DPE 2020/21 Annual Report & Audit Outcomes; with Deputy Minister

Meeting report

Chairperson’s opening remarks

The Chairperson remarked that the Portfolio Committee (PC) had had a long break due to constituency work that had been extended after elections were brought forward. He congratulated all the political parties for free and fair democratic elections. South Africa’s elections continued to demonstrate a high level of maturity and tolerance. There was not a single incident of serious violence.

The PC last met in July, and a number of developments took place in the state entities, including multiple explosions at Eskom, and cyber attacks at Transnet. With all of these incidents, the PC still had to get a proper account from those entities affected. The following week, it would have to get an account from Eskom as to what had contributed to these multiple explosions, including the current load-shedding that was frustrating everybody, including the Committee. The PC would have to “duck and dive” from the load-shedding. The Chairperson called for Members to be business-like in their contributions because load-shedding would affect a number of areas in Cape Town. The PC was working under very difficult conditions which were not of its choice. It still wanted answers to the “quagmire” South Africa found itself in. It would not be running away from Members engaging, but Members needed to bear in mind that the situation was not of its own choice. It was a situation on which it needed to be updated and informed of what the problem was. The Committee would have to be efficient with its time.

Mr Disang Mocumi, Committee Secretary, read out the apologies.

Mr G Cachalia (DA) advised that Ms M Clark (DA) had been granted leave by the party.

AGSA briefing on 2020/21 audit outcomes

Ms Zolisa Zwakala, Acting Head of Portfolio, Auditor-General of South Africa (AGSA) introduced the presentation and members of the delegation. A representative from SNG Grant Thornton (SNG), a private audit firm, was also present. SNG was responsible for auditing Eskom for the year under review (2020/21).

For the first time this year, the AGSA had audited Transnet directly, which was a big milestone for the AGSA. It was something that various structures such as past Portfolio Committees had called for. They had asked the AGSA to get closer to the large state-owned enterprises (SOEs) so that the necessary insights could be obtained timeously. Eskom was still being audited by SNG.

Mr Fhumulani Rabonda, Acting Business Unit Leader: AGSA, made the presentation. The Department of Public Enterprises (DPE) entities were Transnet, Eskom, the South African Forestry Company SOC Limited (SAFCOL), SA Express, South African Airways (SAA), Denel and Alexkor. Of these entities, AGSA audited Transnet, Denel, SAA, SA Express and SAFCOL. Eskom and Alexkor were audited by private audit firms.

Mr Rabonda noted that AGSA had a constitutional mandate. It was engaging with Members as part of its role to strengthen South Africa’s democracy by enabling oversight. The message given by AGSA to the PC would contribute to the quality insights that it would have into the performance of the various entities.

Percentages in the presentation were calculated based on completed audits of 13 auditees, unless indicated otherwise.

Overall portfolio message

• The overall outcomes in the portfolio had remained stagnant when compared to the prior year, with two auditees (DPE and SAFCOL) receiving unqualified audit opinions with findings on compliance with legislation. The Eskom and Transnet audit opinions remain qualified.

• SAA was in business rescue until 30 April 2021 and SA Express was currently in provisional liquidation; both audits remain outstanding.

• Denel did not submit financial statements, as it was currently experiencing financial difficulties, loss of key resources and was addressing significant financial statement issues raised in the 2019/20 audit.

• The Alexkor audit was still in progress and was set to finish during November.

• The prevalent instances of non-compliance were in the areas of expenditure management, supply chain management (SCM), revenue management, consequence management and material misstatements identified in the financial statements submitted for auditing.

• In most instances, findings raised were recurring, indicating weaknesses in the implementation of audit action plans and an effective culture of accountability.

• Leadership should put measures in place to ensure that there were adequate reviews on the annual financial statements (AFS), annual performance reports (APR) and monitoring of compliance with laws and regulations.

Audit outcomes of the portfolio over two years

In 2020/21, two auditees (DPE and SAFCOL) had received unqualified audits with findings. Eskom and Transnet received qualified audits with findings, while Denel, SAA, SA Express and Alexkor received the outcome of outstanding audits.

(See the bar graph on page 11.)

Quality of financial and performance reporting

First focus area: credible financial reporting

• At all four audits, material misstatements were identified in the AFS submitted for auditing.

• DPE and SAFCOL managed to correct the errors resulting in unqualified opinions, while Transnet and Eskom had uncorrected material misstatements on the completeness and accuracy of the irregular expenditure disclosure.

• There were material misstatements in annual financial statements (AFS), weaknesses in the financial reporting process, and inadequate reviews and reconciliations to underlying records.

There were gaps with regard to reviews, and making sure of numbers.

Second focus area: credible performance reporting

AGSA commended SAFCOL and ESKOM for submitting the annual performance reports without material errors, which was consistent with the previous year.

• Root cause analysis: DPE and TRANSNET had findings on the reliability of reported performance information, which were subsequently corrected. The supporting evidence did not always agree with the reported performance on the annual performance report. This was due to inadequate monitoring and reporting of reliable performance information, which was consistent with the previous year. 

Third focus area: compliance with legislation

The areas of material non-compliance reported were:

• Material misstatements identified in financial statements submitted for auditing (Transnet, Eskom, DPE and SAFCOL).

• Ineffective steps to prevent irregular expenditure  (Transnet, Eskom and SAFCOL).

• Ineffective steps to prevent fruitless and wasteful expenditure (Eskom).

• Uncompetitive and unfair procurement processes (Eskom and Transnet).

• Inadequate consequence management (Eskom and Transnet).

• Effective and appropriate steps were not taken to collect all revenue due (Eskom).

The indicator of “Findings on compliance with key legislation" had decreased from 75% in 2019/20, to 50% in 2020/2021.

Mr Rabonda added that Eskom had been struggling with municipal, residential and corporate debt. When SNG audited Eskom, the focus was not on whether the debt was recovered or not, but on what Eskom was doing to recover that debt. There were some instances that could be beyond Eskom’s control. The focus was on the minimum steps that were expected, such as reminders, demand letters and legal actions. The outcome was that there were material instances where those steps were not consistently implemented in various areas, resulting in material non-compliance being reported.

Irregular, unauthorised, fruitless and wasteful expenditure

Irregular expenditure

• Total irregular expenditure amounting to R25.9 billion had been identified. This was a reduction of R8 billion (24%) from the R33 billion incurred in the prior year.

• Major contributors to the irregular expenditure were Transnet (R14 billion) and Eskom (R11.6 billon). Procurement and contract management irregularities remained the cause of irregular spending at these entities.

Mr Rabonda highlighted what these entities were battling with. There were historical issues where, from the 2017/18 financial year, these entities were being qualified based on the completeness of irregular expenditure. When one got qualified, it meant that the auditors came in, audited financial management and procurement, and found non-compliance in the spending of money; auditors would say that this was irregular. That therefore needed to be disclosed. Management was then expected to assess the population of similar transactions that could have been irregular. The entities had been battling with that process for the past three years, and also the current year. There had been engagements between Eskom and the National Treasury, and between Transnet and the National Treasury, to try and get guidance on how to deal with historical matters. Transnet had ended up getting guidance from Treasury, which said that in some instances, some of the populations that related to prior years could be classified as impractical to quantify the full extent of the irregular expenditure, when looking at the cost involved and the nature of the non-compliance that was affected in that instance. AGSA could not do the process for the current year under review. The process of quantifying the full extent of irregular expenditure did not happen effectively at Transnet, so AGSA came up with the qualification on the completeness of irregular expenditure. Eskom did not get that particular guidance from Treasury, which said it had historical issues that could be classified as impractical. The qualification related to the prior years, and also to the current year.

Fruitless and wasteful expenditure

• The majority of the fruitless and wasteful expenditure was incurred by Eskom, and was mainly related to poor procurement and contract management overpayments of R1.280 million relating to a fuel oil contract.

• 9% was incurred by Transnet, and it was related to poor procurement and contract management, inappropriate delegation of authority, redundant assets and stock fines and penalties.

• There was a notable reduction in fruitless and wasteful expenditure, from R2.4 billion in 2019/20 to R1.3 billion in 2020/21.

Mr Rabonda added that there was still concern that so much money had been spent without value in return. He defined the meanings of irregular expenditure and fruitless expenditure. The Public Finance Management Act (PFMA) defined three types of expenditure which were undesirable.

One was unauthorised expenditure, which could be incurred only by a department. That was where a department incurred expenditure that was not in accordance with the budget (e.g. overspending on the budget or using the money for the wrong purposes). That did not apply for public entities.

There was irregular expenditure, which talked to how there was non-compliance with the law in the process that was undertaken to spend the money. The money that got spent in that way became irregular. It did not automatically mean that the money was lost, but it meant that the contractor did not comply with the law. It was a serious issue, because where there was non-compliance with the law, it was a “recipe for wrongdoing and unscrupulous behaviour.” What was then expected was that the management or the board must investigate that irregular expenditure, and determine if there were losses. If there were losses, it must recover the losses that had been incurred. Management or the board must also make sure that disciplinary action was taken against the people who permitted or caused that irregular expenditure.

