Virements monitoring: Department of the Premier briefing

Meeting report

Opening remarks
The Chairperson welcomed Members of the Portfolio Committee and everyone in attendance and informed them that the purpose of the meeting was to be briefed by the Department of the Premier (DotP) on Sections 41 to 44 of the Public Finance Management Act, with special emphasis on Section 43 of the Public Finance Management Act (PFMA) in order to enable the Committee to monitor and evaluate the virements, and shifting of adequate funds within the Department after the Annual Adjustment Appropriation Act had been passed.

The Committee would also listen to the briefing by the Provincial Treasury (PT) on its mitigating mechanism that would ensure that the underspending of the Department remained within the allowable limit of 2%, either in over- or under-expenditure.

The Committee would consider and adopt the draft Committee Tracking document for April 2018. The draft Committee minutes of 6 June 2018 will also be considered and adopted.

Presentation by the Department of the Premier (DotP)
Mr D Basson, the Chief Financial Officer of DotP, briefed the Committee on the guidelines on virements according to the Public Finance Management Act. His presentation focused on what virements were, the motivation for virements, the relevant rules guiding virements, situations that necessitated virements and some virements effected by DotP for 2017/18. The Western Cape Government (WCG) had received the guidelines on virements from the National Treasury (NT) over 15 years previously and had been implementing the process ever since that date.

According to Mr Basson, although he had been asked to address Sections 41, 42 and 44, those sections contained provisions that were not directly relevant to virements. Section 41 dealt with returns, which had to be handed over to the appropriate authorities. Section 42 dealt with processes involved in the transfer of assets between Departments as well as delegation of responsibilities by the Accounting Officer. It was a simple certificate. Section 44 contained information about delegations of authority, which was not relevant to the topic on hand. He would, therefore, address Section 43.

The WCG departmental Votes were appropriated funds by the Provincial Parliament through the budget process and associated Appropriation Bill. The budget of a Department/Vote is a quantification of its strategic priorities. The division of the vote budget into different programmes is indicative of its strategic objectives. Parliament appropriates funds for the achievement of departmental objectives. The PFMA places responsibility for planning on the Accounting Officer (AO). Effective planning and implementation involves the accurate allocation of funds for various programmes within a Vote and the AO is responsible for the effective monitoring of expenditure and had to take corrective action when operations do not go as planned. Budgets for programmes may be changed or amended due to changes in operational requirements.

Virements and why they are effected
Section 43(1) of the PFMA, allowed the AO to effect changes to the budget and to reallocate funds amongst the programmes. That reallocation is known as a virement. If there are savings in one programme, funds can be moved to another programme to defray excess expenditure in a main division or other programme within the same Vote. The amount that may be vired is limited to 8% of the total budget to discourage weak planning, no planning or poor planning.

Departments are not allowed to do the following via virements, without approval from Treasury:

• increase cost of employees.
• increase transfers and subsidies to other institutions
• introduce new transfers and subsidies to other institutions.

Departments are not allowed to shift savings via virements, that is:

• an amount appropriated for a specific purpose mentioned under a programme within a vote
• an amount appropriated for transfer to another institution.
• an amount appropriated for capital expenditure to defray current expenditure.

Virements could be effected after promulgation of the Appropriation Act in February for that specific financial year and a shift of up to eight percent of savings could be requested. Shifting of funds had to be reported to Treasury within seven days of the shift to ensure it was reflected in the adjustments estimates. Virements could also take place after promulgation of the Adjustments Appropriation Act in September/ October each year. He noted that an Adjustment Budget could have a 100% shift because it was a new Appropriation Bill. Mr Basson gave several examples of virements.

The amounts vired are detailed in the virement column of the Appropriations Statement which forms part of 2017/18 Annual Report (AR). The primary intention of Section 43(2) on virements is to ensure proper planning and allocation of funds and to ensure that spending aligns with the appropriations made by the legislatures to address the specific needs of the public.

The amount of savings in Section 43(1) may not exceed 8% of the amount appropriated under a specific programme and must be approved by the Accounting Officer (AO) or Treasury, depending on the limitations. The Act did not provide for Treasury to approve shifts in excess of 8%. Shifts in excess of 8% may only be authorised by the legislature through the Adjustments Budget process. Further virements of 8% savings are also allowed after the adjustments are enacted. Those are reflected in the Appropriation Statement in the annual report.

Discussions
Mr D Mitchell (DA) commended the presentation as straightforward. He sought clarity on the distinction between donations that were made and the ones that were effected through transfers.

Mr Basson said that provisions were made for donations, which either went to an individual or an organisation. The DotP had increased the donations in 2017/18 because the budget needed a top-up. That was in compliance with the PFMA.

Ms C Beerwinkel (ANC) thanked Mr Basson for clarifying some issues that had not been picked up by the Committee prior to the presentation. She, however, sought clarity on the exact time that virements could be done. She noted that the virements effected had to be documented and adequately reported in the Annual Financial Statement.

Mr Basson said that the Adjustments Budget dealt with the difference that occurred between programmes. He said virements occurred between the Adjustments Budget and the end of the financial year

Ms Beerwinkel said that most Committee Members did not know that DotP had the right to shift funds. She expressed surprise that the rule had been in effect for close to 15 years, but the Members of the Committee had not been informed about it. The Members of the Committee should have had the Adjustments Budget with them at the meeting to compare what was said in the Adjustments Budget and what was presented in the Annual Report. The Members of the Committee had to critically evaluate the difference going forward. Was the Adjustments Budget inclusive of the 8% or not? Did it include the eight percent that could be shifted at the beginning of the financial year?

