SABS & NRCS 2018/19 Annual Reports; 2019/20 Quarter 1 performance

Meeting report

Opening remarks
The Chairperson noted that there would be a briefing by the South African Bureau of Standards (SABS) on the 2018//19 Annual Report and the First Quarter Report for 2019/20. The National Regulator of Compulsory Specifications (NRCS) would make a similar briefing.

The Chairperson asked the DG of the Department of Trade and Industry (dti), Mr Lionel October, to introduce the entities and to make the link to the previous day’s proceedings. Representatives of the Auditor-General South Africa (AGSA) were also present.

Introduction by DG: dti
Mr October thanked the Chair and Members for the professionalism and astute comments the previous day and assured the Members that the Department would address the issues raised. He introduced the officials from SABS: Acting Chief Executive Officer Mr Garth Strachan, Administrator Dr Tshenge Demana, Chief Financial Officer Ms Tina Maharaj, and Executive: Standards and Certification, Ms Amanda Gcabashe. He explained that they were the turnaround team. He had informed the team of the issues raised by the Committee the previous day.

DG stated that there were 13 institutions, including the dti, in the dti group and 11 had received clean audits. It was only SABS and NRCS that still had to be turned around. All the entities had been through rough patches before attaining clean audits. He had asked Mr Strachan and Mr Edward Mamadise, CEO of NRCS, to present the audit concerns and how the entities were responding to them.

The DG informed the Committee that he had briefed the Minister of Trade, Industry and Competition the previous evening. He had explained that the dti was expected to be more active in going into the entities to turn them around, especially in respect of NRCS with regards to an IT specialist, financial executive and an audit manager. The Minister had agreed that he would use his powers to enable dti to do so.
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The Chairperson asked Mr Strachan to respond to the issues that had been raised the previous day. He could cover the concerns in his presentation, where possible.

Presentation by SABS
Mr Strachan, Acting CEO, indicated that he would introduce the briefing, Ms Gcabashe would present the performance information and Ms Maharaj, the Chief Financial Officer (CFO), would brief the Committee on the audit findings.

Mr Strachan explained that SABS had 900 staff members and a footprint in all provinces. 20% of income came from fiscal revenue and the remainder of funding came from the certification of standards in the open market.

Mr Strachan noted that the main challenges in SABS in the 2018/19 financial year was the fact SABS was placed under administration by the Minister of Trade and Industry in July 2018. Various operational, financial and governance failures, as well under-investment in key infrastructure, had led to a significant decline in performance over the past few years. Three Co-Administrators had been appointed to develop a turnaround plan. Their terms of office had been extended to October 2019.

Externally, SABS had to manage its critical role in the development and promotion of standards, the provision of conformity assessment testing and certification services and local content verification, which was a recent addition to the work of SABS to support government’s local content policy. The low economic growth in SA had reduced demand for SABS services.

Ms Amanda Gcabashe, Executive: Standards and Certification, reported on the development and promotion of standards. She noted that SABS maintained 7 440 SA National Standards and had published 240 standards in 2019. She added that SABS, which was a founding member of the International Organization for Standardization (ISO), had successfully hosted the 2019 ISO General Assembly in Cape Town in September 2019. Local content verification was problematic because SABS was not asked to verify until a tender had been awarded which meant that difficulties were encountered when SABS found inadequate local content at that stage.

Ms Gcabashe stated SABS had not achieved its customer satisfaction rating target of 80% but at 78.4% was close to the target. A main concern had been the ageing infrastructure but SABS was targeting laboratories depending on the testing to be done. Standards changed every five years and SABS was ahead of meeting the deadline for the implementation of the new standards introduced in 2017. SABS had re-introduced partial standards testing which had been well received by industry and would ensure an increase in revenue.

She informed the Committee that SABS was doing additional training of those working in the food industry as there had been a change in requirements for the food industry following the Listeriosis outbreak. Ms Gcabashe spoke of the good work that SABS was doing in supporting local Small, Medium and Micro-sized Enterprises (SMMEs) that developed products locally by testing and certifying their products. She explained that SABS would be assisting in promoting those SMMEs.

Ms Tina Maharaj, CFO, stated that there had been strides forward but the government grant had been cut and so there had been a focus on generation of revenue. Total assets had grown by 2.7% to R1.5 billion. Capital expenditure was R24.7 million in 2018/19. The capital expenditure was critical to upgrade laboratories. The operating loss had been reduced by 57%. There had been a slight improvement in the numbers but a lot of work remained to be done.

