The Compensation Fund appeared to have received only disclaimer and adverse audit opinions over the past ten years and AGSA said an urgent intervention was required. This Committee was concerned about the incompetence of officials at the Compensation Fund. Concerns were raised about the backlog on return of earnings, lack of internal controls and consequence management for the officials responsible. A major concern was irregular expenditure, where service providers were paid on expired contracts. Members were also concerned about pension payments made to deceased individuals. While the Compensation Fund said that the problems were due to poor ICT systems that were being remedied, Members said systems are run by people, and officials need to be held accountable. The Committee requested a forensic audit with the Special Investigating Unit to investigate audit findings of the last ten years.
The Chairperson said the Compensation Fund had probably one of the worst audit outcomes. Over the past 10 years there have been only disclaimers and adverse audit opinions. This is totally unacceptable and speaks of a collapse of internal controls and absolute chaos. There seems to be no response to the findings of the Auditor General; there seems to be no Audit Action Plan or it is not taken seriously. The situation is untenable.
He thanked Members for being available, bearing in mind that the previous day’s marathon meeting. He welcomed the Minister and Deputy Minister of Employment and Labour, the Director General and the Compensation Fund Commissioner. He asked the Minister to give initial remarks. At the end of the hearing, Members would map out a way forward.
Minister of Employment and Labour remarks
Minister Thulas Nxesi assured Members that these engagements with Parliament are taken seriously where the Minister and officials are held to account for their handling of the public finances. The Compensation Fund officials would give more details on the irregular, fruitless and wasteful expenditure reported in the 2019/20 audit report by the Auditor General (AG), for which the Fund received a disclaimer. The Compensation Fund is in a very serious state of affairs that has persisted for eight years.
The Chairperson pointed out the last ten years at least.
Minister Nxesi said the Commissioner who is running those operations would explain in detail the steps taken to address the 2019/20 audit findings, the progress made and where problems persist. There was progress in cleaning up the registers for irregular, fruitless and wasteful expenditure in reporting on revenue and claims. The Commissioner would also explain why progress has been limited in reporting on prior audit findings. He would report on the establishment of the Clean Audit Task Team during 2020/21 to enhance security and financial controls in the audit action plan of the present year. The Commissioner would give assurances to the Committee that the Fund is committed to addressing the AG’s findings. The Minister and the Department of Employment and Labour (DEL) are determined to address the outstanding problems at the Fund. The following actions have been taken at the last meeting with the Committee and the DG: It was agreed that there would be a thorough organisational review of the Compensation Fund to tackle underlying systemic weaknesses related to the structure, skills, and systems. This partly involves a skills audit to ensure there are the professionals required to manage this highly specialised environment, which consists of health insurance, medical aid, rehabilitation, and running the Fund. These are the skills needed. The entity cannot be run along the lines of the Department, there is need to recruit highly specialised skills. There is discussion on the possibility of applying to make the Fund a full Schedule 3A entity, with the capacity to attract the skills required in a specialised environment. He recently met the Office of the AG following the latest 2020/21 audit report, and they provided guidance on the outstanding problems.
This involves acting on the AG’s key recommendation and he quoted from the report, “The tone from the leadership should not tolerate non-performance and should strive to ensure control is adhered on day-to-day activities. Management must ensure they discharge their responsibilities and safeguard the assets of the Fund sufficiently. Action should be taken to hold employees accountable for poor performance (consequence management) and limit the reliance which has been placed on consultants to assist with the day-to-day financial disciplines and preparations of the financial statement. There is an urgent need to review the control environment of the Fund, including the role of management, and subsequently strengthening the preventative and monitoring controls to identify the deficiencies early and appropriately. There should be a discipline in ensuring that accurate and complete financial and performance records are maintained, where this will ensure financial statements and performance are supported by reliable evidence.”
Minister Nxesi said he was very mad about this. The recent audit report identified areas of weak control, which gave rise to the risk of fraud and corruption. He has met with the DG to start the process of conducting a forensic audit in the at-risk areas. It cannot be that documents cannot be traced, yet money was paid. This must be dealt with. The Department is committed to exercising oversight over the Fund addressing the deep-rooted systemic matters which have led to repeat disclaimers in the past. On his part, he would ensure that there is an organisational review, skills audit and forensic audit so that the rot is dealt with. Together with the Deputy Minister and DG, they are committed to the regular monitoring of progress in implementation of the audit action plan. This will be done with the support of the Compensation Fund Internal Audit and the Internal Audit Committee whose work was commended by the AG.
The reasons for recommendations not implemented will be exposed very soon when the investigations are done, because there were important recommendations which were supposed to be implemented. There is need for monthly monitoring reports, even if it means appearing before both the Portfolio Committee and SCOPA on a quarterly basis to report on targets. There is an agreement with the Auditor General South Africa (AGSA) that constant reporting to and advice from AGSA is key to progress. The DG and Commissioner would give specific details.
The Minister introduced Deputy Minister Boitumelo Moloi, DG, Compensation Fund Commissioner, Chief of Staff George Miller, the Internal Audit Committee and Parliament Liaison Officer.
Compensation Fund hearing
Mr B Hadebe (ANC) said the Minister has become a permanent feature in this Committee. For the past decade, the Fund as an entity has been in the red, this has coincided with the Minister’s political allegiances. This is area of concern for the Committee. The Fund is regarded as an insurance company since it deals with funds on behalf of companies. For ten years, the Fund has received disclaimers and adverse audit findings, yet there is stability in the leadership structure. Most of the senior executives have been there for more than five years, apart from two executive who are currently acting, yet there is still no improvement. The situation is going from bad to worse. The best description fitting the status quo was the Fund is “rotten to the core”.
In the Fourth, Fifth, and Sixth Administration, the Fund has appeared before the Committee and nothing has changed. It is high time that the Committee puts its foot down by taking drastic measures to change the status quo. Insanity is doing the same thing over and over and expecting different results. Managers have been part of the system and nothing has changed. The Fund has an Advisory Board, a Commissioner, and the DG. Can the Minister explain if the accountability structure is working and yielding positive results? Is this structured in a manner that gives oversight and accountability to produce positive results?