Fruitless and wasteful expenditure referred to money that was lost. It meant that money was spent for which there was no value, and could have been prevented if reasonable action had been undertaken. In this category, the investigation was not to determine whether there were losses, because money was already lost. The investigation would be to determine who was liable for the loss, and who permitted it, so that disciplinary action could be implemented.

Compliance with legislation

Consequence management

• Consequence management remained a challenge at Eskom and Transnet, while the DPE and SAFCOL did not have material non-compliance findings on consequence management.

• At Transnet and Eskom, AGSA noted that the respective boards and management developed action plans as part of strengthening accountability and consequence management. As the implementation of these action plans was still in progress, AGSA had identified instances of non-compliance with applicable legislation and related internal controls that resulted in the lack of effective consequence management practices.

The following non-compliance was noted:

•Lack of evidence supporting disciplinary steps taken against some officials responsible for Irregular and fruitless and wasteful expenditure. (Transnet,Eskom)

•Disciplinary steps not taken against some of the officials who incurred irregular, fruitless and wasteful expenditure (IFWE, Transnet).

•Lack of evidence on investigations that were conducted into some allegations of financial misconduct by officials (Transnet, Eskom).

•No disciplinary hearings held for some confirmed cases of financial misconduct (Transnet).

•Lack of evidence that allegations of fraud exceeding R100 000 were reported to the South African Police Service (SAPS), as required by the Prevention and Combating of Corrupt Activities Act (Eskom).

Recommendations

• Improvement of the record management system to enable availability of information relating to consequence management was a matter that required attention at both Eskom and Transnet.

• A strong internal control system in procurement and contract management was needed to bring the board’s effort to drive a culture of accountability to fruition.

• Officials must be held accountable for missing documents. Missing documents effectively meant that management and the board did not have a full view of the extent of the irregularities that took place within the entity.

• Management should consider continuing to seek the guidance of National Treasury in dealing with historical irregular expenditure.

Supply chain management (SCM)

There was an overall regression in SCM compliance. All SCM findings should be investigated. Mr Rabonda added that particularly at Eskom, there was a concern over the availability of information. Under the compliance section of procurement, Eskom was unable to account for the procurement processes that had been undertaken. Money was being spent, but when the auditors had asked for documents supporting the procurement process, those documents were not available. AGSA recommended that SCM practitioners need to be held accountable for the documents that support the processes that they had undertaken to reach a particular conclusion on awarding a contract. It was only through that that the board would then be able to have a view of the full spectrum of what was happening with the SCM system at Eskom, for example. The board would also know if it was an effective system and what irregularities had occurred.

Most common findings on SCM:

• Procurement process that was not fair, equitable, transparent and competitive (Transnet and Eskom).

• Preference point system not applied (Eskom).

• Procurement from suppliers without SARS clearance certificate (Transnet).

• Criteria applied in evaluation differed from specification (Transnet).

• Highest scoring supplier was not selected without justification (Transnet).

• Awards made to contractors not registered with the Construction Industry Development Board (CIDB) (Both).

• Limitation on compliance testing (Both).

Material irregularities

A material irregularity (MI) was any non-compliance with, or contravention of, legislation, fraud, theft or a breach of a fiduciary duty identified during an audit performed under this Act that resulted in or was likely to result in a material financial loss, the misuse or loss of a material public resource, or substantial harm to a public sector institution or the general public.

The MI process had been implemented at selected auditees audited by the AGSA that represented a significant portion of the expenditure budget and the irregular expenditure of national, provincial and local government, including state-owned entities. The selection was also focused on auditees that were key contributors to government priorities.

Mr Rabonda added that the AGSA implemented these additional responsibilities at Transnet. It could not be done at Eskom because it was not an auditee of the AGSA, as it was still a privately-audited entity. Private sector auditors applied the Audit Proficiency Act, where it called MIs "reportable irregularities."

Implementation of expanded mandate in 2020/21

Status of MIs in progress

- Transnet: Contracts for the lease of heavy duty plant and equipment were awarded to bidder(s) that did not score the highest points.

- Status: Accounting authority instituted a forensic investigation.

- Transnet: Contract amounts had exceed the tendered prices for the lease of heavy duty plant and equipment.

- Status: Accounting authority instituted a forensic investigation.

The AGSA had referred these two irregularities to the board. The board had since responded formally. It indicated the steps that it was taking to remedy the material irregularities, which were to conduct a forensic investigation. The AGSA would be following up on this to determine whether appropriate steps were being taken. It would look at whether or not the investigation was happening, how far it was, and if it was concluded. If it was not being done appropriately, the AGSA would then need to consider additional steps that it needed to follow, and whether to make further recommendations as provided for in the Public Audit Amendment Act (PAAA).

Governance and internal controls

Status of internal control

(See the table on page 24).

Status of information technology (IT) environment

• Eskom was not included in the assessment of internal controls.

• The movement (i.e. improved, unchanged or regressed) excluded , as it had not been assessed in the previous year.

(See page 25 for the full details).

Portfolio snapshot 2020/21

- Clean audits: 0 (2019/20: 0)

- Financially unqualified financial statements: two (2019/20: two)

- No findings on performance reports: two (2019/20: two)

- No findings on compliance with legislation: 0 (2019/20: 0)

- Irregular expenditure: R25.9 billion (2019/20: R23 billion).

Summary of key root causes

• Internal controls implemented were inadequate to prevent non-compliance with procurement legislation.

• Management did not implement adequate review and monitoring controls over the preparation of financial statements and annual performance reports.

• Management was not effective in ensuring adherence to the audit action plans developed, as there were repeat findings in Annual Financial Statement (AFS) compliance, as well as in information technology (IT).

Recommendations for entities within the portfolio

These recommendations were made in the main reports of the entities. Additionally, the recommendations linked to what Mr Rabonda understood to be the mandate of the PC -- to follow up on these areas as part of its oversight mandate. It had to find out from the Executive and management of the entities about the plans in place, effectiveness of plans, monitoring of plans, and how far along the plans were, as part of the PC’s mandate.

Discussion

The Chairperson welcomed the fact that AGSA was directly auditing Transnet. It was a positive development, and the AGSA must be empowered with enough resources to audit all state entities directly. This would contribute towards fighting corruption and reduce wastage of South Africa’s resources. Some of these private sector companies that were involved in auditing had been "strongly implicated in state capture.” This proved his contention that the private sector “continues to bring corruption” into the public sector. State capture was about massive looting and advanced instigation by the private sector at state entities and public companies. For him, by having one centre, which was part of the state, to directly audit these companies, would prevent any collusion instigated by business to corrupt elements within state entities. Being audited by the AGSA must also happen at Eskom, and it must happen to all of these entities, so one does not have a situation of these private companies who would, for business purposes, collude with the wrong elements in these public entities.

Mr S Gumede (ANC) asked a question related to the statement that the Chairperson had made. He wanted to find out from the AG if it was optional for the entity to decide whether it was audited externally or internally. He agreed with the idea that the Chairperson was proposing, namely that Members wished that all entities be audited internally. His main question was if it was optional. If an entity did not want that, could the Committee force entities to do so? For how long was an entity allowed not to submit? If an entity had failed to submit a report or statement, did the PC just accept that it was not ready? He believed that no matter how disorganised an entity may be, that was what Members wanted to find out, so that they would be in a position to correct and help the situation. If Members were not aware of the decisions as to why an entity did not submit, then they would leave it, only to find that at the time an entity submitted, it would still get the disclaimers or the qualification.

Mr Cachalia had a number of concerns about the non-submission of annual financial statements. He also had concerns about the qualified aspects of audit opinions that had been presented. These reflected mismanagement and corruption in SOEs by employees and management, and were very worrying. There were three aspects of the financial statements -- their being late, their being qualified, and how it affected those that were in business rescue. In the first instance, he thought that it was important to note that a late financial statement would cost more than time – it could impair relations with lenders and investors, and could lead to negative assumptions, which South Africa did not need. In the private sector, the authorities were empowered with investigative and enforcement powers to take action against companies which do not comply with the timeous presentation of their annual financial statements. This should apply to Alexkor and Denel in particular, which had been remiss in this regard. He pointed out that the DA’s private Members’ Bill intended to remedy that parlous situation.

Of particular concern, given the impact of Eskom and Transnet on the economy, was that one was the beating heart of the economy, and the other was its logistical spine. In the absence of annual financial statements being presented because the companies were in business rescue, it was important to note that it was the responsibility of the business rescue practitioners to provide details about a possible rescue, and to direct management to remedy any material omissions, and forward evidence of any reckless trading, fraud, or any other contraventions while under business rescue. These things needed to be attended to.