Mr Basson said there was provision for the eight percent in the Adjustments Budget. However, the adjustments could be greater than eight percent. If there were no further adjustments, the eight percent remained the same, but values could change if further adjustments occurred. The AO had to account for all the adjustments effected.

Ms Beerwinkel asked Mr Basson to provide an explanation of how to calculate the amount of the Adjustments Budget at eight percent.

Mr Basson reiterated that provisions were made for shifts and virements in the Adjustments Budget. He showed a document to the Committee to narrate the amounts allocated to virements and shifts.

Ms Annelise Pick, Senior Manager: Provincial Government Finance: Expenditure Management, reiterated that there were provisions for shifts and virements in the Adjustments estimate.

Ms Beerwinkel asked how to detect virements that occurred at different times.

Ms Pick said it was currently difficult to pick up such information due to the limitation of the available information. However, Mr Basson said that there were examples of virements in his presentation to the Committee. He noted that an appropriated budget was adjusted at least twice a year. However, he stressed the importance of legality in virements. The person who authorised virements had to account for them before the Committee. The first legal adjustment was the Appropriation Budget and the second virement had to be done before the end of March.

Ms Beerwinkel interrogated the motivation behind the transfer of money from programme to programme. Did shifting occur due to improper planning? What services benefitted, and which ones were deprived due to the shifting of funds? The technical explanation by DotP would help the Committee to know exactly why funds were shifted between programmes.

According to the Chairperson, the Committee needed to know the motivation behind the transfer of funds, despite the fact that Accounting Officers had the right to do it.

Mr Basson said that shiftings and virements did not necessarily result from poor planning. For instance, funds saved on court cases could be transferred to other commitments like the sinking of boreholes in preparation for drought. Interrogation was, however, needed to prevent poor planning.

Mr S Tyatyam (ANC) remarked that funds, especially those earmarked for vacant positions, were shifted to other programmes. What was the effect of political interventions on the shifting of funds? Why were funds allocated for vacant positions when the government knew that those positions would not get filled? That might constitute poor planning.

Mr Basson said DotP had had challenges with the filling of critical positions and the compensation of employees (CoE). The departments filled vacant positions based on the principle of affordability. In response to the question on political intervention, Mr Basson said that the Cabinet, through the Provincial Treasury, said that 80% of the savings on critical vacant positions had to be transferred to stipulated programmes that were contained in the Adjustments Budget. He noted that people had different dispositions to jobs. Some were nominated and appointed but did not show up to fill the post; while some got better jobs, and some asked for a pay rise that the Department could not afford to pay. Vacancies of critical positions did not, therefore, result from poor planning and each case had to be interrogated based on its own merit.

Mr D Joseph (DA) commended the presentation as valuable information. He sought to know what happened to the Annual Performance Plans (APPs). Were there adjustments to the plans before the Adjustments Appropriation? Did the management report on the motivation for the virements and shiftings?

According to Ms Beerwinkel, there had been occasions where Departments had sought approval to amend their APPs or to take a target away from their APPs. That could not be done without the necessary approval. There should be specified circumstances under which adjustments could be made to APPs.

Adjustment to APPs was a vexing issue, which DotP sought to address. He noted that departments seldom amended their APPs. He, however, had noted that structures might be needed to re-construct new APPs if a new political party came into power after the APPs had been approved. In terms of Adjustments Budget and APPs, Mr Basson said that not all expenditures are reflected in the APPs. Sometimes, APPs included key strategic projects that might not be affected by virements.

Ms Pick said that the APP targets should be as realistic as possible. There were very few conditions under which amendments could be made to APPs. As part of the Adjustments Estimate process, the Provincial Treasury and DotP, through the Monitoring and Evaluation Unit, tried to set criteria under which departments could apply for the amendments of APPs. Firstly, departments could apply for amendments after the main budget had been tabled. The departments could also apply for amendments when the strategic direction had been amended since tabling the main budget. Ms Pick assured the Committee that the departments were obliged to provide reasons for deviations, in terms of targets that had not been achieved, at the end of the financial year. She noted that Treasury did not allow changes in targets to occur.

Mr D Joseph (DA) asked why the virement was exactly eight percent and for how long the guideline had been effective.

Mr Basson said that the guideline had been in circulation for nineteen years as prescribed by Section 43 of the PFMA. The eight percent had been stipulated in the PFMA in order to regulate the movement of funds between and within programmes. Virements depended on the governance in the Departments and were only used when necessary.

According to Ms Beerwinkel, what had given rise to the interrogation was the R500 000 that DotP had transferred to an organisation after the Adjustments Budget. She said the Committee could not find the R500 000 either in the main or the adjusted budget. It was not found on the organisation’s budget either. Would DotP have underspent if the funds had not been transferred to the organisation? What could DotP have done with the funds if they had not been transferred to the organisation?

Mr Basson said that the Programme Manager was in the best position to know the specific details about the organisation. He maintained that funds could be legally shifted between programmes as the need arose. The AOs and managers were empowered by the PFMA to manage funds when programmes did not go according to the initial plans.

Mr Tyatyam sought clarity on the timing and processes involved in virements and shiftings. Movement of funds should be done earlier in the financial year and Parliament had to approve of such transfers. That would prevent the departments from indulging in frivolous transfers of funds. He asked who took responsibility for the shifting of funds.

