Non-Tabling of 2018/19 Annual Reports: South African Express, Alexkor & NSFAS; with Ministers

Public Accounts (SCOPA)

30 October 2019
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary

The Committee was briefed on the non-tabling of Annual Reports from the National Student Financial Aid Scheme (NSFAS), South African Express and Alexkor. The Minister had written to the Speaker of the National Assembly saying that the National Student Financial Aid Scheme (NSFAS) would not meet the submission date of its financial documentation and Annual Report. The same was applicable to Alexkor and the South African Express (SAX). The Committee heard that the NSFAS was under Administration and did not table its report because there was a material dispute regarding their 2014 loan book.

The Committee was disappointed that the NSFAS had received a qualified audit opinion with findings in 2017/18, and more so that the full extent of the irregular expenditure could not be confirmed. The Committee emphasised that non-compliance would not be tolerated and entities needed to provide explanations for their non-compliance. Members heard that when Fee Free higher education was proclaimed, there were many challenges so much so that the Chairperson of the Board and the board resigned and the Minister decided to appoint an Administrator. While it was evident that this appointment had resulted in some improvements, Members asked why the Administrator had refused to sign off on the loan book which had triggered a request for an extension.

Members felt the Department’s attitude seemed to suggest that it was unaware of the many problems faced by the NSFAS in the past. They felt that the problems stemmed from a prolonged period of a collapse in governance. While the Committee thanked the Department for holding the perpetrators accountable for stealing, it was unacceptable for the Ministry and the Department to assert that they could not take action for all the years the NSFAS was in trouble. Members were so perturbed by the situation that they suggested that the internal auditors of the NSFAS be summoned to appear before the Committee to explain how they failed to identify the financial wrongdoings that took place in the entity. Members felt that the integrity of the NSFAS had been tarnished and the board had failed completely, they asked what triggered the Minister to write a letter asking for an extension for the NSFAS to submit its report.

It was with disappointment that Members stated that the Department had observed the deterioration of an institution as a result of criminal acts and they had failed to intervene. They asked ‘What had the Minister done’? They asked further what the Minister had done when those shortcomings were identified; what had been done to address the protest action; what assurances could the Department give that the audit recommendations had been implemented; and was there any chance of the financial recovery of the monies stolen.

The Committee was briefed by South African Express on the non-tabling of Annual Reports for the 2018/19 Financial Year. The Deputy Minister said that the SAX had been operating in an environment of recovery after the grounding of all its aircrafts. Members were informed that there was a need for a form of recapitalisation or extension of credit lines to secure the ability to sustain a going concern status as well as a guarantee that the entity would be able to sustain its operations.

Of great concern to the Committee was the failure to submit as they felt that the explanation was vague and did not speak to the other elements that caused the delay. Member stated that they did not appreciate the SAX presenting hollow information to pacify them. Members noted that in a similar matter Parliament had indicated that guarantees did not prevent the tabling of Annual Reports. The Committee stated that it battled to comprehend the reasons for non-compliance. The presentation stated that management and the audit committee held a strong view that a full audit was warranted so they asked ‘When was that conclusion arrived at’?; ‘Did the SAX wait for the meeting with the AG and if so, why’? They stated that perhaps if management had not waited that long then they would not be in the position where they could not submit on time.

Members were confused about what the R300 million guarantees had to do with the failure to submit on time. If the going concern status was not achieved which would not be the case without the R300 million, then the implication was that the directors were trading recklessly. The DA felt that this was a complex situation with only one solution: either amalgamate the airlines or shut them down as the SAX could not continue to operate as an individual airline. Members asked repeatedly. ‘What exactly was the R300 million for’? The ANC found the board’s behaviour particularly destructive describing it as ‘malicious compliance’ and rejecting it. They felt that the non-submission was due to the delay of the R300 million as had it been granted there would have been a submission. Putting it bluntly they said: ‘besides the R300 million bailout, did the board have money to continue operations’?

The Committee was briefed on non-tabling of Annual Reports by Alexkor. The Deputy Minister said that the failing of governance in the entity over a period of time led to the decision to place it under Administration. The Committee heard that the key concerns by the auditors were: reckless trading, trying to sell the business as a going concern and audit findings of housekeeping matters.

Members asked why the Minister had stated that an extension was required. The Department still needed to explain to Members the details that led to the Administrator being appointed and what plans they had to keep the entity viable going forward. The Committee asked why the entity still existed because they realised that the reason why Alexkor did not want to submit was because they would have been exposed and that would have led to their liquidation. Members were most perturbed that the tax payer’s money had been wasted and the people responsible for the mess had just resigned and therefore would not be held accountable. Members asked: Why did they continue to exist and why hadn’t they liquidated themselves’?

The Committee heard that there were issues around a going concern status and whistleblowers coming forth and that the main reason for the delay was the challenge around the going concern status. Members felt that if Alexkor had tabled their financials without clarity around future funding then the company would have to be placed under liquidation; and if not then the directors would be at risk of reckless trading exposing themselves to personal liability for the company’s debts. Members stated that the Minister's letter about the late submission was a complete misrepresentation and the Department ought to have taken Members into their confidence.

The Deputy Minister gave an undertaking to get back to the Committee within seven days. The dates for submission by the SAX and Alexkor were still expected. The Committee said that it would invite the National Treasury, the Department of Public Enterprises and the Department of Communications to deal with all the bailouts.

Meeting report

Opening Remarks by the Chairperson
The Chairperson welcomed everyone. On the 27 September 2019 the Minister of Higher Education Science and Technology, Dr Blade Nzimande, wrote a letter to the Speaker of the National Assembly saying that the National Student Financial Aid Scheme (NSFAS) would not meet the submission date of its financial documentation and Annual Report. The same was applicable to Alexkor and South African Express (SAX). The Chairperson of South African Airways (SAA) wrote to the Committee and requested to defer their appearance to the following week. The NSFAS was under Administration therefore the Department would present first followed by the Administrator. 

The Chairperson expressed that the Committee did not take kindly to non-compliance of any sort, including a failure to submit reports on time as per the prescripts of the Public Finance Management Act (PFMA). The entities needed to provide explanations for their non-compliance and provide dates for when submissions could be expected.