Ms J Mkhwanazi (ANC) said that her questions on the issue of non-submission were covered by Mr Gumede.

Ms V Malinga (ANC) also said that Mr Gumede had covered her questions.

Ms J Tshabalala (ANC) said that she shared the Chairperson’s initial statements concerning the fact that the Department, with its own entities, had not been submitting financial statements. Different entities had been highlighted by the AG. Perhaps Members should have provided a solution, rather than asking that question. The PC had been having this problem previously. She strongly suggested that the PC should write to the Speaker’s Office to highlight this concern that the PC had, because the Executive Authority reported to the Speaker. That was where the Executive Authority tabled its statements, and the Speaker would have timelines, so that the Speaker could assist the PC in responding to how it must deal with this problem, so that the PC could not be accused of not performing its oversight role.

What were the differences in audit opinions specifically between the AG and Transnet regarding the finalisation of the financials? The issue of supply chain management comes up every year in findings – what did the AG’s Office recommend on these repeated findings? Was consequence management the only solution that the AG could provide? As well as the irregular expenditure highlighted, she noted the “capitalism at Eskom and Transnet.” There were reasons why she thought that disciplinary boards became popular in dysfunctional municipalities. There was a need for effort to prevent a lack of consequence management and irregular expenditure at these two entities. She asked if the AG thought that there was a need to set up disciplinary boards to investigate financial misconduct.

The AGSA had reported that it could not finish with Eskom because there was irregular expenditure, if not wasteful expenditure, where some contractors had been overpaid; Eskom was responsible for that. Who oversees who, if the same entities do their own investigations within their own internal controls? She had a problem with that, and thought that there was something that the AGSA was not really looking into deeply. If Eskom and Transnet could handle billions of rands in the their business environments, surely the entities could handle a simple balance sheet? She was thus tempted to ask about these major discrepancies in the finances at Eskom and Transnet, which were the product of poor accounting and capacity, be it issues of theft that one might see. The PC might not have the evidence of such matters, but with the way that things were going, there should be an answer to the question of these discrepancies, and the AG should assist the PC.

As the AGSA had said, its mandate had been extended, so that it now had remedial action that it could take. Her question was, with all that the AGSA was seeing, what were the remedial actions it was strongly recommending? It was saying that the Committee needed to follow certain matters, and make sure that it did proper oversight on matters that needed to be corrected. She asked about the private companies. Alexkor had appointed a private company to audit it, and the audit should finish in November. Why was it that the AGSA’s timelines were not consistent with all the timelines for all entities to submit the financial statement for it to audit at a particular time? What was the implication for Members of Parliament (MPs) who were dealing with the budget, who were responsible for ensuring that there were annual performance plans (APPs), and who were able to agree that if not, the budget could be allocated to an extent? With these private companies that were being employed by different entities, was there a memorandum of understanding (MOU)? What was the budget, and who paid the budget for private auditing companies? Where did it come from, and who was responsible for doing that?

Regarding business rescue practitioners, who did they submit their expenditures to? The PC had problems with this. It had not received the details needed to understand these business rescue practitioners. There were entities who needed to go into business rescue, because of legislation, whether it be liquidation or the work that needed to be done. The PC had seen with SAA that the only thing reported was money allocated to the practitioners for operational expenditure. She enquired about practitioners doing the task of giving the PC a plan. Where did this expenditure for the business rescue practitioners come from?

[Mr Cachalia wrote in the chat box: "We have a private Member’s Bill on the table to address this."]

AGSA's response

Mr Rabonda said that his colleague, Ms Zwakala, would help with the question from Ms Tshabalala about the differences between the AGSA and Transnet. Ms Zwakala would also add to Mr Rabonda’s response to Mr Gumede on whether it was optional for the entity to decide to be audited externally or internally. He had also instructed her to touch on the strategic imperative of the AGSA.

He responded to Mr Gumede’s question on private audit firms, and being audited externally or internally. He understood that Mr Gumede had meant being audited privately or through the AGSA. He would also answer Ms Tshabalala’s question on timelines from private audit firms who were involved in the audit of Alexkor. The PAA empowered the AG to decide whether to audit or not to audit the public entities. With the previous Auditor Generals, Mr Terence Nombembe and Mr Thembekile Makwetu, and the current AG, there had been a gradual process of taking back the audits of most of the SOEs. Currently, out of the 20 SOEs, not counting Telkom, the AGSA audits 15 of them. It had been a gradual process of taking back the SOE audits, considering the resources and the capacity of the AGSA to be the one to audit those entities. Ultimately, it was the intention of the AGSA to say, where there were public funds, that it must have the insight on how those funds were spent. That was why, even in instances where the AGSA was not the auditor -- such as at Eskom and Alexkor -- it had a process of overseeing those audits. At Eskom, the AGSA had appointed a team of people who reviewed the work of the private audit firms. The AGSA engaged with the private audit firms from the commencement of the audit, where it agreed on the audit scope, and on the risk areas that it needed to review. At the end of the day, the AGSA needed to be comfortable that the private audit firms had addressed the risk areas. That was to ensure that whether it was the AGSA or a private audit firm, the message that came from those particular audits had to be one of quality. All were coming from the same audit profession, which meant that the audit profession was effective in being able to render the service to the public of South Africa.

Referring to the timelines, he said the reason Alexkor was late was because it had submitted their financial statements late -- it had been around July. It was for that reason that the audit was also late. The timeline imposed on the AGSA, specifically that it must finish the audit within two months after receiving the financial statements, was also imposed on private companies if those companies were the ones doing the audit. During the audit, the auditors had also experienced some delays involving the submission of information to support the financial statements. The AGSA was hoping that by the end of this month, it could come up with that message. The AGSA was concerned that its own auditors were auditing late, because it always asked itself about the relevance of the message it would get out of the audit if the report came out too late. Would it still be relevant to empower the oversight structures in the work that they needed to do as part of looking into the report? There were some unfortunate instances where the entities themselves were not submitting their financial statements. The AGSA struggled with the question of what it could do in that regard.

The law was very specific on how long an entity was allowed not to submit. Financial statements must be submitted within two months after year-end. If entities did not submit, the AGSA or the private auditors would not have anything to audit, and would therefore not have anything to submit a report on. However, as part of the engagement with the PC, part of the general report that the AGSA tabled in Parliament highlighted those entities that it could not audit because the entities had not submitted financial statements. Then the oversight structures, and those empowered to take action, could take action.

Regarding Denel, the Companies and Intellectual Property Commission (CIPC) monitored the situation at Denel. It had been issuing it with complaint notices, starting with the complaint notice for having a disclaimed audit opinion in the previous three years, and a notice for failing to hold an annual general meeting (AGM) within the timelines. Since Denel was a company, it was still accountable to the CIPC, and the CIPC had the power to take action, such as issuing complaint notices and taking remedial action where appropriate.

Mr Rabonda commented that Mr Cachalia had touched on the CIPC overseeing the private sector. The CIPC also oversaw public entities that were registered as companies, such as Transnet, Denel, and SAA. The CIPC monitored those companies to check if they were complying with or contravening the Companies Act.

The solution for repeat findings started with the tone at the top -- specifically the management and the board having a culture of no tolerance for instances of non-compliance, irregularities and material misstatements. That board had appointed officials who had a role to play. For instance, if there was a contract worth R100 million awarded, AGSA would want the tender file to look at how the process unfolded. However, if that tender file was not available, the board would need to ask itself if there was a procurement practitioner who was coordinating that process, and where was the information that the procurement practitioner was keeping as part of proving that the process was above board? That procurement practitioner must be held accountable. It started with accountability, because in a space where auditors could report findings and nothing happened to an official, it would breed a culture of impunity. People would start to not take the audit outcomes seriously. Before one knew it, the entity would plunge into deeper problems which the AGSA would struggle to address. It was thus about the tone at the top and the issue of accountability. Once the issue of accountability was taken into account, one could see if a person was not doing the work because of a lack of skills or capacity. When a person did not have the skills, an entity would then have to come up with plans on whether it should take the person for training, or if this person was not suited for the position. That process must be done for everyone in the “food chain” so that people could understand what their role was. If a person did not know their role, something could go wrong.

The matter of disciplinary boards started with the board itself. The Public Finance Management Act (PFMA) was clear in making the board the ultimate accountable authority to ensure a culture of consequences and accountability within an entity. That was why it placed the power within the board to investigate any issues of financial irregularity and financial misconduct. It was where that system of accountability fails that external parties need to come in. In an area where the AGSA audits, it had the power to say that if there was no accountability, it could apply the concept of material irregularities and would start to issue instructions for remedial action or refer those matters for external parties to investigate. When the culture of accountability failed at the board level, and an external party comes in to try and intervene, the challenge now sits with the board to acknowledge that it was supposed to have done this, but had not done so, and was accountable for failing to discharge its duties as imposed on it by the PAA. There was a need to drive this culture of accountability to the point where the boards themselves become preoccupied with ensuring that, in addition to running the business, they must run it in an environment that was ethical and had respect for accountability and consequence management.

