Economic Development Department + entities' performance: DPME, Auditor-General, Public Service Commission input

Meeting report

The Committee had only four ANC members present, including the Chairperson. The Chairperson explained that this was due to the clash in schedules and the many meetings taking place in Parliament today.

DPME briefing on MTSF progress and EDD Annual Performance Plan
Mr Rudi Dicks, Outcome Facilitator: Department of Planning, Monitoring and Evaluation, noted that the brief was to give a sense of EDD performance over the MTSF and provide comments on its APP for the 2017/18 as well as how the APP has aligned to the MTSF and the Nine Point Plan. Unfortunately, EDD did not submit its draft of the APP in time so DPME was unable to make its analysis on it. Although the presentation is meant to provide an analysis of EDD indicators and targets in its APP, the presentation will not cover this.

He provided some economic context, saying the South African economy has been dragged into a recession after its GDP declined to 0.7% during the first quarter of 2017 after contracting by 0.3% in the fourth quarter of 2016. This declining economic activity in South Africa’s case is due to its high level of unemployment, poverty and inequality. Economic activity contracted over a wide range of sectors, including construction, manufacturing and transport. Only mining and agriculture made a positive contribution to output growth. The manufacturing industry contracted by 3.7% and contributed 0.5% of a percentage point to GDP growth.  Mining increased by 12.8%, and contributed 0.9% of a percentage point to GDP growth.

Employment prospects remain weak for the near-term in line with poor domestic economic growth prospects. So with business and consumer confidence at depressed levels, it is likely that this will not only result in reduced fixed investment, but also weaker employment. The unchanged jobless rate was caused by somewhat similar rates of contraction in the labour force (-0.7% quarter-on-quarter) and the number of unemployed persons. Compared to the previous quarter, job losses were recorded in construction (110 000), agriculture (40 000), mining (13 000), transport (11 000) and community and social services (9 000) whereas employment gains were recorded in trade (58 000), manufacturing (10 000) and utilities (2 000). Therefore, unemployment rate remains unchanged at 27.7% in the quarter 2 of 2017.

Significant slowdown in GDP and employment growth since 2011/2 was also due to these root causes:
• Abrupt end of the commodity boom that in 2011 saw highest metals prices in 30 years;
• Increased investor uncertainty due to policy contestation and threats to established business licence to operate; and
• Failure to ensure both high-quality policies and programmes and consistent implementation, especially where policies require systematic change.

MTSF performance assessment had two indicators and targets. Out of a target of 4 000 import permits, 5 403 were adjudicated and issues. The target was exceeded due to higher than expected number of applications received. In addition, 3 013 export permits were adjudicated and issued against the target of 3 000. This figure includes 906 export permits issued for scrap metals under the PPS. ITAC conducted 163 scheduled and 849 unscheduled Import and Export Control Permit Inspections, and carried out two investigations of permit non-compliant activities detected. As for tariff investigations, customs duty increased in various downstream products.

EDD, DTI (Department of Trade and Industry), DPME, DoT (Department of Transport) and National Treasury were to establish a task team to identify initiatives for local content promotion and procurement through utilisation of e-Tender portal and Central Supplier Database. This outcome is related to the target of reporting on initiatives to increase localization in the infrastructure and industrialisation programmes, including through the Preferential Procurement Policy Framework Act (PPPFA) and local supplier development. This was not implemented in a manner that is efficient. A target was also set to report on increases in administered prices to assess if they were economically justified. The quarter one outcome highlighted that a report was indeed drafted and discussed internally. Electricity is set way above inflation – this is problematic in the development of small businesses.

As for mergers and acquisitions, 91 mergers were finalised in Q1. Of these, 7 were approved with conditions, 77 without conditions, 5 were prohibited, 2 were abandoned and 5 were deemed to be of public interest. Six cases had employment impacts, of which 4 cases were reported in May and were related to mining, manufacturing and ICT. Of the 6 cases, 5 were approved with employment conditions. DPME commended EDD for the work it has committed to do around mergers and acquisition. In addition, DPME indicated that the Competition Commission should be appropriated additional funding given the scope of its work.