The Chairperson said that as a young person, he had a particular interest in ensuring that other young people’s needs were taken care of, so part of the presentations would be approached from the lens of the beneficiaries of the NSFAS. This would attempt to ensure that the affairs of the entity did not jeopardise the collective expectations of the young people of South Africa.

Apologies where submitted from the Minister, Dr Nzimande, who arrived late; and from Ms Siza Mzimela, Chief Executive Officer (CEO), SAX.

Briefing on the Non-Tabling of the Annual Report for 2018/19 financial year by the National Student Financial Aid Scheme (NSFAS)

Mr BUTI Manamela, Deputy Minister, Higher Education, Science and Technology, indicated that the NSFAS was one of the most crucial government entities that was set up to dispense the government policy on fee-free higher education. When that proclamation was made in December 2017 the NSFAS had to reposition itself to implement that pronouncement. Upon implementation, the Department and the NSFAS had to work with other stakeholders around the clock. There were a lot of challenges and it became clear that the administration and board were not coping with the pressure that accompanied the implementation of the proclamation. As a result the Chairperson of the Board and the board resigned and the Minister at the time decided to appoint an Administrator. The appointment had resulted in some improvements. The extent of the work done and the number of students that had been funded since the implementation of the Fee-Free higher education policy had been noteworthy. When compared with 2017, 2018 had seen considerable stability with a culture of learning being restored to institutions. There had been almost zero protests in 2019 which was as a result of the work being done by the NSFAS, the Department and the officials in the various higher education institutions. 

Deputy Minister Manamela said that the Department was worried about the concerns raised by the Auditor-General of South Africa (AGSA) over the audit work for the NSFAS. This matter would be addressed by the Administrator.  He gave reassurances that the Ministry and the Department were committed to complying with the laws in the execution of their duties especially with regard to the PFMA.  He added that he hoped the presentation would explain why the NSFAS was in the position that it was.

Mr Gwebinkundla Qonde, Director-General, Department of Higher Education and Training, gave the presentation.

The Minister of Higher Education Science and Technology, on 27 September 2019, notified the Speaker of the National Assembly that he would be unable to comply with Section 65(1)(a) of the Public Finance Management Act (PFMA), 1999 (Act No. 01 of 1999), and would be unable to submit the Annual Report and Audited Financial Statements (AFS) of the NSFAS for tabling in Parliament on time as was required.

As a background to the current situation, Deputy Minister Manamela outlined the following areas of concern:

  • The challenges at the NSFAS relate to systems, processes and capacity, and in particular a lack of integration between institutional and NSFAS systems as a result of the rollout of the “student-centered model” between 2013 and 2017;
  • There was evidence of multiple data and IT integration/system problems at NSFAS, and problems with data integration between the NSFAS and institutions;
  • In 2017 and 2018, the Department raised serious concerns about the failure of the NSFAS to effectively confirm funding for students and disburse funding timeously to students in technical and vocational education and training (TVET) colleges and universities;
  • On 11 July 2018, NSFAS received a NOCLAR (Non-Compliance to Regulations and Legislation) letter from the internal auditors;
  • The NOCLAR letter identified serious governance deficiencies at the NSFAS, and highlighted the high possibility of fraudulent activity within the disbursement system. Findings relating to cyber security and controls at the NSFAS in a range of areas were identified;
  • The internal audit assessment of the controls within and around the disbursement process to students noted a number of significant control weaknesses that amounted to an inadequate control environment. The need for an urgent forensic investigation and immediate de-risking of the NSFAS disbursement system was recommended;
  • The NSFAS received a qualified audit opinion with findings in 2017/18. Uncorrected material statements resulted in the financial statements receiving a qualified opinion. Effective steps were not taken to prevent irregular expenditure as required by section 51 of the Public Finance Management Act (PFMA). The full extent of the irregular expenditure could not be confirmed; and
  • After close engagement throughout 2017 and 2018, including with the institutions, and providing support teams to NSFAS, the Minister appointed an Administrator on 21 August 2018.

The following revised dates were communicated by the AGSA team to the NSFAS. Deputy Minister Manamela said that the NSFAS is on track to meet these dates.

The Schedule was as follows:
Finalisation of uncorrected misstatements and concluding the audit file: 11 October 2019;
Pre-Issuance review to be concluded: 16 October;
Final Management report and draft audit report issues to the NSFAS:18 October;
Discussion of the Final Management Report and Draft Audit Report with the NSFAS Audit and Risk Committee: 25 October 2019; and
Signing and issue of Final Audit Report to NSFAS: 631 October.


Discussion
The Chairperson felt the Department’s attitude seemed to suggest that it was unaware of the many problems faced by NSFAS in the past -an issue he felt needed further probing. One wondered what the functionality of the audit committees had been when all the issues were unfolding. He felt reassured at the mention forensic investigations being conducted.

Mr M Dirks (ANC) welcomed the report and was of the opinion that the problems stemmed from a prolonged period of a collapse in governance. He was pleased that the report indicated that some progress had been made.

He wanted to know who was responsible for the vetting of new employees. ‘Was it the Department or the State Security Agency’? Employees would be dealing with large sums of money therefore he felt it necessary that the State Security Agency take prospective employees through a full vetting process to verify their qualifications and criminal background. People working with public funds ought to be vetted.

Ms B Zibula (ANC), referring to slide two, asked Mr Qonde what the Minister notified the National Assembly about.

She thanked the Department for holding perpetrators accountable for stealing. She felt they were counterproductive to the vision of building an education nation of young people.

Ms N Tolashe (ANC) welcomed the presentation. However, she felt Mr Qonde needed to inform Members as to the steps taken by the Department when the problems initially materialised. She couldn’t assume the Department’s role was merely to introduce an Administrator. In her view it was unacceptable for the Ministry and Department to assert that they could not take action for all the years the NSFAS was in trouble. The Administrator had picked up wrongdoing from many years ago and she wanted Mr Qonde to explain what consequence management had been implemented upon the realisation of the wrongdoing doing that led to an Administrator being appointed. It was important to identify the people stealing from the public purse.

Furthermore she suggested the internal auditors of the NSFAS be summoned to appear before the Committee to explain how they failed to identify the financial wrongdoings that took place in the entity.