He said business rescue practitioners were accountable to the courts that appointed them, and to the shareholders. The DPE had the right to get information on the expenditure from business rescue practitioners. As auditors, the AGSA would come afterwards and get the financial statements, and audits the numbers. That was when it needed the information, such as money spent, etc. The AGSA’s message would then come out through the audit outcome. During the business rescue process, the AGSA was not involved, because the business rescue practitioner was focused on turning the company around and returning it back to the board.

Ms Zwakala responded on whether the entities had a choice as to who audited them. The AGSA had the first right of refusal. Of the 20 current SOEs, the AGSA audited 15 of them directly. In the last six years and to date, the AGSA had “upped the game” to take on more of these SOEs. About 15 years ago, that number was quite low. Recent additions included Denel, the Development Bank of Southern Africa (DBSA), and Transnet. There were only five that the AGSA did not audit directly. Even with those five, the AGSA made itself available to ensure that there was consistency. It liaised with the entities, and at times periodically with the auditors. AGSA did this to make sure that entities were properly supported. The entities focus on the risk areas, but because the AGSA was not doing the audit itself, it could not know that every corner had been looked at as it would have done. The AGSA audited all of the departments and municipalities, and had been pushing itself to bring those five SOEs that it was not auditing into the fold.

She said procurement and SCM was a problematic area. It was the door through which money left these entities. Consequence management did happen, but it was not happening at the same speed that the wrongdoing and transgressions happened. One would find that as one fixed one leak, another opened elsewhere. It became a constant following up of the “leaks” and the vulnerabilities of the entities. It puts the board in “a game of always catching up,” and making sure that it understands why the entity was still losing money, why there were SCM transgressions, and why people were still colluding. For example, there was an instance of not awarding a tender to the bidder with the highest points at Transnet, with no explanation of why, and pushing up the contract amount versus the actual bidding amount that the supplier itself said it needed to deliver against a contract. All of these matters need constant attention, and boards have their hands full in this regard. Training was required.

The AGSA did not believe that everything was corrupt or had a malicious intent, based on its work. Additionally, all of these officials needed to be constantly on the go in knowing how the prescripts work, when one triggers emergency procurement, and when one triggers a sole source, what one could do and could not do with public funds, etc. The AGSA believed that Treasury could play a role in keeping colleagues up to date on how they should procure for an SOE. Record keeping was key in making sure that as one procures, all of the tenders were there. It did not help -- whether it was an external or internal audit -- when one cannot find some tender files. That short-circuited accountability and transparency. The AGSA needed proper record-keeping. There must be a file so that if one had to refer to a tender, purchase, or contract, everyone could see what happened there.

Ms Zwakala understood Ms Tshabalala’s question to be about the differences between the audits by the AG and audits by private firms.

Ms Tshabalala replied that she was asking about the difference between the private companies who had been auditing Transnet and the AGSA. It was only now that the AGSA was able to audit Transnet. What would have been the difference between a private firm and the AGSA when it did this auditing? She was also interested in the financials -- was it known how much was being spent, be it on private or internal auditing? That information could be provided at a later stage, so that the PC would be able to make a better comparison, to see if Government was getting value for money from the private companies. This was specifically because such companies gave the statements too late for the AGSA to be able to conclude its work.

Ms Zwakala responded that there were differences between how the AGSA approached its work and how some of the audit firms approached theirs. As an example, the AGSA used different methodologies. The AGSA could say that for it to “give something a tick," it needed 30 items tested, and those items “must come out fine on the other side”. A private firm may say that for it to feel comfortable, eight to ten items would be fine, and it would “give that item a tick.” With the depth of testing, one would find at times that there were differences there. It was no secret that at times when the Office of the AG moved into these environments – it had recently taken over SAA and Denel – it goes deeply into those areas.

Procurement and SCM were two such areas -- that was where public funds were spent, and where Section 217 comes in, to say that procurement shall be fair, equitable, transparent, and competitive. The AGSA wants to make sure that what happens is as intended in the Constitution, the PFMA, and other prescripts that are issued by the Treasury, and bring those two areas to the board for it to fix, so there is no skimming over the issues of procurement. The issue of state capture is known; it was mentioned earlier. The AGSA knows about how conflicts of interest happen at times, even with board members and members of management, where certain people were sometimes targeted for the awarding of contracts. The AGSA would zoom into those specific areas, all in the name of serving the public interest, to make sure that public funds were spent as intended.

Sometimes fees would vary, but at Transnet, for example, the AGSA fees were not so different to the private audit firms. Transnet was a complex operation with multiple divisions. The AGSA pushes itself to audit efficiently and smartly. If there was a specific question, such as how much did the AGSA spend on Denel, it could provide that information for comparison. All auditors were driven by the same standards. All need to be skeptical. The AGSA’s ambition was for it and private audit firms to support each other as a profession, so that whether one was audited by the AGSA, SNG or Deloittes, Parliament or oversight structures still feel as though they were getting their money’s worth for what was spent on these audits. All auditors were skeptical, and were auditing the areas that matter. How money leaves an organisation really gets looked into, whether the AGSA or a private firm was doing the audit.

Mr Gumede asked about non-submission. Did Parliament have the power to force an entity to submit? Failing that, could Parliament have something called an automatic disclaimer for failing to submit?

[Mr Cachalia wrote in the chat box: Hon. Gumede, that was what my private Member’s Bill seeks to address.]

Ms Malinga said that she did not get the response from the AG’s Office on the issue raised by Ms Tshabalala on SCM. She had been in another meeting the previous day with the AGSA where it was presenting the issue of the audit outcomes. Most of the entities were found to be at fault in not following SCM legislation. Her concern was that SCM legislation was one and the same. Then the AGSA told the PC that the method or the process that was being followed at the AGSA was not the same as the understanding of the SCM. The AGSA could perhaps explain to the PC so that it could advise the entities as to what was needed. The SCM policy was five basic steps -- where one makes, produces, etc. Could the AGSA clarify how it faults entities on the SCM processes?

Ms Zwakala responded to the question on non-submission. She sensed the Members’ concern on the matter, and it concerned the AGSA as well. SAA had not submitted financial statements since some years ago. The AGSA was only now trying to complete the audit of 2017/18, and from there it wanted to do the catch-up audits for the next three years.

On whether the AGSA had the power of an automatic disclaimer, she said that in terms of the legislation, entities had two months -- they must submit financial statements every year by May, whether they were in a good shape or bad. The AGSA must then audit and give an opinion by July so that the oversight and accountability processes could have a look at what had happened to the entity. Once that process was short-circuited and sabotaged, then committees could not have insight into the audit. For example, committees could not have insight into what exactly happened at SAA over the past few years. Regarding powers, the Minister was required to table directly to the Speaker if an entity was not going to submit an annual report by September. An entity needed to explain the reasons why it was not doing what needed to be done, so that the accountability processes and the hearings could take place. The provision of additional powers to the Committee could be explored and perhaps investigated further, but those were the levers that forced people to account when financial statements were not submitted by May as required.

Everyone was guided by the same legislation on SCM, whether one was the entity procuring, or the auditor doing the auditing -- all were guided by the same principles of the National Treasury. As far as the audits that she had been exposed to went, the AGSA barely got disagreement, although it would arise at times around the findings. An example was around what the AGSA calls the irregular expenditure framework, that guides how irregular expenditure needs to be identified, assessed, reported, investigated and closed. The instruction notes around the procurement of personal protective equipment (PPE), for example -- on the thresholds one needs to pay for thermometers, masks, etc -- all come from the National Treasury. There were very clear guidelines, percentages and thresholds where one needs to get prior approval beyond a certain point.

A lot of the deficiencies come from people not following those instructions from Treasury. At times, one finds that entities, because they were given a bit more leeway in framing their own SCM policies, were sometimes not following their own policy in terms of approval levels for entities to procure particular things. It varies a lot. But if, for example, tenders were awarded to those that did not score the highest points, and an entity was paying more and there was no good reason for it, the AGSA would raise that as auditors. Those were some of the matters that the AGSA takes seriously, and the AGSA wanted to continue to raise those matters, not only for management, but also for structures such as the PC, so that there could be consequence management.

[Mr Cachalia wrote in the chat box: The Auditor-General checks the spending of public funds and resources by looking at whether these were used for the intended purposes with regard to economy, efficiency and effectiveness. The Auditor-General checks all government spending every year. This checking process was called audit.]

The Chairperson said that the private sector, by its nature, “survives on profit-making.” For it to make a profit, it had to do everything, sometimes even using an easy and dangerous mechanism to get there. State capture was a very good example of where “private companies intervened corruptly at SOEs." Gupta people -- those who were implicated in acts of state capture -- were private entities who came to corrupt politicians and civil servants, including some in South Africa’s SOEs. On that basis, “the corruption we have is imposed by the private sector on the public sector.” He was still looking for anyone to prove that the public sector had corrupted itself, or that somebody within the public sector had bribed somebody else. It was “private people with their private interests who come to corrupt our own public sector." That was why South Africa was in this “quagmire” today. It was “because of the greed of the private sector, using all the mechanisms at its disposal to undermine public ownership of property.”

