Audit Outcomes: AGSA briefing; Department of Public Enterprises 2018/19 Annual Report, with Deputy Minister

Meeting report

The Chairperson welcomed the committee and presenters. Thereafter, he read out the apologies.

Briefing by Office of the Auditor-General of South Africa (AGSA)
Ms Zolisa Zwakala, Business Executive, AGSA, stated that the AGSAs task was to enable oversight, by auditing and reporting to entities and oversight committees. The AGSA presentation would cover the reports and statements of the Department and all 7 managed entities. Annual audits by the AGSA cover 3 areas: Annual Financial Statements (checking validity, accuracy and completeness of the AFS), Performance information (linked to the mandate of the department/entity, interrogating objectives set and performance) and legal compliance.

The AGSA outcomes had 5 possible results: a clean audit (unqualified with no findings), a financially unqualified opinion with findings (entity produced credible AFS but there are issues in either performance or compliance, or both), a qualified opinion (a few issues with the AFS), an adverse opinion (numerous issues in the AFS which interfere with total validity of the AFS), or a disclaimed opinion (where there is not enough information to validate the AFS) – this is the worst form of opinion.

In respect of the DPE, the AGSA reported on 8 entities (DPE and 7 entities). The AGSA would only be reporting on 5 entities in this presentation: SAA, SA Express and Alexkor were not included in the report due to issues with their statements.

The DPE has a number of entities under management: in transport and logistics: SAA, SAE and Transnet, in defence: Denel, in resources: Alexkor and SAFCOL, and Eskom in Public Utilities. In the last 5 years, there had been a regression in audits. Denel and SAA had lost their clean audit status, and while the DPE had gained a clean audit, Eskom, Transnet and SAFCOL had regressed to qualified audits, and SAA, SA Express (SAX) and Alexkor had outstanding audit reports. Denel had a disclaimed outcome due to poor quality of financial statements.

The Alexkor & SAX audits had been concluded by AGSA, but AGMs had not been held, and thus their statements had not been tabled in Parliament.

SAA had not submitted an AFS for the last 2 years for audit. The last audit report for SAA was for 2016/17. Subsection 55 of the PFMA required the board to prepare an AFS and submit it to the Treasury, AGSA and Parliament 2 months after the close of the financial year. There had been a lot of communication with the board and Minister to stress the importance of tabling of statements. Until such time as AGSA has these statements, it can not issue an opinion.

In terms of the submission rate of AFSs, the AGSA received all except Denel and SAA on time. In terms of AFSs without errors, only the DPE submitted their statements without errors. Top qualification errors were in irregular expenditure (Eskom, Transnet, SAFCOL, Alexkor) and fruitless and wasteful expenditure (Eskom & Denel). Only the DPE submitted performance report without errors. SAFCOL, Eskom, Transet and Denel had errors in their APRs.

In terms of compliance with legislation: top 5 non-compliance areas involved
-Procurement and contract management
-Quality of financial statements
-Prevention of irregular, fruitless and wasteful expenditure
-Consequence management
-Revenue management

In terms of financial health and financial management: auditors are required to assess going concern matters. If an entity needs to constantly borrow or be bailed out by the state, the AGSA would report on this. Eskom’s current liabilities exceeded their current assets, was reporting losses, and had a heavy reliance on debt to sustain liquidity. Transnet could service their debt should certain loan covenants be recalled immediately. Denel incurred a loss in the financial year and was projecting losses for the year ahead.

Summary of key financial indicators:
-Current liabilities exceed assets (Eskom)
-Negative operating cash flow (none)
-Deficit for the year (Eskom, DENEL, SAFCOL)
-Debt collection period over 90 days (Denel, ESKOM)

Fruitless and wasteful expenditure is incurred in vain and could have been avoided – no value is derived. This category increased from R80m in the previous financial year to R1.195bn in the 2018/19 financial year.

R522m of this was Eskom’s purchase of coal that it did not take delivery of as there was no transport contract in place. Denel incurred penalties and interest on overdue accounts of R136m.

Irregular expenditure does not follow the law but may have value nevertheless. This also increased from R31bn in 2017/18 to R86bn in 2018/19. R41.5bn related to Transnet locomotive transactions. Irregular expenditure involved non-compliance with competitive bidding processes, incorrect classification of emergency procurement, non-compliance with procurement regulation and supply chain management policy, and interaction with non-tax compliant suppliers.

Supply chain management compliance stagnated, with only the DPE not receiving material findings.

There had been a lack of consequences for non-compliance or irregularity, with allegations not being investigated at all or not well investigated at Eskom.

