the eyes of the Committee, as they were public representatives. She asked that they admit to errors as the documents spoke to the errors. As Team South Africa, she wanted to see changes. Transnet was a cash injection for South Africa, and they should guard it with their lives. When it came to accruals, it talked to the leadership. Who was monitoring projects at Transnet?
Mr Gama, Transnet’s GCE, responded that the entity had 3 000 to 4 000 projects at any one time and project management depended on where they were being executed. It also depended on the size, but there was a project office that looked at different projects, especially the critical ones. Transnet Capital looked at some of the major projects, but in each area -- be it a port or a yard -- there was always one or other project taking place.
Ms Khunou followed up by asking how big the structure to deal with projects was, and how capacitated the structures were.
The Committee was informed that the size of Group Capital Projects was just over 2 000 people, but there were also other programmes and offices throughout the country to deal with various projects.
Ms Khunou said the Transnet report stated that R487 million was related to employee dishonesty by virtue, for example, of utilising positions of trust to request staff to create false invoices and purchases to assist other departments, given the resource constraints. The root cause was the leadership in Transnet, because no one was monitoring the systems. There were no people overseeing the projects. They stopped if there was a mistake, but obviously the money was lost to government. She wanted to see consequences. She referred to the Autonet sale to Prasa of R5.4 billion. No revised contract had been entered into between Transnet and AutoPax for the provision of services, nor was an open bid process undertaken. The employee had been given a written warning after it had cost Transnet so much money. She wanted to know about project control. Size did not matter, but everyone had to control. The company should address the leadership problems at Transnet.
Mr Gama reiterated that they had adequate resources in terms of dealing with different projects in the company. AutoNet and AutoPax had been part of Transnet when there was an inter-divisional policy where the entities supported each other. AutoPax, a bus company, had been transferred to Prasa. There had been an oversight, in that when the entities were transferred, new contracts had not been drawn up. In the past, there had been no need for a tender in terms of the inter-divisional support.
On the matter of criminal conduct, the matter was being looked into by the Asset Forfeiture Unit and the Commercial Crimes Unit, as a case had been opened. The employee had been dismissed, so all of these issues had been taken seriously and followed up, and all of the measures that were available to the company in terms of the law had been implemented.
Ms Mabaso, Chairperson of the Transnet board, emphasised that as a board they scrutinised those issues and were satisfied that measures had been taken, and had not been left unattended.
She was asked if the board had a report to show that there had been progress.
She responded that some matters were sub judice, and some were internally handled, but when things came to an end, they received the findings.
Ms Khunou asked how many cases were talking about -- how many were in progress or sub judice, and how many had been completed.
Ms Mabaso said that Transnet was a vast entity with so many divisions and so many issues, and some of them were small and others big, so she could not say offhand what the situation was, but they were on to management about the issues and were satisfied that action was being taken. However, but no numbers were available.
Ms Khunou noted that the reponse could be interpreted as meaning that it was too big for them to handle, and that it was difficult for them to oversee everything.
The Chairperson disagreed, reminding the Member that there were various delegations before matters reached the Board, and the Board was satisfied.
Ms Khunou asked why Transnet was outsourcing the job of auditing and why they were not using the Office of the Auditor General.
Mr Pita indicated that the Auditor General would have to answer, as the Auditor General’s office decided whether to audit or whether an entity should go to an external auditor. It was the prerogative and choice of the Auditor General.
The Chairperson said that he would take it up with the Auditor General.
Ms Khunou agreed, but said some of the problems that they were reading about could have been dealt with better if the Auditor General had been dealing with them. Could Transnet tell the Committee about the internal auditors and how they were dealing with it?
The Chairperson interjected, wanting to know why the internal report was on a disk and not in the annual report to Parliament.
Ms Mabaso asked the auditor to answer, but the Chairperson indicated that he wanted to know who had taken that decision to put it on disk.
She replied that it was the Executive.
The Chairperson indicated that the staff answered to her, so she should answer, not the staff.
She declared that it was best practice, but the Chairperson disagreed as the disk was not user friendly. Why should one have a laptop or desktop to read the financials? SCOPA needed to have hard copies to read and compare.