DPE 2020/21 annual report and financial statements

Deputy Minister’s opening remarks

Mr Phumulo Masualle, Deputy Minister (DM), DPE, said the Minister asked him to tender his apology. The Minister had to attend to an emergency meeting with Eskom. As Members knew, South Africa was having a very serious energy challenge that was "keeping us at the Department awake.” The Director General (DG) would present the performance of the Department in respect of the year in question. He described the environment in which the Department had to perform. The impact of COVID-19 was an overbearing issue that impacted on programmes, and had impacted the entities that the Department over in a drastic way, whether it was logistics (Transnet) or the energy challenge. These were some of the challenges where the Department had to ensure there was consistent leadership in the context of the COVID-19 circumstances.

DPE presentation

Mr Kgathatso Tlhakudi, DG, DPE, presented the Department's 2020/21 annual report under the following headings:

Annual Report Performance

Financial Performance

Human Resource Performance

AGSA Audit Outcome

Delivery Support Unit

Fraud and Corruption (State Capture)

SOE Shareholder Management Bill

Presidential State-owned Enterprises Council (PSEC)

SOC Operational Performance

SOC Fruitless, Wasteful & Irregular Expenditure

Commenting on the Department's overall performance, he said 74% of its targets had been achieved.

Annual performance highlights

Corporate Management:

• Training interventions as committed in the APP were achieved, contributing to skills development and capacity building.

 

Financial assessment and investment support:

• The Department managed to secure funding for three SOCs -- Denel, Eskom and SAA -- for the 2020/21 financial year.

• There was an improvement in addressing the audit findings, including some SOCs progressing from a qualified audit report to an unqualified audit report.

Governance, legal assurance, risk profiling and mitigation:

• The SOE Risk and Integrity Management Framework was concluded. The roll out phase of the framework for implementation would commence in the 2021/22 financial year. 

• PSEC was established, consisting of the following workstreams: finance, governance and consolidation and crisis management.

Energy resources:

• Significant progress had been made on the implementation of the Eskom roadmap.

• The generation recovery plan continues to be implemented by Eskom to improve plant performance.

Transport and defence:

• Denel - Recapitalisation assisted it to deal with its guaranteed debt obligations and resulted in an improvement in stakeholder engagement to explore the future state of the SOC.

• Transnet - There was collaboration with state organs and other companies to deal with the challenges of cable and petroleum theft.

• Transnet - Leadership was stabilised.

Financial Performance

The DPE's total expenditure was about R78 billion. (See the table on page nine).

For expenditure per economic classification, see the table on page ten for full details.

Mr Tlhakudi said highlights included:

a) The spending for the period ending March 2021 was 99.9% (R77.9 billion of R78.0 billion). 

b) The total spending, excluding payments for financial assets or transfers made to SOCs, was 82.6%. 

c) The spending included amounts of R56 billion (ESKOM), R20.975 billion (SAA), R576 million (Denel) and R143 million (SA Express) for settlement of government guaranteed debts and implementation of SAA’s business rescue plan.

d) The spending on compensation of employees (COE) and goods and services was 76.6% and 95.8% respectively, which was lower than the budget. This was as a result of unfilled posts and outstanding invoices, which resulted in accruals. 

e) The spending on transfers and subsidies was 99.4% of the budget, which was for households and departmental vehicle licences paid to municipalities.

Irregular expenditure

The irregular expenditure of R32.5 million was incurred in previous financial years, and was related to material deficiencies in the appointment of a service provider. The Department was in the process of implementing corrective measures, which includes legal and disciplinary actions.

Fruitless and wasteful expenditure

The closing balance of the fruitless and wasteful expenditure had been decreased by an amount of R1.7 million. This expenditure had occurred in previous financial years and had been included as part of the irregular expenditure amount of R32 million, as the two were related to the same matter.

(See the table on page 13).

Financial management: Payments to suppliers

 The Department made payments to suppliers and service providers within 30 days from receipt of invoices in terms of section 38(1)(f) of the PFMA and Treasury Regulation 8.2.3.

Human resources

The personnel establishment consisted of 214 total posts, including the Minister and Deputy Minister, and 73 senior management staff (SMS). Of these, seven posts were unfunded due National Treasury cost cutting. There were 43 vacancies, and 16 posts were advertised.

AGSA Audit Outcome

The Department continued to maintain a sound governance and compliance framework on how it utilised resources.

It obtained an unqualified audit opinion with findings for the 2020/21 financial year:

Pre-determined objectives:

The AGSA identified three material misstatements on the reported performance information of Programme 3, and this was subsequently corrected.

Annual Financial Statements:

The AGSA identified two material misstatements on the financial statements, and these were subsequently corrected.

Delivery support unit

(See page 19 for the full details.)

Fraud and corruption

The Department had analysed 754 SOE forensic reports, and was tracking the implementation of

recommendations:

- 47 cases were referred to law enforcement authorities.

- 64 employees were dismissed.

- 79 employees were issued with warnings.

- 40 employees resigned to evade accountability. 

The DPE was concerned with the slow implementation of the recommendations (recommended consequence management measures) in forensic reports and employees who resigned to evade accountability. Efforts were under way to foster collaboration with professional bodies and law enforcement agencies.

In addition, the Department of Public Service and Administration (DPSA) need to invoke sanctions against officials and companies who illegally divert the state’s resources from SOEs. A framework was being developed to ensure proper tracking of the implementation of the forensic reports. Support was being provided to law enforcement agencies conducting investigations into the affairs of SOEs. To date, the Special Investigating Unit (SIU) proclamations into Denel, SAA, Transnet, and Eskom were being fully executed, and the DPE was currently compiling statistics to establish the gains registered through the implementation of SIU proclamations.

Going forward, the Department would enhance its efforts to fight corruption and establish its Anti-Corruption Unit, guided by the following pillars:

• Forensic report tracking (historic and current) and Ministerial directive on lead time concerning implementation of recommendations in the reports.
• Collaboration with law enforcement agencies, professional bodies and government departments on:

1. Blacklisting of corrupt companies from doing business with the state.

2. Fostering consequence management.

3. Tracking and preventing employees who resign from SOEs to evade disciplinary proceedings from emerging as state employees in other spheres of government.

4. Blacklisting of corrupt employees from being employed across the three spheres of government.

5. Pursuit of criminal and proceedings and declaration of delinquency.

The Department's other initiatives include advocacy initiatives on anti-corruption and fraud prevention; raising public awareness on gains registered in rooting out corruption, fraud and all forms of maladministration in SOEs; development of a governance Centre of Excellence; conflict of interest and integrity assessment of SOE employees and business partners; and development of an SOE anti-corruption and fraud prevention policy and strategy.

SOE Shareholder Management Bill

A draft SOE Bill would be completed by the end of the 2021/22 financial year, and would address the lack of overarching SOE legislation. It would have the following objectives:

a) Determine an appropriate shareholder ownership model;

b) Inform institutional arrangements for overseeing SOEs, including the future role of PSEC;

c) Appropriately categorise SOEs;

d) Integrate lessons from the Zondo Commission, the Mpai Commission and other public inquiries;

e) Ensure the appointment of competent people of integrity in a transparent and robust process to SOE boards and executive positions;

f) Clarify the respective roles and responsibilities of the executive authority, boards and executives;

g) Regularly review and updating of various guidelines.

[Ms Tshabalala wrote in the chat box: May I suggest Department next time to focus on the APP as it had been called to account on rather [than] other Presentations of [a] Bill that should be set aside for a specific briefing.]

Presidential State-Owned Enterprises Council (PSEC)

To support the DPE's reform process, the PSEC had outlined a clear set of reforms that would enable these vital public companies to fulfil their mandate for growth and development. Overarching legislation for state-owned companies would be tabled in Cabinet this financial year and to Parliament in the next financial year.

 A centralised SOE model was being implemented this financial year, which would ensure a standardised governance, financial management and operational performance framework for all SOEs. The mandates of all SOEs were being re-evaluated to ensure that they were responsive to the country’s needs and the implementation of the National Development Plan (NDP).

SOC's Operational Performance

The positive and negative highlights were given for Eskom, Alexkor, SAFCOL, SAA, SA Express and Transnet.

Transnet: Transnet National Ports Authority (TNPA)

Positive Highlights:

• The Department completed an impact assessment study on the impact of corporatisation on Transnet, the TNPA and other Transnet operating divisions.

• This resulted in the announcement of the corporatisation of the TNPA in June 2021 as envisaged in section 3(2) of the Ports Act, and gazetting of the intent to incorporate TNPA as the National Ports Authority ( NPA), with Transnet as the sole shareholder.