Virtually none of the economic outcome targets in the NDP or the MTSF are being met, and the record is worst on GDP, employment, exports and investment. The overall performance for the quarter has been positive in achieving the MTSF targets in the first quarter. However, the economic outlook continues to deteriorate with weak growth and more recently negative growth in GDP. The pace of job creation falls short of the National Development Plan target of 611 000 new jobs per year, to bring the unemployment rate down to 14% by 2020 and to 6% by 2030. This rate of job creation is premised on 5% per annum economic growth.

DPME concluded its presentation with the following recommendations:
• It should be noted that this is the first quarter where programmes are still at the take-off phase with some continuation from the previous year;
• EDD to comply with requirements of the APP and Strategic Plan submission to see what monitoring interventions for the planned programmes are;
• Stay the course in implementing the Nine Point Plan; and
• EDD to drive measures to support sectors with high potential for job creation and benefits for the rest of the economy.

Discussion
Mr S Tleane (ANC) thanked Mr Dicks for the clear briefing. His concern was that the report indicates the increased investor uncertainty; the country is already offering too many incentives for foreign businesses to invest locally. However, he had reason to believe that those incentives may be doing more harm to the local businesses. He asked what needs to be done to attract foreign investors without compromising or disadvantaging local businesses, and what kind of returns are expected to be gained from the sacrifices that the country has made thus far to accommodate foreign investors.

Secondly, it appears that the focus of the agreement plans amongst government stakeholders (particularly the departments) is not driven by desired results and outcomes of those very same plans that the stakeholders have agreed on. In many instances government departments do not comply with those agreements, particularly agreements on procurement. What is the cause of this non-compliance to procurement agreements?

Thirdly, the high price of electricity is impacting negatively on the economy, especially small businesses. There are businesses that can barely afford to pay for electricity to Eskom - this is worrisome because it significantly affects the smaller players. He asked what DPME believes needs to be done to assist these businesses and ensure that these high energy prices do not affect the economy and its performance.

Ms C Matsimbi (ANC) appreciated the recommendations made by DPME on the challenges facing the departments around procurement processes. She asked if there are legal contracts that bind government institutions from purchasing outside the country (not complying with the regulations of local procurement).

Mr M Cele (ANC) asked for the reason the EDD APP was not submitted in time to DPME.

The Chairperson stated that ITAC made some progress in Q1 in measurable improvements in its support for industrialisation and employment in the country. She asked if the progress made by ITAC means that when the customs duty in various downstream products is increased, the local products (and businesses) are supported. In many instances there are implicit and also explicit trade-offs between supporting local businesses and bringing in foreign companies to produce products locally. It appears that there are often unintended implications when government accommodates foreign companies but in so doing local small players are affected negatively on the downstream products side.

The Chairperson said big companies are getting bigger incentives yet they are the first to complain, and when one looks at the type of products these big companies produce, they are different to those produced elsewhere in the world. Perhaps, Mr Dicks can comment on whether government is more concerned about growing the local economy even at the expense of compromising the quality of the products being produced.

The Chairperson said SABS (South African Bureau of Standards) is said to be incapacitated, and there is a growing concern that the international standards and analysis of products are prioritised as opposed to relying on local standards. It has occurred many times where companies bring in imported products to the country and because they are already inspected and given certification of quality abroad, the inspection of those products becomes very relaxed locally. This is a concern. An institution like SABS that plays a critical role in providing quality assurance, cannot be incapacitated. She asked for DPME’s perspective.

Mr Dicks responded that there is a silo mentality amongst departments; therefore a joint sitting with all the relevant departments needs to be held to facilitate the process of working together. Investor uncertainty as reported in the presentation is about FDI (Foreign Direct Investment), however there is investor uncertainty locally. Therefore if government cannot get local investors to invest locally, it will be difficult to get international investors to invest in the country. Local investors are reluctant to invest due to policy uncertainty and the overall political climate; the country cannot afford to lose local investor confidence.

There is an agreement with DTI and other relevant departments for an evaluation of all business incentives; the agreement will interrogate whether the design of the incentives is correct; whether they are being given to the right businesses; the implications for employment; the overall impact of these companies in the economy; as well as product quality produced by companies granted incentives. These are the type of things that were overlooked when the whole incentive scheme programme was initiated. However the agreement will now consider these areas as well and ensure that incentives are not granted just for the sake of being granted, but granted to businesses that will have an impact on the areas mentioned.