She welcomed the work conducted by the Administrator but wondered what would happen when the cleaned up entity was returned to the Department who were the same people in charge when it crumbled. She wanted assurances from the Ministry and the Department as to how they would ensure the continued viability of NSFAS once the Administrator had completed his work.

Ms Tolashe said that the integrity of the NSFAS had been tarnished. She felt it was being used as a source to create havoc in the form of destruction of public property during demonstrations. She therefore advised that the Minister take the nation into the confidence of the Department by informing the public that the NSFAS had been stabilised.

Lastly, she asked what steps had been taken against the person who had deposited R14million into a student’s bank account. That person needed to be held accountable and the Department needed to protect the young lady.

Mr S Somyo (ANC) welcome the report. He wanted to know what triggered the Minister to write a letter asking for an extension for NSFAS to submit its report.

He stated that slide 9.2 was indicative of the failure to submit on time. Without the report he could not have a discussion that had no basis. In term of the timelines stipulated he wanted to know if the Administrator was ready to receive the report to submit to the Minister, and whether the Minister was ready to submit it the following Monday.

He appreciated that the Administrator considered multiple areas like the technical systems in place and matters leading to personal challenges. A key critical point was that individuals needed to register any funds they received. They needed to keep a record of creditors and debtors a failure of which would create challenges.

In his view it seemed the board had been trading recklessly. He echoed Ms Tolashe’s point that there was an indication that the Department had observed the deterioration of an institution as a result of criminal acts and had failed to intervene. Moreover he wanted to know what the board’s role had been in the deterioration of NSFAS.

Ms V Mente-Nqweniso (EFF) felt Members should not be apologetic about getting answers. With reference to Mr Qonde’s responses she identified that those particular issues had been raised in the past. The same issued had been raised in the NSFAS Annual Report 2017/18 under note 35, 36 and 37. She wanted to know what the Ministry had done to ensure the accounting officer carried out his duties in terms of Section 40(1) (b) of the PFMA. He ought to have analysed the previous reports and the entities shortcomings. As she understood it, the appointment of the Administrator was as a result of the inadequacy of the board. However, the Director-General was the accounting authority put in place. There was also an indication of a report from 2014 which was meant to be an analytic tool in remedying the situation. ‘What had the Minister done’? The letter written by the Minister requesting an extension signaled that strict measures ought to be in place to hold those who failed to comply accountable.

Secondly, Ms Mente-Nqweniso noted that 36 indicated the absence of the SCM policy which guided loans. The AG identified that as one of the problematic areas. She repeated that it was previously identified in the NSFAS Annual Report. The report also identified an excess in payments of contracts which reflected a shortfall of a policy. She felt the Administrator had correctly plotted the problems into the systems which were previously identified and were in the notes of the audit reports and the NSFAS Annual Reports. Notwithstanding the appointment of the Administrator, she wanted to know what the Minister had done when those shortcomings were identified.

She asked if the Department and the NSFAS were engaged in procuring a proper working system as they were at the center of building the future of the country. The Deputy Minister mentioned a new system of fee-free education therefore had a new system been identified that could support that policy? It needed to be able to pay the correct funds to the correct student accounts.

Mr B Hadebe (ANC) welcomed the report. He reiterated that the purpose of the meeting was the issues of the non-tabling of the Annual Report by the NSFAS. Mr Qonde had given dates depicting the issue of non-compliance but he did not confirm whether those dates had been met. Mr Hadebe asked for assurance that the dates outlined in the presentation had been met. That would address the reasons for the meeting.

He addressed other issues raised by Mr Qonde. On the challenges relating to processes and capacity, he said systems had role players and stakeholders that participated within the system and they had clearly defined roles and responsibilities. That way when the system failed it would be easy to detect the defects. It was problematic when role players and stakeholders did not know what their roles and responsibilities were. ‘Did the role players within the NSFAS understand their roles and responsibilities’? That was also applicable to the Department and the student beneficiaries.

Referring to the Administrator’s presentation on slide six that spoke to low staff moral and intimidation he mentioned that the staff members of the NSFAS were currently engaged in protest action. The plans put in place needed to be supported by the labour force otherwise the desired outcome would not be achieved. ‘What had been done to address the protest action’? ‘Had the department engaged with the staff members’? ‘Had the students who were about to write their final examinations received their monies’? ‘Would they receive their funding on time the following year’?

The Chairperson humbly asked that Members confine themselves to the material issue at hand which was the failure to submit the Annual Report on time. The other issues would be raised when the Annual Report had been submitted. He asked that the Department note the other questions for a future meeting but for present day purposes restrict their answers to the issues of non-compliance.

Ms T Marawu (ATM) appreciated the reports and the work being carried out by the Administrator. She observed that there were recommendations that came from the internal audit reports but there was no indication that those recommendations had been implemented. ‘What assurances could the Department give that the audit recommendations had been implemented’? She also asked for a progress report on the forensic investigation that would be carried out as well as a report on the outcomes of consequence management.

On time frames, she asked if there would be personnel appointed during the time the Administrator had to work at the NSFAS. 

Ms B van Minnen (DA) asked if there was any chance of the financial recovery of monies stolen by implicated parties.

She asked for an explanation about the Ministerial task team.

On the top heavy management structure, she asked if there would be financial costs in terms of contractual obligations in minimising the structure.

Mr A Lees (DA) asked why the Administrator refused to sign off on the loan book which triggered a request for an extension.

The Chairperson echoed Mr Hadebe’s point about ensuring that students did not enter the festive season with a sense of uncertainty about the material realities that prevailed.

He declared that the board had failed completely. It was disappointing because a public assurance had been given that the board members were fit for purpose. Many problems took place under their watch. He wanted to know what reasons were cited when they resigned. ‘What handover processes took place and had they explained the circumstances that the NSFAS found itself in’? Where were they as there was a possibility they would be instated in other entities and cause similar challenges.

He asked if the audit concerns, such as the loan book, was raised as the issue stemmed from 2014, which was five years ago.

The Chairperson reiterated that the Department needed to account because the deterioration of the NSFAS took pace under its watch.

