Public Enterprises Portfolio Audit Outcomes; DPE Annual Report 2021/22; FFC Input on performance of SOEs; with Deputy Minister

Meeting report

Opening remarks

The Chairperson welcomed the Members of the Committee, the delegations from the DPE, AGSA, and FFC to the meeting, and the guests from different media houses. He said the meeting would take longer than usual because several agenda items would be covered. He pleaded with the Members to be patient with him as he would not allow them to exceed the allocated time when engaging with the reports.

AGSA briefing on DPE and SOCs audit outcomes

Mr Fhumulani Rabonda, Deputy Business Executive, AGSA, presented the Budgetary Review and Recommendations Report (BRRR) on the audit outcomes of the state-owned companies (SOCs) and the DPE to the Committee. He said that at the start of the current administration, the Department had received the most favourable audit outcomes, namely unqualified with findings. The South African Forestry Company SOC Limited (Safcol) and Transnet were all qualified, while Denel, SA Express and Alexkor received disclaimers of audit opinion.

The AGSA noted three improvements over time, based on the latest available outcomes. Alexkor had moved to qualified audit opinions (2020-21) from a disclaimer, while Safcol and Transnet had moved from qualified to unqualified audits with findings. The DPE had regressed from a clean audit to unqualified audits with findings, and regrettably, the number of outstanding audits had increased from one to five (SAA, SA Express, Alexkor, Denel and Eskom).

Comparing the current year to the prior year, Transnet had managed to move from a qualification to an unqualified audit with findings because of the exemption granted by National Treasury. The entity was exempt from including PFMA disclosures in the notes to the financial statements. The outstanding audits had increased significantly, from one to five, and the following is the list of the audits that were outstanding and reasons:
The audit of SAA was outstanding since 2018-19 due to the business rescue processes. The entity had recently submitted its annual financial statements for the past four years, and the catch-up audits had commenced.
The annual financial statements of South African Express airline were not submitted for three financial years, and the entity had been liquidated.
The annual financial statements of Denel were not submitted for the past two years due to financial and operational challenges. The entity committed to submitting its 2020/21 financial statements by 30 November. It was in contravention of the PFMA and the Companies Act, failing to submit financial statements for auditing for two consecutive financial years.
The Eskom audit was delayed due to various issues, including late submission of information and adjustments of misstatements identified during the audit.
The prior year's audit for Alexkor was signed off late in March 2022, and there had also been delays with the reappointment of the auditors.
On performance reporting and achievement of targets, he said all three institutions (DPE, Transnet and Alexkor) had submitted performance reports that contained material misstatements. However, they all managed to correct the misstatements as part of the audit process to ensure that the final published reports were free from material misstatements.
The DPE had achieved 91% of its planned targets for 2021/22, and the impact of the unachieved targets was insignificant, as its performance targets did not include targets relating to the MTSF intervention for repurposing of SOEs. The AGSA was therefore unable to assess the performance of the Department on this element.
Transnet had achieved 39% of its planned targets for 2021/22, and the service delivery failure and losses incurred had impacted the going concern. The operational challenges that affected Transnet included the increase in security-related incidents, mainly cable theft and vandalism of rail and pipeline infrastructure; information technology (IT) security challenges; the unrest in KwaZulu-Natal, which largely impacted port and rail operations; tippler challenges at Port Elizabeth; the availability and reliability of locomotives; as well as the decline in the condition of rail infrastructure.
Safcol had achieved 86% of its planned targets for 2021/22, and some of the targets were not achieved due to a refocus on the implementation strategies based on feasibility, because a business case and position paper had recommended a feasible implementation plan. The new strategy no longer considered a strategic partner that was supposed to deliver funding and a technical solution together with the execution plan. The company would instead seek funding.
The DPE had embarked on a process to sell 51% of its shares in SAA to a strategic equity partner (SEP). While the transaction was not yet finalised pending regulatory approvals, the AGSA had reviewed the process followed and the agreement signed with the SEP to determine the impact on the DPE’s financial statements. The AGSA had identified the following risks facing government with the transaction:
The purchase and sale agreement required more than R3 billion to be paid by the DPE to complete implementation of the business rescue (BR) plan. Funds to cover this liability had not been appropriated in the budget – potential non-compliance with section 38(2) of the PFMA. The related contingent liability was disclosed in the financial statements of DPE, and AGSA highlighted it in the audit report of the DPE as an emphasis of matter.
The Department did not follow a formal process for the invitation, evaluation and adjudication of proposals from interested parties to identify the successful/preferred strategic equity partner.
No public invitation for bids or expressions of interest;
No evidence that proposals were fairly evaluated based on predetermined criteria.
The valuation report used to determine the transaction value was not timeously provided for audit purposes. This was made only during the last few days of the audit, and the AGSA could not perform all the required audit procedures.
The sale was part of the Department’s strategic goal to resuscitate the SAA. If the sale transaction was not properly processed, it could result in further losses to the state or delays in making the entity fully operational. It was important to ensure that the transaction would be advantageous to the state.
On financial health risks, the DPE had reported working with Denel to implement a long-term turnaround plan that required restructuring. However, it appeared that there were no clear plans to address the immediate liquidity requirements of the entity. As a result, Denel faced several court challenges during the year from employees and suppliers seeking to recover money owed to them. This was also the root cause of the R15.2 million unauthorised expenditure incurred by the DPE, resulting from an unbudgeted transfer made to Denel to settle claims by suppliers.
The SA Express airline was formed to promote frequent services on lower-density routes and to expand regional air services' capability in South Africa. Its liquidation had left a gap yet to be filled in the market it served. Mango Airlines was grounded and undergoing business rescue, which left a gap in the low-cost traveller market, which was currently under-serviced.
During the year under review, auditees incurred irregular expenditure amounting to R1.235 billion, of which Transnet had incurred R1.172 billion. Due to the exemption, Transnet’s irregular expenditure was not disclosed in the financial statements, but was included in the integrated report.
One of the recommendations from the AGSA was that all role players must continue to work together to strengthen the capacity, processes and controls of entities in the portfolio, enabling credible financial and performance reporting, compliance with key legislation, sound financial management and improved service delivery.
Discussion
Mr N Dlamini (ANC) was concerned about the kind of power afforded to the AGSA in terms of its ability to guide and monitor how government departments spent the funds allocated to them in line with their annual performance plans (APPs). To what extent could the AGSA force the entities to submit their financial statements for auditing? Was this something that could be probed through policy to further capacitate the AGSA and the Standing Committee on Public Accounts (SCOPA?)