The Minister agreed that the Fund is “rotten to the core”, and it cannot continue to have disclaimers. This was a combination of factors which could include neglect, corruption and structural issues. There are the required basic controls which have been neglected. He did not want to conclusively say there is corruption, but he suspects that it is there, because certain things are not being followed, yet there are documents. The forensic audit would determine this. Some of the problems are structural. The entity is operating far from the Department. Of course, the DG is the accounting officer, but all the operations are separate from the Department. It has a Board which is advisory, which cannot take any responsibility. That area needs to be addressed. That is why there are discussions on making the Fund a Schedule 3A entity with a full board with fiduciary duties and for it to be able to recruit proper skills. The Fund cannot be run along the lines of the Department since it is an insurance fund which needs technical and financial skills. Part of the organisational review will be to dive deep into the structural challenges since they contribute. There are areas of persistent neglect in dealing with controls which should have been done properly and why there is no documentation to back up the payments made. These must be investigated.
Mr Hadebe said there is no need to waste money to institute a forensic investigation for basic controls. What has been done about those responsible for basic record keeping? Who are the persons responsible who did not play their part? What was done about ought to have instituted consequence management? Why was there a lack of basic controls? The executives are rated on the highest scale and they get salaries monthly, yet there are no results for a decade. Can things be turned around with the current crop? Are they equal to the task? Are they doing their work?
The Minister replied that he had mentioned earlier the skills audit, since it is important to be systematic in dealing with the challenges. The investigations might help. For the current crop, while they need training, they have been appointed in key strategic positions. There are deputy directors, directors, chief directors, chief operations officer, and the Commissioner, who are supposed to have the skills to deal with these basics. But in his view, they are not up to task. This matter will be followed up immediately, as the AG noted that there is no consequence management where people are failing to deal with very basics. Members are right about basic controls. The AG’s report has gone very deep on these matters. Together with the DG, he has already requested the Commissioner to submit names of the responsible officials so the necessary processes are taken to make them account for the rot.
Mr Thobile Lamati, Department Director General, agreed with Members that there is no need to institute a forensic audit to deal with lack of controls. However, to deal with the Compensation Fund's systemic challenges, such a forensic audit is needed. The Fund is appearing before the Committee for the 2018/19 audit. In that year, all the transactions were on the old system. The Fund moved from an old system to a new system. In the process of diagnosing the problem, it became clear that the system was the problem, as it did not have controls to assist the Fund to process the transactions properly.
When the Fund moved to the new system, assurance was given that the new system would deal with several of the controls that were missing and would eliminate some of the audit findings. It will be interesting to see if that has indeed happened, as it will then give the DG the basis to act on management’s failures. Several of the findings were systems-related, given that processes were done manually, thus record keeping continued to be a problem. The intention is to act on the AG findings and hold those officials accountable who did not do what they were supposed to do.
Mr Hadebe asked the DG about the Fund's structure. Is it giving the desired outcome?
Mr Lamati replied it is not giving the desired outcomes, and that is why the Minister said there is consideration of making the Fund a full Schedule 3A entity, but linked to the Department. It is tied to the Department based on the administrative legislation that gives rise to the existence of the Compensation Fund. For instance, the Compensation Fund does not have its own employees. All employees are seconded to the Fund from the Department, and they are paid by the Department. This arrangement is not working. To show that it is not working, the Fund has been struggling to appoint highly qualified people into key positions. That is why the Fund resorted to training these employees so that they can acquire the needed skills.
If the Fund continues to be under Public Service Regulations, which are very limiting and not do not provide space to appoint professional people at competitive packages, it will continue to experience challenges. Moving into a Schedule 3A entity, there will not be these policy constraints. For instance, systems are done through the State Information Technology Agency (SITA), and as a transactional department, the Fund cannot afford to have systems that are down. These are the realities facing the Fund.
Mr Hadebe asked about record keeping. How are documents currently stored because there is lack of assessment on documentation? Why is there a backlog in processing the Return of Earnings (ROE)? Are all employers registered? It appears there is no compelling reason to force employers to register. Is there an enforcement unit to ensure employers have registered? For example, everyone submits an annual tax return to South African Revenue Service (SARS). Everyone is compelled to comply with SARS requirements. Is that the case for the Fund? Employers are compelled by law, but is that being practised in reality?
Mr Lamati replied about record keeping that before 2014 the Fund did everything manually. There are files strewn all over the place because on the manual procedures and there was no proper record keeping. That is why some documents cannot be found now. By mid-2014, the Fund moved to a new Umehluko system. Documents were scanned into the new system. However, not everything was fully automated, thus some documents are still missing. Previously, employers would scan W.CL1 and W.CL2 documents which are required to report an incident and submit the claim. The Fund would then keep these documents and present these to the AG. In an attempt to automate all the systems in the Umehluko, hard copies were done away with. However, that created a problem because while documents were automated, there were no hard source documents to show the AG.
The newly developed fully automated CompEasy system has solved that problem. The source document is attached as a scanned document. That way there is proper record keeping and nothing falls through the cracks. However, there are still challenges with the old legacy information that is not available. That is why there is still reference to old documents not being available in the audit findings. The backlog on the ROE was raised by the AG and this has been a challenge for a long time. It has been caused by one of the biggest challenges the Fund experienced which was the classification of sectors, which had over 100 subclasses. This proved to be a serious problem, because companies were registered in a sector class, yet they were doing something completely different. They never updated their classification on the system. Many employers are coming to the Fund saying they had been registered as a construction company, and yet they are not. Over the years, companies have come to seek refunds on the basis they were incorrectly classified. This classification has changed now. After a lengthy three-year period at Nedlac, the new classification moved the classes from 100 to just 13 classes, which makes life much easier. The Fund implemented this in the 2021 financial year. This will go a long way in improving the situation.
On compelling employers to register, as Mr Hadebe indicated, there is legislation. However, the Fund is unable to go to every workplace and ensure that employers register. There have been discussions with SARS to assist the Fund to enable something similar to how Unemployment Insurance Fund is handled. Discussions are still underway. SARS has highlighted that the Compensation Fund operations are slightly complicated, and there is need for further discussion to see how the Fund can be aligned with the SARS system, to enable SARS to collect on behalf of the Fund. He agreed that the lack of ensuring that every employer contributes, has an impact on the revenue that the Compensation Fund collects. That is why the AG raised the ROE concern.
