NRCS 2020/21 Annual Report & 2021/22 Quarter 1 and 2 Performance

Meeting report

Opening Remarks
​The Committee Secretary, Andre Hermans, opened the meeting, informing Members that as a result of the death of the former Chairperson, the Committee would have to elect a temporary Chairperson.

Mr S Mbuyane (ANC) nominated Ms J Hermans (ANC); the nomination was seconded by Ms N Motaung (ANC).

Ms Hermans stated that she would do her best during her deployment as Chairperson.

Mr D Macpherson (DA) pointed out that the Chairperson of the Committee was not deployed by a political party but elected by the Members.

Ms Hermans accepted the correction.

A moment of silence was held for the late Mr Duma Nkosi.

Presentation of its 2020/21 Annual Report by the National Regulator for Component Specifications (NRCS)
Ms Nontombi Matemola, Acting COO, Department of Trade, Industry and Competition (dtic) introduced the NRCS and the CEO.

Mr Edward Mamadise, CEO, NRCS, presented the briefing. He began with the negative impact that COVID-19 had had on the entity’s operations and finances. The loss of productive capacity, especially market surveillance activities, had a 47% impact on operations in 2020/21 and 11% on operations in 2021/22 to date. The NRCS had incurred a loss of R19 million as a result of the pandemic in 2020/21. The NRCS conducted 35 833 inspections across all regulated industries in 2020/21 compared to 51 386 during the previous year. Covid-19 had led to interventions in product approvals and business assistance.

Highlights included the eradication of the backlog of Letters of Approval (LOAs) which had been a serious problem. The LOA applications had been reduced to 1 843 which was equivalent to one month’s applications, so all would be completed within the stipulated 120 days. The NRCS assisted fish and fishery products exporters by registering firms on the new electronic system of the importing country and was participating in various Southern African Development Community (SADC), Continental and international fora to ensure harmonisation of technical regulations. Legal Metrology had designated 104 verification and 93 repair bodies during the year and to ensure that personnel were competent, verification personnel undertook theoretical and practical examinations in which 136 persons wrote 300 examination papers, with 157 examination papers being passed. Various Compulsory Specifications/ Technical Regulations were submitted to the dtic for gazetting.

On 4 February 2022, non-compliant products worth over R20 million were destroyed in an ongoing operation. Non-compliant products in Cape Town and other port cities would also be destroyed shortly.

Financial Report
Ms Rebecca Ramcharran, CFO, NRCS, presented the financial report, informing the Committee that the NRCS had over-expended its budget by just over R19 million in 2020/21. Irregular expenditure had amounted to just over R9 million, mostly as a result of expired contracts and non-compliance to supply chain management policy. The NRCS was dealing with a case of fraud amounting to R4,5 million wherein an employee had facilitated fictitious refunds. The employee was on suspension while a disciplinary process was ongoing.

Ms Ramcharran stated that there had been significant progress on the revenue qualification by the Auditor-General and the NRCS was working closely with AGSA to align the financial year and the levies which were aligned to the calendar year.

Report on Quarter 1 and Quarter 2
Mr Mamadise briefed the Committee on progress at the NRCS in the First and Second Quarters 2021/22. The NRCS had found non-compliant products valued at R182 million in the current year-to-date. He added that the NRCS had managed to retain its status as Competent Authority for exportation of fish and fishery products to the European Union after an audit. The Enterprise Resource System was 55% complete as at the end of Quarter 2. A recruitment process was underway to fill vacancies at the entity; the positions had been advertised in November 2021. The CFO presented the financial report for Quarters 1 and 2.

The CFO asked the Committee to note that while there was a surplus in the budget in Quarters 1 and 2, the entity would show a loss at the end of the financial year.

Modernisation of the ICT system at the NRCS
The modernisation project had been embarked upon because the NRCS business processes were mostly manual processes and inefficient. The main challenges remained inadequate capacity within the NRCS to implement the project; inefficient functional processes and inadequate capacity to support and drive the key initiatives, and a lack of off-the-shelf systems that could meet operating model requirements of the NRCS; hence the need for custom-developed ICT systems.

Mr Mamadise concluded with an update on NRCS projects and challenges experienced in respect of legacy issues and provided details of how the NRCS had begun implementation of the recommendations made by the Public Protector.

(See Presentation)

Discussion
Ms Motaung posed her questions despite difficulties with connectivity. She asked whether the NRCS had initiated any collaborative measures with the SA Revenue Service (SARS). She posed a question about the Legal Metrology examinations and expressed concern at the slow pace of dealing with the Auditor-General findings as that response was long overdue.