He said since SA Express was liquidated, SAA also seemed to be moving towards liquidation, which suggested that there was something wrong in the public enterprises' system, caused either by too much political interference or something else. He wondered why it was difficult for state-owned companies to generate income, because they were just like other businesses. There was growing concern that the government was running the SOEs down so they could be handed over to the private sector. Perhaps an enabling environment where the SOEs could thrive needed to be created at a political level.

During the lockdown, while Mango and SAA were not operating, FlySafair was the only operating airline throughout the country, and it had recently announced that it had acquired the licence to operate 11 new routes in the region, which meant that there was business. The SOEs were not failing because of a lack of business, but there were other reasons for their failure that needed to be investigated to devise and implement solutions.

Mr G Cachalia (DA) said last year’s AGSA report had stated that audit outcomes had regressed due to controls over financial performance management and compliance, and asked whether this year’s audit outcomes were any different in material terms. Regarding the financial burden on government via bailouts and guarantees, was there any difference from the previous years, because this spilled over to the ability of the SOEs to fulfil their mandates? Was there any improvement in the timely delivery of annual financial statements that affected oversight?

He asked for the AGSA’s opinion on the Private Member’s Bill which had been presented to effect timeous delivery of annual financial statements and consequences for non-delivery. Regarding the increase in irregular expenditure, he wanted to know if the irregular expenditures and material irregularities in unqualified audit findings represented any real improvements. If there was any progress, was the rate acceptable, given that the AGSA had highlighted that SOEs were in a poor state of governance, had weak internal controls, unstable leadership, non-compliance with legislature, and lack of consequence management?