Mr Vuyo Mafata, Commissioner: Compensation Fund, replied that the DG had captured most of the challenges in the control parameters. In the last five years, the Fund has been implementing a plan including replacement of the system and automating the submission of ROEs, managing the revenue aspect of the Fund and claims. There have been several policy changes over the last 24 months aimed at addressing the control weaknesses identified in revenue management. The impact of those policy changes will be seen in the coming audits.
Mr Hadebe said active employers are supposed to be assessed regularly, but this does not happen. What are the reasons for this not taking place? Who are the officials responsible? Have they been held accountable for non-compliance?
Mr Mafata replied that the assessment process follows the submission of return of earnings. There is a big problem with compliance from employers. If an employer has not submitted the ROE, the employer cannot be assessed because the Fund does not have a return to assess. Although there is a set of active employers who may have submitted returns, based on the definition of an active employer, but if in subsequent years these employers do not submit a return, it cannot be assessed. One measure done with DEL was the creation of a Payroll Audit Unit within the Department inspectorate. This Unit was established to assist the Fund to inspect employers who do not comply. The Unit has been in existence for the last 12 months. Once non-compliant employers submit their returns, the Fund can then assess them. One of the weaknesses that existed was that accounting standards do allow the Fund to be able to make some provision for employers registered with the Fund who have not submitted returns. However, the biggest problem has been that such provision has not been raised in the correct manner. This was partly due to lack of skills and some system limitations. Many of these will now be addressed with the enhancements to the system. Therefore raising provision for such employers should not be a major problem going forward.
Mr Hadebe asked if a skills audit had been conducted yet to ascertain if the Fund has the necessary skills among the current staff. What are the findings? If not yet started, why has it not started? When is the Fund planning to conduct a skills audit?
Mr Mafata replied that at the beginning of the turnaround plan, the first thing done was a skills audit to determine what skills gaps exist. It is based on that skills audit, that the Fund then started restructuring. The Minister spoke about the Fund being a pension fund and a health administrator.
Mr Hadebe asked the Commissioner to indicate dates in his responses so that Members could assess if the turnaround plan is yielding positive results. When was the skills audit conducted? The response ought to reflect improvement. Without dates, Members cannot assess if there is improvement. From what the Committee has seen, the Fund is still the same as ten years ago.
Mr Mafata replied that the skills audit was conducted in 2015/16. Following that, in 2016 a restructuring process was started. The whole structure of the Compensation Fund was redesigned. It was then approved by the Minister in 2017. This created additional capacity required in finance. The skills audit revealed gaps in clinical health related skills to administer medical claims, in addition to the lack of actuarial skills. When the redesign was done, these components were created, and posts were filled between 2017 and 2019. The current structure and employees were appointed following the skills audit. The DG raised an important point that since people are employed in the Fund based on Public Service Regulations, although the right structure and skill requirements are there, the Fund does not pay salaries that similar skills would attract in the private sector, making it difficult to attract some skills that are lacking.
Mr Hadebe said in essence the Fund has attracted the wrong people. A skills audit was conducted, followed by recruitment. What skills, expertise, and experience are these people bringing except maladministration? This is 2021, and skills were dealt with from 2017 to 2019. What is before the Committee is a completely broken and rotten business. If the skills audit was conducted, why are there still missing documents? This is confusing as the skills audit was done, but the situation is that same. The Committee needs to propose a full forensic audit investigation for the missing documents. If there are still challenges dating back ten years, yet the skills audit was done and the right calibre of skills recruited, what should be expected if nothing positive has been produced?
Mr Mafata replied that the skills audit was addressing the people issues, but there are also system and process challenges in the Fund. After addressing the skills challenges, there was a need to consider the systemic issues. Most of the weaknesses and absence of controls was with the system, which was configured at a time when the Fund did not have appropriate skills to ensure the system was configured adequately. Over the last three years, a new claims management system has been developed with all the added controls. In addition, the existing financial management system required major enhancements. But the first thing needed was to have the right people. Without some of the clinical skills that were attracted, it would not have been possible to develop the new claims system.
Mr Hadebe said new skills and expertise were recruited to assist in developing proper systems, yet those systems have not yet yielded positive results. What needs to be done for the systems to produce the required outcomes? Surely one of the responsibilities of the new people recruited is to ensure that internal controls and effective systems are put in place. The Committee was told that the old system was not yielding results, and the Fund opted for another system. Systems are operated by individuals, and every individual in the value chain is responsible for achieving certain results. That has not been forthcoming. The system cannot be blamed because it does not operate automatically, but is controlled by individuals.
Mr Mafata replied that the claim system was implemented at the end of 2018/19, thus it was unlikely to see its impact in the audit report in question. The AG has started the audit for 2020/21 which is when the system was used for the full year. All claims were processed using the new claims management system. The Fund is expecting a different audit outcome on claims. The big challenge is to clean up matters raised in prior years as they still have an impact on the balance sheet. The Minister referred to the Clean Audit Task Team that was established. Part of the work of this team is to look at all the prior years and work with management to ensure that those that can be corrected are corrected, and those that cannot be corrected can be cleared off the books.
Mr Hadebe said the AG raised non-dependents over 18 years who are receiving monthly pensions, due to inadequate controls in the claims system. Has that been taken care of in the new system? Have the officials involved in the corrupt practices been dealt with?
Mr Mafata replied that it is possible for an over 18-year-old to get a pension. If a beneficiary is over 18 but still attending school, they are entitled to receive the monthly pension. Part of the big problem was the record keeping the DG spoke about, which is being addressed. When the Fund migrated to the new system, the data from the old system was migrated. This process of migrating the data cleansed the data where there was need to refresh old IDs issued to those who were pensioners before the new ID system. Much of this clean-up was done, including linking to Home Affairs, so that when people are captured on the system, the information can be retrieved from Home Affairs. This is all in the new system.
Mr Hadebe asked about the AG finding that money was paid to deceased individuals. How much has been lost due to that ? Can the response be specific when talking about the clean-up? One example was given but there are more concerns when it comes to malfunctioning systems and weak internal controls.
Mr Mafata replied that the pensions database was cleaned up to determine how much of the database is valid in terms of age or if the persons are deceased. Those concerns have been eliminated completely.
In response to Mr Hadebe asking the Commissioner to confirm with authority that the Fund is no longer paying deceased individuals, Mr Mafata said the Fund is no longer paying them.
Mr Hadebe asked how much had been lost in the process. Has that value been quantified? Have the responsible officials been held to account? Has consequence management been effected?