On the R14 million that was erroneously deposited into a student’s account, he asked what happened to the official who deposited the money as there had been a lot of coverage on the student but not much on the NSFAS Official responsible. Was he still in the system? Non-submission would not be tolerated as that signaled underlying problems. It could not be normalised.

Responses
Dr Randall Carolissen, NSFAS Administrator, gave an assurance that students would be paid for the rest of 2019, and only 8000 students could not be paid as they had not signed their loan agreements. He gave further assurances that the NSFAS was on track to meet the deadlines stated by Mr Qonde. Despite the strike action the entity was on track for 2020 enrollments.

He said the Administrator’s term ends on 20 August 2020 and the Chief Financial Officer (CFO) would have been appointed by then. The Chief Executive Officer (CEO) would be appointed by the end of the year. There would be a six month handing over period to orientate the other new officials. He felt that they needed to arrive at an entity’s office that was as clean as possible.

On the systems, he explained that the terms of reference of the Administrator were to review all the systems in place. It was established that the systems were not fit for purpose. One cannot first buy a system then try and make it work for a desired purpose. The correct way to do it was to design the business needs, followed by the business requirements then request information and on that basis the system would be fit for purpose. He explained that a large part of the fraud uncovered was around the previous voucher system. Under the previous system a voucher would be issued to a telephone number which could easily be changed by a party and the money would be diverted. Unfortunately, the system had to be kept this year as there was no time to develop a new system.

Dr Carolissen said that of the 52 TVET colleges, 26 were on the NSFAS wallet system. Next year students would be paid directly through their bank accounts cutting out all the middle men. The R14 million had been deposited by a middle man who transacted between the NSFAS and the student. Of the R14 million, R800 000 had been spent by the student which had been recovered from the middle man. Cutting out the middle man would prevent further incidents like that from happening. Paying funds directly into student’s bank accounts would require banks to carry out additional verifications.

On systems integrations, he was happy to report that it was an easy process. The identity number of the students and their parents would be typed in and validated with the Department of Home Affairs. That would prevent students from using the details of grandparents and aunties. Where students lived with their grandparents for legitimate reasons the Department would consider those as special cases.

A Memorandum of Understanding (MOU) had been signed with the South African Revenue Service (SARS) to validate income against the SARS database. That was important because in the past credit bureau information had been used but people would inflate their income to get higher credit therefore the information was not accurate. However, with SARS the income records could be determined as well as identify people who lived off investment income. Those were individuals who would give themselves loan salaries when in reality they were very rich. Dr Carolissen confirmed that students would be paid and would not be affected during their final examinations.

He explained that the vetting of prospective employees was conducted by a private company. There was a cost implication and came with some resistance.

On roles and responsibilities, Dr Carolissen said that MOU’s had been signed with the institutions which spelt out the responsibilities on both sides. It was not working perfectly because it required the systems to work correctly. He did state, however, that there had been some improvements. The Department had provided rules and guidelines as to who qualified for funding and under what conditions. The rules and guidelines had been published last year and rolled out by all institutions. New rules and guidelines were being finalised with the Department. All institutions and officials would be trained on how to interpret the rules and guidelines. That would avoid unrest in institutions that resulted when officials misinterpreted the rules and guidelines. As soon as the Minister had signed off the new rules and guidelines, the NSFAS officials would be deployed provincially to train the institutions.

The reason the NSFAS did not table their report was because there was a material dispute on the 2014 loan book.

The Chairperson asked Dr Carolissen if he was signing off on the loan book because he was satisfied it would be corrected.

Dr Carolissen said unanimity on the figure had been reached. Where possible financial recovery had taken place but other instances were criminal.

On the Ministerial task team, the terms of reference had been finalised with the Department and the members of the task team would be announced very soon. Dr Carolissen was a member.

He explained that there would be implications associated with the down-sizing of top management. It would have to be done in a procedurally correct way.

Mr Qonde agreed with Members that the challenges with the NSFAS predated the appointment of the Administrator. He had indicated in slide three that the Department had raised concerns about the NSFAS since 2017/18. At the time, the system had been confronted with the inability of the NSFAS to take funding decisions for students who had applied to the NSFAS. Secondly, the payment of funds had not been taking place for the students who had been confirmed for funding. In that respect the Department engaged and conducted investigations into where the problems rested in respect of the two aforementioned challenges. The challenges had been brought to the Minister’s attention. The Minster repeatedly engaged with the board of the NSFAS. The Minister had written a number of letters to the board of the NSFAS in which the issues had been raised for the board to address.

The Chairperson asked whether the board had been responsive to the issues raised.

Mr Qonde concluded that the board and management had not been able to resolve the challenges.  This resulted in the entity being placed under Administration.

The Chairperson asked how many board members there had been.

Mr Qonde replied that there were 13 members.

The Chairperson remarked that 13 people were unable to resolve the problems yet one Administrator had made progress in cleaning up the entire entity. That spoke to the competence of the entire board collective. This was why he felt they had failed. ‘What were the consequences for those 13 members’? He said that Mr Qonde did not have to respond to that statement.

Mr Qonde said the Department was working with the Administrator to meet the deadlines.

Mr Somyo asked if Mr Qonde was in agreement that the circumstances that led to the Administrator being appointed was as a result of the NSFAS board trading recklessly. The Administrator had uncovered proof to that effect.

Mr Qonde confirmed that what resulted in the entity being placed under Administration was the failure of the board to discharge its responsibilities.

Dr Blade Nzimande, Minister of Higher Education, Science and Technology, declared that the Department would work with the Committee. Now that the issues and processes had been explained he said that further reasons would be submitted to explain the non-compliance.  He assured Members that what needed to be done would be carried out and the Department would incorporate input from Members.  In his experience as a Minister he had not been aware of the importance of ‘acting’ audit reports. He was committed to addressing the matters raised by Members.

As stated in his Budget Vote speech the NSFAS was his top priority as it affected so many people. He did not want to give any further details on the Ministerial Task team. Part of the problem was that the challenge faced with the NSFAS was the speed needed to implement a new system. The date 16 December 2017 left two weeks for implementation which was very difficult. There were many issues he wanted the Ministerial Task team to look into. He said that like the Chairperson he had a common dislike for non-submission but had to request an extension because he had no other choice.