A lot of the incentives need to be targeted to local and small businesses; currently the biggest incentives are targeted at big companies such as in the automobile sector and those companies do not really need these incentives. However, the agreement analysis will ensure that this is also considered when a re-evaluation is conducted. Therefore, the focus is now shifting from that space to supporting the smaller players. It is important to note that government has been driving investment since the global financial crisis; however, there has been a significant decline in investment by local investors.

The way that local procurement is correlated is not yielding results, perhaps the reason some businesses do not procure could be due to the way the procurement framework is drafted and designed. It may be drafted in such a way that may exclude certain areas. It may limit the scope of potential companies that may be eligible to procure. For instance, you may have suppliers that do not meet the procurement requirements or a certain tender’s requirements but if those businesses are put into a supplier development programme facilitated by government, you find that they do qualify or meet the criteria. The supplier development programme would be aimed at empowering small businesses that may lack certain criteria to get a tender although they meet other requirements.

Supply chain in government is managed very poorly; small businesses are not assisted on pricing. In most instances you find that these small businesses are conflicted on this matter, because if they set low prices for the tender they may be perceived as jokesters or not taken seriously, whilst on the other hand if they overcharge they might jeopardise their chances of winning the tender. This reflects the importance of pricing, and if these small businesses can be assisted with this they would be better positioned to win the tenders at an appropriate pricing. This is a win-win for government, because it gets to procure at appropriate pricing whilst empowering local small businesses. In Gauteng there is an open pricing system on tenders where businesses are exposed to different prices offered by other businesses bidding for the tender, which assists the small businesses who are not skilled in pricing for procurement to get a sense of how they can tender at the right prices.

He agreed with the Chairperson that whilst government may attempt to assist in some areas through its custom duties, tariffs and incentive schemes, in other areas it may cause harm. For instance, the furniture manufacturing sector which has faced an enormous demise over the years was one of the best sectors that was doing well in exports. The sector would even export to Chinese companies.

The high electricity prices may be explained by the fact that Eskom was built as a coal generation utility to produce electricity, but in the 1970s and 80s there was a shift to nuclear energy generation so the funding model had to change. Now renewable energy is taking over, and so the funding model will also need to change to take this into consideration because the infrastructure is not conducive for the shift. It has been reported that since 2007 electricity prices have increased by 200%, and this is not sustainable for businesses especially businesses that are labour-intensive because labour-intensive businesses tend to consume more electricity.

Mr Dicks replied that EDD did not submit reasons for its delay in the submission of the APP. However, it submitted the APP on 30 September but that was too late for DPME to make its analysis and comment on it. The deadline was met by EDD but not for its first draft which was going to be used by DPME to make its analysis.

He requested that he respond in writing on the customs and tariffs in the steel industry. The response will outline what has happened to the tariffs that have been given to the steel sector, how they have impacted the local economy and industries as well as the ArcelorMittal South Africa (AMSA) 10% tariff.

Auditor-General South Africa (AGSA) on EDD audit outcomes
Ms Jackie Ramapele, AGSA Senior Manager, went through the 2016/17 audit outcomes and key messages and highlighted that improvement has been noted in the portfolio (over the four year trend), with two entities (Competition Tribunal and Competition Commission) moving from financially unqualified with findings to clean audits, while the Department and ITAC remained stagnant due to misstatements on performance information at ITAC and non-compliance with Supply Chain Management (SCM) legislation at EDD. Improvement will require a concerted effort by the leadership and management to address the root causes.

On compliance with key legislation, AGSA commends management in successfully implementing action plans to address prior year audit findings resulting in no material adjustments to the financial statements submitted for audit. Inadequate monitoring of the non-compliance with SCM legislation at EDD resulted in irregular expenditure; and proactive measures should be implemented to prevent irregular expenditure.

On the quality of the APPs and submitted annual performance reports, management implemented recommendations made by DPME and the AGSA interim audits on the APPs by crafting clearer and unambiguous indicators and targets that conform to SMART principles in all entities except for ITAC. The leadership of ITAC should ensure that indicators and targets are updated to meet the SMART criteria as required by the Framework for Managing Programme Performance Information.