Response to the Audit Report by AGSA
SABS had improved from a disclaimer in 2017/18 to a qualified audit in 2018/19. The qualifications received in 2018/19 related to technical accounting involving the assets that were not separated from the land and buildings because the buildings were so old that there were no separate records. A structural engineer would be identifying the different assets for SABS. Secondly, the laboratory services had had different mechanisms for tracking of revenue. SABS was working on a new system which would be uniform for all laboratories. Thirdly, the annual subscription fees charged by SABS were for calendar years. These cut across two SABS financial years and had not previously been divided into the two financial years that the subsidies covered. There were errors identified by AGSA in splitting the subscriptions between SABS financial year. This would be cleaned up by going back over the past three years.

Irregular expenditure had occurred because of a lack of an appropriate system to identify all irregular expenditure. SABS would be putting systems in place to identify those expenses in the Group and separate financial statements. A future financial commitment had been issued without the authorisation of the Minister of Finance and some goods, works or services were not procured through a procurement process which was fair, equitable, transparent and competitive. SABS was addressing those concerns. SABS took accountability for the findings and was putting mechanisms in place to address all the findings.

Mr Strachan noted that three targets had not been achieved. SABS was competing with internal companies or past employees who served niche markets. The growth target of increasing revenue was important but had been included in the second part of the turnaround strategy. Some laboratories would never be profitable but were necessary public services, e.g. electricity testing. He was of the opinion that SABS would have to identify how much was spent on these public goods. SMME support had not achieved its target level and required a more focussed effort. Mining capability had decreased markedly and would have to be built up again.

The Chairperson noted that there had been an intervention and that there were signs of support. He believed that the Quarter 1 Report would show that certain aspects had advanced. He asked the DG to complete the presentation on Quarter 1.

Quarter 1 Performance Overview for 2019/20
Mr Strachan presented the progress against quarterly milestones. He reminded the Committee that SABS did not set the standards but relied on industry and experts in the working groups to develop standards.

He recognised that SABS had to reduce the number of days that it took to publish standards and there were interventions to improve the work of the working groups. The SABS digital process would make standard setting more efficient and less costly. Support for SMMEs had been lower than hoped. The Design Institute was not funded nor a core institution of SABS although SABS was relying heavily on the Institute to assist with SMMEs, so SABS was looking for sponsorship to reduce the cost of standards for SMMEs. The operating model of the Institute was being reviewed. Customer satisfaction was short of the 75% target by 4%. The administrators and senior managers were visiting companies to make contact with them and to encourage them to work with SABS. Mr Strachan had found that data standards would be hugely important in the Fourth Industrial Revolution. In respect of customer retention, SABS was struggling against the loss of clients by the previous poor services and the closing of the facility which had offered part testing.

The group revenue was lower than expected. One of the reasons was the electricity outage in the first quarter but also, despite back-up electricity generation, the regular theft of electricity cables at The Fountains near the SABS campus was a massive problem as laboratory testing was dependent on electricity to create the right testing conditions.

Revenue had not reached the target owing to the many vacant critical posts. 64 critical posts had been filled and dti would be assisting in capital investment. Turnaround time for testing remained a problem. The R300 million “digital flight plan” planned by the previous management was unaffordable so the administrators had requested staff to use the current digital infrastructure, although there would be a digital upgrade using the funds that the organisation did have available. SABS had to develop its own software as off-the-shelf software need not meet the needs of SABS.

Mr Strachan referred to the proposed Committee oversight visit to SABS in December and hoped that he would then be able to show the Committee the very high standards required of a testing facility. The skills shortage, especially of young black women technicians, was being addressed. One of the most critical issues had been reviving the operational culture and doing team building in the organisation.

The Chairperson stated that he would want to receive more information on the October Turnaround Strategy, which he had now given a name. He confirmed the oversight visit to SABS in December 2019.

Discussion
Mr W Thring (ACDP) thanked SABS. The previous day he had said that despite the movement of the entity from a disclaimer to a qualified audit, there could be no applauding because that still meant mediocrity and he was glad to hear that SABS itself was not satisfied. It was a step in the right direction. Was SABS a monopoly or was it competing with other people, especially individuals who had left SABS and opened a standards testing business in their garages? Mr Thring understood that there was a clause in the contracts signed by most employees to protect the business from employees who left. He asked for comment on that point.