Ms R Moatshe (ANC) referred to the serious problem of youth unemployment. How many of the young people given an internship opportunity were absorbed by the NRCS at the end of their internship? She noted the income derived from investment during Quarters 1 and 2. How much had been invested and where had the investment been made?

Mr Z Burns-Ncamashe (ANC) raised the endemic problem of fraud and corruption. It was a scourge that was paralysing the efficiency of institutions in SA. What control measures was the NRCS putting in place to avoid the recurrence of such fraud taking place? What control measures had been put in place to prevent fraud at the NRCS in the future? What efforts had the NRCS engaged in to recover the defrauded money? He condemned the fraud.

He noted the proliferation of non-compliant products in the market. What efforts had been made to address that problem? It had a negative impact on trade issues and consequently on economic growth. Were there any preventative measures in place to ensure that the products did not enter the market? What system was in place?

Mr W Thring (ACDP) noted that, of the confiscated non-compliant goods worth R273 million, only R20m of the goods had been destroyed. Why was only R20 million of the goods destroyed, leaving about goods of about R250 million? What were those goods and why was the rest not destroyed? Who oversaw the destruction of the goods to ensure that all the goods were, indeed, destroyed? Were there law enforcement officials present to ensure that all goods were destroyed and that none re-entered the system, compromising the SA economy?

He enquired about the hold-up in gazetting, noting the 80% negative variance in the processing of gazetting.
Why was there a 40% variance in the fishing sector, which had been blamed on Covid, while the gaming sector had performed well? He stated that the ACDP did not support BEE but, noting the BBBEE standards employed by the entity, why was coloured group lowest of all groups in terms of employment within the entity? The presentation indicated that the representation of the so-called Coloured group was 4% when the group represented between 10% and 12% of total population in the country.

Mr Thring referred to the R9.3 million in irregular expenditure in the areas of tenders and contracts. What mitigation factors were being put in place going forward to ensure that the situation did not re-occur? The Committee was often told that “measures were being put in place” but, the following year, irregular expenditure was once again reported. How was the NRCS getting rid of irregular expenditure? How was it possible that the entity was defrauded of R4.5 million? It was not a small amount. Who had the person responsible for the fraud been accountable to? How was the NRCS going to ensure that such fraud was not perpetuated going forward?

He noted that the levies was the main reason given for the qualified audit. The CFO stated that there was now an understanding of the problem and how to rectify it. What were the guarantees that levies would not continue to be incorrectly allocated and create irregularities and therefore a qualified audit in years to come? How many unfunded mandates did the entity have and what was being done to remove the unfunded mandates? The unfunded mandates put a huge burden on the running of the entity.

Mr Thring pointed out that the entity reported an inadequate capacity to implement modernisation goals but employment targets were not being met? Why outsource when, if the correct people were employed, there would be adequate capacity to implement the modernisation goals? Regarding challenges in respect of process needs in the different factories, why were they not being addressed? The country could not afford another outbreak of listeriosis. Why was the acronym for compulsory specifications ‘VC’ but technical regulations were abbreviated to ‘TR’? He could not get his head around the different forms of abbreviation.

Mr Macpherson said he had been following the progress of the NRCS since 2014 and believed that despite progress, things were worse than ever. There seemed to be a desperate leadership vacuum within the NRCS. Much of the problem of fraud was due to a lack of leadership and oversight. The R4.5 million fraud had first been detailed in a question that he had put to the Minister of Trade, Industry and Competition the previous year. In his response, the Minister had stated that the entity had been aware of the issue since March 2021 when the disciplinary processes had begun. He asked why the matter had been under wraps for so long? Why had it not been disclosed by the NRCS and in the public domain? Why had the disciplinary process dragged on for nearly one year while the crook was being paid by the NRCS? The Committee should condemn the process whereby crooks were allowed to remain in the employ of state and its entities for so long because the disciplinary issues dragged on and on. It was unacceptable that the situation had remained hidden for so long. In his

view it came down to a lack of leadership in the NRCS.

Mr Macpherson stated that the NRCS had been bedevilled by financial problems for many years and had relied on grants from the state while private testing entities had boomed in the gap left by NRCS and its failure to be reliable and to process applications on time. It would inevitably lead to the demise of the NRCS. That was why the NRCS and the SA Bureau of Standards had to be consolidated. The only financially sustainable path was for the SABS and NRCS to be re-united as they had been in the past. Although it would mean that some people would not be able to be paid good salaries by the NRCS, it was the only financially sustainable path for the two entities. The Committee had to grapple with that issue.