SAX

The Chairperson welcomed Mr Phumulo Masualle the Deputy Minister of Public Enterprises. He stated that it was unacceptable that the presentation had only been sent to Members that day. Members needed time to engage with the presentation in order to make meaningful contributions. He asked that in future presentations be sent in advance.

Remarks by the Deputy Minister

The Deputy Minister said that SAX had been operating in an environment of recovery after the grounding of all its aircrafts. That period had certain assumptions it had relied on. The sense was that there needed to be a form of recapitalisation or extension of credit lines by whatever mechanisms. That would secure the ability to sustain a going concern status as well as a guarantee that the entity would be able to sustain its operations. The Deputy Minister said that Members would have heard about the interventions the National Treasury (Treasury) had to make which resulted in some delays that the board would expand upon. That compelled the Minister to explain the delays to Parliament.  After having listened to the Committees’ engagement with the Department of Higher Education he understood that Members wanted to know why there was non-compliance and what would happen going forward. The board would expand on these matters.

Briefing on the non-Tabling of Annual Reports for the 2018/19 financial year by South African Express (SAX)
Dr Thabi Leoka , acting chairperson of the SAX board, and Mr Andre Odendaal, SAX CFO, gave the presentation said that as legislated the financial statements were submitted to the Auditor General on the 31 May 2019 with supporting schedules. On the 15th July, the Auditor-General scheduled a meeting with management advising her of a decision to conduct a limited scope audit. SAX has however conducted limited scope audits for a number of years, therefore management and the audit committee held a strong view that a full audit was necessary.  This would assist in achieving a full understanding and unearthing of the historical issues, especially in the light of the recent history at SAX.  Dr Leoka said that the AG had advised that a full audit would result in the deadline of 31 July not being achieved. The AG completed the audit on 15 August.

Dr Leoka said that further delays were as a result of the timing of the R300 million guarantee / funding from the government. On 6 September 2019, government provided SAX with an allocation letter regarding funding of R300 million. The audit and risk committee met on 13 September with the AG to approve the Annual Financial Statements (AFS). He said that the AFS will be finalised by the Board by 1 November 2019.

The SAX played a major role in taking action against corruption and opened criminal cases against individuals who benefited or played a role in unscrupulous activities, three of which are listed below:

  • SAPS CAS 19/07/2019; date reported 02/07/2019; Investigation in progress; Bag port matter;
  • SAPS CAS 29/07/2019; date reported 03/07/2019; Investigation in progress; North West Province matter (Koreneka); and
  • SAPS CAS 202/5/2019; Date reported 24/05/2019; Investigation in progress; North West Province matter

The following Irregular and suboptimal commercial agreements are being investigated:

  • Namane Capital (Internal Disciplinary Action concluded);
  • Mothebe Shuttles (The (alleged offenders) employees involved resigned.);
  • Solenta Aviation (Solenta Aviation lost against the initial arbitration award);and
  • Bagport Africa
  • Civil Litigation matters, Parties are awaiting confirmation of court date from
  • the Supreme Court of Appeal. The estimated date would be during last quarter of 2019.

Mr Odendaal said that the 2018/2019 audit had a few challenges which resulted in the delay of the Annual Report submission:

  • A full Audit versus a limited scope audit was requested;
  • Delay regarding the R300 million government guarantee/funding; and
  • AFS to be finalised on the 1 November by the Board, subject to the AGM.

 Discussion

The Chairperson referred to the apologies and pointed out that the acting CEO was not present.

Dr Leoka explained that Mr A Odendaal was present before the Committee as the acting CEO.

The Chairperson asked whether Mr Odendaal was the acting CEO merely for the purpose of the meeting with the Committee.

Dr Leoka confirmed that officially he was the Chief Financial Officer (CFO) but was standing in for the CEO for the purpose of the present meeting.

The Chairperson asked how long he had been acting.

Dr Leoka explained he was only acting as the CEO for present purposes.

The Chairperson rejected the trivial delegation of powers that the SAX had carried out. It was incorrect and looked clumsy.

Mr Somyo referred to the third page, bullet 3, and asked why the Annual Financial statements needed the AG’s approval as that was an internal function. As he understood it the financials were prepared through board processes and presented to a finance committee after which they would be finalised. Thereafter they would be handed to the AG to audit. He asked for clarity on that process.

He asked if the matter between the entity and the AG was whether to conduct a full audit or a limited scope.  ‘What was the main causal factor of the failure of the finalisation of the SAX audit’? He felt the presentation failed to answer that key question.

Ms Mente-Nqweniso was not convinced. She wanted an expansion on the slide that spoke to the failure to submit. She felt the explanation was vague and did not speak to the other elements that caused the delay. She referenced the Minister’s letter which did not outline the reasons for the late submission. The NSFAS presentation gave clear reasons for late submissions and identified the areas that needed correction. The same could not be said for the SAX as the reason still remained unknown.

She pointed out that the last Annual Report available on the website was for the year 2016. Previous minutes for SCOPA revealed that the SAX had previously failed to submit their 2017/18 Financial Reports on time. She did not appreciate the SAX presenting hollow information to pacify Members. The only thing that had been communicated was the delay of a guarantee however the 2016 Annual Report detailed a lot problems faced by the SAX such as their going concern, risk management and cash flows. She pleaded with the SAX to give a proper explanation. ‘What were the internal auditors doing’? ‘Were operations ongoing or was the issue that there was no cash flow on which to report ’?

The Chairperson drew the SAX’s attention to the fact that in 2016 when the same matter arose the SCOPA and Parliament indicated that guarantees did not prevent the tabling of Annual Reports. That was the view that was held in discussion with the SAX at the time.

In addition, the Ministers letter stated that ‘SAX due to financial constraints was unable to finalise annual financial statements for the 2018/19 financial year. Government remains committed to find a sustainable solution to the challenges facing the airline’. He felt the explanation was lacking and the mention of the limited scope was a distraction.

Mr Hadebe said that he battled to comprehend the reasons for non-compliance. The presentation stated that management and the audit committee held a strong view that a full audit was warranted. ‘When was that conclusion arrived at’? ‘Did SAX wait for the meeting with the AG and if so, why’? He said that perhaps if management had not waited that long then they would not be in the position where they could not submit on time.