In response to Mr Tyatyam’s question, Mr Basson said that the AO was responsible for the shifting of funds. Virements might come very close to the end of the financial year due to unforeseen circumstances and the PFMA made provision for that.

Ms Beerwinkel said that the explanation on the amendments of Money Bills was helpful. The Committee would have insight into the activities of the departments if it made inputs into the amendments of Money Bills. However, she expressed doubt the virements/shiftings occurred very close to the end of the financial year due to unforeseen circumstances.

The Chairperson thanked Mr Basson and Ms Pick for a very interesting presentation.

Presentation by the Provincial Treasury
Mr Z Hoosain, the Head of Department (HOD) of Provincial Treasury (PT), introduced the presentation to be made to the Committee and requested the Chief Financial Officer (CFO) of the Provincial Treasury, Ms A Smit, to make the presentation. The Minister of Finance in the Western Cape, Dr Ivan Meyer, joined the discussion.

Mitigation mechanism to ensure that underspending remains within 2%
Ms Smit spoke about the current mechanisms within the PT that were in place to ensure that understanding remained within 2% during 2016/17. The PT had continued with those mechanisms in 2017/18 financial year and had implemented additional mechanisms.

The first mechanism was planning and compilation of the budget. Strategic planning meetings were held to determine the objectives and targets. Presentations were made at the Medium-Term Expenditure Committee (MTEC) 1 and 2 engagements to demonstrate the proposed impacts of the budget, the responsiveness to provincial priorities as well as the credit and sustainability of the proposed MTEF Budget. The budget for the compensation of employees (CoE) was determined by budgeting for ‘warm bodies’ and the identification of critical posts to be filled. It was difficult to determine the number of people that would leave government entities. Budgets for goods and services were based on the needs of departments to achieve objectives and targets of the PT and transfer payments were based on the needs of municipalities determined via a number of engagements.

The second mechanism was monitoring and reporting. Monitoring reports were compiled monthly throughout the financial year. The reports were discussed at top management meetings and submitted to the PT and National Treasury. For the 2016/17 and 2017/18 financial years, the focus area was particularly on CoE because all the Departments needed to be on a sustainable fiscal path. In light of that, the CoE Committee was established. Critical vacant posts were identified, recruitment action plans were compiled and the progress on the filling of funded vacancies as per a recruitment plan was presented at top management meetings. The Managers were requested to explain why they had not adhered to the dates as per the recruitment action plan. Expenditure on key contracts was monitored monthly and the status of those contracts was discussed at top management meetings. It was important to note that the gazetting of transfers had been brought forward to the third quarter.

The third mechanism was the Adjustments Estimate. That mechanism was used to surrender funds that would not be utilised due to posts filled later than anticipated, staff exiting the Department, differences in uptake of interns, delays in project starting times and transfer payments not taken up by municipalities. Though the PT had not completely achieved its targets, it aimed to put additional mechanisms in place in the 2018/19 financial year to keep underspending at 2%.

Additional mechanisms implemented for 2018/19
Ms Smit said zero-based budgeting would be undertaken as efficiency measures were introduced and budget would be aligned accordingly. The PT aimed to achieve better alignment between planning and budget processes. For instance, the finalisation of procurement plans prior to the finalisation of budget. The focus for 2018/19 was on managing expenditure on contracts and consultants since CoE had been stabilised via approved post lists. The gazetting of transfers to the municipalities would be brought forward soon after the conclusion of the second quarter.

Mr Hoosain said that the 2% was emphasized by the PT to get a better control of the compensation process and make it sustainable. Therefore, the process of compensation was institutionalised and there was a Committee that dealt with the approval of posts. The PT looked at opportunities to improve efficiency. The PT used the Districts, instead of municipalities, to support itself and that had proved to be efficient.

Discussion
Mr D Joseph (DA) asked about the relevance of the 2% target in terms of filling of the critical vacant positions. He sought to know if there were still challenges in filling the critical senior positions.
What levels of administration were referred to as senior management when it came to monitoring and reporting? He sought clarity on underspending in terms of contracts/consultants in relation to the 2%. Why was the gazetting of transfers done in the third quarter? Why was it not done earlier?

Mr S Tyatyam (ANC) asked if the PT had ICT system in place to monitor the expenditure of municipalities in terms of specified timeframes. What was the nature of the engagement between the PT and the municipalities? He noted that most underspending occurred because there was no readiness on the part of certain municipalities to receive funds on time. Also, some municipalities did not spend money as pre-planned.

Response
Mr Hoosain said that funds had been transferred in the last quarter (in February) three years prior to the 2017/18. The PT later decided to transfer the funds in the third quarter of the 2017/18 due to complaints from municipal managers. He noted that there had been improved efficiency when transfers were made earlier as that gave the municipalities time to spend the funds.

On the tracking of efficiency, Mr Hoosain said that the PT had systems in place to ensure that municipalities acted in alignment with their targets. The PT aimed to get money to the municipalities in the first two months of the financial year so that procurements could be done. Currently, the system did not allow the PT to get into the individual projects. However, that was a long-term vision for the PT. The PT required municipalities to report back on budget spending against deliverables on a quarterly basis.

On the levels of management, Mr Hoosain said that there were two layers of management. There was a top-level management that met monthly on routine matters like budgeting. That was up to the level of the Chief Director, Chief Financial Official (CFO) and Heads of Strategic Support. There was also an extended management level, including the Directors, that met every quarter.