Mr Macpherson said that not much had changed: the ICT system had not been modernised, the entity relied on paper forms which could not promote the economy, it did not make access easy for clients and the fraudsters and crooks were the ones that benefitted.

Mr Mbuyane noted the issues raised by the Auditor-General. How was the NRCS planning to resolve those? How was the dtic assisting the NRCS? He asked if the NRCS had any programmes that were intended to reach the masses, especially in the rural areas. Had the ESKOM power outages impacted on NRCS and what was the plan to address any impact?

Ms Y Yako (EFF) had been covered by other Members in terms of questions but asked about the capacity in the NRCS. The leadership of the NRCS seemed to have a victim mentality. She did not get a sense that anything was moving forward. She proposed that the Committee go on a follow-up oversight visit, following which recommendations could be made to the Minister. She requested a quarterly report on progress.

The Chairperson asked about the qualified audit and unmet targets. Why in the light of that was a performance bonus of R20 million paid to employees? Why had there been a delay in tabling the 2020/21 Annual Report? She noted the historic problem of vacancies and that the posts had been advertised, but the NRCS needed to make a commitment regarding the filling of vacancies.

She said that on page 11 of the Annual Report, the Minister noted that Department was looking to regulatory amendments to close the gap in respect of the unqualified audits. What processes were in place to handle that and why had it not been put in place years ago following the initial years of unqualified reports?

Mr Mamadise responded to Ms Motaung’s question about collaboration with SARS. The NRCS had a memorandum of understanding with SARS and collaborated in terms of the movement of goods through the ports of entry. The two entities were aligning their risks alerts so that all products regulated by the NRCS were on the SARS risk alert at customs. Whenever SARS stopped a container that had to do with the RNCS, the entity was alerted and the goods were inspected to prevent non-compliant goods from entering the market place. Information was shared on the Bill of Entries so NRCS could identify goods that it wished to inspect.

Regarding Mr Burns-Ncamashe’s concerns about non-compliant products, he explained that such goods came through SA’s borders. The NRCS had a border management strategy but the NRCS was not designated to operate at the borders but the entity had an agreement with SARS to check goods coming in but SARS used a risk system which meant that not all containers were examined and goods slipped into the country. However, the NRCS had a surveillance strategy, hence the confiscation of goods in the market.

Mr Mamadise addressed the reason for the inappropriate proportions of races in the verification and repair examination. Previously, only the privileged few had access to those careers but the NRCS was now encouraging participation by disadvantaged people in the work of the NRCS. Regarding Mr Thring’s questions on racial proportions, he explained that those people who were writing the examinations were not employees, but would become service providers, qualified to repair and inspect. They worked for private companies and hence the NRCS could not do anything about race representation. He noted that the NRCS employment figures showed 10% Coloured males but he admitted that Coloured females were under-represented at 4%. The NRCS employment equity policy was designed to address issues of representation of races.

He reassured Ms Motaung, that despite the apparent slow pace of resolving the Auditor-General findings, the NRCS had resolved almost all findings, except those relating to ICT, where most findings arose out of the IT system that had become redundant. The ICT modernisation programme would resolve those issues, and as that programme had already started, all findings had been attended to. The NRCS had not ignored the Auditor-General’s findings. The internship programme had only commenced in the 2020/21 financial year and so was a fresh initiative and only at the end of the term of internship would the RNCS see how many interns could be absorbed. That would depend on the availability of positions and resources. The entity had an investment account with the Reserve Bank, which was permitted by law. Monies from the dtic and monies retained following surpluses had been invested and had earned interest.

Ms Ramcharran stated that the NRCS investment in the SA Reserve Bank was R302 million in Quarter 1 and R308 million in Quarter 2. Several control measures had been put in place to address the possibility of fraud again in the future. The Regulator had revised the Standard Operating Procedures and any refund requests had to start at the Business Unit and then required two additional approval processes. If money was to be moved from one account to another or from one allocation to another, a two-step approval process was now required. There would be no integration between the accounts receivable module and the accounts payable module. The accounts payable team would make segregated payments; the opening of new customer accounts required a new level of approval.

Regarding the recovery of funds, she explained that the disciplinary process was underway and much depended on the outcome of that process, but the entity had also engaged with the SA Police Service and the National Prosecuting Authority and staff had provided affidavits.