Did the AGSA’s findings reflect on the urgency in respect of Eskom, Transnet, Denel and Alexkor and the burden they placed on the fiscus without any visible improvement? How did the AGSA view what they highlighted as material and procedural irregularities regarding the SAA and Takatso Consortium deal? He wanted to know what was foretold by the procedural and material irregularities, and how that could be managed.

Given that the AGSA had all the information about the country in terms of accountancy and governance, and taking into account the past and the present state of the SOEs, he wanted to know if the AGSA had an opinion of what the future of the country would look like, and whether it was positive or negative. Given the accounting data perused and analysed by the AGSA, did the serious issues they had highlighted require actions beyond business as usual, especially given the slow progress over the years?

Ms O Maotwe (EFF) agreed with Mr Dlamini that the failure evident in the SOEs could be attributed to political interference, and said it did not make sense that other businesses were thriving while SOEs were struggling while operating in the same market. She would have preferred the AGSA to have provided a list of the material irregularities, and the progress made by the DPE and the SOEs in resolving them in the presentation.

She asked if the AGSA sat in other platforms besides Parliament, to raise the issues regarding the progress of the SOEs and their performances. She asked for the details of the R1.1 billion irregular expenditure at Transnet, as well as the timelines for finalising the funding criteria and the progress thus far. Lastly, she wanted to know whether the AGSA had given the DPE a deadline to align itself with the SOEs, because its alignment with the SOEs would be critical to their success.

Mr S Gumede (ANC) said the fact that Transnet received its audit results by default was not good and needed to be scrutinised. He was concerned that there was no clear plan to move Denel forward and that the entity was in contravention of the PFMA. The guidance that the AGSA offered to the entity was welcome, but what would the future of the entity look like if the guidance was not followed?

The common issue among all the entities was a lack of funding, and government had pronounced that there would be no financial assistance to SOEs and no money coming from the market to assist Denel. What would be the best option for Denel in that regard?

Mr F Essack (DA) said the funding criteria remained a huge policy uncertainty, and the SOEs were struggling to deliver on their mandates and unable to compete globally. Denel was also a sore issue, with R15.2 billion in unauthorised expenditure, and more detail was needed on what was happening at the entity.

He said several opportunities remained at Denel, but they were not tapping into their resources, and it was hard to tell whether the problem was with the board or whether the unions were dictating to it, and it was unsure where the line could be drawn to ensure that it could become globally competitive.

Alexkor also had several challenges, including the issues that transpired between communities, the shareholding agreement, issues with contractors, and the continuous sale of diamonds below market prices. All the issues resulted in Alexkor struggling to get off the ground.

Mr E Buthelezi (IFP) asked if entities or Departments were allowed to ask to be exempted on some indicators like Transnet. If they were allowed, would there not be more departments or entities asking for exemptions with a view to improving their outlook, while that would not be the case in reality?

Ms J Mkhwanazi (ANC) wanted to know if the AGSA had mechanisms to ensure that the DPE would implement their recommendations. She also wanted to know the root causes of the issues identified by the AGSA at the entities, and what could be done to prevent their recurrence in the future.

Some root causes, such as leadership’s failure to exercise adequate oversight in financial performance reporting, could be avoided. What were the consequence management actions taken against the senior management members that had caused some of the issues in the entities, especially in the irregular expenditure incurred in the appointment of service providers?

Ms V Malinga (ANC) said the AGSA always told the Portfolio Committee that departments did not submit their financial statements according to the PFMA, but the AGSA had never taken consequence management action against any of them. Why was it not taking consequence management action against the Departments? She said the AGSA did not have the teeth to bite in that regard.

Ms J Tshabalala (ANC) noticed that many of the targets of the entities had not been achieved -- for example, on the DPE programme for energy and resources, where shareholder compacts were not signed at Eskom, Alexkor and Safcol, as well as progress reports that were not submitted. She wanted to know what would be done about that situation, and the recommendation from AGSA on how the issues could be resolved. The recurrence of the issues was unacceptable, as they impacted the financial performance of the entities and the Department.