In response to the question on the filling of critical senior posts, Ms Smit said that the PT had made significant progress in that regard. Unfortunately, there had been a number of exits in the past few months. As soon as a person left, the PT advertised in order to fill the vacant position. The PT had sped up the process of filling vacant posts. All critical positions were fully funded.

Discussion
Mr Joseph asked about the extent of underspending on contracts/consultants in relation to the 2%. Was underspending on contracts/ consultants under control?

Mr Hoosain noted that the PT had challenges with goods and services as well as CoE in 2016/17. The PT sought to get the CoE under control in order to achieve stability in the system. The PT had tried to avoid over-commitment in terms of staff establishment. Therefore, critical posts were prioritised. Once a person had been employed, that person could not be disengaged, and the management had to continue to pay the salary. However, the commitment was limited to stipulated timeframe under goods and services.

Mr Tyatyam sought an explanation as to why the Auditor-General differed with the PT on transfer payments as well as goods and services.

Mr Hoosain said that the PT had processes and requirements for transfer payments.

Consequence management mechanism for mitigating any future losses of IT equipment
The PT had reported in the 2016/17 Annual Financial Statement that lots of IT equipment had been lost. All cases that involved the loss of IT equipment were investigated by the internal control unit. The cost of the loss was recovered from the official if the loss was due to negligence. Cases were referred to employee relations if the loss was due to financial misconduct or if prescripts had not been followed. In cases of financial misconduct, there were disciplinary actions.

Discussion
Mr Joseph asked if there were any outstanding cases and the impact on the departments.

Ms Annamarie Smit, Chief Financial Officer, Provincial Treasury, said four cases had been referred to Labour Relations and appropriate actions had been taken against the affected officials.

Mr Tyatyam sought clarity on the nature of consequence management for officials in relation to the loss of IT equipment.

Mr Hoosain said that the consequence management was two-fold. One, there were processes to recover the money from the official if the person had acted negligently. The PT initiated the recovery process when the internal control unit reported cases of negligence. This process was being strengthened in the current year. Apart from the recovery of funds, the employee might undergo additional sanctions and there could be HR implications depending on the recommendation of Labour Relations on the matter.

Mr Tyatyam expressed concern about the loss of IT equipment. What did the PT do in cases of incessant offence? What cadre of employee was mostly associated with the loss of IT equipment? He urged the PT and WCG to put measures in place to ensure integrity and trust across all the Departments in the WC Province.

Mr D Mitchell (DA) sought clarity on the percent of IT equipment that was lost.

Ms Smit said there had been four reported cases involving the loss of IT equipment. She said adequate measures were in place to ensure the integrity of the investigation. Mr Hoosain said two cases had resulted from officials’ cars being broken into. Based on the recommendation of the internal controls, Mr Hoosain said the losses had been due to negligence on the part of the officials.

PT Circulars issued to Departments during 2016/ 17 and 2017/18
Mr A Hardien, a Chief Director at the PT, said that National Treasury instructions were considered in the PT circulars. The PT circular looked at the National Treasury instructions holistically and ensured that the intent of the instructions was covered. In many instances, the PT circulars were more detailed than those of National Treasury. That was to ensure that all departments followed the instructions in the circulars.

Discussion
Mr Joseph asked if there were other structured avenues, apart from the circulars, in which policies were discussed. Were the circulars circulated on a case-by-case basis as loopholes were detected?

In response to the question on the PT instructions, Mr Hardien said there was usually an advanced notice before the issuance of instructions. Every instruction in a PT circular was discussed in the CFO forum that occurred bi-monthly. They were also discussed in the sub-fora of CFOs, which happened monthly in most cases. That helped those in charge of implementation to know exactly what to do. The PT sometimes implemented National Treasury instructions selectively. That was due to the peculiarity of each province. Some of National Treasury’s instructions could be repealed at provincial level. That was always discussed and finalised at top management meetings.

Ms Beerwinkel cautioned that the list of circulars was not sufficient to address the concerns of the Committee. She requested the PT to provide details of instructions that had issued in the financial year under consideration.

Dr Ivan Meyer, Minister of Finance said that the Auditor-General would be glad to release the details of the instructions.

Discussion
Ms Beerwinkel noted that the reason for the discussion was the Treasury Note regarding the 8%. The Committee had not heard of the Treasury Note until it came out of the Treasury or DotP. She insisted that the PT give precise information about the treasury instructions.

Mr Hardien said that each circular had a purpose and was easily documented. The 8% referred to virements and shifts that could occur and it was provided for in National Treasury instructions that had been issued in May 2007. Those instructions had been issued in line with Section 76 of the PFMA.

The Chairperson said that the Committee would write a letter to the PT to address those matters that the Committee wanted to address.

Pronouncement of emerging risks which related to accounting, performance management/ reporting and compliance matters
According to Mr Hardien, Head: Financial Governance and Accounting at Provincial Treasury, the first emerging risk identified by the auditor had been the componentisation of assets. The Departments were encouraged to componentise assets in their asset registers as that would become a requirement in the future. The effective date to componentise assets had not yet been determined. That required that people, processes and governance had to be in place to achieve the componentisation of assets.
The second emerging risk was associated with inventory disclosures. The departments had been encouraged to develop their Inventory Management systems as the Inventory Disclosure Note would become a requirement in the future. The effective date had been postponed until a date determined by the Auditor-General.