Mr Mafata replied that the amount has not yet been quantified, because interrogation of matters raised by AG is still ongoing.
Mr Hadebe asked how the Fund then knows that the deceased are no longer being paid if they have not been quantified.
Mr Mafata replied that given all DEL systems link to Home Affairs, the database has been fed and refreshed with Home Affairs data. That work has been done.
Mr Hadebe asked if it is possible to tell how much had been paid to deceased individuals.
Mr Mafata replied that once the quantification is done, it will be possible to state this.
In reply to Mr Hadebe asking if currently the Fund does not know the extent of the loss incurred, Mr Mafata replied that the Fund does not know.
Mr Hadebe asked when the Committee can expect that report.
Mr Mafata replied that Clean Audit Task Team was busy with that work. The Fund is cleaning up errors from prior years and it has set itself until the end of the financial year to clean up.
Mr Hadebe said there must be milestones and timeframes which are broken down into achievable targets.
Mr Mafata replied that the Fund is busy with the planning and diagnostic process. A plan will be submitted to the Committee by end of June for the milestones for the prior period.
In reply to Mr Hadebe asking if this was a guarantee that a report on controls would be given to the Committee by 30 June, Mr Mafata agreed.
Mr Hadebe asked if the report would have all the details, including consequence management for all individuals found in the wrong for non-compliance.
Mr Mafata replied that he was committing to the plan with timeframes. He had indicated that the assessment of the work needing to be done to correct the prior period is being done now. The team is putting together a plan for what should be prioritised in the next six months, and so on. That plan will be submitted at the end of June. Consequence management will be part of the plan. Once it is established who was responsible for what activities, consequence management will follow.
Mr Hadebe said it is possible that officials who have not yet been identified will continue with their maladministration and corruption. Is that a possibility? Currently it is not certain which individuals are responsible for the status quo in the Fund.
Mr Mafata replied that he would not say that it is due to officials, since most of the challenges are to do with systems. The Fund pays the people that exist in the system.
Mr Hadebe asked who drives the system. Who designed the system? Who recommends the system? Who administers the system?
Mr Mafata replied that it is the management.
Mr Hadebe asked who must then account where the system fails. Should the system be charged?
Mr Mafata replied that it should be those that are responsible. Where concerns have been raised, but they have not been dealt with, management must answer.
Mr Hadebe said there are basic controls, and those officials must be identified, since there is decades of rot. Can the Fund give the Committee a sense of comfort that these individuals are being dealt with? There cannot be double payment. Payments cannot be made to people who have died. The dead cannot be used to amass wealth, without consequence. The system cannot be blamed for that. Systems are administered by individuals. An official chooses to deliberately punch in details of a person who is deceased so they can amass wealth. That money does not go to the grave, but it goes into someone’s account. Can the Fund show a sense of urgency that what is currently happening should not continue? There should be a sense that basic controls are being dealt with. There is no need for a forensic audit or a team of experts to tell that an official has not been complying. It appears that management is tolerant of non-compliance since there are decades of adverse audits. The Committee was hoping that the Fund said that heads have rolled in a particular department. Heads must roll. People must account for their actions.
Mr Mafata replied that work is done when people have been found to be in the wrong or have contributed to losses to the Fund. If they are internal officials, disciplinary action is taken against them and several dismissals have taken place. For external individuals, cases are taken up with the South African Police Service (SAPS), and some matters have gone to court where people have been found guilty.
Mr Hadebe asked who paid the deceased individuals.
Mr Mafata replied that he wanted to give context to the issue of deceased individuals. Once a person has been declared permanently disabled, they are entitled to a monthly pension from the Compensation Fund. Where a person’s injury resulted in a fatality, the person’s dependents are entitled to receiving the monthly pension. The AG found that in some instances pension was paid over the years when they are alive, but when they are deceased, they would have been paid for a month or so because the system had not yet been updated with information from Home Affairs. Those are the circumstances. There is no instance where a claim is processed for someone who is deceased. In some instances, there are clear cases of fraud where a deceased person’s ID has been hijacked and a claim is made based on that. However, the Fund has not encountered a case were an official deliberately captured a claim for a deceased person.
Mr Hadebe asked if the Special Investigating Unit (SIU) was present in the meeting. He asked if SIU had attempted to pursue the shenanigans and corruption taking place.
Mr Johnny le Roux, SIU Chief Forensic Investigator, replied that SIU had not received a request to investigate a matter at the Fund. However, they are willing to assist wherever possible. If the AG report is made available, SIU will review it. The DG is aware the SIU is currently doing work within the Unemployment Insurance Fund (UIF) for the Labour Activation Programme. The SIU can take this up, and if there is sufficient evidence, a request will be made to the President for a proclamation. The SIU is certainly willing to assist.
The Chairperson said the Committee would decide at the end of the meeting how the SIU could be incorporated into the roadmap.
Mr Hadebe said he wanted to address irregular, fruitless and wasteful expenditure which the Fund has not been addressing. It is difficult for the AG to get a sense of the extent of the irregular expenditure. Can the Committee be given a sense of the irregular, fruitless and wasteful expenditure, and what has been done to comply with National Treasury guidelines.
Mr Mafata replied that the Fund has been working on the irregular, fruitless and wasteful expenditure register for several years. Part of the biggest challenge, as the DG mentioned, is that historically the Fund has not been good with record keeping management. The register has several cases which cannot be confirmed if they are supposed to be on the register, because there is no background to what led them to be there. Some may have been as a result of audit findings by the AG in prior years, but management at the time did not do enough to interrogate the findings to confirm if this was irregular, fruitless and wasteful expenditure.
The new management inherited a situation where they have had to clean up the register. It has even been a struggle to reconcile back the amounts that were disclosed in the annual financial statements. There has been success in cleaning up the register for the just ended financial year, by tallying what is in the register with what is in the annual financial statements, apart from few transactions that do not make sense and are still being investigated.
Another big problem with the register is that there are many cases where there are no supporting documents. This is part of the work the Fund is doing in consultation with Treasury. In the beginning, the approach was to apply for a mass condonation and write-off of cases which cannot be substantiated and where there are no supporting documents. That way, focus can be placed on items that have records, which can be investigated properly. However, the advice that Treasury gave was to look at each case individually. The Fund had to go back to check what information can be found on each of the cases which were then to be submitted to Treasury.