The DPE had spent only 99.4% (R39 billion) of its allocated budget of R39.3 billion in the 2021/22 financial year, and the variance as a percentage of final appropriations amounted to 0.64%, which was an under-expenditure of R252 million. What may have been the cause of the under-expenditure by the Department? What could the AGSA do to ensure that departments spent their entire budget allocations as intended? To what extent did the AGSA have authority over the spending of departments?

She also wanted to know what consequence management actions had been taken by the AGSA on the irregular expenditure incurred at SAA due to deficiencies in the appointment of service providers.

AGSA's response

Mr Rabonda said the accountability ecosystem at the beginning of his presentation had explained what the AGSA’s response was to the weaknesses it identified in departments and entities, because the solutions to those issues were not only the AGSA’s burden to deal with, but also the institutions where the AGSA reported its findings -- including the departments as well as Parliament, according to their oversight functions. As much as the AGSA had specific powers regarding material irregularities, there were specific things that the AGSA could use those powers for, and there were other things that needed to be dealt with in the accountability ecosystem.

The PFMA was clear in its recommendations on what should be done when there were allegations of wrongdoing, financial misconduct, or weaknesses in internal controls, and the powers sat with the Accounting Officers/Authority. The Accounting Authorities would need to account by reporting on their implementation of the recommendations presented by the AGSA.

Expecting the AGSA to resolve the issues it reported on would be expecting the AGSA to be the player and the referee at the same time. The information brought by the AGSA to the Committee needed to be appreciated, and the Committee needed to exercise its powers to hold the Accounting Authorities of the institutions accountable for the lack of implementation of the AG's recommendations.

The other law enforcement bodies that were supposed to pick up the weaknesses and act on them also needed to be held accountable. Institutions such as the Companies and Intellectual Property Commission (CIPC) were supposed to pick up on issues that related to them and report to the entities and provide solutions, especially if they contravened the Companies Act.

The AG raised the Transnet exemption deliberately to ensure that the Transnet board and management would not relax and think they had managed to move from a qualified audit opinion to an unqualified one because of their good work. They needed to appreciate why the Minister exempted them, and ensure that they implemented effective measures in their operations, including plans and targets and milestones on how they planned to ensure that when the exemption expired in three years, their internal control environment issues would be solved. The Minister was allowed to grant such an exemption according to the PFMA, and Parliament had the authority to oversee the extent to which departments and entities could be abusing the exemption.

He said the Private Member’s Bill was a policy document that still needed to go through the parliamentary processes. Auditors were not allowed to be involved in the policy, so they did not have a view on the Bill. The audit process was informed by facts, evidence and historical information, so the AGSA could not foretell the future state of the country. The weaknesses identified in the presentation also pointed to the risks that could happen in the future if they were not resolved.

The AGSA was not concerned about the timelines, but rather with the actual actions that needed to be taken by departments and entities. The Portfolio Committee would identify the weaknesses in the actions taken and recommend solutions, and the cycle of accountability would continue. He encouraged the DPE to continue working with the AGSA to implement and review their new plans. He said the Department should look at the commentary from the AGSA as information that they could use to ensure the credibility of their plans to address the issues faced by SOEs.

The AGSA did not imply that government must bailout SOEs, but was merely commenting on what was said by government through the State of the Nation Address (SONA) and the Minister of Finance’s budget speech. Government planned to have an SOE funding criterion, but it had been delayed, and the delays caused policy uncertainty and damaged the ability of the entities to secure and sustain themselves. This drove investors away from investing in the entities because they wanted certainty that government would also support the entities so that they would know what type of investment to make in them.

He said the material irregularities were the same as those presented in the previous financial year's audit, and the AGSA was just highlighting the entities' progress in dealing with the irregularities. The status of the Transnet irregularity that was reported last year, where the contract for the lease of heavy plant and equipment was awarded using a criterion that was not aligned with the Preferential Procurement Policy Framework Act (PPPFA), was that the Accounting Authority had responded to the material irregularity and investigated the matter. They were in the process of disciplining employees. The disciplinary process was taking longer because of the counter-appeals lodged by the employees.

