Department of Public Enterprises 2017/18 Annual Report, with AGSA input

Meeting report

The Chairperson welcomed the Auditor General’s delegation and the independent audit firms providing services for the entities. Mr Thuto Shomang, the new Acting Director General, who joined the Department of Public Enterprises (DPE) for a period of six months, introduced himself to the Committee. 

DPE audit outcomes: AGSA briefing 

Mr Sybrand Struwig, Senior Audit Manager: Auditor General of South Africa (AGSA), said that for this presentation, the percentages were calculated based on the completed audits of the Department of Public Enterprises and its entities, which were audited by AGSA and SizweNtsalubaGobodo Grant Thornton (SNGGT) respectively.

The status of audits outstanding as at 31 August 2018 were:

Denel Group  

Financial statements were received on 31 July 2018. Denel was still negotiating with lenders to address going concern challenges, since they could not submit its annual financial statements (AFS) with a going concern assumption.

Safcol

The audited Industrias Florestais De Manica (IFLOMA) financial statements, a subsidiary of the South African Forestry Company Limited (Safcol) in Mozambique, were not received in time to audit the consolidated figures of the group.

South African Airways (SAA) group

SAA did not submit formal AFS for audit due to going concern challenges, amongst others. Financial statements, excluding going concern, were received on 31 July 2018.

The audit outcomes for the DPE remained unchanged, with an unqualified audit opinion and no findings

Alexkor had an unqualified opinion with findings.

Eskom and Transnet both had a qualified outcome with findings. Transnet had regressed with this opinion for this financial year.

Entities with outstanding audits were SA Express, Safcol, Denel and SAA.

Irregular expenditure increased from R4.976 billion, to R27.746 billion. R12.260 billion (44%) of the irregular expenditure was for payments/expenses in previous years which was uncovered and disclosed for the first time only in 2017-18. R15.486 billion (56%) of the irregular expenditure was for payments/expenses in 2017-18. It included payments made on contracts irregularly awarded in a previous year. If the non-compliance was not investigated and condoned, the payments on these multi-year contracts continued to be viewed and disclosed as irregular expenditure.

Recommendations

• There must be timely consequences for officials who deliberately or negligently ignore duties and contravene legislation. A list of action taken against transgressors must be provided quarterly to the Portfolio Committee (PC) for the follow up of irregular, fruitless and wasteful expenditure.
• The PC should monitor the implementation of commitments by accounting officers/authorities and the executive authority.
• The PC should request management to provide feedback on the implementation and progress of action plans to ensure improvement in the audit outcomes of the portfolio.

Discussion

Ms D Rantho (ANC) suggested that SNGGT, which had audited these firms all these years, should be invited to appear before the Committee because there were a few concerns and questions to be raised with them, not only about this year’s audit report alone but about previous years as well. There seemed to be a lot happening around this audit firm and their work with the entities. As internal auditors, they should take measures and act immediately they see anything going wrong, instead of waiting for comments from the AG. On the recommendations of the AG, the contravention of the legislation had been ongoing in the Department and its entities.

This was almost a cancer in all the government entities in South Africa. If entities had unqualified opinions with findings, what was the AG going to do? Since a positive response was not forthcoming with the AG’s recommendations, Parliament and the AG had to work together to find a solution to this scourge. The DPE was expected to act decisively on its entities when they were constantly not getting a clean audit year after year. As for SAA, did it not submit its financial report to the AG when it was under the Treasury, or had their non-submission happened only now? The DG should confirm if the entities had internal audit branches and sections at the management level. Was there an audit committee chaired by the sub-committee of the board, as was normally the case? How was the independence of the sub-contracted audit firm maintained?

Mr S Swart (ACDP) was of the opinion that the AG’s report showed the stark reality and extent of state capture. Were SA Express, Safcol and Denel all audited by the same private audit firm? It was shocking and a major concern that they had failed to submit their papers in time to the auditors. The regression at every level in these entities, as illustrated by the AGSA, was set back for the country. As a result of significant deviations in the audit outcomes, SA now finds itself with various commissions of inquiries. The state of affairs in our public entities, and learning that financial statements were not even submitted -- and those submitted had major audit worries -- was truly shocking.  The AG’s office needed more teeth, because this had to stop, as there was absolutely no consequence management. This was not a game, because even when Parliament tried to do its work, death threats had been issued to Members. This was a very serious matter.  

Eskom’s irregular expenditure over the years, which had only been uncovered last year, was mind boggling. What about Transnet, with the locomotive contracts that was ongoing? The same would apply here. This was shocking and unacceptable. Did irregular expenditure include deviations applied for? How could so many gross irregularities in procurement take place at Eskom when an audit was carried out every year? This was a severe indictment of the auditing profession for putting the nation at risk. The possibility of defaults at Eskom and the entities was no joke, because the country was at the precipice. One had to be thankful to courageous men and women who were working tirelessly to fix this mess.  He expressed thanks to the AGSA for painting a stark picture of where the country was.

