Transnet on irregular, fruitless and wasteful expenditure in 2016/17

Meeting report

Deliberation on Transnet financial irregularities

The Chairperson said that the purpose of the Public Finance Management Act (PFMA ) was to enable managers to manage and account. Both the Committee and Transnet, as a public entity, were on the same team. The Committee was very proud of its public entities and wanted, in return, for public entities to endeavour to make it even more proud. The Committee was primarily interested in being given a fair sense that the processes embarked on by Transnet (Ltd) were robust, and that its procedures fell within the requirements of the PFMA.

Mr E Kekana (ANC) asked why irregular expenditure had gone up since Transnet had been audited by the Auditor General (AG). He said that in 2013/14, irregular expenditure had been R49.6 million, and had fallen to R32 million in 2014/15, and to R21 million in 2015/16. However, in 2016/17 it had soared to R692 million. There was clearly a huge spike in irregular expenditure and it was concerning that the figures were lower when Transnet was being audited by Sizwe Ntsaluba Gobodo, compared to now, when it had been the AG that performed the audit.

Mr Garry Pita, Chief Financial Officer (CFO): Transnet, said that the figures were correct for 2013, 2014 and 2015, but the 2015/16 figure included an amount of R230 million which was for tax clearance certificates for foreign vendors. Transnet had applied to National Treasury (NT) for condonation, because it felt that the tax clearance certificates were not irregular but necessary for vendors who were not domiciled within the Republic, and therefore did not owe tax. Condonation had subsequently been received from NT, so that explained R230 million of the 2016/17 irregular expenditure figure.

He said the R692 million total of irregular expenditure had condonations of R293 million and amounts recoverable of R159 million, which came to R452 million. If the amounts condoned were subtracted from the total irregular expenditure figure, then there was a total of R241 million which, compared with the R251 million from the prior year, was not a significant a spike but rather a decline in irregular expenditure.

Irregular expenditure was, nevertheless, taken very seriously. Disciplinary processes and criminal cases were being implemented to curb the occurrence of irregular expenditure. The entity believed in zero tolerance for any PFMA violations, and any rand or cent spent irregularly was too much.   

Mr Kekana said that in terms of the PFMA, the executive of Transnet was responsible for preventing fruitless, wasteful and irregular expenditure. The report painted a very promising picture and future for the entity, but that if one delved into the specifics, it became very concerning. There was a serious problem with contract management, and he asked what the delegation was doing to improve on this. He asked why contract values had been exceeded, and which contracts those excess amounts applied to.

Mr Pita admitted that there had been inefficiencies in contract management.

The Chairperson asked which contracts had been mismanaged, their value and also which officials had been responsible for them.

Mr T Brauteseth (DA) asked how long members of the delegation had been in their respective positions. If they had been there for a while, why had nothing been done about the problematic contract management?

Mr Pita responded that he had been the CFO since 1 February 2016. Contracts had been mismanaged as a result of a lack of automated controls. For example, if a contract value was for R10, the system allowed for additional work to be done without terminating the contract, so one could easily come to spend R12, which would amount to R2 in irregular expenditure. Transnet had since identified the fact that automated controls would have to be fixed. He added that there were a number of other root causes that had resulted in the mismanagement of these contracts.

The Chairperson said that those other root causes was the information that the Committee wanted. The Committee was interested in the past -- much like a post mortem -- of how the figure had come to be.

Mr Kekana asked whether the procurement procedure manual (PPM) was being followed.

Mr Pita responded that the PPM was being adhered to. It had been tested against local and international best practice and had been confirmed as best practice. The instances of non-compliance had been highlighted as part of the procurement PFMA report. There had been 40 criminal conduct instances recorded, 41 fruitless and wasteful instances and 62 irregular items identified. Non-adherence to the PPM was related primarily to the fruitless and wasteful expenditure items as well as the irregular expenditure items. In each of those instances, Transnet had identified the root causes of the instances and then implemented controls to ensure that they did not recur.

Many of the recent actions have been related to automation. They had found that many contracts had not been loaded on the system, and that besides the root causes which have been mentioned -- where there had not been controls to flag exceeded values -- the contracts had not been loaded on to the system at all in some instances. These contracts were managed manually and therefore one of the mitigating controls which were put into place was the training of staff, and automation of the contract management system.

Mr Kekana said that he was not interested in what was being done now, but rather for the board to account to the Committee for the figures that were before the Committee as irregular expenditure.

