Department of Public Enterprises 2016/17 Annual Report, with AGSA input

Meeting report

Mr M Gungubele (ANC) was elected as Acting Chairperson, with Ms G Nobanda (ANC) nominating and Dr Z Luyenge (ANC) and Ms N Mazzone (DA) seconding. Mr Gungubele thanked the Committee for the opportunity.

Department of Public Enterprises Audit Outcomes: Auditor General South Africa (AGSA) briefing
The Auditor General-South Africa (AGSA) representative said the annual audit looks at these areas: fair presentation of the financial statements with the absence of significant misstatements; the reliability of the performance information reported; and compliance with laws and regulations affecting financial matters.

Auditor General South Africa (AGSA) spoke on the audit outcomes of the Department of Public Enterprises and six of its entities: SAFCOL and SA Express (audited by AGSA) and Eskom, Transnet, Alexkor and Denel (audited by SizweNtsalubaGobodo).

AGSA can express five audit opinions but for Public Enterprises they expressed three: Unqualified opinion with no findings (clean audit); financially unqualified opinion with findings - typically with corrected misstatements but showing noncompliance with key legislation; qualified opinion - with misstatements that were not corrected.

The audit outcomes for the Public Enterprises portfolio over the past four years were compared. For 2016/17, Department of Public Enterprises (DPE) achieved a clean audit, Eskom was qualified and SAFCOL, Transnet, Alexkor and Denel were unqualified with findings. SA Express was still being audited due to its late submission of financial statements for audit. DPE had improved but Denel, SAFCOL and Eskom had regressed. Although the Denel audit had been finalised, the published Denel Annual Report contained an incorrect audit outcome.

Instability due to vacancies in key positions and slow response in addressing risk were some of the reasons for regression. Irregular expenditure was mainly due to non-compliance with supply chain management (SCM) legislation. There was a rise in fruitless and wasteful expenditures in all these entities in 2016/17. Strategies and recommendations to mitigate the findings have been made and some are under implementation (see document for details).

Discussion
Dr Z Luyenge (ANC) said fruitless and wasteful expenditure has become “normal language” in government departments and entities. He asked AGSA if there was any kind of relationship with the internal audit units to ensure that there is no continuation of such expenditure and if AGSA was satisfied that the audit findings are taken seriously. He asked if AGSA should expect a central asset management policy of all entities centered at the Department. He was concerned about the misrepresentation of Denel’s financial audit outcome. He wondered how many entities are affected by this.

Ms N Mazzone (DA) said that people often ignore SAFCOL because it is seen as irrelevant and people have grown immune to millions and it seems like a small amount of money and yet this is taxpayers’ money. She urged AGSA to brief them on how a company could get into this position. The Committee has asked over and over to get reports to know exactly what is going on in the state owned entities. Only now that the problems are rife are these recommendations being put forward. This was a major failing not only by the DPE but also AGSA. Why would AGSA make recommendations that are always ignored? It was disconcerting that AGSA had to write a letter to an audit firm to request that it reconsider its audit opinion. How secure should the Committee be that the audits being done by external firms are free from interference and not pursuing other agendas. Given the KPMG scandal, one has to be careful.

Mr P Gordhan (ANC) asked for details on the Denel matter and wanted to know what it took for AGSA to have this matter returned and a change of audit opinions by SNG. South Africa is currently experiencing a crisis of credibility in its auditing firms. He asked if the prior three-year period that Denel was audited by SNG had been checked for inconsistencies. He recounted the plethora of emails with allegations about the three entities that are audited by SNG as well as the allegation about the DPE Director General and asked if AGSA and DPE have played a reliable oversight role in light of this. He asked AGSA to comment on the audit report and asked how material some segments of it were, and how it impacted on the AGSA opinion and who is to be held responsible.

Mr M Dlamini (EFF) asked if the names of the people involved could be disclosed so that these problems can be halted. There are people in junior management who knows things are wrong but feel they cannot point out the management person. He called for the name of the Denel manager who did not comply with AGSA’s request that the amended audit report be disclosed.