The third emerging risk was associated with Treasury Regulations. National Treasury, for close to three to five years, had sought public comments on its Regulations. That had gone through three to four commentary processes. There was no indication of when the Regulations would be finalised for implementation. The Regulations were being revised, which might introduce a number of new requirements.

Another emerging risk was associated with the National Instruction Notes (NINs). NINs were issued by the National Treasury on a continuous basis in terms of S76 of the PFMA. Those instructions did not go through public participation or commentary process. That was why the PT selectively implemented National Treasury instructions in a fair, equitable and just manner. However, the AGS had cautioned that selective implementation might constitute non-compliance. The PT would review those Instruction Notes and reissue them to the various Departments and entities on a selective basis.

Emerging risk was also associated with the Accounting Manual on Transfer Payments. National Treasury was currently drafting an Accounting Manual to distinguish between “Goods and Services” and “Transfer Payments”. That possibly affected the future classification of those transactions. The PT was working with the Treasury on the Accounting Manual on transfer payments. Mr Hardien said that further discussion on the matter would occur at the meeting of Accountant-Generals on 16 June 2018.

Minister Meyer said that there was continuous interaction between the Western Cape Government (WCG) and Treasury. He noted that situations that posed major risks were discussed at SCOPA meetings.

Mr Hardien stated that further risk pertained to the Central Supplier Database (CSD) that did not contain all audit requirements. The CSD was a list of all suppliers in the country that the WCG could do business with but it did not house all the evidence required for auditing. For that reason, the WCG used its database of suppliers to complement CSD. The CSD did not verify the Broad-Based Black Economic Empowerment (B-BBEE) status level and had set a future date for the verification of B-BBEE status (1 October 2016). That had not happened and, even currently, the CSD did not verify the B-BBEE status of suppliers. The instruction did not exempt institutions from complying with the PPPF Act requirements for obtaining valid evidence of B-BBEE level status.

The OCPO had introduced the CSD on 1 September 2015. That was accessible on www.csd.gov.za, had reduced the administrative burden on both the suppliers and the administrator. The system verified and validated information with the South Africa Revenue Services (SARS), Companies and Intellectual Property Commission (CIPC) and the Department of Home Affairs, amongst others. The system was mandatory from 1 April 2016 for all suppliers to national and provincial departments and entities at those two spheres of government. CSD was the master supplier of information and should be modified by the Western Cape Supplier Database (WCSD). Suppliers registered on the CSD should not be excluded or disadvantaged in any way.

Suppliers that met all compliance requirements could access opportunities on www.etenders.gov.za. The eTENDER Portal enabled the suppliers to have access to tenders published on the platform. The compulsory implementation of that portal was 1 April 2016.

Emerging risk was also associated with the Public Service Regulations (PSR). The new PSR, as gazetted, had been effective since 1 August 2016. It posed a number of risks for the departments that needed to be addressed in subordinate and administrative Directives as well as Circulars by the Department of Public Service and Administration (DPSA) in order to give further guidance on its implementation.

In terms of Local Content, there had been an increase in the number of instances identified by Management and auditors, over the past two financial years, relating to non-compliance with Preferential Procurement Regulation relating to Local Content.

Disclosure on FSs: Economic Classification- “Transfer Payments” and “Goods and Services”
Goods and services included administrative fees, advertising, minor assets, bursaries to employees, catering, communication, computer services, consultants: business and advisory services, infrastructure and planning services, laboratory services, scientific and technological services, legal services, contractors, agency and support/ outsourced services and entertainment.
The disclosure of goods and services was detailed into what had been purchased, and further details could be found in the notes to the Annual Financial Statement.

Transfers and subsidies included funds transferred to provinces and municipalities, departmental agencies and accounts (Annexure 1B), higher education institutions (Annexure 1C), foreign governments and international organisations (Annexure 1E), public corporations and private enterprises (Annexure 1D), non-profit institutions (Annexure 1F) and households (Annexure 1G). Transfers and subsidies disclosure pertained to whom funding had been made available. Further detail could be found in the annexures of the Annual Financial Statement.

Discussion
Ms Beerwinkel said that she needed time to digest the information on emerging risks. She sought clarity on the Accounting Manuals and transfer payments. What was the difference between the Circular of 28 May and the current Modified Cash Standard Instruction of the WCG? Were the documents available for Committee Members to read? The Members needed to know the Modified Cash Standard Instructions about the transfer payments and the principles guiding various agreements, amongst others.

Mr Joseph noted that the PT had been using the provincial database set of regulations in conjunction with those of National Treasury. Did it mean that National Treasury allowed national companies to do business in the Western Cape? What was the impact of that on local content? In the Health Department, and the Province was allowed to choose the contractors from any part of the country. There were complaints from contractors in the Western Cape that their businesses were struggling due to the presence of national companies. Was there a way to encourage business owners in the Western Cape to participate at the national level?

Mr Tyatyam sought clarity on how the departments dealt with the issues of componentisation of assets and inventory disclosure. He noted that the Auditor-General encouraged departments to comply in that regard in order to minimise findings. He asked how many companies in the WC had benefited from the CSD, especially at the national level. Participation at the national level would create more opportunities and encourage competitiveness.

Ms Beerwinkel sought an explanation on the contradiction between B-BBEE and the CSD. How did the PT ensure that those on the CSD complied with the requirements of B-BBEE?

Response
In response to the questions on Accounting Manuals for transfer payments and subsidies, Mr Hardien said that a comparative analysis of the Economic Reporting Framework Policy and the Modified Cash Standard had been undertaken and the PT was ready to give the final Circular to the Committee.