Mr E Marais (DA) said that the starting point of making mistakes began with the appointment of chief executive officers (CEOs) to state-owned companies (SOCs). Looking back at the Eskom inquiry, what was seen today was understandable, but not acceptable. Considering the figure of R26 billion in irregular expenditure, if SA taxpayers were to see this figure, the big question mark would be what did Parliament do and why did the management of SOCs fail to do their duties? The future looked bleak, and to move forward one would have to drastically improve the way SOCs were managed. This Committee, managers of these entities and the AG would have to work together, because they were the main stakeholders in this endeavour. They all had to engage in future to stem the rot and ensure that those who were responsible faced the consequences. In most case, one only saw the principal actors in the corruption resign, and then pop up in another institution with a new position.

Ms N Mazzone (DA) thanked the AG for a very good report which unfortunately painted a grim picture -- which was not the fault of the AG. It was important to understand the enormity of the amount involved in irregular expenditure. The increase in irregular expenditure had been over R22 billion, which was totally obscene. She understood that the AG was trapped in legislation that allowed entities to ignore its recommendations, but at what point would the AG come to alert the authorities that it was picking up serious financial lapses that could lead to corruption? There was no way one could see this much increase in irregular expenditure without corruption taking place. If there was a hint of corruption anywhere that came to Members of Parliament’s attention, they were legally obligated to report it. When, then, would the AG start reporting these things? It was high time Parliament ensured that the AG had more teeth. 

SAA must never be allowed to deny the AG to see its financial report, because they were legally mandated to submit this report to the AG. The AG was a Chapter 9 institution, and not even Parliament could stop them from doing their job because the constitution guaranteed them complete independence. SAA was now acting as if it was above the law and if the AG could not bring it to order, then Parliament must be informed. A Chapter 9 institution in SA must never be treated with disdain like this.

Mr R Tseli (ANC) wondered why the Department kept getting a clean audit, unlike its entities that were constantly struggling. Best practices in the DPE mandated it to assist entities which were struggling. This issue must be taken up with the Department.

Responses

Mr Kgathatso Tlhakudi, Deputy Director General (DDG): DPE said that there were internal audit committees in the all DPE’s entities, but in some instances this service was outsourced. The DPE had an internal audit unit while some entities, such as Alexkor, had this job outsourced because of their small size. Transnet was outsourced as well, while the AG audited some of the firms as well.

Mr Nkanyiso Ngobese, Director: SNGGT, said that Parliament could at any time request information from their office and they would be happy to oblige. Because they worked in the financial services sector, it was incumbent upon them to report any cases of corruption discovered in the line of duty to the appropriate authorities. In cases were irregularities had occurred, especially in the case of Eskom which he audited, it had to be reported and when reported it had also to be condoned. If, for example, it was a case involving tax clearance that fell within the ambit of the National Treasury (NT), they had to list it as an irregular expenditure and report it to the NT for condonation. In the case of deviations applied for from the NT which they have the right to approve or decline, it would not be reported as irregular expenditure if it was approved. Eskom did have a problem of operating as a growing concern, especially before the present board was constituted. It was after the new board was put in place that the banks agreed to lend money to them again. The audit firms had always been proactive in highlighting the financial woes of Eskom.

Ms Zolisa Zwakala, Business Executive: AGSA, in answer to what more could be done by them, added that there was a currently a Public Audit Amendment Bill in Parliament which had gone through the National Council of Provinces (NCOP) and was awaiting the President’s assent. This legislation would allow AGSA to refer material irregularities and serious contraventions of the law for further investigations to the Directorate for Priority Crime Investigation (HAWKS), the Special Investigating Unit (SIU), and the like. AGSA was currently drafting regulations to operationalise that legislation once it became law. Action would be seen in terms of consequence management next year instead of the present “arm-twisting” law governing AGSA, which allowed it only to issue recommendations.

Mr Alex Philippou, Director: SNGGT, added that over the last four years, there had been over six cases whereby the authorities had been alerted to irregularities at Transnet. In this financial year alone, he had personally reported 13 cases of irregularities to the appropriate authorities. The issue here was that those authorities did not follow up with investigations. Those irregularities were highlighted in detail in the annual reports. The concern raised by Members was in order because the amount of R27 billion in irregular expenditure so far identified could be even more, because some of the these contracts were only at the beginning stages as of now. Contracts awarded for R100million at the commencement stage could end up being R300 million when they were completed, for example. At Transnet, 53% of the irregular expenditure was uncovered during the external audit process, and all this had gone through their internal audit undetected.  The reality was that mechanisms to identify these irregularities were not strong enough in these entities. The issue here was how to deal consistently with validation and reporting of irregular expenditure and then consequence management, because if the consequences were harsh, these irregularities would not be happening.