The Chairperson said that one of the challenges was the insistence of dealing with departments after the fact. He argued that interventions would be effective if Annual Performance Plans (APPS) that were articulated wrongly were addressed to avoid wrong outcomes. He asked why APPs with wrong performance information were tolerated.

Response
AGSA responded that they were satisfied by some of the auditees but not all of them. SAFCOL’s irregular expenditure was always there as an undertone until it reached a point where it overpowered the financial management to a point that the audit opinion had to be modified. The uniqueness of departments and entities across government would make it difficult for a central asset management system. Tremendous effort was put towards trying to avoid the SAFCOL change of opinion including training with different people in the chain. When each does their role there is constructive progress. The main point communicated to SNG was of material non-compliance and they listened and made adjustments. AGSA works over and over to engage with these auditors, guide, and share ideas and work in good relations despite limitations of not having access to their files. There is a management report which is more detailed with relevant managers so this will be made accessible. AGSA does do proactive auditing of APPs and submit them for change.

Normally the internal audit unit does the predetermined objectives audit throughout the year and the department comes in at the end of the year and certain objectives were ignored but this was rectified. The statement with two indicators was intended to be the objective but the face value does not seem clear. The technical indicator description points to the exact area in the strategic plan or other documents.

SNG Managing Director: Assurance, Mr Aaron Mthimunye, replied that SNG had already picked up on the material non-compliance at Denel before AGSA notified them. SNG had brought the irregular expenditure to the attention of Denel senior management. There was resistance from Denel’s chairman and CFO to table the amended audit report. The quality control manager picked it up at SNG and requested Denel executives to change the statement before reporting it at the AGM.

AGSA said there are various stages to the issue but the report seemed to be the final report and SNG did not explain to AGSA in their engagement that the matter was being handled internally already. It did seem new to them.

Mr Gordhan said that the SNG audit report did seem to suggest it was the final audit opinion when it was given to AGSA and whether an internal issue was being pursued is not certain at this stage. These were small matters in the grand scheme of things but these entities have been seriously marred by corruption allegations. He was curious how these auditors sleep at night. The technical material sounds fine but it does not reflect to the public what is going on in these entities. These matters are in the public interest, yet what is before us is a clean audit opinion.

Mr Dlamini wondered why they would send a half-baked signed report to AGSA. He was curious why SNG should be taken seriously, considering they are auditing four state entities. Are they bowing down to political employees running these enterprises?

Dr Luyenge said that what is important is the credibility of the institution since their interaction with AGSA is vital for their business.

Ms Mazzone said she had a concern about the Denel issue as to why they would deny the AGSA advice to change the audit opinion. She asked AGSA if this has ever happened before and if it had been kept from the Committee.

The Chairperson suggested a meeting where AGSA should give their account leading up to their engagement with SNG and for SNG to do the same. It was a big issue and could suggest an element of collusion so it had to be dealt with on its own time.

AGSA replied that they did not pick up anything that could be raised in the DPE audit report. The matter in the media was assessed and inquired about. These did not have a direct impact on the fair presentation of the financial statements.

Mr Gordhan challenged AGSA’s conclusion that all the public domain information had no relevance to the DPE audit as the State of Capture report and the emails indicate a direct relationship to these matters. He said the public knows what they were talking about. There was a need to engage with AGSA on the media issues.

The Chairperson suggested that this should be included in the enquiry that was to begin in the coming weeks with the AGSA.

2016/17 Annual Performance Report and Financial Statements
Minister of Public Enterprises, Lynne Brown, said that she was happy to present the DPE 2016/17 Annual Report and the salient features included a clean audit report from the Auditor-General and also that the DPE spent almost 95% of its budget while achieving 18 of 22 set targets. She showed the progress of the Department during her tenure and remarked that it needed to be emulated at all state-owned companies in her portfolio.