He also could not understand what the R300 million guarantees had to do with the failure to submit on time. The report was very short and did not speak to that core issue so he asked for clarity on that point.

Mr Hadebe also wanted to know what was submitted to the AG on 31 May 2019 despite the fact that management held a strong view that a full audit was necessary.

Ms Marawu declared that there was no report before Members. It did not answer the question put before the SAX and therefore she struggled to even begin engaging with it. She referred to the criminal cases against individuals lodged in May 2019 in the North West province and asked what had happened in previous years. ‘What about possible cases in the other provinces’?

Mr Lees referred to the guarantee that had resulted in financial statements not being signed off. That had happened for years and by many entities. He pointed out that the SAX was insolvent and had been for a long time. The only way it could achieve a going concern status was for the tax payer to either bail it out in cash or to provide a guarantee so that they could show that they could continue to trade for the next 12 months. If the going concern status was not achieved which would not be the case without the R300 million, then the implication was that the directors were trading recklessly. He said that if he were one of the directors he would flee. He cited the reckless trading charges against Ms D Myeni. He declared that currently the SAX faced a liquidation challenge which would lead to individual director accountability. He therefore understood the reasoning behind not producing the Annual Report albeit an unacceptable one. He said that in the previous week he had challenged the AG on the same point. The AG had refused to answer his question about SAA. ‘Why couldn’t the AG issue the qualified statement declaring them not a going concern because he did not have to wait for the entity to submit statements’? Although the AG did that in 2017, he was currently holding back. He felt it was a complex situation with only one solution: either amalgamate the airlines or shut them down. In his view, the SAX could not continue to operate as an individual airline and he urged the board to make that clear to all South Africans.

He asked what an allocation letter was. ‘Was it a governmental commitment to give SAX money’? If it was a government guarantee in the form of a commitment to give SAX money in the MTPPS then that would exceed the bounds of legislation as the government had already used section 16 of the PFMA to bail out Eskom. ‘What exactly was the R300 million for’?

He asked if any negotiations or plans had been put in place in terms of the stated intention over the last few years to amalgamate SAX with SAA

Ms Zibula was not convinced as the report did not enlighten Members. The presenters assumed Members had been privy to the contextual information they had been privy to.  It appeared to her that no preparation had gone into the report as it appeared to have been put together with very little preparation. She pleaded with the Chairperson to condemn SAX’s effort as it would reflect badly on the Committee. She asked the Chairperson to reject the report on behalf of the Committee and to instruct SAX to write a more thorough report. She expressed great dissatisfaction with SAX.

Ms Tolashe echoed those sentiments stating that Members had been presented with chaos. To her, what was clear was that SAX had manipulated the Minister for them to come and present what they had presented to the Committee. Upon further inspection of the five page document it was clear it did not speak to the reasons why the Committee had asked SAX to come before them.  She said that the board had failed to answer the fundamental question as to why they had not submitted on time. Instead what had been illustrated was the manipulation and in some instances blackmail of government where SAX refused to submit the Annual Reports until government had given them the R300 million. That was the main issue. She did not take kindly to SAX appearing before the Committee with such an attitude. It was unacceptable and insulting. The matters relating to corruption would be dealt with when SAX submitted a report and not prematurely when they had failed to submit a report. The question as to why the board had not submitted their report on time still remained.

She emphasised that the board were legally responsible and perhaps their fitness should be probed as the issues had existed for a long time under their watch. She said Members should be brave enough to ask those difficult questions as Members were accountable to tax payers whose monies had been wasted.  She wondered how much was spent on transportation costs for the board members to appear before the Committee with a substandard report. It might have been better for them to have presented the five page document via teleconferencing.

Mr Dirks did not want to comment on the report. He felt there was no use blaming the board as the problems were bigger than the board. He repeated that SAX along with SAA was under the Ministry of Public Enterprises when they should be placed under the Ministry of Transportation. The problems would not be resolved and there would always be issues around submissions and bailouts because the entities were not placed in the correct ministries. Eskom ought to be placed under the Ministry of Minerals and Energy. The Department of Public Enterprises was problematic so its issues could not be dealt with accordingly.

The Chairperson said he was clear that the explanation was not acceptable and the report presented by SAX was a malicious compliance. He rejected it. He echoed Mr Lees’s statement that the non-submission was due to the delay of the R300 million - had it been granted there would have been a submission. The Committee had the capacity and authority to request financial statements. The board would have to explain. Put bluntly, besides the R300 million bailout, did the board have money to continue operations?

The Chairperson asked when they would submit their report.

Mr Odendaal said that he had taken to heart what Members had said. He explained that Sax had been grounded for three months the previous year. The new board had been appointed at the start of that period. There had been a fundamental breakdown in management before the new board had been appointed and they had been working to rectify the challenges. There had been a lot of legal cases and a lot of work needed to be done.
 
On the R300 million, he explained that initially there had been other funding that would pay off government guarantee debt and at the time all the facilities that the company had were revoked by the banks. Thereafter SAX had been operating without any working capital. Without the R300 million the company would not be a going concern. 
 
They had a plan going forward to merge the airlines which was an ongoing process with time frames. 
 
Part of the reason why the AG delayed the audits was because there were still issues with the accounting in the company. The board wanted a full audit because they felt the company could not go a full year without an audit. That would enable them to develop plans to address the identified challenges. 
 
He agreed that financial statements could be finalised with a qualification but with an airline that could lead to loosing routes which had a fundamental impact on operations. This was why they would negotiate with the AG to try to change the wording of the audit report and this would take time. 
 
The Chairperson was alarmed by the suggestion that SAX could negotiate with the AG to change the wording of audit reports.  That spoke to ‘sanitising’ the facts of the issues and realities. That was a dangerous road to take.
 
Mr Odendaal indicated that SAX had received the R300 million on 10 September 2019.
 
Mr Lees asked for an absolute guarantee. He said that a letter guaranteeing payment was one thing but had the cash been paid? 
 