Root causes could be summarised as threefold:
-Slow response to risks and internal deficiencies
-Inadequate consequences for poor performance or transgression
-Instability or vacancies in key positions

AGSA’s recommendations were as followed:
-Consequences for officials
-Increased urgency in responding to messages from entity management and the executive authority
-Stability in key vacancies
-The Portfolio Committee should monitor implementation of commitments by accounting officers and the executive and ask management for updates

Non-submission of AFS by SAA for the last 2 years needed urgent attention. AGSA had introduced additional efforts to improve financial and performance management.

Discussion
The Chairperson thanked the presenters. Before he ceded to Members, he checked if there were external auditors present who wanted to present.
           
Ms Zwakala relied that the SNG auditors for Eskom & Transnet and Ngubane auditors for Alexkor were available to answer questions.

Ms J Tshabala (ANC) asked who these officials were that were not doing their jobs properly. In terms of Denel not tabling its report due to mistakes found by AGSA and the subsequent late submission, what could be done about this? How far could the AGSA go in terms of accountability? What was the punitive measure for non-tabling of reports, if there was one? Did the AGSA highlight the risk of non-payment of debt to Eskom? She also enquired as to AGSA’s procedure where the entity being audited was in severe financial crisis, and what enforcement measures could be taken in this regard.  

Ms J Mkhwanazi (ANC) enquired as to the impacts of entities not submitting AFSs. On the matter of non-quantification of statements, what was the role of the Auditor-General? Who was supposed to correct this lack of evidence for AFSs? She asked the AGSA for recommendations to the Committee as to what it could do to stop the disregard of compliance. Furthermore, how could the Committee assist in making entities able to sustain themselves? She enquired as to AGSA’s role after the audit. After one had the audit report, what could be done to achieve the desired outcomes?

Mr N Kwankwa (UDM) noted that politicians needed to take a decision on SOEs that kept coming to the government for bailouts without clean audits. Parliament was blindly giving bailouts to entities that did not give the financial information necessary to make these decisions. He recalled that the Public Audit Amendment Act allows the AGSA to compel accounting authorities to act and order further investigations in case of material findings. How did AGSA use this to ensure accountability? SOEs that came to Parliament for money should not be given it until their financial statements were in order – if Parliament gives them money, it is encouraging lax financial discipline. If an entity’s liabilities to assets ratio was less than 1 they are not a going concern – when SOEs report to the Committee, they never have this information. He proposed that, in future, the Committee should require this information to give it an idea of the liquidity of SOEs.

Inkosi E Buthelezi (IFP) enquired as to whether an AFS that was over 2 years late could be trusted. He imagined that the answer was no. In terms of accountability, where did the AGSA think things started to go wrong?

Mr S Gumede (ANC) echoed Ms Tshabalala’s question, asking whether Denel’s late submission of its report could have influenced outcome of the AGSA’s findings. Were there any other matters that could influence the outcome of audit findings? If an entity like Denel received a disclaimer, when did the AGSA say the organisation is no longer viable, or was this outside of AGSA’s mandate?

Mr Gumede asked who confirmed AGSA’s findings, if these findings could be queried or verified at all. He enquired as to the possibility of findings being influenced by what auditors personally knew about the entity. For instance, could the disclaimer be because Denel failed to submit substantiated statements?

Ms D Dlamini (ANC) asked, regarding fruitless and wasteful expenditure, what the AGSA’s actions and recommendations were.

The Chairperson echoed the concerns of his colleagues over the disparity between the good performance of the DPE and the substandard performance of its entities. As auditors, what was it that the DPE was doing for itself but was incapable of doing in the entities? Was there a connection between the evidence being given at the Zondo Commission and issues in these audits?

Ms Zwakala replied that the AGSA primarily dealt with the CFO, but was able to talk with everyone through the chain of management. The people entrusted with making sure policies were in place were members of the board. Section 51 of the PFMA was powerful in that it placed obligations on the board.

She characterised the issue of late submissions as a catch-22. The Minister wrote to the Speaker in terms of the issues at Alexkor and SAX, as the law allowed him to do. Where AGSA was able to complete an audit, it had certain powers as well. In terms of the PAA, AGSA had the responsibility and power to table the audit report itself.
           
Regarding issues of financial health, the AGSA’s mandate was to audit and report, and it thus could not stop auditing any entity. If issues were increasing, the AGSA had to know, if things were getting better, AGSA had to know. She noted that just about all the entities in the Department had a turnaround plan, but many of these turnaround plans had very little traction, and unstable leadership made this even worse.

Management was supposed to quantify lapses in the preparation of financial statements. If there was an issue it must be able to be disclosed and quantified.