Mr Thring referred to the comment about no industrialisation being successful without standards. Regarding standards, he noted, for example, there was no SABS standard mark on the bottle of water on his table which sometimes tasted of chlorine. How did one close those gaps, particularly with regard to small scale industrialisation? For example, guys were making concrete blocks and selling them to homes and shops and who knew where, and there had been incidents of bridges, walkways and shopping centres falling down and killing people. Previously one had not been allowed to build unless the materials were certified. The AGSA had bemoaned the fact that they had had no teeth and had subsequently been given teeth. Did SABS require teeth?

He was concerned about the financial performance. In 2017 there was a R20 million operating loss but in 2018, the operating loss had quadrupled to R80 million, so, suddenly, there had been serious challenges. There had been a slight improvement in 2019. Was that during the period of distress and had any individuals been held accountable for that poor financial showing? Cable theft was a huge concern. One could imagine how it impacted the country and the Committee needed to look at cable theft as an act of treason

Mr F Mulder (FF+) asked about illegal imports and corruption, overcharging and grey products. What impact did that have on SABS potential to earn income? What was the desired turnaround time? Concerning the financial performance, he asked if SABS saw a further decline in the grant from National Treasury which would have a negative impact on the entity?

Mr D Macpherson (DA) said that he didn’t often say it, but what Mr Strachan and his team had achieved was nothing short of heroic. The SABS had been nothing short of a cesspool. He believed that Mr Thring did not appreciate how bad it had been. There was, of course, room for improvement but the reduction in operating loss and net loss was remarkable. He was interested in the accountability of those who had got SABS into the mess. He wanted an update on the investigation. Dti seemed reluctant to criminally charge those who were guilty. For example, five years later, no one from the Gambling Board had been criminally charged.

Mr Macpherson asked Mr Strachan if public-private partnerships would be possible. Would there not be an appetite for private capital investments on the basis of a shared revenue model? Could Mr Strachan take him through his thoughts around that? Regarding the deferred income in respect of increased current liabilities, he asked what it was made up of and who had owned it.

Mr Strachan asked if he could answer those questions at that point. The list of questions was getting very long. He noted that DG attributed his concerns about remembering the questions to his age!

Chairperson agreed as they had to make Mr Strachan comfortable.

Response by SABS
Mr Strachan informed Mr Thring that SABS was a national standards body and the monopoly was only in the standards because SABS was a member of the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC). SABS adapted their standards for South African use and sold them to SA industries. That was a costly business as standard setting teams had to be brought together to do that. In certification, testing and consignment inspection, SABS competed with other players because the market had been opened up in 1993 and de-centralised but, unfortunately, SABS had not been re-purposed to compete effectively with private sector players. SABS was competing with Japanese, British and other European players. Also, deregulation had allowed people to set up cost-effective niche processes. SABS would be putting in place a cool-off period for former employees but it was not legal to permanently stop ex-employees from entering the market.

Mr Strachan explained that the standard mark was a voluntary mark of quality unless the standards were regulated or legislated and then they were enforceable in law. There was a need for other regulatory improvements. SA needed an eco-system of the various standards and testing bodies and a lot of work needed to be done in the regulatory sphere. For example, state-procured condoms had to be tested by SABS to secure quality and that ensured revenue to SABS. Ease of business needed to be secured but there had to be an optimal eco-system to protect consumers, and deal with issues of health, fire, etc.

Responding to Mr Mulder, Mr Strachan agreed that the importation of grey products was a huge concern but he did not think that a quality and standards organisation could not stop the huge problem of grey sub-quality goods. He agreed that they constituted a risk to the consumer. Perhaps the NRCS could respond to the issue.

Replying to Mr Macpherson, Mr Strachan thanked him for the kind words. SABS had completed a forensic audit into the Eskom issue and given the audit to dti and the outcome was that the statements made by Mr Matshela Koko fell short of being truthful in the opinion of the independent auditors. Minor standard operating procedures in SABS had been addressed, specifically the tracking device on one of the vehicles bringing coal to the testing area had been inoperable and that system had been tightened up. SABS had also developed rules determining exactly who could be present during testing.

SABS was also investigating the loss of accreditation of SABS in the auto industry by the German Association of the Automotive Industry (VDA). SABS was undertaking an independent forensic into possible irregular appointments in SABS and, where there had been a breach of the law and policy prescripts, he assured the Committee that SABS would not hesitate to take action and institute consequence management. Consequence management was currently the order of the day in the institution.