Mr Gama declared that Transnet had followed the latest trends, for which they had won a prize from the Top 300 companies at the Johannesburg Stock Exchange (JSE).
The Chairperson commented that Parliament and the public entities were not the stock exchange, and the annual report was for the public.
Ms Mabaso took note of the point, and said she would ensure that the financials were included in the written report.
Ms T Chiloane (ANC) declared that she had struggled to read the annual report because of the way that it had been written. It was a public report and the public must be able to access it, no matter where they were. As there was no CD Rom on her laptop, she was disempowered by the way it was reported. She was used to the way in which reports were written by the Auditor General.
Ms Khunou indicated that the various accruals showed that no one was managing projects. What about projects and incomplete projects that did not meet the requirements of the PFMA and were not reported on? These amounted to more than R487 million. What happened to this money? There had been a profit, but these funds could have been doing something else. If managers were not taking care of the process, people would do as they pleased. There were consequences, but verbal warnings were not significant consequences. There was a lot of unlawful expenditure, but it was not value for money.
The CFO conceded that there had been gross negligence in the process, but the equipment had been needed and hence there had been no loss.
The Chairperson noted that the issue was not about completion and value for money, but about due processes. The intention was to prevent irregular expenditure. There was consideration of value for money, but the issue was compliance. Were people complying with the processes and procedures that had been written down? If they did not comply, they should become “red flags” who could be managed so that things did not become worse. The Committee’s main concern was compliance, and people must understand that they are operating in an environment in which adherence to laws was required and there were processes which had to be followed.
Transnet agreed that compliance was essential. It was about root causes and ensuring that there was compliance, so if these issues arose there was a problem. Management had initiated a number of training and awareness sessions, followed by a test on the PFMA procurement procedures manual and other legislation. On the instructions of the Board, those who had not passed did not get their delegation back. The company was taking action to bring about a behavioural and mindset change amongst employees.
Ms Khunou accepted that supply management personnel were being given documents and tests, etc. She requested that Transnet compile a report on these issues specifically so that the Committee could see that action was being taken. What was it doing about fruitless and wasteful expenditure in respect of overpayment and redundant stock and cancellation fees?
The CFO explained that on the first matter, they had paid a supplier for plant to assist them with a rotating machine for Transnet Engineering. They had made an advance payment to help the supplier with cash flow, but the supplier had gone into liquidation. Transnet had been unable to recover the R2.2 million, which was a result of bad contract management. They were creditors and awaiting that process. They had not had a policy for following up on guarantees, but management had since put a policy into place. On the procurement of paint, they had since put in controls to ensure a system of ‘first in and first out,’ so that they did not have obsolete stock. They had a new system for procurement of paint. Both employees involved had resigned.
Mr Pita said that the administration fees of R425 000 for cancelled flights had been a result of a decision taken to defer certain projects when the economy had not performed as expected and major clients had been unable to engage in certain projects owing to the volatile economic environment. Transnet had prudently decided to defer and optimise, resulting in the need to cancel pre-booked flights. The airlines had refunded the ticket costs but had charged a cancellation fee. Transnet could have handled the matter better, but it had been unforeseen. Discussions had been held with the airlines so that Transnet would not pay administration costs in the future.
Ms Khunou raised the issue of outsourcing. She alleged that there was too much outsourcing generally by government, giving employees a cushion. The Committee did not hear entities talking about outsourcing to South Africans. The Minister had to ensure that state entities did not outsource overseas. Many South Africans were unemployed -- could they not be given work, and not on a tender basis, as they needed permanent work? She understood that Transnet was big, but the project managers should be having long-term plans about how they would build SA industries.
Regarding tax clearances, how did Transnet or anyone in government give anyone a job without checking the tax clearance certificate? It meant that they were part of an illicit action and complicit with people who did not pay taxes. The Committee wanted to see the records and have the facts. Hearsay meant nothing, as it was playing to the gallery and the media.
The CFO responded on the issue of tax clearance, explaining that the PPPFA required tax clearance certificates and that Transnet had requested them as required, but certain foreign vendors were not required to pay tax in South Africa because they were not domiciled in SA. They were liable for tax in their own countries of origin. These vendors had applied for a tax number from SARS, but could not get one owing to their non-taxable status. They had been asked to submit an affidavit, which was accepted by the Auditor General, National Treasury and SARS.