Regarding SAA’s non-submission, the AGSA had done what it felt it could, and the feeling was that it was up to other powers-that-be to drive action. If the board or minister could not do anything more, government come to the party. AGSA did not have the power to do any more.

The AGSAs findings came from audits in accordance with what was publicly available (in terms of the PFMA, Companies Act etc.). So, the prescription against which it audited was public legislation. Entities mostly agreed with AGSAs audit opinions. This meant there was credibility in what it was saying. There were cases of disagreements, but this was normal. Entities admitted where there had been deficiencies in their reports and statements

Mr Wikus Janse van Rensburg, Senior Manager, AGSA, clarified that, after auditing, the AGSA did a debrief, met with the executive authority to get commitments, and engaged the board. The AGSA worked quite closely during the year to track progress and give recommendations.

Denel’s late submission was at least partly linked to instability in the CFO position. Late submission was always an issue, but even with this lateness, AGSA only issued a qualified opinion.  

Mr Alex Philippou, Director, SNG Grant Thornton and Lead Audit Engagement Partner, Transnet, spoke to fruitless and wasteful expenditure of R507m at Transnet. Fruitless and wasteful expenditure was a waste of money, as nothing was seen in return. The R507m encompassed assets purchased that had never been used, as well as contract management issues, including paying for software licenses that it was not using. Auditors would follow up on this: was it illegal? Was it poor management? What had been done? Where fruitless and wasteful expenditure was present, it was incumbent on management to act, and recover the money where possible. The auditor would follow up at the next audit about issues it identified in the previous audit. Was it as a result of issues mentioned at the Zondo Commission? The simple answer was yes. There were contracts agreed 5-7 years ago that were still running. A lot of the irregular or wasteful expenditure was as a result of these contracts. In terms of outcomes it depends how one looked at it: was it a good thing that one sees what was being wasted, or bad that all this money was being badly spent?

Mr Nkanyiso Ngobese, Director, SNG Grant Thornton, responsible for Eskom auditing, spoke to the collection of debt by Eskom. What Eskom had done in the past would be to go to court to implement debt recovery processes. There were also processes where debt recovery had been attempted but the process implemented had not led to Eskom receiving money. As for recommendations on assisting Eskom in revenue collection, the monies due to Eskom by organs of state and government could be looked at as a priority for the Committee, and this would translate to significant progress.  

In terms of irregular expenditure, entities were expected to monitor irregular or fruitless expenditure. Entities were expected to give auditors information on this form of expenditure. There is often not a complete list of the information, which hinders the auditor’s ability to quantify irregular expenditure. This was management’s responsibility.

Regarding the financial viability of Eskom, its current liabilities exceeded its current assets of R68bn by over two times. This was partly due to debt not collected, but Eskom was also over-indebted. During the construction of power plants, Eskom entered into loans, which could be included in construction cost until these stations came online. Now this debt had to be repaid as such. Eskom was also disputing NERSA’s revenue calculation.

Mr Fhumulani Rabonda, Deputy Business Executive, AGSA, noted the importance of reiterating the objective of the PFMA. The existing framework ensured accountability and consequences for wrongdoing. The AGSA reports were a tool in this area. Questioning AGSA over repeated findings of wrongdoing was misguided. Accountability began within the entity – the board was mandated to do something about wrongdoing. The AG’s powers only came in where that process had failed. AGSA preferred to work in environment where it didn’t have to use supplementary powers.

Ms Zwakala gave some suggestions over what the Committee could do. In terms of practical steps, Members could pick a few themes or a theme across entities, monitor these themes, pick certain ratios that meant something to them, and keep track of them. She agreed that that an AFS released 2 years late would have little credibility or validity. The AGSA saw a key issue in terms of action – there was a lack of consequences and initiative in this regard. Regarding DPE receiving clean audits while its entities were disclaimed, this was a valid question. If stability in boards and appointments could be achieved, some progress may be achieved. When APPs were tabled, the committee should see whether the planned targets would give it what it wanted to see.

Inkosi Buthelezi reiterated his question on the non-submission of AFSs by entities. Could these reports still be trusted if they were submitted?

Zwakala replied that, where it came to SAX and Alexkor, once the Minister had tabled the reports, AGSA would come and deliver an update on these.

The Chairperson thanked the members and presenters and called for a break for lunch.

Briefing by Department of Public Enterprises (DPE)
The Chairperson reopened the meeting and ceded to the Deputy Minister of Public Enterprises, Mr Phumulo Masualle, for a presentation.

Deputy Minister Masualle apologised for the Minister’s delay. He noted that the Department had had a difficult year and was still suffering the shocks of bad management of the SOEs in previous years. The Department did gain a sense of confidence and hope in that its financial and performance indicators were in the targeted range.