Concerning inventory and componentisation of assets, there should be a system that accounted for the inventories in order to manage the huge data that was involved. The timeframe for the implementation of Economic Reporting Policy was between seven to ten years. The province had to maintain an inventory account to avoid difficulty when information was migrated from the old to the new system. From the accounting perspective, consideration was given to the materiality and significance of the item. The PT was working with technocrats on that matter.

Mr Isaac Smith, Head: Asset Management at Provincial Treasury said that the supplier database had been implemented in 2002. The database was improved in 2012 to take care of all governance requirements on supply chain management. When National Treasury started with the National CSD, they had considered the WC database and had decided not to run a document-driven system. The CSD system was data-driven. He noted that the CSD had started in 2015. Initially, the WCG sought exemption for the first year. Since then, the WCG had been implementing CSD fully. However, there were challenges with the CSD system. The WCG, therefore, maintained its supplier database in order to prevent risks.

In response to the question on conflict of interest, Mr Smith said that the CSD was linked with WCG and municipality systems. Information from municipalities was easily incorporated into the CSD. The Western Cape had adopted the CSD as the Central Master System. National Treasury had improved the system based on the recommendations from Provinces. The next challenge was the linkage of B-BBEE certificates.

Mr Tyatyam asked how the CSD system would deal with illegality in the tender process. How did the system deal with political interference in the tender process? There should be mechanisms in place to prevent government officials and their family members from interfering in the tender process.

Mr Meyer expressed concern that the system, in its current state, might not be able to detect illegality in the tender process. The WCG depended on the integrity of the supply chain management in an institution in terms of the tender they submitted. The institutions should give reliable information about the identities of all those involved in the procurement process. Therefore, the WCG urged its institutions to instigate a rigorous adjudication process. He said such issues would never be picked if companies failed to disclose their information in the bid document.

Mr Tyatyam said that the detection of fraud, by the CSD system, was simple if the WCG linked with other entities like the SARS, SAPS and Home Affairs to detect relationships between people.

The Minister said the WCG welcomed any information that could enhance the effectiveness of its systems. He urged the Chairperson of the Committee to coordinate with other Standing Committees on Public Accounts to seek ways to improve the system operated by the WCG. He believed that other Provinces could improve the efficiency of their systems. He said the WCG placed preference on local contracts when it came to business and at the same time gave them opportunities to play at the national level. He said that Local Government and supply chain management at different levels worked together to prevent tension between local business owners and national companies working in the Western Cape. Bigger companies were required to work with local companies to expand local businesses in the Western Cape. He said that a process was in place that helped local companies to register on the e-portal.

In terms of using local suppliers, Minister Meyer said that the CSD did not intend national companies to get businesses in the WC Province at the expense of local business owners. He emphasized that the CSD was a data-driven database system that was used by all procurement authorities throughout South Africa. Also, the WC system did not confine local business owners to the Western Cape province. The implementation of the CSD ensured a competitive platform where people were encouraged to participate in an open-market system.

Ms Beerwinkel asked how the requirements of B-BBEE would affect the people of the Western Cape in the future.

Mr Smith said that there were about 56 000 enquiries that went through the system. To prevent inefficiency due to the huge number of enquiries, the B-BBEE was used to facilitate the procurement process. The B-BBEE helped to deal with the risk of verification associated with the CSD system. Mr Smith suggested the linkage of the CSD system with the Department of Trade and Industry, SAPS and SARS, amongst others, in order to ensure an effective verification process through affidavits and certificates, etc.

Mr Hardien said that information on goods and services was contained in the Annual Financial Statement. Disclosure of goods and services meant that the transactions were subject to audit. Goods and services referred to the things that had been purchased with the funds given to the departments for their own use. Transfer payments had to do with how the Departments used the funds given to them to fund the operations of other entities. The difference between transfer payments and goods and services depended on whether the transaction was subject to audit scrutiny in relation to what was contained in the budget allocation and the entities to which the money was given.

Ms Beerwinkel insisted that the WCG should explain goods and services and transfer payments in terms of the Treasury Note that was issued. She noted that the purpose for the meeting was to discuss the Treasury Instruction Note. She requested the PT to explain goods and services as well as transfer payments in terms of the Treasury Instruction Note. She expressed dissatisfaction with the answers given by the PT.

Mr Hardien said that the PT would give the Circular and all relevant documents to the Committee.

Mr Joseph asked which official had the final say on the Accounting Manual. That official made decisions that were binding on everybody. He made enquiries about the Accounting Manual of 28 May and its impact on the work of SCOPA and the departments within the Province in terms of what they needed to comply with.

The Chairperson cited the difference in opinions between the Auditor-General and the Department of Agriculture, which had led to tension between the parties. The Chairperson believed that detailed documentation would help the Committee to get to the root of issues and clarify areas of conflict.

The HOD of the PT promised to furnish the Committee with documentation that would shed light on what was happening. The dispute between the Auditor-General and the Department of Agriculture was technical in nature. The dispute arose due to the difference in the interpretation on how transfer payments were structured. National Treasury had tried to give clarity to the interpretation. The Auditor-General had consulted with different parties to resolve the issue. He said Mr Hardien had presented the issue in a forum headed by the Accountant-General. The forum tried to seek accountability and transparency in terms of the Circular, which had been the subject of discussion for close to nine months. The HOD said that the Circular had been issued in its final version and it sought to address certain aspects of transfer payments. The PT aimed to ensure transparency in transfer payments and compliance with the Modified Cash Standard. The final Circular had been issued on the 28 May. It was, therefore, difficult for departments to make adjustments and necessary corrections since the Annual Financial Statement had been due on the 31 May.