• A maintenance shutdown programme was underway on all the corridors, which was meant to sustain the capacity by replacing and fixing damaged parts of the rail network.

• An interim board was appointed in June.

Negative Highlights:

• There was an information technology (IT) security breach. Transnet's IT system was hacked, forcing it to declare force majeure to mitigate the effect of the cyber-attack.

• R224 million was the reported impact of the security incidents in the first quarter.

• COVID-19 continued to impact Transnet operations, with 6 598 employees infected by the end of July 2021.

Discussion

The Chairperson said that the presentation was a bit long, because the PC anticipated having load-shedding in most areas at 12:00. The area of the meeting’s host would have load-shedding, as would the area where the Chairperson was located. The majority of the areas in the Western Cape would have load-shedding, so the meeting would be “undergoing serious strain”. Members must say everything they wanted to say to avoid going to a second round of questions.

Mr Cachalia said that the PC had 15 minutes left to 12:00, and the Members had important things to discuss. His notes were four pages long. If he started asking questions, and making observations, the meeting would reach 12:00. Would the meeting close at 12:00? If the meeting was going to close at 12:00, would there be a further session to address these issues? If not, all Members had data on their phones which was paid for by Parliament. He suggested using the data on their mobile phones.

The Chairperson replied that he was not saying that the meeting would stop at 12:00, but he knew that Members would be having network problems. It was not a case of when there was load-shedding, the meeting would be shut down. The meeting would be continuing, but he warned Members to appreciate that during that time, there would be problems where people would be “bumped” from the Zoom platform.

Mr Gumede said that Members always lamented the non-performance of the entities. He wished to congratulate the Department on the Presidential Council and for initiating the Bill. Would the programmes that had not been achieved, especially transport and defence be carried over, or would they be completely dropped? Would those programmes still be assessed to see if they were relevant? If relevant, would the programmes be brought back, and if not, would they be dropped?

Mr Cachalia asked about the DPE’s description of itself as a centre of excellence in respect of accountability and management of resources. He presumed that accountability and management of resources referred to the various companies under its aegis. The areas included the effectiveness of the national logistics system. There was South Africa’s rail, with the theft, crumbling infrastructure, and derailment of the Blue Train. South Africa’s ports were described by the World Bank as the “worst in the world”, and had two declarations of force majeure. How did all of that reflect the accountability and efficient management of resources?

Regarding the security of electricity supply, he said that he would not ask that question -- he would just leave it like that, because “that was answered by everybody,” and was answered by the Chairperson’s reference to load-shedding potentially disrupting the meeting.

On the improved financial viability and competitive advantage that was referred to, how did that reflect against an R18.9 billion loss at Eskom and an R8.4 billion first-time loss at Transnet? The graph showed 23 out of 30 targets achieved, and the pie chart below it showed that 70% were not achieved; which was it? On the financial working group, what were the exact elements of the strategy referred to in terms of the energy group? Could the Department please explain the implementation of the road map it referred to? The latter was effectively measured by the energy availability factor, which was sitting at 64%. What interventions was the Department advising? Regarding Transnet, the Committee was told that “the efforts with regard to the ports were going quite well.” When would South Africa be expected to rise up from being described by the World Bank report as amongst the world’s worst ports?

The timeous presentation of annual financial statements affects the ability to borrow and investment sentiment. What was being done to remedy this? What did the term “deliverology methodology” mean? Regarding the PSEC, what were actual reforms referred to and how would this increased centralisation result in responsiveness to the country’s needs and implementation of the National Delivery Plan (NDP)? There had been a market failure of SOEs from the application of the current model. How would increased centralisation improve on this? What was the model? Was the Department advocating a state holding company, and how would this ensure accountability apart from more state control and more layers of cost? What exactly was being proposed, apart from following the models of Egypt, Finland, Brazil, Hungary and Slovenia (which were cited as having state holding companies)?

Regarding load-shedding, there was an admission of 15 000 megawatts of unplanned losses and breakdowns due to various operational challenges. This was a “staggering number." How was this being addressed in terms of the strategy referred to, which said that the task was to ensure a sustained, reliable and cost-effective energy supply?

Alexkor had been shown to be "taking care of itself,” and he was interested to know what the community had to say about that. What about the lower prices received for carats sold, and the reduced caratage? He also asked about the contravention of the PFMA regarding key operations and joint ventures (JVs). How did this square with Alexkor seeming to be able "to take care of itself?" He asked about Denel’s ability to fill its order book, given the operational activities that were “below capacity.” Revenue was down by 60%, and there was a skills haemorrhage, and R1.5 billion owing to employees and suppliers. What was being advised regarding Denel -- was it viable?

Ms Mkhwanazi said that she was looking forward to the finalisation of the Bill, and she was happy with the progress reported by the DG. She hoped that the Department would keep to the timeframe. She asked about the establishment of an anti-corruption unit, specifically the cost of the private contract to the Department. Could the DG talk to the timeframe? She also asked about the issue of in-house capacity regarding the unit, when the unit had finished its work. She asked about capacity in order to understand if the Department intended to perform that task alone. On the unsigned shareholders’ compact for Eskom, what was the cause -- what was the issue around that?

Ms Tshabalala asked the DM about the shareholder deal. Part of the presentation, about 13 slides, spoke to the SOE Shareholder Management Bill that the PC had been waiting for. She wanted to know about the timeline, as the presenter had said that there would be a draft Bill by the end of the 2021/22 financial year. The PC would then be able to have a timeframe to do oversight. The PC needed to be succinct with dates. She imagined a scenario where the PC would not complete the Shareholder Management Bill until the end of its term -- it would still be philosophising about it, speaking about its importance, why the Bill was needed, and when it must arrive. At a political level, as much as the presentation was about performance, the PC was keen to get a presentation on what the Bill would look like and entail, etc. There was mention of corruption units, and how people “must not do business with the state” – those were things that were supposed to be a known fact at this point.

One of the Department’s key focus areas was a legal unit, which was supposed to deal with issues of corruption. The PC had been saying that it needed to have time for that unit. The Department needed to give the PC a report. What had been the performance around that, primarily to say that these were the people who had been charged, and what the state of the investigations was. This was work that should be reported on a continuous basis. The PC should see corruption not just coming to an end, but also being nipped in the bud. She was sure that the PC would schedule another date where it would have such a presentation, and really engage on the Bill. The focus of the meeting had been on performance. Unfortunately, this took a lot of time, and she thought that it defocused the PC.

Ms Tshabalala said that Eskom was “a shell of its former self.” She thought that that was the viewpoint of the majority of citizens. This was because Eskom had failed to manage its balance sheet, which had resulted in higher debt being incurred. Load-shedding also had a negative impact on the lives of citizens. How did Eskom intend to source funding to jumpstart the transition? The type of transitions was known, and she did not want to get into a discussion about whether it was coal energy technologies, etc. They needed to know strategy that was in place from the Department that had the responsibility of insulating the country from the unreliability of providing electricity, which was its function. The PC would have Eskom come before it, where it would go into detail. As a department, the DPE was tasked with the responsibility to oversee and ensure that there was work done around this. There was much that the Department needed to check up on.

She asked about the slide on shareholders, where the presenter had spoken about how the Department wanted to centralise SOEs. Did this mean that the Department was recognising that there was that element of entities really going to their policy holders? What she got from the Bill was that another modus operandi was being drafted. What the PC saw were things that needed to be resolved. With these policy holders – and where one spoke about energy when one spoke about Eskom –

she was finding serious trouble on this issue. She did not have much confidence about how things had developed.

Referring to the annual performance report, she said the Department had revised its APP in July 2020. The PC needed to have the Department explain why its performance indicators had been revised, because it did not get that information when the Department revised that plan. The Department’s strategic plan covered the period 2021 to 2025. Therefore, there was no need to revise that document. The PC should get an outline of the strategic planning tools. Those tools were clearly not adequate if it required a revision of the strategic plan and the APP. The reasons for the revision of the strategic plan and APP were not really highlighted in the documents that were given to the PC a day or so ago. It was important for the PC to get that revised framework, so that it could have that annexure within the Department’s presentation. Having the latter would mean that there was no contravention within the guidelines of the DPE. The Department should account for “this infraction of Government frameworks.” It was important, because “this was what the we are dealing with as a Department.”

One of the output indicators was related to the implementation of IT architecture (the master plan). The Department should advise the PC what the outcomes of this indicator were, and if they were related to the performance tracking solution discussed under the Department’s priorities. The Department would have developed a framework on the state-owned company risk and integrity, but how much input did the Department have in the drafting of the framework, given its lack of capacity? The Department should give the PC the reasons why it did not achieve three of its performance indicators. Why were the additional indicators really necessary?