Mr Kgathatso Tlhakudi, Acting Director-General, DPE, presented the Department’s financial and performance reports for FY 2018/19.

In terms of SOEs, audit outcome performance over the last 5 years had been deteriorating. Denel was a case in point, declining to a disclaimed audit from a clean audit. This showed that the issues of corruption and state capture were still with the entities.

For 2018/19, there was also an increase in total irregular, fruitless and wasteful expenditure. SAA and SAX numbers were not yet reflected.

Overall performance of the DPE in 2018/19 was 80%. 28/35 indicated targets were achieved. This 80% ranking was an increase of 8% from the previous year.

Items not achieved included:
-Shareholder management policy: the DPE was confident that in the current FY, the Blue paper, White Paper and Bill would all be published. Mr Tlhakudi noted the committee’s desire to see the timeline,
-Development of standardised loans, guarantees, assessment and financial reporting. The SOP for loans and guarantees was not approved
-Development of localisation strategic framework
-Number of reports on SOC skills development impacts: this was not met due to delays, and the target was only reached after the March reporting deadline.
-Report on monitoring and implementation of SOCs allocated projects - not delivered due to human resources deficiency
-Number of Shareholder compacts signed annually: Eskom SHC was not achieved as Eskom requested an extension

Ms Benedicta Mokgaladi, CFO, DPE, spoke to the financial statements. The DPE spent R6.475bn, representing 98.3% of its total budget. This spending included a R5bn and R1.2bn capital injection to SAA and SAX respectively as per the 2018 Special Appropriation Bill. Irregular expenditure related to 2014//15 FY and had been condoned by the Treasury. Fruitless expenditure was in respect of the DPE documentary – this was under investigation. The DPE paid suppliers within 30 days of receipt of invoices as per the PFMA.

The DPE received a clean audit outcome for the third year running. The DPE continued to maintain a sound governance framework.

Mr Tlhakudi noted that 177 out of 211 posts had been filled, with 34 vacancies. The Reorganising of government impacted on this as well. The DG concluded.

Discussion
The Chairperson thanked the DPE for its brevity and opened the floor for discussion.

Ms Tshabalala asked the Deputy Minister how confident he was of getting SOEs to a similar audit status as the Department, keeping in mind the historic issues in this regard. Secondly, when would the DG post be permanently filled in the Department? The AGSA highlighted the issue of executive instability in the Department and its entities. Regarding the localisation strategic framework – part of this idea was reindustrialisation but this framework was not achieved. How long would the Department spend developing frameworks rather than implementing them? In terms of the vetting of board members, what was the Department policy in this area? Part of the problem was people in boards not adhering to their mandates. Did the DPE know how many executives in the DPE and Entities were doing business with the state? In terms of the non-tabling of SAA’s AFS, how many more years would this occur, and had any action been taken in this regard? The fundamental question was when a person did not perform, why did they retain their employment? People under public administration were difficult to remove, but people at the helm who were involved in state capture could not stay in charge for 5 years. She requested forensic reports on the progress of the redemption of misappropriated or stolen funds.

Ms Mkhwanazi enquired whether the DPE was able to identify the issues at SOEs leading to bad audit outcomes. What was the role of the Department in the non-tabling of reports by SOEs? She enquired as to the state of investigations of irregular or wasteful expenditure. Was there a plan to increase the department’s performance target achievement? In terms of the shareholder management policy, she requested a timeframe and plan of action.

Mr Gumede congratulated the Department on its results. He wondered if there were not still some rotten elements in the entities causing shoddy performance in terms of annual performance reports and financial statements. He inquired as to why internal auditors were not part of the discussion around audit outcomes. Could there not be some kind of forum with internal auditors before the AG did its duties? Mr Gumede suggested the integration of the management of financial statements and performance management of the DPE’s entities into the department itself given its good audit performance.

Ms Dlamini enquired as to the fruitless and wasteful expenditure in Transnet – what had happened to the purchased assets, and what happened to the management who approved this expenditure? She noted the need to act against those who had executed this expenditure.

The Chairperson wanted to highlight that the Department’s good audit outcomes should be reflected in its entities. He ceded to the Deputy Minister for responses.

Deputy Minister Masualle affirmed his confidence that SOEs would one day reflect the same good audit outcomes as the Department. He cautioned that it would take a bit of time however. State capture had harmed governance, deployed people to positions who were unlikely to perform, and targeted procurement to extract resources. SOEs had to be equipped with the right skills and placements. Proper and fit boards and management were essential. He brought up the appointment of a permanent CFO and CEO at Denel, which was already beginning to bear fruit in finances and procurement. The picture looked very bad because of the impact of the period South Africa was getting out of. Ensuring that proper and stable leadership was in place was essential to achieving better outcomes. There was progress in this regard.