The Chairperson referred to the grounding of the aircrafts which he felt was no material basis for the non-submission of the Annual Report. It did not absolve SAX
 
Dr Leoka expressed regret as she felt she should have been on the Members’ side expounding the same sentiments. 
 
She agreed with Mr Dirks that there were deeper issues. 
 
She was heartbroken to hear Ms Tolashe question the board’s fitness as they only appeared unfit because of the limitations and restrictions caused by the deeper issues. Being a board member of a State Owned Entity (SOE) was not an easy task. Board members had to clean up the troubled entities they had entered which came with a lot of obstacles.

She concurred with Mr Lees that the entity had found itself in a deep financial ‘rot’ that South Africans would not appreciated the extent it took to emerge out of that financial ‘rot’. That also spoke to the possibility of successfully turning things around within a very limited space of time.

The aircrafts began flying again in August and by October the problems of the past nine years could not be dealt with in 13 months. That was impossible. They still had to take account of their stock which was part of the audit. She realised that the board had a duty to clean up the entity which would take a long time.

She echoed Mr Odendaal’s point that the board had asked for a full audit in order to identify the root problems which would not be identified by a limited audit.

On the cost of the boards travel expenses she explained that she had paid for her travel and accommodation costs with her own money therefore it was not at the state’s expense. As an economist she understood the country's fiscal position and was hurt by the suggestion that they had squandered the tax payer’s monies. The board had been very prudent and that was why they approached the private sector for funds which they received. The private sector had committed to assist SAX going forward which unfortunately had not been forthcoming. The private sector also had vultures and competitors that had an interest in SAX remaining weak. Therefore it did not help for politicians to continuously speak negatively about SOE's. That also made the shareholders agile.

She accepted that Members rejected the report and would be happy to return with another report. She said the board had not been thoroughly briefed on what the Committee had expected. Dr Leoka had asked the CEO, Ms Siza Mzimela, what the brief was and was told that Ms Mzimela had not been fully briefed on the expectations. Dr Leoka stated that there was a broader report.

On Koreneka, she believed it had political connections which a lot of the cases had. That was because they stemmed from political decisions that were taken over the past nine years. Those included decisions about who to hire and where to place individuals, for example hiring members of the public who were related to certain people. The current board had been working on rooting out those irregularities in a systematic manner that would not further impact the entity. Forensic information was required before prosecution could take place.  Many of the suspended individuals were still being paid despite them instituting proceedings against SAX.

She confirmed that she was concerned about her position as a director trading recklessly and had raised the concern with the Deputy Minister several times. She did not want her name tarnished possibly resulting in her being unable to work. She also did not want to be compared to Ms Myeni who she knew was the root cause of SAX’s troubles.

She confirmed that SAX was facing a liquidation challenge. Decisions about SOE's needed to be informed. ‘Would a decision to sell be because SAX was not working and there was a fear that state money would continuously be used to bail out the entity’?  ‘Had it been considered that it would be sold for a very low price’? ‘Was the goal to stabilize with the aim of selling or merging’? Perhaps if SAX merged with SAA then SAX could fly regional routes while SAA flew the rest as was done with Ethiopian Airways. It was not helpful to think of short term solutions. She mentioned that SAX had recently signed the African Free Trade Agreement and in her opinion three things could link up the continent namely rail, road and aviation. The short term view that SAX should be sold because only certain people used aviation did not take cognisance of the broader developmental agenda. That short term view or
suggestion that South Africans would be kept poor to the point that not every citizen could afford to fly. The country needed to aspire for more for its citizens.

The Chairperson assured Dr Leoka that the CEO had been fully briefed and that was a matter the board needed to look into.

Mr Hadebe said that he still had not gotten a sense as to when the board arrived at the decision that a full audit was required.

Mr Odendaal replied the board had always been of the view that a full audit was necessary.

The Chairperson asked when the SAX report would be submitted.

Mr Odendaal replied that the board had signed off on the financial statements.

The Deputy Minister appreciated the Committee position in terms of the inadequacy of the report. It was an opportunity for not only the board but for the Department to reflect upon. The method currently being used was that after the financials were approved by the board they were sent to the Annual General Meeting (AGM) for shareholders to approve. How the entity accounted needed to be looked into.

Before the board received confirmation that they would be getting a guarantee they could not approach private lenders and something had to happen. At the time the board members stated that either they had to declare themselves insolvent failing which they would be at the risk of trading recklessly. A similar thing had occurred with SAA for the past two years.

He said that he had reflected on Members’ stance that stall tactics should not be used to avoid submission merely because the entity was concerned about its going concern status. He pleaded with Members to be patient with the entity and that the board would correct their approach.

Mr Lees apologised to Dr Leoka for implying the misuse of funds by the board members.

The Chairperson said the Committee will invite the National Treasury, the Department of Public Enterprises and the Department of Communications to deal with all the bailouts.

Alexkor
The Chairperson stated that Alexkor were before the Committee for the same reasons as the NSFAS and SAX, namely to explain why they had not submitted their Annual Reports on time. He cited a letter from the Minister to the Speaker dated 30 September 2019 in which the Minister requested an extension for Alexkor to submit their Annual Report at a later date.

Opening remarks by the Deputy Minister
 
The Deputy Minister said the failing of governance in the entity over a period of time led to the decision to place it under Administration. It was a unique arrangement as the state was a 51% shareholder in a joint venture with the communities that had a claim to the land. The board was comprised of Alexkor, SOC and the community. The board oversaw the mining operations. The community representatives in the board had been in a dispute over a long time. This dispute had resulted in governance failures. That necessitated intervention in the form of an appointment of an Administrator. Since the board had collapsed the Administrator served as the accounting authority.  The Deputy Minister gave that context to explain why there was no board present only the Administrator.
 
Briefing on Alexkor on the Non-Tabling of Annual Reports for 2018/19
Mr Lloyd McPatie, Alexkor administrator, said that the audit had been completed and a disclaimer opinion had been achieved. Key concerns raised by the auditors were:
Reckless trading;
Trying to sell the business as a going concern; and
Other audit findings of housekeeping matters

The 2018/2019 Operational Challenges:
Quality and size of Diamonds produced;
Low Carat volume production;
Liquidity challenges;
Retrenchments;
Financial Model not sustainable; and
No geological survey to support reserves

Mr McPatie said that the Progress update on the Annual Financial Statements was:
Audit completed mid July 2019;
Integrated Annual Report ready for print
Alexkor is engaging the Department of Public Enterprises to address the going concern challenge;
Different mechanisms are being investigated that will support long term sustainability, that will address the concerns raised by the external auditors; and
The Annual Report was ready to be tabled


Discussion

The Chairperson asked when the Annual Report had been finalised.
 