The material irregularity at Safcol was related to a penalty that Safcol had to pay to SARS for underpayment of their provisional tax. This was a material irregularity because it was a loss to the entity, because it was supposed to have employed people who could ensure that all their outstanding payments, especially to SARS were paid, but they had failed to do so. The AGSA had issued the material irregularity to the entity, which had investigated it and submitted a report back to the AGSA, which was examining the report to see if its outcomes were aligned and appropriate to respond to the irregularity.

Most of the other information on material irregularities could be provided to the Committee by the Department or the entities, but the AGSA would be available to provide any other information required by the Committee to assist with its oversight function.

The Chairperson thanked Mr Rabonda for the information he had provided, and noted that he captured all the questions and comments made by the Members in his response. He said the Members were welcome to write down any matters they felt were not dealt with adequately, or any outstanding questions to the AGSA, and forward them to the Committee Secretary.

FFC briefing on observations and findings at SOCs reporting to the DPE

Mr Chen Tseng, Head of Research, FFC, introduced the Financial and Fiscal Commission delegation in the meeting.

Ms Nthabeleng Mochochoko, FFC Commissioner, apologised for the absence of the Chairperson of the FFC, who could not join the meeting due to prior engagements.

Mr Siyanda Jonas, Researcher, FFC said SOEs had not performed well in executing their mandates and had not contributed to economic growth as expected. Their poor performance resulted in greater risks and exposure to the national government, adversely affecting the economy.

On the departmental budget analysis, he said the DPE had three programmes. Programme 1 dealt with administration, Programme 2 involved SOC governance, assurance and performance, while Programme 3 covered enforcement, transformation and industrialisation.

Total expenditure on Programme 3 had increased significantly, from R78.8 million in 2017/18, to R6.3 billion in 2018/19, due to the disbursement of funds to SAA and SA Express to settle government guaranteed debts. Since 2018/19, this programme had accounted for the biggest proportion of total expenditure, while the proportion of expenditure on administration has decreased due to under-expenditure on the compensation of employees (CoE) as a result of vacant posts. Total expenditure in 2020/21 and 2021/22 included direct charges against the National Revenue Fund (NRF) to SA Express, SAA and Denel in terms of Section 70 of the PFMA.

Over the medium term, expenditure on administration was expected to increase, constituting the largest proportion of the budget, due to the increase in expenditure on CoE and consultants. The Department intended to fill only critical vacant posts to ensure it remained within its expenditure ceiling for CoE.

The decrease in the proportion of expenditure on current payments between 2017/18 and 2018/19 was due to under-expenditure on CoE as a result of vacant posts, as well as under-expenditure on goods and services due to delays in the implementation of projects. From 2019/20 to 2021/22, under-expenditure on current payments was caused by the reduction in travelling and stakeholder engagement events resulting from Covid-19.

Between 2018/19 and 2021/22, payments for financial assets constituted over 96% of total expenditure. It was expected to account for 98.8% of expenditure in 2022/23. This would include additional amounts of R21.9 billion to Eskom, and R1.8 billion to SAA. The under-expenditure on payments for capital assets from 2019/20 to 2021/22 was due to delays in delivering information technology (IT) equipment from international markets as a result of Covid-19. Over the medium term, the expected increase in current payments was due to the increase in CoE, to fill vacant posts, and expenditure on consultants.

In 2020/21, expenditure on administration decreased by 20.6% due to vacant posts. Over the medium term, expenditure on Programme 3 was expected to decrease at an annual rate of 34.3% in 2022/23 and 99.7% in 2023/24 due to allocations made to Eskom, SAA and Denel to settle debt and interest.

Mr Thando Ngozo, Senior Researcher: Macroeconomics and Public Finance, FFC, presented on the government guarantees and exposure to SOEs, focusing on Eskom and Transnet. He said the total guarantees to all the SOEs had increased from 12.2% of gross domestic product (GDP) in 2019/20, to 12.4% in 2021/22. Eskom government guarantees had increased from 6.2% of GDP in 2019/20 to 6.3% in 2020/21.