To strengthen key controls, filling of key positions at EDD should be prioritised by leadership and careful attention to monitoring of compliance with legislation by senior management of all entities in the portfolio should be enhanced to maintain and improve the current audit outcomes. In addition, processes to review policies having a direct impact on financial statements, performance information and compliance should be strengthened at EDD, specifically in the area of SCM. Lastly, non-compliance with SCM remains a risk at EDD, Competition Tribunal and Competition Commission. Senior management are therefore encouraged to improve current controls around SCM to prevent non-compliance and irregular expenditure in future.

As for assurance providers, AGSA reported that the Portfolio Committee provide robust oversight in the budget vote process, review of the annual report and the quarterly reporting; follow up on progress made by the entities in addressing audit findings; and legislative oversight requirements.

Senior Management and accounting officers at EDD and ITAC should strengthen controls over procurement of goods and service and also ensure that indicators and targets meet the SMART criteria.

On the analysis of expenditure per programme versus performance achievements, programme one (Administration) was not audited. EDD did however achieve all its targets under this programme. There were no material findings under programme 2 and 3; in fact both programmes over-achieved the number of planned targets. The amount spent under programme 3 included R213 124 000 transferred to IDC (SEFA) to finance its financial economic activities. Spending on programmes and transfers were met and no non-compliance noted. Reports have been timely on the progress of the implementation of programmes.

Irregular expenditure disclosed in the EDD portfolio reported that irregular expenditure was incurred amounting to R348 000 because three quotations were not obtained and goods procured were split to circumvent the application of the PPPFA.

AGSA reported that the top root causes for findings were due to the slow response by management (accounting officer and senior management) as well as the instability of vacancies in key positions. The Department had committed itself to strengthen procurement processes to prevent irregular expenditure. EDD will also improve the preparation of evidence files on performance information, for audit purposes.

AGSA made the following recommendations to the Portfolio Committee (PC):
• PC must request management to provide feedback on the implementation and progress of the action plans to address poor audit outcomes during quarterly reporting;
• PC must request management to provide quarterly feedback on status of key controls;
• PC must request quarterly feedback on the progress of filling vacancies at EDD and ITAC; 
• List of action taken against transgressors must be provided quarterly to PC for follow up.

Discussion
The Chairperson stated that an irregular expenditure of R750 000 was detected in the Competition Commission, and there was a forensic investigation and a criminal fraud case opened against the employee implicated. She asked if AGSA detected this irregular expenditure, and if so why it is not included in the audit report. Subsequent to this, the implicated employee was said to have resigned. She asked AGSA’s view on consequence management in the Competition Commission on this matter. Secondly, there is another case involving R1.7 million, where there was also no consequence management implemented. She asked AGSA to also confirm these cases.

Ms Ramapele responded that the focus of the audit report covered only the areas that were reported on and included on the presentation. Consequence management was implemented by the Competition Commission through its internal investigation, and therefore complied with the requirements of the Public Finance Management Act in dealing with fraudulent cases within the institution as far as the AGSA knows. If the implicated employee resigned, the case can still be pursed as a civil matter. The Committee can note that there was indication that the money is being recovered through the pension fund of the employee implicated but the AGSA can look into this and provide a report on it. The fraud case of R750 000 occurred in the previous financial year while the AG’s audit report covered 2016/17.

Mr Tleane commented that the AG’s work has been consistent in assisting EDD and its entities to be effective and accountable which is commendable. The AG’s recommendations are welcomed and duly noted, and on behalf of the Committee those recommendations will be adhered to by the Committee particularly those directed at the Committee in conducting its oversight work.

Ms Matsimbi asked for clarity on why Sefa is still getting transfers (monies) from the IDC (Industrial Development Corporation) as Sefa is now under the DSBD. She also asked for clarity on the irregular expenditure as well as the filling up of key vacancies. Why are these continuing as explanations for these vacancies are given year-in-year-out, but it does not seem anything is being done about them.

The Chairperson stated that if the miniscule problems are left unaddressed, they end up being bigger challenges, then the Standing Committee on Public Accounts (SCOPA) ends up being burdened with unnecessary work that could have been eliminated. She believes that the relevant structures that hold these departments accountable are too soft. The fact that management takes too long to respond to management letters from AGSA indicates that something is not right. She acknowledged the recommendations made by AGSA, and expressed concern about the delay in filling key vacancies. She agreed with the list of actions that must be taken to address the transgressors as outlined by AGSA in its report.