Minister Meyer acknowledged the importance of the discussion. The difference in interpretation was a major risk. He was at a Cabinet meeting on 6 June 2018, where he had briefed the Cabinet on the matter. One of the mandates given by the Cabinet was to conduct comprehensive risk assessments for all departments in relations to transfer payments. The risk assessment would be evaluated by the PT, which then developed a risk profile and risk mitigation strategies. He reiterated that the Department had difficulty in effecting corrections because the circular had reached them three days before the deadline for the Annual Financial Statement. In light of that, Minister Meyer expressed concern about the principle of predictability, fairness and certainty in certain environments. The Minister had taken steps to engage with the Auditor-General on the matter. Mr Meyer also said that he had had engagements with the National Minister of Finance on the matter. According to Mr Meyer, it was important to keep the conversation open.

Mr Tyatyam expressed displeasure at how long the dispute between the Auditor General and the Department of Agriculture had lingered. He urged both National Treasury and PT to address conflicting areas so that the matter could be brought to a closure. He said that the Committee had not been told about the three-day issue in the previous meeting with the Auditor-General and the Department of Agriculture.

Mr Joseph said that it was important that the departments complied with relevant rules, policies and procedures. He said that the decision of the Auditor-General was not in alignment with good practice in terms of its timing.

Minister Meyer shed light on the decision of the Auditor-General. He said that there was a memorandum of understanding (MoU) for transfer payments in the Western Cape Province. The Province had a legal unit where the contracts, due diligence, outcomes and contract agreements were considered. He noted that people in other Provinces had used transfer payments to steal public funds. He cited the example of a dairy farm in the Free State. Therefore, the AG tried to put stringent measures in place to minimise the abuse of those payments. He advised that funds should go through the proper supply chain management procedure to prevent corruption. That was the explanation for the Auditor-General’s decision and what went on in the geopolitical landscape of South Africa.

Ms Beerwinkel said that there was a distinction between the issues being discussed and what had happened between the Auditor-General and the Department of Agriculture. While the dispute had been discussed a long time ago, the current matter affected all departments in the Province going forward. She stressed that the transfer payments should be handled as goods and services to ensure transparency. Why were certain activities performed by consultants on behalf of the WCG? Were they not classified under goods and services? She would like to see the Auditor General’s comments on the Department of Agriculture.

Mr Hoosain said that the PT had models to monitor transfer payments within the Province. The Accounting Manual should not be allowed to change business models of the departments. The PT may lose its leverage in doing business with the departments if transfer payments were done away with.

Minister Meyer said the removal of transfer payments would pose significant risks to the WCG. He cited the case of the Departments of Social Development and Health. In the case of the Department of Social Development, R1 billion out of the R2.3 billion budget went to transfer payments. Also, a huge proportion of the R23 billion budget for the Department of Health went to transfer payments. The transfer payments are classified as statutory funds and were paid to NGOs, government entities, higher education institutions, consortium of universities, amongst others. Those entities had complementary funding to augment the payment received from the WCG. That way, the WCG got value for its money. The removal of transfer payments meant that the WCG would cut its budget by almost 50%. Transfer payments are also paid to municipalities and other government entities.

Mr Tyatyam asked what the Ministry of Finance and the PT were doing to address the risks associated with transfer payments both at the provincial and national levels.

Mr Hoosain said that the Ministry of Finance and the PT sought to ensure transparency in the processes involving transfer payments. The issuance of the Circular three days prior to the submission of the Annual Financial Statement demonstrated a lack of fairness and predictability put the departments in a difficult position. There should be an early warning system that helped the department to prepare itself for any change in accounting standards or business module.

Preferential Procurement Policy Framework Regulations, 2017 (PPPFR)
According to Ms N Ebrahim (Head: Asset Manager at the PT), the Cabinet, on 22 June 2016, resolved that the PT approach the Cabinet for policy guidance on the implementation of PPPFR once gazetted for implementation. That was necessary because the PT had observed certain challenges when the promulgation was made.

Preferential Procurement Regulations Implementation Challenges:
The four main areas of concern in terms of risk were
raising of the 80/20 threshold from R1 million to R50 million.
prequalification criteria focusing on black-owned Small, Medium and Micro Enterprise (SMMEs) like military veterans, youths and people with disabilities
30% sub-contracting greater than R30 million
local production and content (special condition).

In terms of raising of 80/20 threshold from R1 million to R50 million, premiums would increase from 7.71% (R832 million) to 10.13% (R1.094 billion), which was R262 million extra based on the 2015/16 expenditure.
In terms of prequalification criteria focusing on black-owned SMMEs like military veterans, youths and people with disabilities, there were concerns on double preferencing and the ability to get value for money, fronting and collusion as well as non-compliance to PPPFA, B-BBEE Act and other regulations within the procurement environment.

There was a contradiction in terms of the sub-contracting that could not apply in all cases because of the diversity of industries and the negative impacts it had on Value for Money (VfM) and pricing.

Regarding local production and content (special condition), consideration had to be given to how local content fit into the context of the constitutional objectives of unfair discrimination. Another concern with local production and content was that the cost of verification was passed onto the procuring institutions, which could lead to increase in pricing.