It was mentioned that Alexkor was sustaining itself financially. In the PC’s last engagement with Alexkor, it was reported that Alexkor would have made R35 million in profit, but the issues of the plans around COVID-19 were not really incorporated. The PC had just heard the AG’s report, and one of its concerns with the AGSA’s interaction had been about the issue of having private companies auditing the Department’s entities. The PC had received an explanation, but the issue was that statements were not being tabled by all the entities. Statements were not being tabled, and as a result, the AG was not meeting the timelines, whether it be those of Parliament or the PFMA. Parliament was then not achieving its role of being able to account. The PC was told that Alexkor would finish its financials in November -- was it the entity itself that chose this deadline, and was it the AGSA that got involved in whether it or a private company had to audit the entities? How would the Department deal with these issues? The AGSA must do its work so that the PC could follow the money. Over time, it was the PC that must speak to the budgeting of these entities in the Department. However, “we were failing to account.” It was something that at a political and executive level, the Department needed to account and tell the PC how it intends to deal with certain issues.

She referred to a report about Denel employees involved in an accident. At the Rheinmetall Denel Munition (RMD) factory in Somerset West, Cape Town, there had been an incident that became a subject of discussion -- a gas explosion that resulted in the death of eight employees in 2018 -- and critics had called for the factory to relocate or shut down. Following another explosion in October 2021, the RMD’s safety protocols had been put under the spotlight once more. The question was whether RMD had at its disposal the financial means and human resources to improve its capacity to manage explosives, and to ensure the safety of residents and the environment in Somerset West? The PC would have a discussion on the balance sheet and financials of Denel as the week went along, so that the PC could delve more deeply into these entities and speak to them. The PC hoped the entity's boards would be brought in, so that it could speak about controls and systems, especially from the boards' point of view what the entities were doing to ensure that corruption was curbed, and what they concerned themselves with day-to-day.

 

The Chairperson raised additional issues. According to the report from the AGSA, the financial statements from some of the entities (including Denel, Eskom and Transnet) painted a very bad picture. This was because of some of the issues that were raised, such as effective and appropriate steps that were not taken to collect revenue -- for example, revenue due to Eskom. This meant that Eskom was failing to collect money that was owed to it. At some point, he thought that the report referred to the situation in Soweto, but it was big business that had been owing Eskom money for many years. This money had not been collected, and that had contributed to the qualified audit. outcomes.

Both Eskom and Transnet were failing to deal with consequence management, in the sense that there were cases of people who committed a crime, and/or were implicated in wrongdoing, but had not been charged or suspended, and were still at work. All of that contributed to qualified audit outcomes. An issue raised for Eskom, Transnet and SAFCOL had been the ineffective steps to prevent irregular expenditure. Those were very critical issues that he thought the Department was supposed to monitor closely, and to engage with the entities on those issues. Transnet and Eskom, which were the Department’s biggest entities, had both been implicated in state capture. If at this stage, the entities had not been consistent in dealing with those irregularities, it meant that things continued despite the experience of the past. South Africa continuously experiences these problems because these issues were ignored. New boards had been established in these entities under the current administration. A new executive had been employed. In all these entities, there were sharp and strong executives with a new board that were supposed to have learned from the experiences of the past. Up until that moment, the PC still had to deal with financial outcomes that talked to the same problems as before.

With the National Port Authority that had been launched recently, which was separate from Transnet, to whom would it be accountable? Would it be an entity that falls within the DPE, or the Department of Transport? Where was this entity that would be a host of the Department’s entity, Transnet? What was the rationale behind that quick move? What informed the leadership, and what propelled that decision? He did not remember the PC engaging on that, unless it was something that had been ongoing before the current PC's term. For him, that move had “the potential to collapse Transnet”. That entity “is the most important part of this in terms of income.” Transnet generated more profit than any other entity. His understanding of how Transnet operated was that the strength of Transnet belonged to the National Port Authority, and if that important section of Transnet was weakened, South Africa would be left with a shell, and would experience a lot of problems. Transnet would soon have to be dependent on the fiscus, and the fiscus would say that it does not have money to fund Transnet. Then Transnet would have to be sold. He knew of those “neoliberal moves” -- he had seen them before. Was this an attempt to go in that direction? He did not intend to fight; he was asking those questions with a friendly attitude.

The DM had indicated earlier that the Minister intended to be in the meeting, but had to attend to matters relating to Eskom. He thought that the expectation was that the PC may be taken into confidence on some of the interventions that were being instituted to deal with the energy crisis, and to also factor in what was possible in respect of other forms of energy -- specifically cleaner forms of energy -- that could be brought into the system. Perhaps there could be a session where that could be dealt with exhaustively before the PC in the presence of the Minister. He was relating that to the earlier concern that was raised about the time available in which to deal with these very deep and serious matters.

He referred to Mr Cachalia's comments about the performance of South Africa’s ports and the perception globally of the performance of these ports. A strategy had been put across to deal with the ports, namely a commercialisation strategy. That had led to the establishment of a Ports Authority that was a standalone, which was distinct but still within Transnet. The DM was saying “distinct” for purposes of operational efficiency. The focus on the ports, the viability of the ports, and the speed within which goods come in and out of the ports, required that there be a dedicated capacity in a focused institution. It was intended that best practices should be brought on stream as far as possible. The Ports Authority would become one of the subsidiary companies in Transnet. More than anything, it was an attempt at trying to focus and ensure that the Department could achieve a better operational performance through that focus.

On the framework to deal with SOC risk and integrity, the input had largely sought to bring to the attention of the PC something that had been outstanding. This was to do with the announcement that was made by the President, in keeping with what was in the review of SOCs, that a council be established to look into this issue. The DPE provided secretarial functions for that. That SOC council reports to the President and was established by the President. Part of the work being done was brought over to help the PC see the overall direction that was being taken in respect of looking at SOCs. It was more to try and bring relevance to some of the things that needed to be done. For example, the Department had spoken about the Shareholder Management Bill. It should then be seen in the context of that effort that was being steered through that SOC Council. One may want to give it more time. He agreed with what Ms Tshabalala seemed to be saying -- let it be focused on separately so that the Department could be exhaustive on that topic. That would be welcome, if it was agreed to. The departmental team may add further flesh to this. Regarding what the Department said when it came before the PC at the beginning of the financial year, it was looking towards end of the current financial year to bring the Shareholder Management Bill on stream. The Bill had to take into account the overall trajectory that the Department was taking in respect of the guidance that the SOC Council was making regarding the task of consolidation and looking to improve their effectiveness. Once decisions were made, there would be an announcement.

Mr Tlhakudi responded to questions about transport and defence issues. The Committee would have an opportunity to engage with the SOEs on their annual financial statements, including some of the issues that had been raised about their performance. What should not be forgotten was that this financial year was highly impacted by COVID-19. In respect of Transnet, the Department had operations being impacted by things such as vandalism of infrastructure. The Eskom problems had been going on for some time. There was a build programme that had gone R300 million over budget. Those debts needed to be serviced. The losses were mainly emanating from an inability to generate adequate cash to pay off those commitments, but it was a business where the Department was seeking to optimise infrastructure.

On annual reports that had not been tabled by SOEs, There were two bases on which one could prepare a financial statement. One was a going concern, or an accrual basis. If one does not have adequate capital in one’s business to meet one’s future obligations, the statements have to be prepared in terms of the latter. In order to avoid that, the Department seeks to raise the necessary funding from the fiscus to fill the hole. That was one of reasons why some of the SOEs had been late in compiling their annual financial statements, and in presenting them to the various auditors for audit. Denel falls into that category. At SAA, the situation had normalised, and the AG was busy with the backlog. SA Express was in liquidation, which was why the annual financial statement had not been presented.

"Deliverology" was no different to project management. It was a particular methodology that was developed to deal with governments, and being able to programme political promises into administrative activities, which could then could be tracked. If the PC so desired, the Department could come back and do a more extensive presentation.

The Department had spoken about the challenge of Eskom and plant outages, and what had been done to improve on that. The Department was seeking to implement a multi-pronged strategy. Firstly, it was looking at improving the quality of maintenance that was done. The Department had to look at the quality of materials it was able to procure, and that involved how the procurement system had been set up. The Department had to improve the quality of people doing the maintenance. The Department needed to look at ensuring that it gave enough time to the units to undergo maintenance. The challenge that the Department had had within a very constrained generation system was that there was always pressure to return the units into service. That had meant that the work scope gets constrained. An additional five to six units would go a long way to improving the time that would be required.

There was the matter of Alexkor and the compilation of its financial statement not being done in terms of the PFMA. There was a legal directive in this regard, and resolutions had been put in place. There were other PFMA challenges that the teams were dealing with. On the community and its entities, Mr Tlhakudi said that his colleagues at the Department of Agriculture, Land Reform and Rural Development were best placed to deal with that. They had placed those entities under administration to restore them to proper function.