In order to mitigate factors relating to irregular expenditure, the CFO stated that committees sat on a quarterly basis at NRCS and more frequently, if required. The position supply chain manager had changed several times but now the Regulator had had the same manager for two years. The expiry of contracts was closely monitored as that was the source of many irregularities.

Ms Ramcharran responded to questions about the fraud that had been identified. The fraud had been committed by the Accounts Receivable Manager who managed an account into which money was paid when customers put money into the NRCS account, but the reference was unclear. The fraud had taken place from July to December 2020, which was during the period of Covid when the money had been allocated to fictious accounts. The person had been reporting to an interim CFO and then a new CFO and had taken advantage of the situation.

To address the audit qualifications on the levies, which ran on a January to December financial year, the Regulator had to calculate the amount that should be allocated to the previous and the current financial year. 4 000 accounts had to be checked and the amounts calculated manually. That was taking some time. The Auditor-General would be starting an interim audit on revenue. The NRCS had previously started calculations in April, so the entity was a few months ahead this year. The Auditor-General would start the audit on 15 February 2022 and if anything was picked up by the Auditor-General, there would be time to correct matters before the submission of the financial statements for 2021/22. The CFO admitted that there was still a risk that the NRCS could receive a qualification because the process was a manual one. However, the Regulator had built in additional processes of control and review, but until the entity had a fully integrated system between business operations and finance, there would be a risk. Nevertheless, the CFO was confident that the audit would be positive that year.

With regard to the unfunded mandate, one was in fishery products, canned meat and processed meat and one was in the metallurgy space. Currently, National Treasury was aware of the situation and had engaged the NRCS and the dtic to resolve those issues and to find ways to fund the unfunded mandates. The NRCS management was working with dtic in that regard; a meeting had been held the previous week. The NRCS was not permitted to budget for a deficit but the situation in which it found itself was one of a deficit because of the unfunded mandates.

The compliance issues raised by the Auditor-General related to material adjustments to financial statements where the NRCS had attempted to correct figures, etc. in response to the Auditor-General’s findings. The CFO stated that the Regulator was engaging the AGSA much earlier in the financial year and the NRCS was training the team to ensure improved capacity in the financial sector.

Concerning the amendment of regulations, Ms Ramcharran assured the Committee that the NRCS was currently in discussions with dtic but the challenge was finding balance that would fix the financial issue while not impacting negatively on the operational side. The regulations had not been amended earlier because the problem had begun as a technical matter in which the RNCS and AGSA had had different views of the accounting principles involved. The matter had gone to AGSA national and to National Treasury and then there had been a change of CFOs and finally the technical issues had been resolved.

Mr Duncan Mutengwe, Acting COO, NRCS, continued with the responses as the CEO had connectivity issues.

Mr Mutengwe added to the previous response on SARS, informing the Committee that SARS had invited the NRCS to join its programme of accrediting traders, giving a benefit to those that complied with SA legislation. That was over and above the MoU which the NRCS had with SARS. The entity was developing a relationship with SARS and traders in the programme which would also benefit from a quicker turnaround time in respect of the release of the containers arriving at the border.

He said that there would always be unscrupulous businesses that would attempt to avoid complying with NRCS requirements but non-compliance was considered a criminal offence. A technical committee in the NRCS sat on a monthly basis to adjudicate on matters of non-compliance and had determined that simply destroying products was no longer sufficient for repeat offenders and was considering additional measures against such companies. There would always be non-compliant goods in the market, hence the need for inspectors to check products.

Mr Mutengwe explained that the NRCS had destroyed non-compliant goods worth R20 million out of a total of goods worth R273 million, on a single day, i.e. 4 February 2022. The programme had started on 11 January 2022 but on 4 February 2022, the NRCS had created an event to send out a message about what happened to non-compliant goods.

In response to the question about reaching out to rural communities, Mr Mutengwe explained that the NRCS was going out to remote areas to share information regarding the work of the NRCS. The Marketing and Communications Department of the NRCS was in Limpopo that week.

Mr Edward Matemba, Strategy and Risk Manager, NRCS, informed Members that the NRCS itself witnessed the destruction of products which was carried out either by the company itself at its own cost, or the company paid for a service provider to take responsibility for destroying goods. Food products had to be destroyed immediately and of the goods worth R273 million, food products accounted for R26 million. Other products were electro-technical and auto products. Other service providers in Cape Town, Port Elizabeth (Gqeberha) and Durban would destroy all non-compliant goods before the end of April 2022. The intention was to make it a monthly process which would limit the possibility for fraud and theft. He added that goods worth R81 million, particularly in the metallurgy sphere, had been corrected or rectified by the supplier and did not need to be destroyed.