In terms of vacant posts, there was a pool of Directors-General who had no posts but were still employed due to the restructuring of government. This excess capacity was being wasted and the President and Minister were committed to using it to solve the issue of understaffing.

He noted Mr Gumede’s insinuation that entities should be merged into the Department due to its seeming capacity for good governance. However, the Department’s plan was instead to build capacity within the enterprises. The first point of reference could not be the Department.

Mr Tlhakudi noted the frameworks being developed were also being implemented: implementation was happening although performance could improve. The development of frameworks was a product of how government operated. Goals and plans had to be indicated in order to act. Industrialisation was one of the DPE’s major focuses. Each of the major SOEs had a role to play. Eskom and Transnet were instructed to guide procurement expenditure to maximise impact. Denel used the NIPP to guide its industrialisation programme.

Mr Melanchton Makobe, Acting Deputy-Director General: Corporate Management, DPE, clarified that board members were vetted. An authorised vetting provider had been appointed. This recommendation was included in the cabinet submission. Recently, the SSA had also been included in the vetting of officials. DPE also had provision in its recruitment processes that, should an adverse finding come out in any procedure, that board member could be dismissed.

Mr Tshepo Makhubela, Acting Deputy-Director General: Legal, DPE, noted that, in the year under review, there was no executive in the Department or entity reported to be doing business with the state.

Mr Tlhakudi explained that the late tabling of reports and late provision of evidence to auditors was, in many cases, due to instability in leadership, as in the case of Denel. He stressed the need to be able to get the SOEs to the point where they could become part of the countercyclical investment strategy of the government again.

There was correspondence from executive to board level to attempt to solve problems. Where there were specific individuals causing problems, the DPE could definitely improve on its performance in getting them dismissed. Boards and executive had to be given space to perform their function.

In terms of target performance, the Acting DG noted that if the DPE was getting 100% it would not be stretching itself enough. He highlighted that the DPE was a very thinly stretched department - one person looked after both SAFCOL and Alexkor.

In terms of Mr Gumede’s suggestion, he recalled the decision to corporatize the SOEs in 1992 which he doubted would be reversed.

On Transnet’s fruitless expenditure: this was a lot of money, and both Eskom and Transnet had expenditure in this range. The DPE would be following up to ensure proper action would be taken. When SOEs came to present their annual reports the Committee would have a better idea of what action was being taken.

The DPE was aiming for clean audits in all SOEs as soon as possible, as this would free it to concentrate on socioeconomic issues and infrastructure spending, and generally to leverage the impact of SOEs to grow the economy.

Work was unfolding at Eskom to arrive at a transmission situation which would allow private operators to contribute to the grid, and at Transnet the National Ports Authority was moving to becoming a standalone entity. The Department of Mineral Resources and Energy had to ensure extra capacity would be added to the grid. Cross-departmental coordination was key to the operation of the SOEs under DPE. SAFCOL’s performance was impacted by land claims, for instance.

The Chairperson brought up the issue of the relationship between the department and SOEs. Were there any legislative impediments preventing the DPE from executing the same programmes/approaches in SOEs as those in the DPE? He did not share the idea of transferring capacity to other bodies. He noted the disparity in performance between the Department and its entities.

Ms Tshabalala agreed with the Chairperson’s point. She would verify the matter of vetting board members. She asked the DPE for a list of people vetted. She stressed her dissatisfaction at the casual attitude towards frameworks and implementation: the localisation framework was not implemented – why and whose fault was it?

Deputy Minister Masualle replied that there was no legislative impediment to keeping the same strategy for entities as the Department. Entities were managed by the PFMA and Companies Act. What the DPE needed to revisit was strengthening the content of the shareholder compact so that it reflected the desired outcomes.

The Deputy Minister proposed that things were beginning to improve. At Transnet, where there was about to be an AGM, the major issue had been the qualified audit opinion. However, the qualified audit opinion resulted from the irregular awarding of contracts driven by socioeconomic benefit motives, and otherwise Transnet would have received an unqualified audit.

The Acting DG noted that the localisation strategy being located under departmental supervision was new and the lack of performance was partly due to teething problems. In line with the district-based delivery system, DPE has paid attention to integrate this into the localisation framework.

The Chairperson thanked the Department for its presentation, noting that its line of questioning was driven by its desire to solve problems presented, and not to criticise the Department.

The meeting was adjourned.