Responding to the question on Public-Private Partnerships (PPP), Mr Strachan explained that the sequencing was important and SABS had to be fixed first but that PPPs were on their radar. SABS would be signing a partnership with a global not-for-profit organisation, Global Standards 1. The institution was talking to other big players but Members had to bear in mind that SABS had to be on its guard as it could not sign a PPP that would put SABS at risk. He was looking at PPPs and other partnerships as SABS had huge, costly infrastructure but could also provide assistance to other government services. Under DG’s leadership, they were looking at using the very big SABS Durban campus, that required costly upgrades, to set up an IT focus on the campus and to invite other government organisations to set up on the campus to offer support for SMMEs, Black Industrialists and so on.

Ms Maharaj responded to financial questions. In response to the question about the 2017/18 operating loss and why it had quadrupled, Ms Maharaj stated that that was the year that became the climax of the financial challenges at the SABS. There had been a lot of issues relating to expired permits and so on. There had been a huge loss in customers which had resulted in the decline in revenue. In terms of accountability, the shareholder had taken action and had removed the board and the then CEO.

Secondly, the question on a possible reduction in the grant received was always possible but she could not comment further. Regarding the deferred income, it was additional funding from dti and was only released into the income statement as it was used.

Discussion
Ms Y Yako (EFF) wanted to interrogate the document had been provided to the Committee. She asked about slide 16 that spoke to the assets not accounted for. Was there an asset register for aging assets? Was there an asset register for procurement? Female representation was at 44%. SABS was not doing women a favour. 44% was not good enough as women were the backbone of the economy. She added that 50% of SMMEs given assistance should be women-owned.

Ms Yako asked how capitalisation funding had been spent? She was worried and stood with Mr Thring on not being satisfied with SABS. She wanted to see more radical solutions, excitement and answers. It wasn’t about ageism but Mr Strachan’s energy was very low as he presented and she wanted to see a bit more radicalism in turning around a situation and radical solutions. It seemed Mr Strachan was subdued by the situation he was in.

Ms P Mantashe (ANC) was pleased that the ANC opponents were buying into its policies. She had heard Ms Yako say that there should be 50% of women SMMEs and was pleased to see that the EFF was buying into ANC policy.

Ms Mantashe congratulated SABS on the award received from SANAS. AGSA had spoken about daily and monthly reports and compulsory pre-scripts that were not being reviewed. She asked to see the AGSA report. AGSA had given limited assurance as there were material errors in SABS reporting and AGSA had been concerned about overspending on certain contracts by the institution. How would SABS improve its footprint in other provinces? There were SMMEs in other provinces that needed the assistance of SABS. Finally, she asked why there had been a decline in the training of delegates.

Ms N Motaung (ANC) asked if dti could provide an update on the investigations at SABS? Could SABS explain the delay in the payment of suppliers that had resulted in fruitless and wasteful expenditure? Did SABS have a strategy in place to be profitable? How long had the SABS been without a board?

Mr S Mbuyane (ANC) welcomed the report. The main concern was the current situation. The Committee needed to understand what was happening currently in SABS because the last time that the Committee had checked, there had been serious challenges in the institute. Could Members get clarity from dti. The decline in income was an issue and it was disturbing that there were irregularities. Did SABS have a single strategy or plan to address all the AGSA findings? How was the management team going to ensure the viability of the institution as a going concern? The net loss of R17 million was a challenge.

Ms J Hermans (ANC) stated that, as a Committee, Members recognised the improvement and hoped that the shortcomings in respect of the AG’s findings would be addressed so that the entity could get a clean audit at the end of the year. The disability number at 1% concerned her. Dti and EDD had set good examples by having 3% disability employees. She had been covered on the footprint in other provinces. The Small Enterprise Finance Agency (Sefa) was listed as a key partner and that made the provincial footprint essential. Was the graph on employee benefits, benefits only or did it include salaries as it was astronomical? If it was just benefits, how did it compare to industry norms? Why had the CFO written off the loan to SABS Commercial? Why could it not be recovered?

Response
DG October stated that he would address the broad issues about the turnaround, the audit findings and the forensic investigation. The team had agreed to work closely with dti and AG and would provide an update when the entity presented the October turnaround strategy but the expectation was that all four audit queries would be addressed. The capability was there but they had done the wrong things in the past few years so it was about a change in culture. As the Committee would know, SABS had consistently obtained clean audits in the past. Dti would work closely with the AG so that it was an institutionalised, and not a once-off, clean audit.