Ms Khunou said that she was unhappy with foreign vendors who came to South Africa, because they knew that they could dodge tax in this country, and it was wrong of government to support them. Those foreign vendors did not transfer skills, so South Africa did not benefit from their presence. Transnet had said that they wanted a procurement and provisioning system according to the PFMA that was fair and equitable, but when they used foreign vendors were they looking at SA companies? What about joint ventures? A law had been passed eight years ago that stated that companies could not have any business in South Africa if they were not from South Africa. Foreign companies had to engage in a joint venture in any tender so that tax could be paid in South Africa. If they had suppliers from outside of South Africa, the suppliers should have a South African partner so that tax could be paid.
Ms Chiloane said that as far as taxation was concerned, the annual report talked about deferred taxation that had increased to R44.4 billion as a result of a charge of R1.1 billion for the year due to equity, and partially offset by deferred taxation resulting from the company taxation laws. She requested Transnet to take the Committee through this matter.
Mr Pita explained that normal tax plus deferred tax arose out of a number of tax rules, and that deferred tax that came about as a result of permanent differences – for example, the depreciation on a locomotive might be 30 to 50 years of useful life, whereas the wear and tear could be written off in ten years. Those differences about items that could be written off over a different amount of time resulted from the differences in accounting versus tax laws. In 2012, the President had announced Transnet’s strategy, where the company had put capacity ahead of demand. By the end of the 2016/17 financial year, Transnet would have spent close to R150 billion on new infrastructure, new rolling stock, new ports and equipment, and the permanent differences associated with that had resulted in the additional deferred tax charge.
Ms Chiloane went back to the issue of fruitless and wasteful expenditure. An amount of R2.2 million occurred as a result of overpayments. She asked the CFO why the company needed to provide classes about overpayments. Was it not just negligence? What had led to that overpayment, and who was responsible for such losses? What disciplinary action had been taken against that particular person?
Mr Pita reiterated his earlier explanation about the advance payment made to Wire Systems Technology. Transnet gave small businesses advance payments so that they could pay employees and have start-up money, but Transnet did not do it irresponsibly. They asked for advance payment guarantees, but that particular business had been put into liquidation. Transnet was in the line of creditors. No one had done advance payment guarantees at the time, but the policy and procedure had since been put in place, and managers had been trained. There had been no disciplinary action in that instance, because no policy or procedure had been in place. That had been, a shortcoming by Transnet and the company was responsible for that lapse.
Ms Chiloane said she could not understand the response because within the R2.2 million were small amounts of money, yet the CFO had spoken of an individual company. National Treasury regulations required tender processes for expenses of more than R500 000. Tender processes should check all procedures and the viability of the company. It was unreasonable for Transnet to waste R2.2 million on any company out of the blue. It was unacceptable.
The Chairperson asked how many companies were involved, who they were, and who owned them. What had happened to Wire Systems Technology?
The CFO said Wire Systems Technology was a subsidiary of First Strut Group. He would check and get back to the Committee on the ownership of the company. Money had been provided, and they had started working for Transnet to provide plant around the company’s rotating business -- a specific business in Transnet Engineering. They had obviously had other customers as well. Through their own running of the company, they had got into financial difficulties and had later gone into liquidation. The CFO could not say after how many months they had gone into liquidation. Transnet had put in an Advance Payment Guarantee (APG), but it had been allowed to expire. This had been because there was no policy and no register of APGs in place at Transnet. This had since been rectified.
The Chairperson asked the GCE why there had been no register or policy in place.
Mr Pita replied that it was one of the lessons that they had learnt, as there had been no clear direction. There was no oversight in 2013, but the company had included steps in procedure manuals on how to deal with matters of this nature. They had taken steps in terms of standard operating procedures so that there could be no repeat of this situation. It had been an oversight that had been corrected and put into compliance manuals.
The Chairperson asked why it had been disclosed only in 2015/16.
The CFO referred to all the initiatives that had been brought about in 2013 when they had changed from manual to electronic systems. This had included automation of the PFMA items and as a result of that process, they had picked up quite a few of the older issues. For the sake of transparency, they had wanted to report the issue in the interests of good governance.