Having cleaned the register, the Fund is now starting the process to submit the cases individually to Treasury. But there is no hope that records will be found in many of the cases. There is one major case which contributed to fruitless and wasteful expenditure and it has been referred to the State Attorney for recovery. It was a payment made to a contractor who was in breach of contract. There were several advance payments by the Fund in 2012 to medical service providers and third-party agents who represented medical service provider. The Fund is attempting to recover this money as it was deemed irregular. Processes have started with the State Attorney for civil proceedings against the parties. Two of the parties have agreed to a settlement agreement with Fund, and there is a process of identifying claims that will be used for the settlement agreement. However, in most of the cases, there is not enough information to help the Fund move forward.
Mr Hadebe said Liquid Telecom was a service provider without a valid contract in 2018. How were they appointed without a valid contract?
Mr Mafata replied that Liquid Telecom was appointed as service provider with a contract in place to render data lines. What led to the irregular transaction was that the contract expired; it was not renewed as the Department was moving its lines to SITA. The Fund's ICT Head at the time who was responsible for those contracts. Consequence management was implemented against the official and a final written warning given.
Mr Hadebe asked how much was paid and why the service provider was paid without a contract. The expiry of a contract means an agreement has ended and there is no longer a legal binding document between the entity and the service provider. What prompted the continuation? Who are the officials in that transaction? As the case was concluded, Members should be given details.
Mr Mafata replied that when a contract expires, it would state that if neither party serves notice, the contract would continue on a month-to-month basis. This was the case. The correct process that should have been followed in such a case should have been for the ICT Director to take the matter to the Bid Adjudication Committee to formally request extension of the contract. This was not done; hence the expenditure was irregular. About R1 million was paid to Liquid Telecom. The contract was not terminated and the payment was made because without the payment, the online services would have shut down.
Mr Hadebe said it is not as if the Fund did not know that the contract would expire. Prior approval and authorisation from a delegated authority should have been sought in advance. But that did not happen.
Mr Mafata agreed and said prior approval did not happen, hence the ICT Director had to be held to account.
Mr Hadebe asked if this was just by a mere letter of warning.
Mr Mafata replied that that was the sanction that was deemed appropriate at the time.
Mr Hadebe asked the Commissioner to explain the month-to-month contract of more than R20 million with First Property.
Mr Mafata replied that since the Fund would run manual processes, there were massive loads of paper and files that had to be stored in different warehouses. First Property was one of the service providers that housed documents of the Fund. Like the Liquid Telecom matter, the contract expired, and the process was not followed to have it extended. Thus it continued on a month-to-month basis while the Fund was retrieving the documents from the warehouse, since the electronic storage process had already started. The contract dates back several years. The Fund has requested an investigation on this matter. Following the investigation, the responsible officials will be held to account. No action has been taken against any official yet.
Mr Hadebe said he suspected the action would be a written warning. Why are the agreements not being negotiated prior to the expiry dates? This is basic project management. This speaks to senior management being tolerant of non-compliance. The Commissioner said the process of identifying the officials responsible has not yet started. First Property was getting paid R20 million. Are there struggles with project management?
Mr Mafata replied that contract management was seen as a major weakness in the Fund. Management is working with the CFO to ensure that this is addressed. Apart from Liquid Telecom and First Property, there have not been any other instances of irregular contracts.
Mr Hadebe asked when the contract expired and when the month-to-month contract began. Why was the matter not acted on?
Mr Mafata replied that the contract ended in 2018, but the matter was brought to his attention when a request was made for payment of outstanding rentals for 2019/20. It was then that an investigation was started so that those responsible could be held to account.
Mr Hadebe asked why the First Property rentals were paid month-to-month from 2018 to 2020 and investigations had not yet been concluded.
Mr Mafata replied that month-to-month payment was done until mid-2020 because the process was to retrieve these documents for electronic storage. The payments did not continue beyond that point.
Mr Hadebe said from 2018 to 2020 payment was made, yet investigations have not yet been concluded in 2021. Someone processed the payments; is that person is known?
Mr Mafata replied that the person who processed payments is not the person at fault. The person responsible for managing the contracts would be at fault.
Mr Hadebe said the person who was at fault has not yet been found. How long should it take? The person who processes a payment gets a request from someone. Does it take three years to identify an individual?
Mr Mafata replied that it does not take three years. The instruction for the matter to be investigated was issued in 2020. Unfortunately, the processes taken to deal with fruitless and wasteful expenditure seem to take long. This is one area that has been identified that there should be a faster way of dealing with this. The determination process must be done through the Financial Misconduct Committee, only then can the process of holding people to account be done. That process is taking long, and it was agreed that matters need to be dealt with much quicker. Part of what hindered progress was there had to be a process of cleaning the register, which slowed down other things because of limited resources to manage the register.
Mr Hadebe asked if the Fund honestly wants the Committee to believe that it was difficult to identify the official responsible for the First Property contract. Transactions were processed without hindrance, but when it comes to consequence management it now becomes practically impossible to identify the individual.
Mr Mafata replied that when consequence management is done, the job of HR officials needs to be made easier. It would be easy to just pick one individual from the group and charge them. If it is done this way, the Fund will lose the matter at the disciplinary hearing. However, investigation ensures that underlying issues are looked and to see who along the value chain was responsible. That would determine the extent of sanctions given.
Mr Hadebe asked when the matter was added to the register, and how far the process was. The Commissioner's team was asked to find the answer while the meeting progressed.
On irregular, fruitless and wasteful expenditure, Mr Hadebe said the Fund submitted a request for condonation to Treasury. However, the Commissioner is fully aware of Treasury regulations. They were not followed for the request for condonation. Treasury regulations refer to in-year monitoring, an updated checklist every month to track all irregular expenditure to keep an up-to-date schedule for all irregular expenditure before approaching National Treasury for condonation.
The Fund must first be satisfied that there has been investigation, the official held to account and sanctioned, and loss has not been incurred to the Fund. Why were those processes not followed? Was the Fund trying to protect certain individuals? Remedial measures had to be put in place to prevent it from occurring in future. That did not happen. Procedure was not followed before requesting condonation. The Commissioner cannot say he only realised when Treasury told the Fund to investigate case by case. This ought to have been known before.
Mr Mafata replied that, as mentioned, the matters taken to Treasury were those which historically did not have substantive information in the register if they are valid cases of irregular, fruitless and wasteful expenditure.