The 2016 Memorandum of Incorporation (MOI) differed from the 2014 version and it gives her as shareholder additional powers to act decisively to ensure the assets of the 54 million South Africans are looked after. The Minister has now been assigned the power to act against a chief executive officer of a State-Owned Company should the need arise. The principles of the new Shareholder Policy to improve the performance of State-Owned Companies and sharpen Government’s role as shareholder were approved by Cabinet in the last financial year.

She added that the structures can be put in place to avoid a repetition of the ease with which Eskom appeared to have been able to lie to its shareholder about its dealings with McKinsey and Trillian. She regarded Eskom’s lies when asked to provide information to a parliamentary question as an assault on the democratic system of governance. The opposition was entitled to ask the question, and to receive a truthful response. She had since asked Eskom why the response provided to her in December differed from its recent responses on the McKinsey/Trillian matter. The previous night she had received a report from the Eskom Board which she would read through and ask the Department’s Legal & Governance unit for its considered recommendations.

Minister Brown said the statements the Committee would have noticed attributed to the interim chairperson of the Eskom board, Mr Zethembe Khoza, relating to the suspension of four senior executive members due to their alleged involvement in the McKinsey/Trillian relationship and a fifth executive against whom an allegation of conflict of interest has been under investigation. These were done by the interim chairperson because the boards of state-owned companies are responsible for adherence to proper corporate governance, which includes instituting appropriate investigative and disciplinary processes into allegations of corruption, maladministration, malfeasance or conflict of interest. The Eskom interim Board was appointed in June, and immediately instructed by the Shareholder to initiate investigations into allegations of irregular conduct – and to take disciplinary action against members of the executive, if warranted.

The Minister said that Eskom is on the path to a stable balance sheet but the biggest remaining challenge was lack of adherence to proper governance. She intends to address collapse in governance and internal controls before the end of the financial year, including the SIU investigation, as it is critical to restore public and investor confidence in Eskom and its procurement processes. The company must recruit new executives and strengthen their disclosure system to prevent executives and other staff and their families in doing business with the company. She intended to arrange an Eskom Special General Meeting in November to appoint a permanent board. Candidates were undergoing a vetting process. The new Board's first mandate would be appointment of a permanent Group Chief Executive and restoring the credibility of its operations.

The Minister said the Committee would have noted statements from the Special Investigating Unit over the past 48 hours to the effect that, with the Department of Public Enterprises, it has agreed on the terms of reference for an investigation into Eskom governance and procurement. The SIU had agreed to expedite the McKinsey/Trillian aspect of the investigation and the proposed terms of reference would be sent to the Presidency for approval and the issuing of a proclamation. She was quick to note that the speed of the effort to address these issues would not appease those baying for the immediate shedding of heads on the basis of leaked email correspondence. It was not as simple as that as the people were still entitled to be regarded as innocent until proven otherwise. The appropriate procedures articulated in the Companies Act, the State-Owned Company enabling acts and Memoranda of Incorporation, amongst other legislative and regulatory prescripts, must be followed.

Minister Brown concluded by saying, barring Eskom which received a qualified audit, the other State-Owned Companies in the portfolio with the exception of SA Express, achieved unqualified audits but it did not mean that they must rest on their laurels. She had tasked the Director-General with speeding up the filling of vacant positions in the Department to enhance its oversight responsibility for 2017/18. This included building capacity within the Department to analyze information received from State-Owned Companies and ensuring that information she submits to Parliament and other parties is credible and legitimate at all times.

Discussion
Dr Luyenge said that he appreciated the insistence from the Minister of some kind of improvement in the state entities but he wanted to see change on the ground and not just financial statements on paper. The entities are supposed to be drivers to pursue their development objectives but the government requires the Department to do more and ensure capacity.