Mr McPatie replied it had been finalised on 31 July 2019.
 
The Chairperson asked the Deputy Minister why the Minister had stated that an extension was required.
 
The Deputy Minister explained that at the time that the Annual Report had been finalised the sustainability of the entity had been greatly debated. There were issues around a going concern status and whistleblowers coming forth. An investigation had been commissioned and the finding was only received recently. The main reason for the delay was the challenge around the going concern status. A replacement board had to be assembled as the Administrator would not remain permanently. The entity's future sustainability in terms of funding also had to be considered. All those problems called for some action and once the report had been given to Members a way forward could be agreed upon. The Ministry felt it wiser to have first solved the aforementioned problems before publicising the Annual Report.
 
Mr McPatie mentioned that if Alexkor had tabled their financials without clarity around future funding then the company would have to be placed under liquidation. If not then the directors would be at risk of reckless trading exposing themselves to personal liability for the company’s debts.
 
The Chairperson asked if the Deputy Minister had seen the Minister's letter about the late submission. He felt it was a complete misrepresentation.
 
Ms Tolashe welcomed the presentations from Mr McPatie and the Deputy Minister. She felt the Department represented as a 51% shareholder to Members and was concerned because the Deputy Minister was speaking politically and being elusive. The Department ought to have taken Members into their confidence. She accepted what the Administrator had to say but felt that the Department still had a responsibility. Whether or not the Administrator was successful did not absolve the Department from its responsibilities.
 
She reiterated her question put to the NSFAS and asked what happened to the people who had been in place while all the problems ensued. ‘Did they get the leave unaccountable’? SCOPA did not represent that.

The Department still needed to explain to Members the details that led to the Administrator being appointed and what plans they had to keep the entity viable going forward.
 
She questioned why the entity still existed. She now realised why Alexkor did not want to submit as they would have been exposed and that would have led to its liquidation. She further questioned the Department’s role in that strategy. It seemed that people could just waste tax payer monies, resign and not be held accountable.
 
 Ms Van Minnen was concerned that Alexkor was a waste of the tax payer’s money. ‘Why did they continue to exist and why hadn’t they liquidated themselves’?
 
 Ms Mente asked Alexkor the central question namely why they had not submitted the Annual Report on time. If the financials had been submitted on 31 July 2019 and the letter from the Minister was signed 27 September 2019 then what was the understanding between the board, the Minister and the extension when the time came for Alexkor to submit their Annual Report. ‘What was the actual problem that caused them not to submit’?
 
Mr Somyo said that he understood what the issue was and felt that the Department and Alexkor were afraid to state the reason frankly. The fact of the matter was that the audit had been finalised but they were determined not to submit the Annual Report because their financials were in the negative. That meant a shareholder would become responsible. If the shareholder wanted to hold the company it needed to ensure its current financial standing: was it a going concern or was it insolvent? If it was insolvent then the company would be placed under liquidation. It appeared that along with the shareholder there had been a decision not to place the company under liquidation. That was an enterprise decision based on the financial position. He said that he said that he was of the view that had the Administrator had been firm in his integrity then he would have recognised that his continued involvement in the entity was hollow. His involvement had conditions attached to it. The company was R102 million under and it would go down with the Administrator. In his view, if the responsible authority did not agree to work with the Administrator to turn the company around then it ought to be shut down. The Department needed to explain what its plan was for the entity, an entity that was clearly drained.
 
Mr Lees stated that it was a political issue. De Beers had stopped mining 15 years ago and their concessions had been opened for tourism but Alexkor carried on and a land claim was awarded to the community in which it mined. The massive infrastructure left at Alexkor was currently empty buildings. He felt that this answered the question that Members had continuously asked which was why the entity continued to exist. This was not an issue of a developmental state.  What would happen was that the tax payer would deposit another R150 million to give it the going concern status. The beneficiaries of the bailout were not running the operation like a business as they could not even agree on who should be appointed to the board. This was all at the tax payer’s expense. He pleaded that the havoc wreaked on had to be stopped. Communities had to make the land work on their own.
 
On the land operation, he asked if they were being carried out by contractors. ‘Were they on the existing tailing stamps or on virgin land’?
 
Mr McPatie replied that they were on both.
 
Mr Lees noted that there was a great deal of distrust between the contractors and Alexkor so the issues went beyond financial issues.
 
Mr McPatie explained that the settlement included two documents that governed the Pooling & Sharing of the Joint Venture (PSJV) namely the deal of settlement and the resolution. Those two documents made it extremely difficult to manage and run the entity. It was not possible to simply shut down the entity if the CPA had not been properly formed and constituted.
 
The Chairperson said that those issues would be dealt with when the Committee received the report but the current issue at hand was the non-submission.
 
 The Deputy Minister said that he had seen the letter that the Minister had written. Inadvertently it may have lifted the problem of resources, but in essence it was meant to put to the fore the reality of the situation with Alexkor. He could not speak for the Minister but he doubted there would have been an intention to mislead the Committee in so far as the predicament at hand. The predicament had been explained to Members. He said the Department had to review the practice of holding back with the tabling when issues like the going concern had not been addressed. He said that the Department would reflect on the hard choices that needed to be made as the debts were growing and the entity could not meet them. He admitted that that still did not address the issue of non-submission which was what the Department would reflect on. He gave an undertaking to get back to the Committee within seven days.
 
The Chairperson said that that would be beneficial as from where he stood there was no convergence. Since the letter was from the Minister it was unreasonable to expect the Deputy Minister to provide answers. The pertinent question was whether another bailout would take place, and whether the issues with the board and the community would be sorted out.  The dates for submission by the SAX and Alexkor were still expected. As long as the Department existed, the Committee would exercise its oversight role.
 
The meeting was adjourned.
 

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