Mr Hadebe said that should have arisen after an investigation. The point he was raising was that the Fund did not investigate before approaching Treasury. It would have noted that investigation was done in a stated number of cases, and indicated which cases were difficult to handle.
Mr Mafata replied that that was not the case. The new management inherited many cases. In addition, as part of the clean-up and trying to get corrections, many other cases were added to the register for prior years. Some of the cases date back even 13 years. Each case was looked at, to try to find the relevant documentation to determine what went wrong, who the responsible parties were, to then determine a way forward in dealing with those responsible and with the transaction itself. But after years of searching for the documents, they could not be found. As such, the first thing was to go to Treasury and present the cases where documentation could not be found, so that they can de-recognised and not continue being kept on the register.
The advice from Treasury was that it should not be brought as a whole, but rather the circumstances of each case be indicated, so that a request can then be made for either de-recognition, condonement or write-off if it is a fruitless and wasteful expenditure. When preparation for this was done, the Fund did another check to have certainty when presenting the cases to Treasury that there was indeed no supporting documentation for the fruitless or irregular expenditure. For some of the cases where documentation was found, it was proven that they were not cases of irregular or fruitless and wasteful expenditure. The appropriate authority approved that these be de-recognised. The reason the Fund went to Treasury was the quantum of the cases and the impact they were having on the financial statements.
Mr Hadebe asked if it is true that the Fund went to Treasury without doing a thorough assessment of each case as then there are possibilities that some documentation can still be found.
Mr Mafata replied that the documentation cannot be found, that is why this process is being followed.
Mr Hadebe asked what exactly was being followed when each case was being taken one-by-one. What is the Fund hoping to find if they are saying management is convinced that no documentation will be found on these cases?
Mr Mafata replied that the Fund wants to get the correct approval to get the cases removed from the register. That is the process being followed.
Mr Hadebe asked what the process entails.
Mr Mafata replied that it is the process that Treasury advised, to look for available documents in each case. Ultimately, whatever sits on the register must comply 100% with the framework issued by Treasury on what irregular or fruitless and wasteful expenditure is. For most of the cases on the register, there is no 100% certainty that they meet that definition of either irregular, or fruitless and wasteful expenditure.
Mr Hadebe asked about the Dimension Data payment of R14.2 million. How was this payment fruitless and wasteful? Who is being held accountable for this expenditure? Why were the payments on a garnishee not made on time? Who was the official responsible?
The Chairperson asked Mr Hadebe to conclude, so that Mr Lees could be given an opportunity.
Mr Mafata replied that when the Fund entered a contract with Dimension Data in August 2019 for deployment and configuration of the new system, there were several things that needed to be done as part of the project. Since all the systems of the Fund are hosted in the Department's data centre, part of the work was to upgrade the hardware in the data centre. This was so that once the initial phases of the project were complete and Dimension Data was ready to start configuring the system, the configuration could be done on the new hardware as it had its own specific requirements which were not aligned to the existing hardware.
By December 2019 when Dimension Data was then ready to start preparing the hardware for the configuration of the new system, the Department had not yet finalised the procurement process for the hardware. There had to be an interim process to be able to start the configuration without compromising the timelines. However, this process meant that for the four weeks in January, no actual work was done. Instead of starting with the configuration, the contract and timelines had to extend by a further four weeks. This had the financial implications of R14.2 million. The reason it was included in the register is that fruitless and wasteful expenditure is something that could have been avoided or should have been addressed. Currently, this has been taken to the Financial Misconduct Committee so that it can confirm if this is a case of fruitless and wasteful expenditure. It will determine if it was within or beyond the control of the Fund. It can then apply the framework to have it written off. If not, the officials responsible will be held to account.
Mr A Lees (DA) said he wanted to begin with a question to the Minister. Karl Marx is reputed to use an expression, though he may not have been the originator, “The road to hell is littered with good intentions.” Over a period of ten years and more, there have been many good intentions, but as Mr Hadebe described it, it is rotten. It is hell. We have arrived in hell. There is a kind of panacea being presented to the Committee about converting to a full Schedule 3A entity. At the same time, the Minister and the DG are saying the employee complement of the Fund is not up to the job. The conversion to Schedule 3A entity in itself is simply an empire-building exercise and will not achieve what needs to be achieved. The argument that 'market-related salaries not being able to be paid' is a fiction. It does not excuse people who are appointed not to do the job as appointed.
Much of what resulted in the disclaimers are basic items. No one needs a PhD to store documents. In the Annual Report, page 96 shows that there seven employees who were given warnings. On page 91 it shows there are 815 employees at Head Office. The Annual Report seems silent on how many employees are in the provincial offices. The Committee does not know this unless the Commissioner can indicate. Of the 815 employees only seven warnings were issued the entire year. There was no single verbal warning, four written warnings, and three dismissals. Since he became an MP in 2009, he has heard on a nauseatingly repeated basis, the question about consequences. Here is an entity in hell, but only seven warning were given the entire year. Of the three dismissals, who were those dismissals? For what were they dismissed?
Mr Mafata replied that of the seven cases where consequence management took place in 2019, three officials were dismissed for soliciting bribery.
Mr Lees asked if none of the dismissals were related to the malfeasance and maladministration that has taken place over the last ten years. Was no one dismissed for poor job performance in that year?
Mr Mafata replied that one of the biggest challenges in the Fund has been fraud. This is what has led some officials to compromise controls. Such actions have a direct link to some of the problems in the Fund.
Mr Lees pointed out that it is then not a question of skills, but basic crookery. No matter what the skills are, fraud is fraud.
Mr Mafata agreed. While improving the system controls, the Fund is working on process controls. It is due to the controls that have been put in place that the Fund is then able to detect some of the malfeasance that is happening, and deal with it.
Mr Lees asked who the employees were in the three cases.
Mr Mafata replied that he did not have the names at this meeting.
Mr Lees asked about ROE. The Fund website has been dysfunctional for many years. He has personally experienced it. What is the current backlog? How many ROEs are outstanding and overdue?
Mr Mafata replied that the Fund does not have that record now, as they are currently in the period of filing of 2020/21 returns, where assessments are done. The information will be known at the end of May, once the filing season ends. This process is self-administered, because employers submit their annual returns on the ROE system, and the assessment happens electronically. The details will be known at the end of the financial year how many active employers in the Compensation Fund system have submitted and been assessed.