Ms Mazzone said she was the opposition member who asked the Minister a question and was given a lie as an answer and she wanted a copy of the elusive Eskom report to which the Minister refers and understand why she was lied to. A copy of the report must be made available to the public. It was worrying when the Minister said she was comfortable with the audit reports. She should be worried because it showed a frightening trend in public enterprises. It seemed Treasury was an underlying problem in a lot of issues with the public entities and there were contradictory statements. She asked if DPE had met with SA Express and SAA, and why Treasury was not coming to the table and if the Minister had reported on this. No one is politically or publically interested in seeing the public entities fail as they are the lifeline of the economy and the Minister was wrong to say that.

Mr Dlamini said that it was unacceptable for the Minister to come to the Committee and disrespect them by saying she was comfortable with the state of the entities. The Minister should respect the time and be present for the entire meeting as these matters were very important.

Mr Gordhan asked if the Minister is going to reprimand the arrogance of the Denel CEO owing to her new powers over the executives of public enterprises and also act against the Denel chair who was implicated in the emails and had links with the Gupta family. He said the separation of powers can be misleading. There are very clear delineation of responsibilities but there are overlaps as well but the overall oversight powers are with the Ministry. They should be frank about their abilities and willingness to use those powers appropriately and not confuse the Committee with issues of separation of powers. He asked what they can expect from the Minister in terms of reprimanding the Eskom issue and all other misdemeanors as listed in the academic report and other documents. He asked about the process being followed to elect the new Eskom board and how can they be assured of the independence of this board. He asked if the Director General had been investigated or if he was going to be investigated. Whatever the narratives in the Annual Report, the Department should be disdained for the leak of millions of rands from these public entities.

The Chairperson said that it is fair not to prescribe length of time when dealing with Annual Reports. The Department should know that the responses from the Minister are the departmental responsibility. He said that the fruitless and wasteful expenditures and predetermined objectives are all moving in the wrong direction. These figures are articulating a negative movement; the Minister must respond to this as well.

The Minister expressed her apologies for not knowing that the meeting would take all day as she had allocated a specific timeframe in her diary from their communication. Each of the entities will have a session besides the one they were having. The SIU investigation was largely brought about by the AG’s report into certain companies and it would look at both procurement and contract management. Those were systemic processes that had happened in the companies over a period of time. All she can do is believe the AG when matters of the companies are reported. She had heard about the Denel matter from this meeting as she was not aware and would look into it. The MOI had to be changed because it had not worked as well as it used to so that it could give more ability for the Minister to step in. She inherited the process of electing a board and had since changed the process. She had delayed the appointment of the boards by advertising again so that she can have people with the requisite skills that the process requires and they would all have to be vetted. She would not be able to test who the applicants’ friends are and their outside connections but she hoped the board would be independent. There is a declaration of interests every six months and boards are rotated annually as opposed to every three years. She is absolutely convinced that people are innocent until proven guilty in a court of law and this is one of tenets of democracy. She had not seen an email that implicates any of the board members and the credibility of these is with the Hawks. She was waiting for National Treasury to give them the process of private sector involvement into infrastructure issues. The companies still collectively trained more than 10 000 artisans and technicians and they still play a developmental role and Eskom electrifies still 200 000 households annually. She had just received the Eskom report and it would have to go through the Ethics Committee and the Public Protector’s office but she was sure the Committee would receive it. She has faith in the Chapter 9 institutions and believes in the Auditor General. The fruitless and wasteful expenditure is what constitutes the SIU deep dive and this will be looked into in detail as they have the forensic resources for this.

The Chairperson said that the fruitless and wasteful expenditure jump was huge and the fact it depended on an SIU investigation showed that there was a serious problem. He said that the principle of ‘innocent until proven guilty” had a limit to which it applied in the presence of an apparent deterioration of an institution in their hands.

Department of Public Enterprises 2016/17 Annual Report: Director General briefing
Mr Mogokare Richard Seleke, DPE Director General, said that the Department was surprised as they thought discussion on the separate company annual reports would be done when the presentation on these was scheduled. They were not aware that the AG would be making a presentation. This put them in the space of answering details they were not prepared for. He asked to cover the entities when the meetings on their annual reports are scheduled.