He understood that the forensic report had been completed and submitted to Parliament, but he would check. The context was that SABS, and other private companies, had done coal testing for Eskom. In Parliament, Mr Matshela Koko, a former Eskom leader, had claimed that he had had SABS approval for the coal from the Tegeta Mine. However, that coal had been proved defective. Dti had done an investigation of SABS and had gone to court to request that SABS be put under administration because dti had known things would not be corrected under the then board and management. He thanked Mr Macpherson and Ms Mantashe for their support at the time because dti had been a lonely voice declaring that things were going wrong with the SABS board. The report stated that Mr Koko had made a false claim. Only three pieces of coal had been brought for testing and the SABS test had failed the coal. But Mr Koko had lied by saying that he had had approval of the coal. The failure of the board was that when Mr Koko made the claim in national newspapers, the board had failed to contradict him and the board had made false statements to National Treasury and had failed to give the real report to National Treasury. The report on the matter would be made to Parliament.

The DG explained the circumstances of the listeriosis outbreak. There were two kinds of standards. There were voluntary standards and compulsory standards. Where necessary, such as in seafood, there were compulsory standards and SABS tested regularly in fish factories, but there had been no compulsory standards in processed food such as bacon and salami. Previously, there had been a voluntary standard but the industry had rejected a compulsory standard. In the past month, dti and the Minister had decided that there would be compulsory standards. Standards were dropping and there was a risk factor that impacted on people’s health. He would welcome a move, together with the Committee, towards more compulsory standards. Exports had dropped and big export markets had been lost after the listeriosis outbreak. Standards would give people confidence again.

The DG asked Ms Maharaj to explain how quickly SABS would be able to address the audit findings.

Ms Maharaj stated that, as previously explained, SABS had an action plan that was monitored on an ongoing basis. The action plan had been tabled with the audit committee in SABS so that it could also monitor the implementation of the plan. The majority of findings would be addressed before closing for the December break. SABS took all the AG findings very seriously and wanted to move towards a clean audit. The staff were giving significant time and effort to resolve issues. SABS was looking at digitalisation to resolve some of the issues and the entity was bringing in technical experts to solve some of the matters that could not be done internally.

She explained that the irregular expenditure was a result of overspending on contracts. There had not been a system for tracking and monitoring contracts but a system was being implemented to monitor expenditure and expiry dates. SABS had appointed a General Manager in the procurement space in March and he was reviewing legislation and SABS compliance with the relevant legislation. As far as the SABS Commercial loan was concerned, it had to be tested for impairment on an annual basis. It was not about cash collectability but about the projection of that loan. The AGSA had not seen significant impact and could not see the numbers implied regarding that impairment because it had only been in place for four months. SABS had made certain assumptions about the loan and would have to see at the end of the year whether the impairment could be reversed.

Mr Strachan admitted that there were issues with employment equity and disability but those were legacy issues and SABS was working towards set targets. With respect to investment, it was not just about the laboratories themselves. For example, the plant room which ensured the conditions in the laboratories, such as temperature, had been long overdue for refurbishment. SABS had invested R5 million in the plant and would be investing another R20 million in the coming months. Laboratory equipment was needed but it was essential to ensure that technical specifications were correct and they were very, very technical.

He explained to Ms Mantashe that SABS needed to expand its footprint but needed the money to do it. In the Eastern Cape, SABS was doing accreditation and was currently improving the East London plant to provide better testing in the automotive industry. One of the first sections to be turned around had been procurement because systems had been inefficient and it had taken up to 12 months to procure anything. Procurement, supply and development had been turned around by the new General Manager and SABS had a much more efficient and cost-efficient process, including the payment of suppliers.

Mr Strachan assured the EFF that he had a lot of energy, although it might only be intellectual energy, but he was too old to dance on the table.

Mr Macpherson pointed out to Members that they were seeing an excited Mr Strachan – that was what he was like when he was excited.

The DG explained how SABS Commercial and the loan had come about. SABS had created an entity, SABS Commercial, some years back but it had not been approved by the Minister of Finance. The entity was 100% owned by SABS and there was no private partner. SABS had consequently made loans to itself. The DG had informed SABS that it was a state-owned enterprise and the fact that it had commercial activities did not make it a commercial entity. Those issues had to be resolved as SABS could not lend money to its own laboratories. The board had wanted to privatise the profitable laboratories and that was another reason for the fight with the board. The testing for Eskom had been done by SABS Commercial. Mr Strachan had reversed that process and had had to change attitudes so that employees understood that they were working for a government entity and not a private venture.

The Chairperson suggested moving on to the next presentation.