Mr Lees asked if this meant that for the 2019/20 year in question, every employer submitted a ROE and there were none outstanding for that period. Are there no outstanding ROEs for 2019/20 or for prior years?
Mr Mafata replied that the annual performance report shows that out of the 400 000 active employees, only half submitted their returns for 2019/20. The rest did not submit. This is a problem of compliance, because if an employer has not been assessed, it is because they have not submitted a return, which is non-compliance with the legislation.
Mr Lees asked what the situation is like now. It was 200 000 not submitted for 2019/20. The Commissioner has not given figures for the past ten years. Members are not really interested in employer compliance, because it is known that employers will from time to time not be compliant. What are the statistics? How many of the ROEs that should have been submitted for the years prior to the current year are still outstanding? It could be up to ten years that someone has not submitted, because it seems that the administration does not follow up, and just waits for submissions. Does the Fund not have that figure?
Mr Mafata replied that he did not have the rand figure for 2019/20 but he would have the one for 2020/21 once the assessment was completed. As earlier indicated, a Payroll Inspection Unit was created in the Department, whose sole objective is to root out non-compliance by employers, including non-registration, non-submission of returns, and non-payments once a return has been assessed. That problem is being addressed through the inspections.
Mr Lees said he was incredulous because if this were the Commissioner’s business, which was a monopoly, and clients did not provide payment, action would have definitely been taken ten years ago. That there is no information of how many employers and how many returns are outstanding is incredible. He was not sure what the Committee was achieving with this hearing, but he would proceed. It seemed to him that it was not just a matter of fixing processes but a lot more than that. For instance, the Commissioner gave a lengthy description about classification of sectors and its impact on returns. This is nonsense. ROEs are returns on earnings and it does not matter what classification they are. The provisional assessment is not something new. It is how the Fund always works. There is no need for a submission from an employer to raise a provisional assessment. Many times it is done, and massive assessments are made. Thus, it is not an excuse to come to the Committee and give that as a reason for why the ROEs have not been processed. It is simply incompetence. Can he tell the Committee what the email backlog is at the Fund contact centre? How many emails are awaiting a response?
Mr Mafata replied that he did not have that information in this meeting.
Mr Lees asked if that information was anywhere. Does the Commissioner get reports at least monthly on the performance of the call centre and email centre, stating the number of emails received, how many were responded to, and the backlog? The UIF was able to give this information at the drop of a hat when the Committee visited them. Can the Fund not do the same?
Mr Mafata replied that if the information had been requested beforehand, it would have been available because there is a dedicated email address that clients send information to. The call centre team keeps statistics of how many have been attended, and those outstanding. This is tracked in the Exco as part of reporting on the call centre turnaround times.
Mr Lees asked the Commissioner to ask someone in his team to get that information while the meeting progressed. He gave an example of the call centre and the emails. On 13 July 2018, at 10.53am he sent an email requesting details of an employer who had been attempting to register for about three years at that point. The registration information had been submitted over and over. There was no response to the email. On 27 May 2020 he emailed again and got a response on 26 August 2020, simply acknowledging receipt. There were further emails. To date on 19 May 2021, he is yet to get a substantive reply to the emails that started in 2018. Why?
Mr Mafata replied that he would not know why the specific matter had not been responded to. One of the biggest challenges the Fund has had is delays in registration of employers. Therefore, an online registration platform was introduced two years ago so employers do not have to wait for the Fund to process their registration. With the online registration, the employer can instantly get a registration number so they can submit returns and transact with the Fund. Part of the restructuring in response to the skills audit was to address this area of Employer Services, because this was where a lot of the bottlenecks were. A separate Employer Services Unit was created to be more responsive to employers on the queries they raise. Following the creation of the Employer Services Unit, the Fund has started to see a lot of feedback, and responses are given. Some responses may not be favourable to the employers, but the Fund does give responses. If one is not happy with the response, they have the right to object and the Fund attends to them.
Mr Lees asked if this meant it was very easy for whoever received his email to go onto the system and give him a response. He doubted that the system is working very well.
On claims, can the Fund give the Committee statistics on the waiting process? On average, how many claims does the Claims Department handle per year?
Mr Mafata replied that about 800 000 medical invoices are submitted to the Fund annually. In 2020/21, because of Covid-19 lockdown, and the fact that workplaces were not operational for the full year, there was a slightly reduced number of claims. Last year 99 000 claims were processed by the Fund. As on 17 May 2021, there were about 17 831. These claims are being worked on by the officials. There are about 92 000 claims that would have been submitted.
Mr Lees said on claims, there is a backlog of about 110 000.
Mr Mafata replied that he would not call this a backlog, because these claims are being processed. Contact had been made with the employers, and the Fund was waiting for information from the employers to process the claim further. On medical claims, out of the 618 000 that were received last year, about 617 000 were paid within the financial year [network unstable 2:05:55-2:06:17].
Mr Lees asked what the situation was like for the previous day for medical claims.
Mr Mafata replied that he did not have the situation as of the previous day, but he had information on medical claims for the end of April [network unstable 2:06:34-2:07:07].
Mr Lees said presumably that equates to 10%, which is two months of claims of the 618 000.
Mr Mafata replied that it was roughly around that.
Mr Lees said for the year in question, there were 51 employees who got performance awards. What were these rewards for given the mess that the Fund is in?
Mr Mafata replied that the problems in the Fund do not mean that there are no pockets of excellence among some of the officials who performed above the norm. Instances of good performance are rewarded, hence the 51 individuals who received performance awards.
Mr Lees asked the Commissioner to submit a list of those individuals and what they did.
Mr Mafata replied that the Fund will be able to do that.
Mr Lees asked if bonuses were paid to employees for 2019/20. How does the bonus system work?
Mr Mafata replied that all civil servants are entitled to a 13th cheque as part of the conditions of service. The bonus in the financial statement is relating to the 13th cheque which is paid to all officials in the Fund.
Mr Lees asked if this was irrespective of performance and Mr Mafata replied yes.
Mr Lees asked if the Commissioner got a bonus and Mr Mafata replied that he got one.
Mr Lees said R10m was spent on training costs. Given the degree of skills shortage and chaos at the Fund, how was the training determined? What training was it? It does not appear to have made much difference.