The Chairperson asked why internal auditors would pick up something from a previous financial year. Why sample something from 2013?
Mr Pita explained that auditing worked on a sample basis, but when Transnet had updated to the electronic system, they had looked at all of their records, and the programmes had picked up all transactions going back five years.
Chairperson wondered whether he should believe that out of all the APGs, there was only one that had gone wrong, but he did not expect Transnet to provide an answer. Was the advance payment policy approved by the board – yes or no?
The CFO responded that the policy had been approved by the appropriate delegated authority.
The Chairperson asked if the issue of advance payment as an organisation-wide policy principle had been approved.
Mr Gama, GCE, agreed that advance payments were part of Transnet’s credit management policies.
The Chairperson asked when this had been approved, as he noted that a previous executive had subsequently moved to Parliament. If something was policy, why were there gaps in the policy that was so broad and vague that it had led to difficulties in implementation?
In response, the GCE pointed out that the main flaw was that there had been no reporting guideline to the Group Treasury, and the Advance Payment Guarantee had expired. The loss had arisen as a result of not being able to claim against the guarantee. Transnet should have provided security.
The Chairperson noted that companies that went into liquidation usually did so because due diligence had not been done. The company had other tenders or work and were being paid, unless they had not been paid for other work done. Advance payment became pocket money. What happened was that someone pocketed the money and walked away and opened another company. The company was at fault, but the individual was not accountable. That was the bad part, but if the requisite processes were in place, it could be managed. This loss might be insignificant in terms of Transnet’s turnover but for the Committee, every cent of public money counted.
Ms Chiloane followed up on fruitless expenditure, and referred to the total of R60.3 million incurred due to criminal conduct. How much had been recovered? In respect of employee dishonesty, there was one matter in which the person involved had since died, but it appeared that he had colluded with the company when awarding a tender. How could Transnet progress if employees were dishonest? Could Transnet talk about dismissal and recovery of the money?
Mr Gama replied that in respect of the R60.3 million, the criminal conduct had varied. Some had involved the general theft of rail track, copper cable, vehicles and scrap, break-ins, etc. Transnet had compiled a document that provided details of criminal cases handed to the Commercial Crimes Unit and the Hawks. These matters were at different stages, but so far Transnet had recovered R2.4 million, but recovery was dependent on the criminal justice system. Transnet deducted the pension money available when people were found guilty of such misconduct, and they attached properties and got the Asset Forfeiture Unit to chase the cases. Transnet was trying to get the money back, but matters were still in process, as they were in the criminal justice system.
Mr Booi asked for a comprehensive report, and the GCE indicated that each case, its status and case number had been recorded on the sheet of paper handed out.
Ms Chiloane indicated that she had heard the GCE, but registered her concern about the money not being recovered.
Ms N Mente (EFF) could not believe that a company as old as Transnet could still have been struggling to put the PFMA, PPPFA and other regulations and policies in place by 2013. She was of the opinion that there was a lack of leadership. She asked who ensured that the finances of Transnet were being secured and protected from vultures.
Mr Pita replied that Transnet had an internal control framework built on all the Acts which needed to be adhered to, and this was the responsibility of head office and each operating division. There was an internal control department and an internal control steering committee that was headed up by the CEO of each division. They also had a chief audit executive who audited all risk areas and reported to Mr Gama.
The Chairperson noted that the policies were in place, but that Transnet had not explained why policies had not been in place in 2013.
Ms Mente agreed that her main question had been why it had taken so long to get policies and procedures in place. Had the disciplinary cases been instituted before the audit picked them up, or had it been the internal audit?
The CFO informed the meeting that the majority of cases were picked up by internal controls via compliance and risk departments. These controls had been in place before 2013. Internal audit was not the first line of control. Transnet had been improving electronic controls, because they were better at preventing these matters from occurring.
Ms Mente referred to the disciplinary cases on the spreadsheet. She asked whether the criminal cases shown were only those that had been picked up by the auditors, and did not include the ones that had been picked up by internal controls.
Mr Pita said that it was a consolidated report showing violations picked up by internal and external controls. He referred the Member to the earlier comments on the testing of their control mechanisms that had shown how well the measures worked.