Mr Mbuyane stated that the officials had not answered all the questions. He proposed that the Committee be given a written report on the turnaround strategy and also on contract management at SABS. He was not happy with the bringing in of consultants when they were not managing contracts. He wanted a proposal responding to the recommendations of AGSA.

The Chairperson told the DG that there would be options, possibly written responses but also presentations and the oversight visit, but he would send through questions and SABS could give a written response.

Presentation by the National Regulator for Specification Standards (NRCS)
Mr Edward Mamadise, CEO, presented the report. He explained to the Committee that the work of the NRCS was to develop, maintain and administer compulsory specifications and technical regulations. NRCS was ten years old. He had been seconded to NRCS from 1 March 2018 and he had had to stabilise the institution and deal with the legacy issues, as well as the audit qualifications.

When NRCS had started, only 51% of companies were compliant. Now 85% of companies were compliant and NRCS was investigating the remaining 15%. NRCS was being restructured to align with the new mandate. The NRCS needed to develop a new organisational microstructure. He explained how the mandate of NRCS differed from SABS: NRCS standards were compulsory and NRCS developed and enforced standards but it was allowed to reference the voluntary standards developed by SABS.

2.4 million non-compliant goods had been identified and removed from the market in the past ten years. Many products had not met the measurement standard. For example, a 500ml bottle of water had to contain exactly 500ml. In the difficult economic climate, many manufacturers were producing short measurements. Non-compliant products to the value of R319 million had been identified during the financial year: electro-technical products - R76m, fisheries - R72m and Legal Metrology-related transgressions amounting to R132 m. Short measure remained a major challenge within the Legal Metrology domain, with 2 458 incidents identified. 50 178 inspections had been conducted across all regulated industries. Another example of the work of NRCS was the checking of paraffin stoves in disadvantaged areas. That was critical [because of fire risks]. The NRCS spearheaded a project where the organisation had exchanged 1 200 compliant paraffin stoves to communities for non-compliant stoves.

The Chairperson suggested that DG checked measurements and Mr Thring tested taste and the Committee could do an investigation.

Mr Mamadise noted that a number of legacy issues had been resolved. They included the Electro-technical Letters of Authority (LOAs) legacy issues which had been resolved by creating additional capacity, implementing a risk-based approach and implementing the 30-day cancellation period for applicants who failed to address findings within 30 days. The Ford Kuga issue had been concluded with the finding that the cause of the motor vehicle fires had been systems or parts that were not covered by the vehicle’s compulsory specifications. The standards only covered “critical components”. The fires had been caused by a coolant in the vehicles. The processed meats concerns [listeriosis] had been addressed when the Minister had signed and gazetted new compulsory specifications for processed meats.

Mr Mamadise presented the Modernisation Roadmap for Program Management, Change Management and Training. However, there had not been any significant progress in the modernisation project as the Chief Information Officer (CIO) who had been appointed in January 2019 had resigned in July 2019. An IT expert had been seconded from the State Information Technology Agency (SITA) and dti had offered to second suitable officials.

Challenges included supply chain problems and irregularities that meant two tenders for an IT system had had to be cancelled. There was no off-the-shelf IT system for the development of a regulatory system and so the tender had to be re-advertised. The resignation of the CIO had been a setback. Inadequate capacity within the NRCS to implement the Modernisation Project was a challenge but the key vacancies would be filled by December 2019.

Financial presentation
The CFO, Ms Mimi Abdool, thanked the AG for the support given during what had been a very difficult year for the financials of NRCS.

Ms Abdool explained the issues that had given rise to the audit findings: Not all registered companies submitted levy declaration forms to the NRCS as per regulation and not all known regulated companies were registered on the NRCS database. Consequently NRCS had estimated the levy declaration to be 10% -15% non-compliant companies and AGSA had qualified the NRCS based on the estimation calculation method as NRCS had qualifications that had not been addressed since 2014. Since January 2018, NRCS had embarked on a project to manage the levy issue by collecting the levy declaration form. NRCS had separated the three months of the levy that was payment for the previous year.

Ms Abdool said that a second issue had been the cut-off date for levies. All public entities followed a financial year which ran from 1 April to 31 March compared to the levy declaration periods which were based on a calendar year from 1 January to 31 December. That was being addressed by separating the three months of the levy that was payment for the previous year.

She explained that NRCS had been unable to timeously submit employee benefit obligation information or the information on the provision for leave. She promised that action would be taken and that there would be consequence management. Ms Abdool presented a progress report on the Revenue Qualification Plan.