Mr Mafata replied that as mentioned earlier, this training was in response to the skills audit. Employees had to be trained so they are familiar with the use of clinical coding and the use of clinical terms used in claims [network unstable 2:10:26-2:10:56 and 2:11:10-2:12:06].
Mr Lees asked the Minister why the DG had not been held responsible for the sins of the Compensation Fund. What the Minister and the DG have said to the Committee are simply plans and good intentions. The DG as the accounting officer must be held accountable.
Minister Nxesi replied that he had been raising all the concerns with the DG as the accounting officer. He had indicated to the DG about consequence management, and he was very clear on that. At the operational level things have been good, from the Commissioner and how that is structured. However, he had indicated that in dealing with consequence management, if need be, he must start with the DG. This has been communicated very clearly, so that the DG should ensure that the Commissioner and all management get their act together. Some of this was as a result of the DG’s initiative.
Mr Hadebe asked Members to consider the proposal to institute a forensic audit in the Fund, especially for payments without documentation. There is need for the Minister to come up very clear and unequivocally to the Committee if such a forensic audit would be instituted. He supported the recommendation made by the AG that the Fund must appear before SCOPA on quarterly basis if the status quo is to change.
Mr Less said there was certain information requested from the Commissioner. If it was not available now, a deadline should be given for when that should be submitted.
The Chairperson said the information should be submitted by 27 May by close of business. He was aware that Members were all busy with budget votes.
Mr Hadebe said the DG must tell the Committee about those that have been held accountable. Heads must roll.
Mr Lamati replied this was the recommendation by the AG. The recommendations will be implemented, and those who did not do what they were supposed to do will be held accountable. That is the intention.
The Chairperson said he understood what Mr Hadebe meant about the DG implementing consequence management. The Committee is saddled with eight years of disclaimers, and ten years of adverse findings. There has been absolutely no change, and the same individuals have been in charge. The question that should be asked the Minister: Is the DG and the Commissioner fit-for-purpose and competent for the challenges? In the Fifth Parliament, Members went to the Compensation Fund, issues were raised and all sorts of commitments were made but they have come to nought. Years have gone by, and the audit outcomes are pointing to the same shortcomings. It is either nobody cares, or nobody takes Parliament seriously, or nobody bothers about the wellbeing of the Fund that it continued in the same way. Any one of these is unacceptable.
None of the responses in the meeting have given Members any comfort on the concerns about the Fund. It is becoming tiring and absolutely nauseating to be saying the same thing repeatedly to the Compensation Fund. Worst of all, it is to the same individuals. There is full agreement that the Committee is calling for a full-scale forensic investigation of Fund for the 10-year period. As it was done the previous day for the National Skills Fund, the Minister is asked to lay out a roadmap for that forensic investigation and refer the matter to SIU and subject it to a proclamation. The Committee expects the Minister to make a submission in 30 days on the modus operandi for the forensic investigation. How will be done? Who will be doing it? What will be the terms of reference for that forensic investigation?
The Committee expects that the audit findings will be central, including the audit action plan, since the Internal Audit Committee is very functional. They have raised the issues, but nobody is listening to them. This speaks of coordinated corruption. The structures are there, but there is no compliance. The Committee calls on the Minister to conduct a performance assessment of the DG and the Commissioner, to determine if they are capable, competent, and fit-for-purpose. On the other hand, the Committee is dealing with the UIF headache in the same portfolio. These are perennial headaches which mount on top of one another every year, with the same individuals for over five years. There is no change. Something must give.
If the Minister does not bite the bullet and make decisions about the individuals concerned, the Committee will make recommendations accordingly. The Minister was requested to get back to the Committee not later than 20 June. While Parliament would be going on recess, the Committee has been granted permission to meet, as and when circumstances dictate. The Compensation Fund is a priority. The pledges that things are going to turn around have been tolerated long enough but have come to nought. This is totally unacceptable. The Committee will wait to see what the Minister submits to come up with conclusions to turnaround the Compensation Fund. If he is still Committee Chairperson next year, he will pull his hair out if he must listen to the same audit outcomes from the same individuals in the same institution, but with no progress. The Committee is flagging that the Minister has not yet tabled the Annual Report to Parliament. There seems to be a glitch. Can the Minister follow that up? Parliament records do not reflect to the availability of the Annual Report. He handed over to the Minister for concluding remarks and a response to the summation of the Committee. The Committee has had it with the Compensation Fund because the same issues have been raised from the Fourth Parliament to Fifth Parliament and they are still being dealt with.
The Minister said that the Committee has raised constructive criticism, which is meant for the Department to correct. That is what accountability is all about. In dealing with wrongdoing, the first thing is to acknowledge the wrongs. The Fund acknowledges the chaos. The Committee has added to some of the blind spots which were not being looked at before. He assured the Committee of his commitment to address the AG findings and to conduct organisational review [network unstable 2:28:50-2:29:35]. Together with the Deputy Minister and the DG there is commitment to regular monitoring of progress. This will be done with the Internal Audit Committee, whose work was commended by the AG.
He supported the proposal that the Fund report regularly on its audit action plan and performance targets to SCOPA, the Portfolio Committee, Select Committee, and the Office of the AG. The instruction to have a full-scale forensic audit has been taken. However, care needs to be taken not to come up with very broad terms of reference, where there will mean an unending forensic audit with people continuing to make money. A submission will be made in 30 days, including a roadmap, modus operandi, and terms of reference. The performance assessment of the DG and the Commissioner is already stipulated in the Minister’s own performance agreement with the President. Progress would be reported to the Committee not later than 20 June. This has been taken as constructive criticism in the interest of accounting for public funds.
The Chairperson thanked the Minister. He thanked Mr Hadebe and Mr Lees for bringing to light the audit outcomes, demonstrating why the Committee is concerned about the Compensation Fund. The questions were thorough, but the responses have been plainly weak, and have been an indication of the extent of the collapse of the institution. It is not a pretty picture. The Committee will await the Minister’s June report. The written responses from the DG and the Commissioner should reach the Committee by 27 May.
He thanked the Minister for his presence, knowing that it was Wednesday, and some would have said it is Cabinet day – but the Committee maintains that it is Parliament day. He thanked the Deputy Minister, DG, Commissioner and his team for appearing at the hearing. The Committee appreciates the continued support and cooperation of SIU and AGSA on these matters that are very complex and difficult.
The meeting was adjourned.
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