The Transnet internal auditor added that the audit committee reviewed individual control issues and then got responses from management about how controls were to be effected, and when they were going to be effected. Irregular expenditure had been reduced because of the improved controls, but new approaches in business and new processes demanded new responses to control them.
Ms Mente returned to the Chairperson’s point about non-compliance and the detection rate, in particular, of maladministration. Transnet needed to send a message that was loud and clear to ensure that employees did not repeat incidents of irregular expenditure or non-compliance. However, the sanctions had been no more than a written warning for a few months, while Transnet believed that they had got value for money. The reason for the deviation had been to ensure that the person’s friends, and no other company, got tenders. A loud and clear message had not been sent that prevented employees from using the “emergency” clause to give tenders to friends. Sanctions should be significant.
Ms Chiloane wanted details on the contractors. The Committee wanted to know who was responsible for the company that had received the R2.2 million advance so that they could check what had happened to that person. What had Transnet done about the company? If they blacklisted a company, the person could trade under a different name. She suggested to the Minister that when a company was blacklisted, the person involved should also be blacklisted so that the government would not give work to that person again. Employees liked to “cushion” themselves with contractors. What were they doing about contractors? How many employees did Transnet have, and what were the human resource costs? How many contractors did they have, and how much did they get paid?
Mr Ross said that Transnet’s turn-over was very high, but its profit was a very low percentage. Would Transnet agree that there should be a higher percentage profit compared to turnover? Perhaps the Minister could help regarding the borrowing requirement in terms of Transnet’s contingent liabilities.
Mr E Kekane (ANC) referred to the spreadsheet, and said that the last column noted that there was value in the losses. If one read the loss, how did one arrive at the value? People had violated procedures, so why was there a statement that there had been no loss?
Ms Chiloane referred to targets and initiatives in the performance summary of the annual report. It had been intended to spend R150 million on research and development (R&D), but R207 million had been spent. Why the difference?
Ms Khunou referred to National Treasury regulations and the PFMA, pointing out that 20 years of PFMA was being celebrated that day, and said she could not understand why policies were not in place in 2013.
Mr Gama responded to the irregular expenditure issue. Value had been received, but Transnet had also wanted to ensure that compliance with policies took place. They wanted to make improvements in terms of the compliance framework. When blacklisting companies, directors and any other known associates, were blacklisted. Transnet had just over 60 000 employees. Fixed term contractors amounted to 4 000 people who performed particular projects, such as seasonal construction projects within a fixed term. Those were the numbers at the end of March.
Regarding the profit margin, he was aware of the issue. Transnet had embarked on heavy capitalisation, so depreciation was high and there were finance charges, but profits would improve when the economy improved and they were looking at the return on capital assets. Transnet was aware that the profit margin was not where they wanted it to be, but they were confident of improvement.
Mr Pita added that the R&D expenditure had increased, as they had made an internal strategic decision to invest more to drive as much localisation as possible as a leading SOC. They were unapologetically driving transformation. South Africa was exporting wagons around the world. That was sustainable job creation, hence the increased R&D. Profits had grown by 2.6%, which was four times the increase in the gross domestic product (GDP). Human resources expenditure amounted to R19 billion, and constituted just over 50% of the operating costs.
Transnet did not get funding from government and had not asked for government guarantees since 1998, and would not ask for them, which investors supported. Transnet operated off its own budget sheet and had an investment grade credit rating. Borrowing amounted to R100 billion, as they wanted to spend R300 billion over next ten years, which would stimulate the economy.
The Chairperson raised the matter of the R229.8 million – a breakdown of that amount was required from Transnet, including the names of companies, amounts, when they were contracted plus a report on investigations that declared this not be irregular expenditure, within a week’s time. He also wanted to check on Transnet’s reporting level of violations.
The CFO said Transnet was required to report all violations above R25 million, but in fact the report included all violations identified by all parties, the internal controls plus auditors and all lines of defence.
The Chairperson noted that Transnet had private auditors. Private auditors were doing business, and it was in their interests not to jeopardise future business, so there was a fine line between reporting and keeping business. The difference between a private audit and that of the Auditor General was substantial. Also, audits from private firms were highly refined and there was a lack of detail to allow for oversight. The Committee could not be sure that all was well if it found statements of concern by private firms. It really worried the Committee that the situation could be very much worse than was stated. The private audit firm had complained about performance information and performance management, but SCOPA had struggled to verify these issues.