The total contingent liabilities amounted to R195 billion in 2008/09, of which government guarantees to SOEs constituted R63 billion, representing only 32% of contingent liabilities. Contingent liabilities were projected to reach R1.1 trillion in 2020/21, of which R569 billion would be government guarantees to SOEs, accounting for more than half of the total contingent liabilities (53%).

He said the maturity of SOEs' debt presented a substantial risk to the fiscus. SOE debt repayments would peak at R24 billion in 2025/26, of which the government guarantees would be 17%, or R4 billion. In 2026/27, debt repayment by SOEs would amount to R16 billion, of which more than half (55%) would be guaranteed by government.

On assets, liabilities and profit/loss margins, the net asset value for Eskom had decreased from R175 billion in 2017 to R170 billion in 2018, then increased to R215 billion in 2021. Eskom's liabilities increased from R534 billion in 2017 to R637 billion in 2020, and its net loss increased from R2.3 billion in 2018 to R20.9 billion in 2019. Transnet's net asset value decreased from R143 million to R129 million between 2017 and 2022. Transnet posted a net loss of R8.4 billion in 2020/21, and in 2022, the entity made a profit of R5 billion.

Some of the challenges faced by SOEs included the following:

The poor financial performance of SOEs and reliance on government support adversely affected public finances and sovereign credit ratings.
South Africa’s sovereign credit rating downgrades were attributed in the main to unsustainable government expenditure commitments, linked to the counter-cyclical fiscal policy stance and multiple requests for support from SOEs.
The challenges of SOEs resulted in poor service delivery, poor financial management, less growth, massive unemployment, corruption, and low business confidence.
The financial distress of SOEs also impacted fiscal outcomes indirectly through their links to the rest of the economy.
Corruption, mismanagement and technical inefficiencies have become a defining feature of SOEs.
Ineffective boards and high turnover. Mandatory training of board members was were required to ensure that boards understood and were effective in carrying out their roles and responsibilities.

Discussion

Mr Dlamini found the breakdown of the number of hours of load shedding that the country experienced in the current year interesting, because the electricity bill of the country did not reflect the two-month load shedding that was indicated in the presentation. It was also worth noting that the situation had deteriorated at Eskom over the years, especially after 2017. What significant changes were the DPE prepared to make to turn around Eskom's trajectory and resolve the challenges? He said the report gravitated towards the question of who really benefited from the load shedding, because the entity seemed to be spending more for fewer benefits.

Mr Cachalia said the upward trend in government guarantees and contingent liabilities to very high levels was concerning. Government was an insurer of last resort, usually operating in domains such as flood risks, support to small businesses and other key areas, but this was skewed by the demands made by the SOEs, which represented a model operation and a financial hazard. The increased demand and calls for guarantees, with borrowing requirements increasing in 2020/21, raised the sovereign risk. When could the gross debt be expected to stabilise?

Mr Buthelezi appreciated the challenges of SOEs highlighted in the presentation and said a solution to those challenges would help stabilise the SOEs. He asked the FFC to explain what they meant by the proposition of the professionalisation of the SOE boards and managements.

Mr Essack said the report from the FFC was frightening -- it seemed like the situation was worsening, as the contingent liabilities were going from bad to worse. He wondered what concrete resolutions the Committee would be able to make in trying to resolve the challenges. He suggested that it should look at the damning realities in the South African SOEs compared to the SOEs of other countries at the same level as South Africa which were much more effective.

Mr Gumede wanted to know how often such a report was given to the Committee, because it would be very useful in the analysis of SOE expenditures. He asked if government guarantees could be at risk of abuse by SOEs, because they affected the fiscus.

Ms Malinga wanted to know if the FFC had presented its report to the DPE and other Departments that oversaw some SOEs. Was there any new method that could be used to curb corruption, fraud and mismanagement of the SOEs besides the legislation that was currently available?