Ms Abdool added that NRCS had raised an impairment on debtors of R24 million but that could be reversed if debtor payments were made.

Presentation on the Performance Information in the First Quarter 2019/2020
Mr Mamadise reported on the achievement of targets.

Ms Abdool informed the Committee that revenue was not consistent across the year but that there would be an increase in the second quarter. Recovered levies not paid in previous years had exceeded the budget of R5 million. R40 million had been received. The income had spiked because dti had transferred its grant in the first Quarter. Compensation of employees was lower than budget as a result of the key vacant posts. 23% of the budget had been expended in the first quarter.

Implementation of Actions to Address Findings.
The CFO explained that the AG had disagreed with NRCS’s assumption of a 10% increase in levy funding as the AG stated that the costs had to be aligned to the official Consumer Price Index (CPIX) figure. NRCS would revise the economic factors as recommended by the AG. NRCS would have to conduct the process manually and thanked dti for agreeing to provide assistance by seconding officials.

She explained that a decision had been taken by senior management to introduce a Letter of Authority validity period of three years as that would ensure that there would be contact with the clients and the entity would be able to check levy declaration forms to ensure that, in future, there would be 100% compliance with the levy income. The normal processes of checking levy declaration forms would continue.

The CFO thanked the DG for offering additional officials to assist. There had been many difficulties and she accepted that the consultants had been unable to provide the kind of assistance needed in a state-owned environment.

Mr Mamadise concluded by saying that NRCS took into consideration the findings of the AG but pointed out that SABS was not being audited on GRAP although NRCS had been obliged to adopt the GRAP accounting method. The previous management had believed that an IT system would resolve the issues but he believed that processes had to be put in place before IT systems could be developed. He admitted that negligence had led to the qualification.

The DG referred to the concerns about fraud and corruption. He explained that it was dti policy to suspend people on the same day that there was a whiff of corruption. The person was charged if there was evidence. NRCS had adopted the same policy. The third qualification in the audit was unacceptable and he personally had been to the NRCS on several occasions and he had told management at NRCS that they had to solve that qualification. It was unacceptable that the same issue continued year after year. The dti would second people to solve the problems and he had told the CEO that there had to be action taken against the existing staff members of NRCS who were responsible for the problem. He insisted that there had to be consequence management. It was the only entity in the dti that had had an audit qualification for so long. It was unacceptable to him and the dti.

The Chairperson assumed that such action by the DG was permissible. He asked what role of support the Committee could play. He thought that there might not be consensus on how to manage the situation.
He believed that the AG and the entity would work together and resolve the problem in that area and provide a report to the Committee.

Discussion
Ms Mantashe said that the entity had promised to fill the senior staff vacancies over the past five years. The AG had picked up that the key vacant posts were a major cause of the qualified audit. The CEO must say why the posts had not been filled. The Committee could not live on promises for ever. She heard the DG trying to babysit the CEO but that could not go forever. Action had to be taken. All the issues raised by AG were the result of inadequate controls. For example, the levy was not controlled. It had been the same issue over and over again. That entity rubbished the work of dti. She wanted to know what had been done to people who had been involved in fraud and corruption.

Ms Mantashe asked why the financial statements had not been completed in accordance with financial reporting requirements. She applauded the improvement in issues related to the Letters of Authority but for the rest, she was not happy.

Ms Moatshe stated that she had been covered by Ms Mantashe on the issue of vacancies but there were no senior leaders. The revenue collection was also addressed by Ms Mantashe and she asked for more clarity on that point.

Ms Yako asked about the shipping of the ocean economy. She thought that the CEO had said that NRCS did not check the goods directly but issued certificates based on supporting documents and health certificates. Was that correct? Would that not open up the door to corruption through incorrect documents? Did the NRCS not check the products that were being shipped out? There were no timelines on when issues would be resolved so they were just promises. She expected timelines so that the Committee could monitor NRCS and keep the entity on its toes.

Mr Mulder agreed with other Members. He asked if the measures taken thus far to address shortcomings were sufficient. There was a huge challenge in the SA economy and the work of the NRCS impacted directly on the economy and the possibility for recovery. Did the Regulator have the capacity to see the measures through?

Mr Mbuyane appreciated the presentation. He had been told by Mr Macpherson that he used to applaud non-improvement. Now he was applauding the fact that something had happened in the NRCS.