Ms Ramapele responded that AGSA enquired from management about the transfer to Sefa, and management responded that since Sefa moved to the DSBD there was still some appropriation due to the agency, hence the transfer. Therefore, the transfer was merely a movement of the appropriation that was due to the agency. However, Sefa is a subsidiary of the IDC, therefore there are some shared responsibilities between EDD and the DSBD since EDD is the shareholder of the IDC.

Public Service Commission (PSC) on Department of Economic Development performance
Ms Irene Mathenjwa, PSC Deputy Director-General: Integrity & Anti-Corruption, noted that in terms of planned outputs achieved versus budget spent by EDD, there has been slight decline in the percentage spent from 2013/14 to 2016/17 but the Department is still within the 2% under or overspending. The Department spent only 93% of its budget under Programme 2. The Department has been consistent over the last three years in achieving 100% of its targets while also achieving a number of additional targets supporting its KPIs (32 during 2016/2017). In the current financial year the overspending during the first five months of 2017/18 needs to be managed to ensure the Department stays within the 2% norm at the end of the financial year. On financial management in 2016/7 the AG found that:
• Effective steps were not taken to prevent irregular expenditure;
• Although the Department’s internal control environment has improved, the internal control environment within finance stayed the same as a result of review processes which could not detect some non-compliance with laws and regulations.
• No material findings on the predetermined objectives of the two line function programmes.

As for payment of suppliers, there were 69 invoices that were paid after the 30 day period in the current financial year with the value of R18 680. There is a worrisome increase in a number of invoices paid after 30 days during the first quarter of 2017/18.
 
Human Resources reported overall vacancy rate as at 31 March 2017 as 11%. The vacancy rate at supervisory and production levels came down but the rate at SMS (senior management staff) level is still exceptionally high. The Department has succeeded over the past 4 years to meet the target of 50% women at Senior Management level. The percentage of female SMS members increased from 2012/13 to 2015/16 but declined from 51.6% during 2015/16 to 50% in 2016/17. However, the figures still confirm that the Department is complying with the Employment Equity target. The percentage of People with Disabilities increased since 2013/14 from under the target of 2% to 2.54% in 2016/17.

In terms of the financial disclosure framework, all SMS members must disclose the particulars of all their registrable interests (e.g. companies and properties) to their respective Executive Authority (EA) by 30 April each year. EAs are required to submit copies to the PSC by 31 May of each year. EDD has been consistent in complying with the filing of all (100%) SMS financial disclosure forms by the due date over the last four financial years. The PSC found 9 conflict of interest cases of EDD officials in 2013/4. This rose to 10 conflict of interest cases in 2014/15 and reduced to 5 in 2015/16. The reduction in conflict of interest is a positive sign and a trend that should continue. It is important that remedial action is taken against cases of potential and actual conflict of interest. Data for 2016/17 is presently not available.

Ms Mathenjwa highlighted EDD’s achievements such as 100% attainment of targets in all programmes during 2016/17 and the equity targets. However, the PSC is concerned about the following:
• EDD should ensure that an HOD is appointed and Performance Agreements of the HoD and Deputy Director-General are in place;
• The 2017/18 spending pattern should be contained within the norm;
• The recent finding on payment of suppliers by the department requires attention; 
• There is a need to address cases of potential and actual conflict of interests.

Discussion
Mr Tleane asked about the filling of posts in EDD particularly the Director-General post which has been unfilled for a very long time. What is the PSC’s understanding on why the post has not yet been filled? This is a critical post because if the head is non-existent that affects the entire system.

It appears that there are a number of plans (Diversity Plan and Employee Wellness Plan) in EDD that are not submitted on time. What is the PSC’s understanding of these delays? Most concerning is the fact that no action is taken by EDD on conflict of interest and this creates a very bad impression. He asked about the PSC engagement with EDD on this. How is the PSC intervening to ensure compliance by EDD? He asked for the reasons for the 69 invoices not paid on time by EDD and what PSC intends on doing to intervene on this matter. Understanding the underlying reasons behind the delay could assist the Committee to ensure that it does not occur again.

The Chairperson added that EDD has been growing since 2010 and the changes have been positive. However, did the Commission know the reasons behind the increase in unpaid invoices?