Mr Luvo Mvinjwa, Director: SNGGT, said that at Alexkor there was the lack of continuity of accounting officers, which was hampering their ability to unearth cases of improper financial conduct. There was therefore an unstable environment that was creating a vacuum in their financial reporting.

Mr Tlhakudi said that there had been a systematic weakening of oversight functions, not only at the entities, but also in the departments, and the consequences of that were now very glaring. The PC may get a complete and clearer picture once the other entities whose financial audit reports were yet unaudited were completed. The figures might be worse than they were now.

Mr Swart advised the auditors to come to Parliament when they uncovered any wrongdoing in the course of their duties. Parliament remained ready to take the matter up with the appropriate investigation and law enforcement agencies, and any infringement of the Public Finance Management Act (PFMA) could result in personal liability for the officials concerned. Parliament would also like to know how directors were appointed, as offending directors could also be declared delinquent directors in terms of the Section 162 of the Companies Act. All hands have to be on deck to ensure that these things never happened again, the PC was grateful for this interaction.

Ms Mazzone was relieved that 13 cases of irregularities had been reported by the auditors. She asked whether there was any form of confidentiality clause that the external audit firms entered into with the entities when they audited their financial records. Was that kind of attorney-client confidentiality applicable? When this matter was reported to the Minister, why had the Minister not taken action? How could Parliament have gained access to what was reported to the Department before this presentation to Parliament?

The Chairperson told the Department to ensure that when their entities came to Parliament to present their annual performance plans (APPs), they must come with the year’s action plan, reporting on the investigations being conducted as a result of the opinions raised by the AG. The audit reports stated that only Eskom had carried out some investigations emanating from the AG’s recommendations, and evidence for disciplinary actions must be presented to the PC. Some of the investigations were complete and others were still in progress. Parliament wanted to know what Transnet was doing about what was discovered by the auditors. The supporting documents requested by the AG must also be brought to Parliament, including explanations for deviations over a five-year period. All disciplinary processes must be reported quarterly.

DPE’s 2017/18 Annual Performance Report

The Department focused on the non achievement of the targets in its 2017/18 annual performance report. These included:

Development of a business intelligence system

The database from SHC was consolidated to initiate a process of developing an information portal for SOC’s reporting requirements. It was anticipated that this information would support the development of the business intelligence (BI) system. However, the information had been insufficient. The system development required raw data to integrate and inform interactive analysis and dashboards. Standardisations of key oversight processes would be undertaken in 2018/19, which would determine the suitable BI system required.

Automation of business processes

Automation of the three processes was not finalised by March 2018 due to protracted engagements with relevant stakeholders to finalise the standard operating procedures that informed the automation of the processes.

Long time scenarios developed in the six sectors where SOCs operate

The project was discontinued due to the lack of timely submission of proposals by the universities.

Develop draft Bill on shareholder management

The development of the Bill on shareholder management was dependent on a number of factors:

• Inputs from the Inter-Ministerial Committee (IMC) on SOC reform before submission to Cabinet;
• Undertaking of the Socio-Economic Impact Assessment System (SEIAS) of the policy prior the finalisation of the Bill;
• These undertakings could not be finalised by March 2018;
• The appointment of the legal firm to develop the Bill and assist on other SEISA documentation

Approval of six business cases for the development of black industrialists to leverage on SOC procurement and industrial capabilities

Six business cases were developed by the Central University of Technology (CUT) and the University of Pretoria (UP), but not approved. Further engagements with the institutions were required to refine the business cases.

The Department’s annual performance had been 72%, a decline compared to the 2016/17 performance of 82%

The following issues contributed to the non-achievement of targets for the performance under review:

• Quarterly milestones not linked to the achievement of annual targets;
• Deviating from quarterly milestones in the achievement of annual targets;
• Contracting targets which relied greatly on external stakeholders;
• Implementing APP projects late in the year; and
• Inadequate and untimely implementation of corrective actions and risk mitigations.

The Department had spent R250.4 million, or 94% of its total budget of R266.7m. The under-spending of R16.3m included R14.731 million for the compensation of employees, which was due to vacant posts which were put on hold as a result of the re-alignment of the organisational structure 

The Department had made payments to suppliers and service providers within 30 days from receipt of invoices in terms of section 38(1)(f) of the Public Finance Management Act (PFMA) and Treasury Regulations 8.2.3. The external auditors had confirmed that for 2017/18 financial year, the Department had taken an average of three days of pay suppliers and service providers.