Mr Mamdise responded to Mr Macpherson’s concerns about the lack of leadership in the NRCS. Fraud did not reflect a lack of leadership; the leadership had acted swiftly to suspend and take action against the person when the acts of fraud were discovered. Other factors had contributed to the delay in the disciplinary process, including the fact that the initiator appointed by the RNCS had died of Covid-19, after having spent extensive time interviewing witnesses and preparing processes. That had meant that the entire process had to start afresh. As was normally the case, people explored loopholes, made valid requests for postponement, as had occurred when the person’s representative had become unwell, resulting in hearings being postponed. He was, however, satisfied with the progress being made by SAPS as far as the criminal investigation was concerned.

Regarding financial programmes failings, the CEO pointed to the results of the pandemic, unfunded mandates and an increase in fees that had been delayed for two years as having a negative impact on revenue. The NRCS was waiting for the dtic to publish new levies. He was convinced the NRCS would be sustainable for the foreseeable future.

The Acting Chairperson instructed the CEO to work with the Committee Secretariat to determine those questions that were unanswered so that the NRCS could respond in writing. She would take the proposal for a follow-up oversight visit to the NRCS and the SABS to the Portfolio Committee management committee.

Portfolio Committee Programme
Referring to the Committee Programme, the Acting Chairperson stated that the Senior Legal Advisor from the Office of Constitutional and Legal Services in Parliament, Adv Charmain van der Merwe, had informed the Committee that more time was needed before she and the dtic could present a report on the public commentary of the Remitted Bills (the Copyright and Performers’ Protection Amendment Bills).

The Committee Secretary stated that programme adopted on 7 December 2021 was largely unchanged, but 50 submissions had been received in response to the Remitted Bills and Adv van der Merwe had requested additional time to prepare to brief the Committee. The Remitted Bills would be finalised in the second Quarter of 2022. The proposed oversight visit to the NRCS could be considered for the Second Quarter of 2022. Fridays would be used for additional meetings, where necessary.

Mr Macpherson commented on the meeting planned for 2 March 2022 at which the Committee would be briefed by the Special Investigating Unit (SIU) on its investigations into the National Lotteries Commission (NLC). That morning, the courts had thrown out a request by the NLC to reject a corruption report on the Commission. He noted that the meeting also included a Quarterly Report from the dtic. He suggested a request should be made to the management of Parliament for the Portfolio Committee to have a full day with the SIU in order to engage deeply on such a critical issue.

The Acting Chairperson stated that the second agenda item would be moved to another day.

Mr Mbuyane reminded the Committee that there was a sitting of Parliament at 2pm on 2 March 2022.

The Acting Chairperson corrected the time of the sitting to 3pm.

Mr Macpherson stated that the online meeting process meant that it did not matter whether Members attended the sitting or not, but the Committee had to address the various reports of corruption in the NLC.
He added that the Deputy Chief Justice had referred in the Zondo Report to the failings of Parliament to address such issues of corruption, etc. He suggested that it was not favourable to put a timeline on such a matter.

The Acting Chairperson suggested that the meeting run from 9am to 2pm as the Peace and Security Cluster were answering questions and she believed that it was important to attend the session.

Mr Mbuyane proposed that the meeting on 2 March 2022 should run from 9am to 2pm.

Mr Macpherson said that it was short-sighted, but maybe the Committee had to learn its lesson yet again.

Mr Burns-Ncamashe supported the proposal by Mr Mbuyane that the Committee meet from 9am to 2pm on 2 March 2022.   

The Acting Chairperson indicated that Mr Mbuyane’s proposal was carried by the Committee.                                                                                                                                                                                                                                                                
Committee Minutes
The minutes of 30 November 2021 and 7 December 2022 were read and adopted as presented.

Closing Remarks
The Acting Chairperson summarised activities to follow the meeting: written answers from the NRCS were required, a response to the proposal for an oversight visit to the RNCS, and maybe SABS, by Ms Yako was required, and an updated Committee Programme.

The Secretary informed Members that the next meeting was to be held on 15 February 2022and would be a briefing by the dtic on the Equity Equivalent Investment Programme, as well as on the B-BBEE Commission’s activities during the 2020/21 financial year.

The meeting was adjourned.