If people could not manage performance, they were not managing effectively or appropriately. The PFMA said fruitless and irregular expenditure should not happen. To the extent that it happened was a failure, and then the Committee could start asking about how much. There was the issue of contracts, and the awarding of contracts to people whose tax matters had not been settled. From SCOPA’s experience, such comments from a private audit firm suggested things should be very worrying.
He said that in terms of the PFMA, Ms Mabaso -- as chairperson of the Transnet board -- had to take responsibility for everything in the report and for reporting to Parliament. It was expected that the chairperson would be able to articulate the answers to the all questions put to Transnet. She had to be able to answer to show that she understood what was happening in the company. Did she serve on other boards? Could she give quality time to focus on Transnet, instead of relying on management to inform her? If not, the board was led by management. She should play a more active role. The chairperson of Transnet should be concerned with the auditor’s report. Her auditors were expressing concern about the entity’s leadership and management. The Committee was worried. It was about risk management of the board. If the board did not manage, questions arose. What was the use of having boards for public entities? What did they do? How effective were they?
The spreadsheet showed inconsistencies in disciplinary processes. An employee had been guilty of committing irregular expenditure of R475 million and had been dismissed, but others had been guilty of equally large irregularities, but had received only written warnings. Was the chairperson of the board satisfied with that? Disciplinary processes must be improved. Critical to this approach was the review report from National Treasury that related to finance, management and contract management, and this should be dealt with as soon as possible. The matter had been shifted forward since January. The demons must be faced head on so that everyone could move on past them. He requested National Treasury to push for a finalisation date so that the Committee could deal with these issues relating to state entities. Grey areas had to be cleared up.
Minister’s closing remarks
The Minister of Transport, Lynne Brown, said that it had been a very useful session and fitted in with the shareholder model of the Department of Public Enterprises (DPE). At every annual general meeting, the agenda considered issues such as fruitless expenditure. Transnet operated in a complex political, social and economic environment. Regarding the profit, the Committee needed to recognise the downturn in the economy, where supply and demand was thrown out of kilter, so Transnet had adapted their market demand strategy to be fulfilled within ten years instead of the normal seven years.
The entity should act within the law, including the PFMA. There was an agreement between Transnet and the DPE, and annually the DPE looked at the contract between Transnet and DPE. As Minister, she had asked for reports beyond the contract. The Committee had referred to public money, but they did not have state money. They had a guarantee of R3.5 billion, and debt stood at R21 billion, which was not significant for the size of the company. Transnet and Eskom had an asset base of R800 billion, so they should therefore be managed properly. Advance payments were difficult, and the Minister would like never to have advance payments, but the economy was so skewed that companies had to build in mechanisms to make it possible for small, medium and micro enterprises (SMMEs) and black companies to work with them and enter the economy. Of 3 000 SMMEs which were paid advances, one had broken the rule, but that should not stop them being given advances. State owned companies had to work in the South African economy, even when the economy was bad.
Entities perhaps needed to write annual reports that satisfied both investors and SCOPA. Local vendors formed 60% of Transnet contracts. South African suppliers were there, and the percentage could be higher, but very high level engineering skills were needed, and these had to be brought in. Foreign investors were important to Transnet, and they should use different ways to bring in foreign money.
She was largely pleased with the company. In the World Bank report, amongst Organisation for Economic Cooperation and Development (OECD) countries, Transnet was viewed as a leader. It was the only company on the continent that could do Africa-wide logistics and rail. It was good to engage with SCOPA, as they could start looking into other areas that could be strengthened.
She added that there had been lots of engagements with the Auditor General. Two state-owned companies were being solely audited by the Auditor General, but many large black audit companies were not participating, so it was part of bringing in black audit companies into the economic frame. However, the point was taken. The management of SOCs was another matter.
The Chairperson said he was pleased with the results of meeting, as the overall picture was a positive one. They wanted more state-owned companies, and they wanted to see them doing well.
The meeting was adjourned.
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