The Department had continued to maintain a sound governance and compliance framework for how it utilised its resources. It had achieved a clean audit outcome for the financial year 2017/18, as it had in 2016/17. AGSA had not identified any material findings on the usefulness and reliability of the reported performance information. The Department had presented its 2017/18 annual financial statements, which were free from material misstatements, to the AG. AGSA had not identified any material findings on compliance with specific matters in key legislation, or any significant internal control deficiencies.

Discussion

Mr Tseli said he was surprised to learn that with all the skills at its disposal, the Department had been unable to assist its entities to attain a clean audit. Why was the DPE always getting a clean audit and not the entities? There seemed to be no correlation between the Department achieving 100% when some of the entities did not even submit annual statements to the AG -- this did not make sense. The same applied to consequence management. What happened to the entities that did not submit annual financial statements to the AG? What was the consequence management -- or would it continue to be business as usual? The 30% vacancy rate from 2013 to date, and the re-alignment of structures spoken about -- had this been based on the President’s pronouncements, or before that?

Ms Mazzone spoke about the security of coal supply and the necessity to ensure its availability going forward. There was also the issue of the bogus mandate that allowed Eskom to buy coal only from only one supplier. Had all these policies been audited or were they to be audited in the next financial year? It was heartening to learn that the letters from the management to the AG were not confidential. Could copies of the 13 letters written by the external auditors to management be made available to the Committee? Was any financial pay out effected with the sudden resignation of the former DG a few weeks ago? If so, would this be taken into account this financial year or was it to be reflected next year?

Ms Rantho was concerned at how budgets were being used within the entities, because what was presented by the Department did not reflect the observations made by the AG. Could the DPEexplain why they set targets they could not achieve? Were they forced to set those targets even though they could never achieve them? When the DPE looked at its entities and their performance, how did they feel knowing that most of them were riddled with financial mismanagement and were constantly operating at a loss? Which banks would give loans to an entity knowing that they ran at a loss to the tune of R100 million in one calendar year? What was the Department’s response concerning the AG’s report which stated that irregular expenditure had doubled in this financial year? Did it have the case numbers of those who mismanaged the funds of this Department? The Committee wanted to be able to track these cases to follow their progress.

The Chairperson commended the Department for effecting mechanisms that enabled them to pay suppliers within 30 days. This was good, because it would alleviate the suffering of small suppliers who depended on this money to continue to function and run their various businesses. Risk management, however, should mitigate risks and help the Department to hold executives to account. More needed to be done in this area. The Department’s expenditure was currently sitting at 94%, and this was not good enough because NT only allowed a 5% leeway. The PC was happy that the Department had not incurred any irregular expenditure, but assistance had to be given to its entities to match its level.

DPE’s response

Mr Shomang said that targets had to be measurable and achievable, so the Department would be careful going forward in setting them. The process of revising the annual performance targets had already begun. The Department had also noted the comments about spending at least 95% of its budget, as demanded by the NT. The corporate plans had to be improved so that entities could be held accountable. The CEO of any organisation was the highest risk manager, and the fact that risk management was failing in the entities was an indictment of the CEO and the accounting officer in particular. The SCM and risk management teams needed to be looked into. Internal audit functionaries in any organisation should be independent of the management. When they were functioning properly, they should report directly to the audit committee, which was the committee of the board who were answerable to the management executive. When this was not functioning well, that was where one saw financial irregularities on this scale.

Ms Benedicta Mogaladi, Chief Financial Officer (CFO): DPE, commented on the question of setting targets that were difficult to achieve, and said the Department found itself in a difficult place because it always had to set targets that were “SMART” and achievable. The SOCs also found it difficult to work with targets set by the shareholders without the necessary instruments to achieve them. This was even complicated by the targets of an 80% performance level set by the AG, with high performance standards set to qualify for any incentives.

Eskom needed structural changes on how the business operated for it to come out of the doldrums. Most entities were technically insolvent, so their business models had to be re-looked at.

Ms Avril Halstead, Acting Deputy Director General (ADDG): DPE, said the problem with the airlines that were late in submitting their annual financial reports, was how to institute consequence management as well as to enforce them. The Department was now working on putting in place submission deadlines in the shareholder compact, and outlining that late submission could affect their annual bonuses, for example.

Mr Tlhakudi, in answer to the question on why the Department was not assisting its entities to obtain a clean audit, said that the DPE was actually “running thin” because of the 30% of vacancies that were yet to be filled. It also had to deal with the criminal elements within the entities who test the internal controls to exploit weaknesses. These weaknesses needed to be eliminated, and this was being done at the executive level and would cascade down to the lower levels.

The meeting was adjourned.