He said that for the past three years, the Committee had been told about the ICT system that had to be installed and the tender that had been issued. It was like a broken record. The problems were always the same problems. It was not helping the people out there. The Committee had a mandate to see that the departments and entities worked. What assistance did NRCS need to implement the ICT system? The AG had said there were vacancies. Had they been filled?

Mr Mbuyane asked what the findings into the corruption investigation had been. If the NRCS had come and told the Committee that one, two, three had happened that would be fine, but nothing was actually happening. The online system was not accessible. The system had to be strengthened. The DG was there. The CEO had to ask for assistance or state that he could not cope with the job. Nothing was happening.

Mr Mbuyane asked about the findings in the listeriosis investigation. It was very disturbing for him. It was painful for deployees to sit in the Committee and hear that the entity was not working. He wanted a breakdown of vacancies and when and how they would be filled. He was fine, but really he was not fine.

Ms Hermans said that it was very depressing to see the continued lack of performance by NRCS. The DG should explain why the NRCS was not being put under administration. If they were now going to address AG’s recommendations, what had they been doing in the past when they had been in exactly the same position? The presentation had not presented the targets in tables so that Members could see where the entity was at that stage of the year. It was not user-friendly to her. The entity was a blight on the dti.

The Chairperson indicated that he would take responses. The DG could conclude. The response to AG was one point and the intervention was the other point. The Committee had indicated that it wanted to take another dip to see where the entity was at that point in time.

Response
Mr Mamadise stated that he appreciated the comments by the Committee. He had intervened personally and given a directive that the vacancies had to be filled by the end of November.

He explained about the issues of fraud and corruption. The NRCS had gone out on an infrastructure tender for R35 million the previous year but after the process had been concluded, it was found that there had been irregularities in the appointment of two companies. Netscreen 1 was appointed to do data migration from the old system to the new. However, there had been allegations of collusion between a staff member and two directors of Netscreen 1. A forensic investigator had found possible collusion as they had known each other in a previous company and had communicated constantly before the adjudication process but none of that had been acknowledged. The manager had resigned on the spot to avert consequence management but NRCS had opened a corruption case against the former employee. The case had recently been referred to the National Director for Public Prosecutions for a decision on prosecution.

The second company involved in the fraud tender allegations was Trillcom. Mr Mamadise explained that the members of the bid committee had allegedly received international trips. The forensic investigation could not confirm corruption but the company appointed was found not to have the necessary capability for the job. NRCS had contacted National Treasury because the bid adjudication committee members could not explain why they had scored the company so highly even though it did not have the required experience. He was taking action for collusion against two employees who had been part of the bid committee. As DG had said, NRCS had also adopted a policy on non-tolerance when it came to corruption.

He explained to Ms Yako that NRCS issued health guarantees that were based on the farm to fork monitoring whereas a compliance certificate relied only on a specific test. For example, there were no prawns in SA waters and prawns were imported. If the company wanted to export them to another country, NRCS could only give a certificate saying that the prawns were fit for human consumption according to NRCS tests but it could not confirm that the entire process had been according to required standards.

Mr Mamadise told Mr Mulder that mechanisms and interventions would solve the problems. The revenue qualification came from 2013 when the then management had believed that it could only be solved with a system but he understood that one needed a process first before a system could be developed. The modernisation process was essential as the entity could not continue to operate on a manual process as it was not efficient. The NRCS welcomed the intervention of the dti that would assist the entity in developing the system.

He added that the vacancy of the HR Manager had impacted negatively on the appointment of other staff. People were acting in the various positions and the acting persons were not fully accountable. The entity had since appointed an HR Manager who would take responsibility for the appointments.

Mr Mamadise promised to submit a plan which responded to all the issues and included timeframes to the Committee.

He explained that when the listeriosis outbreak had occurred in 2018, the Departments of Health and Agriculture, the National Institute for Communicable Diseases and the National Consumer Commission as well as NRCS had formed a task team to investigate. A report had been issued. What was important was that there now was a regulation determining the standard for processed meat.

The DG accepted there had been action on the fraud cases and the intervention programme but agreed that a clear action plan indicating timeframes would be tabled with the Committee shortly. He had gone to the NRCS premises personally to tell the team that if the problem continued, NRCS would be put under administration.

The Chairperson confirmed that there would be an update report to the Committee from the DG and possibly a presentation updating the Committee.

Committee business
The Committee Secretary reminded Members of the agreement that training by Professor Black would take place from 9 am to 12:30 pm on Friday that week. He had forwarded reading materials.

The Chairperson stated that the Committee had concluded its business.

The meeting was adjourned