Mr Pita confirmed that the PPM had not been followed in the instances which had resulted in irregular expenditure. 78% of PPM transgressions had been picked up by management through control processes, and 22% had been picked up by internal and external audits. As an example, he mentioned Transnet Freightrail, where there was an amount of R1.498 million, where the PPM tender and bid processes were not followed for companies called Sinebob Marketing and Consulting and Joprotho Promotions. This was for the supply and delivery of branded corporate blankets, which had been awarded to a bidder who was involved in cover quoting and also in contravention of section 4 of the Competition Act 89 of 1998. Various control weakness had been identified as a result of these transgressions. No criminal conduct had been found on the part of employees, but rather on the supplier. The employee responsible, Sandile Simelane, had been subjected to a disciplinary process, but had subsequently resigned from Transnet. The matter had been reported to suppliers and the relevant authorities.

Another example where the PPM was not followed had been where R567 000 was awarded for the supply of branded pens and refills, lexicon tablets, stands and styluses and other promotional and marketing materials. It was also found that there was no evidence of criminal conduct on the part of employees but rather on the supplier, who was involved in cover quoting. A blacklisting process had therefore been instituted. If such a process was not initiated, the same suppliers could target other consumers, which was entirely unacceptable. Workshops had also been held to train employees to pick up on collusive activities.

Mr Pita added that 885 criminal cases had been lodged in the year under review.

Mr Kekana asked whether there were case numbers available for the criminal cases, which Mr Pita briefly responded to.

Mr M Booi (ANC) asked who had been involved in the conduct caused by the non-compliance and resultant fruitless and wasteful expenditure, exactly what had happened, and how far the board had got in retrieving the money.

Mr Pita said that he would highlight a couple of items. Under Transnet Freightrail, there had been R2 million identified as fruitless and wasteful expenditure which had involved a company called Elcon Crane Hire. The senior engineering manager had failed to prevent the fruitless and wasteful expenditure in respect of the crane hire during the execution of the project. The crane hire company, although paid in advance for a period of approximately one year, was used for a far shorter period. This involved negligence, as well as a lack of planning. A disciplinary hearing was held in February and in March there had been a subsequent dismissal. The responsible manager was Ndu Mlaba, and the responsible employee was Lawrence Siyakaneng, who was a senior engineering manager. The employees were charged with failing to prevent fruitless and wasteful expenditure and therefore dismissed. Recovery procedures were under way and a total value of R158 million was currently in the process of recovery from various suppliers.

Mr Booi asked what “other,” amounting to R3 000, referred to in the list of fruitless and wasteful expenditure.

Mr Pita said that the R3 000 was for various traffic fines for vehicles driven by employees on various occasions. Avis was the car rental company that would charge the entity fees for the fines, which would then be recovered from the respective employees.

The Chairperson asked whether these fees had been recovered.

Mr Pita said that the amounts had been recovered.

Mr Booi asked why it had not been indicated to the AG that the money for the fines had been recovered.

Mr Pita said that the reason was because the recovery and reporting thereof had been done after the financial year end and after the reporting period.

With regard to the issue of non-declaration of interests, Mr Booi asked who the employees were that had been involved in the contravention of section 53(b) of the PFMA, and what had happened to them.

Ms Carli van Rensburg, General Manger: Transnet, said that there were two instances in this regard. One was an instance where an employee who was a part of information technology (IT) but not the supply chain, had signed off on a contract when he was not duly authorised to do so. This employee was subsequently dismissed. The other instance was still under forensic investigation, and had not yet been finalised and had therefore not been fully reported.

Mr Pita added that in the former instance, senior officials had been working together with contractors in multiple contracts relating to capital, and had not declared their interest and relationships with the suppliers. The allegations that the persons involved had abused their positions for personal interest were true, and there was further investigation taking place under the relevant criminal investigative authorities.

Mr Booi asked what the procedure was for people responsible in the supply chain management department, and whether those persons and processes were vetted.

Mr Edward Thomas, Chief Supply Chain Officer: Transnet, said there was a process started by national security, whereby the processes and the individuals were vetted. The process had, however, slowed down since engagement with the unions, since they were apprehensive about the sharing of third party information relating to employees’ families and other personal details. It had taken a long time to address this issue, but they were hopeful of coming to a clear understanding regarding the way forward on the issue of vetting.

Mr Booi said that Transnet was misleading Parliament, because it could not answer directly which unions were against the vetting of persons and processes. One could not hold a union liable, but then not be able to exactly identify the unions when called upon. It was clear that the board was lying to the Committee about the details of its relationship with particular unions. He urged Mr Thomas to motivate his statement fully and reminded him that he owed an explanation to the House, especially after making such a generalised statement.