WCG supplier base –contract awards for 2015/16
The non-BEE contribution to the total value of contracts for the 2015/16 financial year was R1.17 billion, whereas the BEE-compliant contribution was R6.75 billion. 96% of the total BEE contribution, R6 495 million, went to 2 287 SMMEs entities.

Proposals approved by the Cabinet
The Cabinet noted the progress made by the WCG in respect of the preferential procurement since the implementation of PPPR in 2011.
The Cabinet approved the issuance of an interim strategy as well as supply chain management governance requirements via the PT instructions to:
apply its discretion not to implement the pre-qualification criteria (i.e. regulation 4)
apply its discretion not to implement regulation 6(9)(a)-(c) and 7(9)(a)-(c)
makes provision for empowerment assessments to be conducted for all procurements for above R10 million (EMR threshold) and also allowing Departments to lower the threshold should its analysis so indicate and
makes provision for the implementation of regional indicators to target local suppliers via the e-procurement system and rotation of suppliers.

The PT issued Circular 12 and 15 and held information sessions with all departments in the Western Cape Province. A full review of the PT instructions was currently underway. Statistics that related to PPPFR were provided to the department via the quarterly Supply Chain Management Performance Insight reports. There were challenges in implementing the empowerment impact assessments; thus, the PT was in the process of developing an Environmental Impact Assessment (EIA) toolkit to assist the Departments with the process.

The Cabinet also approved the development of an Economic Procurement Policy that was assigned to Strategic Goals One (PSG1) of the Western Cape’s five strategic goals. The first draft of the Economic Procurement Brief had been received and the task team had met on 25 August 2017 to provide final input into the brief. The first Draft Policy had been tabled with the PT by the DotP policy team on 15 April 2018. The PT and the key stakeholders had provided comments to be taken up into policy.

The Cabinet had approved the Broader Transformation Policy that promoted private sector spend on economic growth and further strengthened the partnership with the private sector by enabling access to the WCG supplier database. The Broader Transformation Policy was a long-term objective.

Preferential Procurement Spend 2017/ 18
In terms of expenditure to suppliers registered on the WCSD per ownership category for the period, about R4.26 billion was paid to businesses that were 51% black-owned, R3.17 billion was paid to business for which the B-BBEE status was not indicated on the system and R3.12 billion was paid businesses that were less than 51% black-owned.

About R3.92 billion was paid to large businesses, R2.97 billion was paid to those where business size was not indicated on the system, R1.90 billion to Qualified Small Enterprise (QSE) and 1.77 billion to Exempted Micro Enterprise (EME).

In terms of Preferential Procurement Regulations for 2017/18, the total expenditure for the period was R16.18 billion.

Demographic representation on CSD
Ms Ebrahim gave a breakdown of CSD suppliers per province and a demographic description as at 16 April 2018. A total of 480 620 suppliers were registered on the CSD system across the nine provinces of South Africa of which 3 953 were military veterans, 3 388 people with disabilities, and 124 650 were youth whereas 346 833 suppliers did not indicate any criteria when they had registered on the system. In the Western Cape alone, 432 of the registered suppliers were military veterans, 316 were people with disabilities, 5 076 were youths and 28 722 registered but did not indicate any criteria when they registered on the CSD.

In terms of supplier spend per gender for the period 1 April 2017 to 31 March 2018, 131 653 were females (27.39%) and 189 181 were males (39.36%).

Discussion
Mr Joseph asked why the data on CSD suppliers per province and demographic description was collected on the 16 April 2018, considering that the financial year ended on 31 March. Did all procurement rules apply at the second phase of the procurement process, where people came forward to tender their goods and services, prices and the agreements they preferred to work with?

On the amount spent on preferential procurement, Mr Tyatyam asked about the “not indicated” category because the number was huge, and he did not have an understanding where the money went to. He asked why women were not included in the gender category. He noted that there are sometimes distinctions in the way females and women were categorised. How did the PT engage females/women in situations where the mainstream of supplies belonged to men?

Response
In response to the question on the “not indicated” category, Mr Smith said that those were suppliers that had not indicated any criteria when registering on the system. In terms of categorisation of size, Mr Smith said emerging small companies were those with a turn-over of less than R10 million in terms of the B-BBEE code. Quality small enterprises (QSEs) are those that did not have a turn-over of greater than R50 million in terms of the B-BBEE code and large businesses were those with greater than R50 million turn-over.

The CSD did not capture the turn-over for the PT to identify whether a company was small, quality or large. He said that the PT would coordinate with National Treasury to force companies to disclose their turn-over. Turn-over was one of the criteria referred to in the B-BBEE Act.

In response to Mr Joseph’s question, Mr Smith said that the PT was directly involved in procurement in terms of processes guiding goods and services. The data on CSD suppliers per Province and demographic description had been collected on the 16 April 2018, Ms Ebrahim said that the PT would arrange with National Treasury to address issues that have to do with dates.

In response to Mr Tyatyam’s question on the possible involvement of women, Ms Ebrahim said that women had not effectively taken advantage of the portion of the CSD that they needed to populate. She said that the PT intended to use procurement as a lever in its engagements with suppliers across all categories. The PT aimed to use the available data, information and intelligence to influence the procurement environment.

Closing remarks
The Chairperson thanked the Committee Members and everyone that was in attendance. The Committee decided to write a letter to the PT to address further areas of concern.

The meeting was adjourned.