Denel was viable. Denel had an order book that should ensure that it was viable. It needed to be recapitalised for it to be able to execute that order book. It needed to be restructured -- it was a much smaller business than it used to be in the past. It used to be worth R8 billion, but now it was worth R3 billion. The Department also needed to look at how it could creatively restructure the business to take advantage of the capabilities that were in Armscor and the Department of Defence. That was a conversation that was ongoing. Denel was a business that was critical to the security of South Africa, and it deserved to be helped out.

With the Bill, the Department had a target of the end of the financial year. There was work that was continuing to ensure that it was put in place. The Department had always reported on the target in relation its progress. It thought it would be for the benefit of the Members to have a sense of what was happening, so that the Department did not just put the Bill before the Committee without having shared some information with it.

The Department had contracted in some of the anti-corruption work. The work that it had contracted in was informed by whether it required the skills that would be used in the long-term. It would not make sense to bring in skills for the short-term, and then be sitting with those skills. Project management of the work was done by the officials. That was to ensure that the Department built up its own capacity in the process. The Department was always very careful to ensure that there was a proper balance between the work done externally and within. The last thing the Department would want to do was to hollow itself out.

On the shareholder compacts not being signed on time, this was sometimes a product of negotiation that goes on in the SOE. It was not just a lateral process, where the Department gave targets to the SOE. The Department aimed to have the shareholder compacts signed at the annual general meetings (AGMs), but it did not always work out that way, for various reasons. Sometimes it was for the reasons Mr Tlhakudi had outlined in relation to the annual financial statements. Sometimes there was a new board that came in, for instance at an AGM. Boards would sometimes ask the Minister for time to go through the shareholder compact instead of signing it at the AGM. That could lead to that process sliding into the next financial year. It was for the Department to ensure that it had the basis for tracking performance via having that shareholder compact signed prior to the new financial year starting.

The Department was sharing best practice on a centralised shareholder management function versus a decentralised function. Parliamentarians would have an opportunity to interrogate that when the Bill made its way to Parliament. Some of the comments made referred to the DM. Under the APP deliverables, the Department had a plan for the architecture developed and approved, and was currently implementing it. Some of this work would go into the next financial year, because the work had turned out to be much bigger than anticipated. IT architecture work was one of those areas. It involved both the Department and the SOEs. The Department wanted to get to a point where it had real-time information on the performance of its SOEs. There was certain data that the Department needed to be able to receive on a continuous basis so that it could have large data dashboards.

Rheinmetall Denel Munition was not an SOC. Through Denel, the state had a minority share in it. There was an incident in 2019, where there was aloss of lives. That had been investigated. A report had been published. It was an investigation that was conducted through an internal RDM functionary. Improvements to the system had been made to ensure that there was non-recurrence of those types of incidents. The report by the Department of Labour and Employment and the South African Police Service (SAPS) remained outstanding. The recent fire was at a warehouse, where there was no loss of life, and it was not an explosion. Management was investigating that, and it would share the information in due course.

All of these endeavours, including ensuring that the Department had a proper oversight mechanism in place, were to get the Department to a place where it could improve the quality of interventions and instruments that oversee its entities. It was hoping that if it followed the best practices it was learning from other parts of the world, it would see similar improvement to what other countries had experienced with the finances of their own SOEs. That was work that would take time, because South Africa was having to deal with businesses that were damaged by state capture mismanagement. It was damage that was done over many years. The impatience to get a turnaround within two years from the executive teams that had been put in place was “not right”, especially where entities needed to be properly capitalised after damage had been done, and that capitalisation had not happened.

He wanted the AG to share with the Department those big businesses that it was saying was not paying Eskom on time. It was being said that there was no consequence management in SOEs, and the Department wanted to have that information. The information the Department had “said the opposite.” The challenge was in law enforcement agencies and making sure that the people who had been implicated in wrongdoing were facing the courts, and that those in the SOEs were being dealt with. Where there were instances of irregular expenditure happening, it was a direct result of “remnants of the past” from which South Africa had emerged. Where evidence had been presented that a person was implicated, action had been taken. Recently Eskom had reported on Tutuka power station and the theft of fuel oil there. Action had been taken against the people who had been found responsible. If there were incidences where the AG suggested that there was no prompt action, then the Department wanted to hear from the AG on that matter.

Irregular expenditure had been explained earlier. Locomotives at Transnet were given as an example. Those contracts were deemed to be irregular, therefore the expenditure that flowed from that, which was about R54 billion, had been deemed to be irregular. With that expenditure, the Department had had to find a way to ring-fence it so it could be dealt with properly. For that reason, the Department had been engaging with the National Treasury to ensure that it improved on its irregular expenditure frameworks so it could recognise historical irregular expenditure, and so that things did not lead to an audit opinion with the qualifications that the Department had seen with both Eskom and Transnet. That was where the problem had emanated from. With some of these entities, the number of transactions involved and the magnitude of the problems the Department was dealing with in order to ensure that South Africa had a complete and reliable register of irregular expenditure, was something that would take years. An audit was a year-to-year activity. The AG would have been there the previous year, then it would come back in and find that there was still no complete register, but the effort would take three or four years to put together. What did one do in those instances? Did the Department put itself in a position where it had complications, while the rest of the management that financed the entities were correct -- and one gets qualified, and found in default, because one had relied on bank finances for one’s operations. One was then exposed to having to negotiate one’s loan agreements, and having to pay more, because one was found to be qualified. The Department had to get to a point where it had a framework that helped it to improve, but did not punish the entities unfairly. He thought that there was an element of consensus between the Department and AG on that. The AG audited the Department based on the framework that came from the National Treasury.

Regarding the TNPA, this was an old requirement. The National Ports Act was passed in 2005, and it called for the corporatisation of TNPA. In terms of section 3, it was corporatised, but remained a part of Transnet. Its finances were still consolidated within Transnet. The statement that this was tantamount to a hollowing out of Transnet would not be the case. The Act was informed by extensive research by the Department of Transport (DOT). It had produced a green paper and a white paper, and eventually the legislation. The DOT sought to look at the best arrangements in terms of ensuring that the TNPA operated optimally. There had been concerns within the user environment that the tariffs that were raised at the TNPA were not finding their way to improving facilities and the capacity of the TNPA, so that greater volumes could be handled through its ports going forward. This was also to try and give some level of control to the board and executive of the TNPA so that it was able to have a greater say on how the funds it raised were spent within its business. Going forward, what one may find, similar to infrastructure and other spaces such as rail, versus operations, the best practice would be that one separates them. The Department was thinking about third party access, ensuring that it had a mechanism where the operators would pay for access, which would also go towards the improvement of infrastructure. In terms of one’s corporate arrangement, how could one ensure that one structured that in such a way that there was transparency in how the resources were being used towards the improvement of infrastructure, so that operators were not saying that there had been inadequate investment in infrastructure?

There was no intention to take away the SOEs from the government and the South African people. The continuous review of portfolios to get the best returns out of them was proper and best practice of portfolio management. Going forward, the Department may say, “Where do we have areas where we should be starting SOEs, because there is inadequate movement from the private sector on investing in those areas, when it is critical that South Africa has those capabilities?” As the Department did those kinds of reviews, it came to a point where it said, “Is there still a case to be sustained for the state to own this type of asset?” Should it be releasing it? Whatever the problem was, such as the market failure that Mr Cachalia had referred to, that had been remedied to say, “Let us fill that gap.”

Responding to Mr Gumede’s question, Mr Tlhakudi said that some of the deliverables were year-to-year, such as ensuring that the Department had shareholder compacts that were signed, and ensuring that it reviewed the quarterly reports on time. If the Department did not achieve this, it would come out the following year again. Some of the targets would have been specific to a particular year. Depending on whatever developments occurred, the Department would keep it going forward like that. Sometimes the Department would rethink its targets, such as a review of the supply development programme that it had developed for SOEs.

The Chairperson asked if he could get an indication of Members who wanted to ask follow-up questions. Members replied that they were covered on questions.

Consideration and adoption of fourth term programme

Mr Mocumi briefed the Members on the fourth term programme. There were only four weeks in the parliamentary programme until 8 December. On 17 November, Eskom would be coming to brief the Committee on its annual report. In the week of 24 November, the Committee would be considering its budgetary review and recommendations report, including the oversight reports. In the week of 1 December, SAFCOL would brief the Committee on its annual report. On 8 December, Transnet would brief the Committee on its annual report. The rest of the SOEs, as reported by the Department and the AG, had not yet tabled their annual reports. The Committee may make input on who it would prioritise, or what issues it would prioritise.

The Chairperson asked if there was anyone who wanted to add or omit anything.

Mr Cachalia asked if Transnet was coming before the Committee.

The Chairperson said that it was.

Mr Cachalia wanted to confirm that Eskom and Transnet would come before the Committee.

The Chairperson replied that the Committee would start with Eskom the following week.

Mr Cachalia moved for the adoption of the programme. Ms Mkhwanazi seconded the motion.

The meeting was adjourned.