The Chairperson said that there could not be people running supply chain management whose backgrounds were unknown to the executive, and therefore vetting was an integral component to effective supply chain management. These people were at the heart of procurement so it was a very critical area which needed to be addressed.

Mr Siyabonga Gama, Group CEO, said that he had had to deal with two senior officers on this issue in the past.

Mr Pita said an example of this involved an amount of R21.9 million in which there was non-compliance, where an employee had signed a memorandum of agreement with Starlight Aviation for aviation training in helicopter engineering and piloting, without the necessary delegation. The training had been necessary and value had been obtained, but the problem was that the employee did not have the necessary delegation to enter into the agreement in the first place. The responsible person, Rofus Lekala, was currently under suspension while the disciplinary action was currently under way.

Mr Gama said that he would include more detailed information about the case in writing.

Mr D Ross (DA) said the irregular expenditure could also be hidden in accruals, and wanted a comment on that.

Mr Pita said that international reporting standards of accounting were followed, which encompassed the Companies Act. He truly believed that no irregular expenditure was being hidden in accruals, and said there was an accruals list which was available to the Committee.

Mr Ross said that the total value of trade payables and accruals to the value of R29.7 billion was indicative of an increase.

Mr Pita said this was correct, and could also be justified by activity. Revenue had also increased by 6.7% compared to the prior year, which was significant when compared to the gross domestic product (GDP) growth, which meant that there would be more trade volumes and therefore more accruals and debtors as well.

Mr Ross asked why there was an upward trend on fair value adjustments, and what had been done to achieve that.

Mr Pita said that the finance cost increases were as a result of the economic climate. The cost of borrowing had also increased, and lenders were not willing to lend at the same rates as before because the risk premium needed to be included to accommodate the volatility of the economic environment. Although there had been increases in the finance costs, they had been 4.4% below the budgeted amount. The fair value adjustments were related to foreign exchange and hedging movements that would go into the income statement as a result of hedging policies. In the balance sheet, one would find significant derivative assets, which meant that Transnet was effective in hedging any foreign exchange movements. He said that 30% of movement was in foreign exchange, and that no contracts were allowed to have foreign exchange fluctuation exposure. Transnet covered every single foreign exchange fluctuation.

Mr Ross asked for a detailed schedule of costs and the deposits received.

Mr Pita said that such a schedule would be made available to the Committee.

Mr M Hlengwa (IFP) asked about the length of Mr Pita’s tenure.

Mr Pita said that he had been the CFO since 1 February 2016, but had joined the company in March 2006. He had initially served as the head of internal control and in 2008 had been appointed general manager of business services, and thereafter chief supply chain officer.

Mr Hlengwa said that it concerned him that Mr Pita had spent all this time in all those finance-based roles, yet there had not been an improvement in the irregular expenditure figures.

Mr Hlengwa asked who Mr Shongwa was, because he had noticed that he had been quite active in the misdemeanours of Transnet. The CEO had been with the company since 1994, as well as the group executive, and all of these things had happened on their watch. He also asked for clarity on emergency procurement, as it was a source of potential disguising of irregular incidents.

Mr Gama said that emergency procurement happened outside the course of ordinary business. It should be borne in mind that the company operated 24 hours a day and in instances when something unforeseen happened which affected operations, that issue needed to be dealt with as soon as possible. Emergency procurement was all unplanned, but there had been instances were employees had carried out misdemeanours under the guise of emergency procurement. Those employees had undergone disciplinary proceedings, but often employees resigned before their conclusion. In these circumstances, those employees were pursued even outside of their employment with the entity for their misconduct.

Mr Hlengwa said this perhaps this pointed to the employment of people who did not know what they were doing. There needed to be emergency controls, as well as the use of scenario planning. When the emergency procurement was so open-ended, it was susceptible to abuse.

The Chairperson said that if emergencies were so regulated, they would not appear in spreadsheets as emergencies, because the procedure would then fall within the ordinary course and scope of policy.

Mr Gama said that in some of the instances, what started off as an emergency procurement ended up as an instance which he had described earlier, in which the process of emergency procurement was abused. In the current year, the system had been abused, and Transnet recognised that it was an issue.

Mr Pita said that when they mentioned that they were in the process of recovering R160 million, this was actually related to the abuse of the emergency procurement mechanism and conflict of interest issues.  

Closing Remarks

The Chairperson suggested that the Committee be briefed at a later stage after being given time to peruse more detailed reports relating to the financial position of Transnet.