The Chairperson said that it only makes sense for the Department to come to the meeting and be ready for the bigger picture as they were the ultimate voice and authority of the entities.

Dr Luyenge said that the Annual Report is supposed to relate across all entities of the department. If the DG is not ready, he should have communicated that.

Mr Dlamini said that there is lack of competence being shown by the DG. The Director General was the accounting authority and should not waste the Committee’s time if he is not ready.

Mr Gordhan said that in the presentation it seems that all the entities will be covered and he was wondering why this was an issue. He advised that if something is not known, the DG could let them know that he would check on it and come back to them.

Mr Seleke asked for exemption on the details of the irregular expenditure in each of the state entities. He said the economy in which the public entities have been operating was sluggish and it contributed to the bad numbers. As a department they have been seeking ways to improve these entities by working with universities to ensure that there is broader research and knowledge management

He said Eskom had so far managed to turnaround generation performance from the verge of collapse to a surplus energy position Transnet had registered great successes in expanding its global footprint and Transet Engineering had unveiled the first diesel powered Trans-Africa locomotive and also donated 36 locally made passenger coaches to Botswana. Denel, SAFCOL and Alexkor remained on sound financial footing and continue to play a critical developmental role.

Mr Seleke said the fate of SA Express is still under consideration, however, it should be noted that it still plays a major role in the industry. He spoke about the solutions to the challenges of the entities and sorting out the capacity problems as well. He went through the performance of each DPE programme and noted the targets achieved (see document for details).

Discussion
Ms Mazzone asked what the Department’s plans were about the AGSA letter on the audit opinion on Denel’s financial statements being questionable. She asked if a meeting will be set up with SA Express and Treasury, and also SAFCOL as it seemed to be neglected, in dealing with some of the bigger entities. She also asked how the media developments on Transnet problems with procurement of their trains and cranes would influence DPE going forward. She was worried that Eskom was asking for another price hike and asking for power cuts due to lack of payment and asked what DPE is doing about this. She felt highly uncomfortable from a justice point of view at having the Annual Report presented by the DG who is highly implicated in state capture. She would have liked the Minister to put the DG on leave pending the outcome of the investigations. Justice cannot prevail while those under investigation are still in their positions.

Dr Luyenge said that there should be a reflection of all service providers coming from rural areas or underprivileged communities. The filling of vacancies procedure has not been properly aligned and critical positions still had to be filled. The public entities need to invest more in the local economy.

Mr Dlamini said that the DG was not being accused of things he was not accountable for as the reports were under his tenure. The DG was a dishonest leader because he said he could not speak about the state entities and yet they were covered in the presentation. He wanted the DG to explain why there was a huge increase in fruitless and wasteful expenditure at Eskom, Transnet and others.

Minister Brown responded that the Annual Report outlines what the challenges are and these can be brought together under project management and procurement. She could not respond about whether somebody was rude or a liar. She said the auditor firms were autonomous. On the Denel matter, she was shocked at why they had not acted on the letter. The DG would follow up with the unit and give feedback. She was of the view that SAFCOL does not belong as a public enterprise. It needed economies of scale as it was up against very tough competition within its area and seems to have fallen off the tracks but they had deployed a chief director to go and fix things there. She said Transnet is having an investigation to look internally about what is said in the public space. The issues to do with the DG being implicated, it is the commission of inquiry that has to look into that and she hoped by end of October, the President would move on this. She noted they had a localisation policy but it was not perfect.

The DG said they would be issuing adverts for vacancies as soon they received the approved structure they were awaiting from the Ministry of Public Service and Administration.

The Chairperson thanked everyone for acting in good manner, noting that an inquisitorial inquiry works differently from an accusatorial inquiry as a matter of principle. He said to the Minister that his understanding of audit firms and the AGSA is to state the facts but the facts are not for them to deal with. It was the duty of the department to deal with the findings and audit firms and the AGSA should not be asked to deal with these.

The meeting was adjourned.