The Chairperson asked the PSC to take the Committee through the EDD organogram process until its approval, and whether that structure was approved or not. Surely there are recruitment standards or guidelines that can be implemented by departments. Can the PSC take the Committee through those standards? Is there a retention strategy for key personnel in departments developed by the Commission because retention rate in government departments is very worrisome?

Ms Mathenjwa replied that the recruitment function, as clearly outlined in the Public Service Act, is delegated to the executive authority. However, performance of departments differs so their recruitment processes may also be different. It is with great emphasis that this function is delegated, particularly recruitment processes for executive positions such as the Director-General. The Minister is the one who is supposed to initiate this process and furnish the information to Cabinet and appoint. The Minister can delegate this function to the Director-General, and so forth. The Public Service Act allows for this delegation to happen. When the delegation framework came out, Ministers were not very keen on delegation, and so that led to about 63% of departments that actually delegate.

The Commission through its analysis on recruitment in government departments picked up that there is a problem around recruitment in the public service. Through that analysis it also surfaced there are instances where people apply for jobs when the interviewing processes are conducted by an elected panel do not qualify for those positions. But when the very same people are interviewed by an “illegitimate” panel, they qualify for the positions applied for.

It is no secret that the Human Resources function in many departments at large is a very weak. When recruitment takes place things such as the culture of the organisation are not looked into when recruiting officials, amongst other key essentials that need to be considered when recruiting.

The PSC came up with a guide to assist departments in their recruitment processes, and it is very detailed on the steps that need to be taken by the department because there were a lot of grievances received across departments by personnel and that the wrong people were being hired into positions that they should not have. On the filling up of the DG post in EDD, the Minister has to ensure that the post is advertised and relevant processes have been adhered to.

The EDD has restructured, previously there were four or five branches but there are now only three. As for delegations, these are some of the things that were designed when the PSC started. In appointing the head of the department, that responsibility in terms of the law sits with the President. However, the delegation to appoint has been given to the relevant Ministers with the concurrence of Cabinet. Therefore, the Minister has to ensure that the process takes place and oversees the entire recruitment process.

On delegations within the department, the Minister can delegate to the DG and the DG can delegate to others. However, it must be noted that the powers lie with the Minister. Before the framework, Ministers were not keen on delegation and one would find even the cleaners at the departments being appointed by the Premier because they actually have the powers to do so.  

The delay in the payment of the 69 invoices was just picked up. However, EDD is doing well in comparison to other departments; some departments are sitting with thousands of invoices that have not yet been paid. However, if this matter is not addressed at an early stage it may become a bigger issue later. There are challenges with the ICT in some instances, but those challenges can be dealt with if the finance section plans appropriately. BAS could be down around the time when the payments are supposed to be made due to the volume of payments that must be processed. Unfortunately this is no one’s fault, but this can be mitigated by ensuring that departments do not wait for the end of the 30 day period to process payments.

In addition, capacity is key, people need to know where the invoices are supposed to go and cut out other unnecessary steps. Financial delegation is also important, because if the one person who is responsible to sign off on the payments is not available, the invoices are not going to be paid. Hence, PSC recommends to departments that they need to have financial delegation in place, as well as standard operating procedures to ensure that invoices are signed off.

One of the things PSC has picked up is consequence management which is critical. As long as people are not held accountable for their transgressions, these issues will persist.

On conflict of interest, PSC would receive and scrutinise the forms and check whether indeed the person has disclosed fully their interests and conflict of interests. The PSC writes to the EA to report on concerns about a particular individual and appeal to them to address the matter. Recently PSC has been working with Treasury in the Central Supplier Database, and they picked up a lot of public service officials through their ID numbers and PERSAL. PSC requested that those companies be scrapped from the system including dormant companies. PSC also requested that the public servants resign from those companies (as outlined in the Public Service Regulations) and officials were given until January 2017 to resign.

As for the vacancy rate, EDD outlined that there is a shortage of skills in the market that affect EDD’s ability to fill the posts. The human resources function in government is still more administration based rather than the strategic human resources required. A human resource manager in the department should have a profile of their organisation and where they source their people and how can they be brought into the organisation and developed. If a department does not have a strategy on its human resources, it will end up recruiting the wrong personnel.

The Chairperson thanked the PSC for its useful remarks and comments.

The meeting was adjourned.