Ms Tshabalala said public-private partnerships (PPPs) were normally considered a solution to financial and operational performance challenges of SOEs, but the share of the partnerships was very low. How would the financially struggling SOEs survive, considering they were already a burden on the fiscus? What were the FFC’s recommendations on financing the financially struggling SOEs, considering government’s fiscal constraints and the absence of private capital?

The Chairperson wanted to know what financial advice was given to the SOEs by the FFC, and if there was concern about the lack of PPPs because some of the clients of the SOEs were other SOEs. For example, Denel was supposed to benefit substantially from the state through the South African Police Service (SAPS), the South African National Defence Force (SANDF), etc., but Denel could not even get a simple purchase offer for bullets from any of those entities, as they imported them from other countries, leaving Denel abandoned.

It was irritating that state capture and corruption were often used as the only excuse for the struggle of SOEs, while private interests were also central to state capture, where officials were bribed to order products from companies that gave kickbacks to them. How would the DPE ensure that the PFMA would not be used to destroy its own SOEs? What work was the FFC doing to improve the financial status of the SOEs?

FFC's response

Ms Mochochoko said the root cause of most of the problems faced by SOEs was lack of consequence management, and if the leadership of SOEs was not emphatic about implementing it, the problems of financial leaks such as irregular expenditure, fruitless and wasteful expenditure, as well as unauthorised expenditure, would persist. The recommendation for the professionalisation of boards and management by the SOEs was based on the lack of leadership drive within the SOEs to enforce consequence management.

Mr Tseng said a mistake had emerged in procurement in the 2010s, where the procurement prescripts made the space of the public sector and corporation activities complicated in pursuing a competitive market and transparency. That was where the corruption in procurement and supply chain management processes began.

The introduction of the procurement prescripts shifted the responsibilities and expertise of activities from the people working on the ground (engineers, technicians, etc), to procurement officers. That was the reason many procurement officers struggled to identify poor quality contracts, which had led to the current challenges of irregular expenditure and, ultimately, the reason for the lack of PPPs. Other countries, whether developing countries or more advanced economies, were also struggling with the same problem.

The FFC had made submissions to various committees regarding the issue of the guarantees -- that it should not be an automatic expectation of the SOEs to receive guarantees, but all the guarantees had needed to be conditionalised on the performance of the SOEs since 2015. The Committee needed to be wary of transfers between entities and how they covered each other -- for example, the Government Employees Pension Fund (GEPF) on the Eskom debt, and various other entities that one could perceive as PPPs. Treasury did not report on the full picture of the debt, especially on how government guarantees affected debt, because the guarantees would not be issued until exposures at the end of the financial year.

He said the FFC’s mandate was to advise Parliament. Their advice was that the Committee needed to partner up with the Appropriations and Finance Committees, as they played a huge role in deciding on the money bills and issues of double-dipping financial incentives. In terms of the public sector and public finance management, there was only a little that money could do, and looking at the data, it had exhausted its effectiveness. It was a real problem regarding operational issues, processes, and internal controls within the SOEs, and fixing those issues would require resolve at the management and board levels.

Follow-up discussion

Ms Tshabalala wanted to know whether the FFC felt their recommendations and advice regarding the SOEs in their interactions with the Ministry of Finance were taken seriously. She also asked when last the FFC had interacted with the DPE.

The Chairperson did not think there was enough pressure put on National Treasury in guiding, advising, and criticising them where necessary to play an effective role in improving the finances of the SOEs. National Treasury also had a role in the state of the SOEs, even though corruption, state capture and malpractice within their functions had created a disaster within them.

When SAA faced liquidation, Treasury reacted slowly, as if waiting for the entity to fail, and the business rescue practitioners had come on board. He felt that National Treasury had the same intent for Denel and did not have the best interests of the SOEs at heart. To what extent was the FFC assisting the SOEs by engaging with National Treasury? He felt that National Treasury was using the PFMA to deliberately destroy the SOEs.

FFC's response

Mr Tseng agreed with the Chairperson, and added that even if SOEs wanted to pursue the PPP route, they would not know how to do it because procurement prescripts would not allow them to do so. He said the prescripts were not the issue, because their approach was correct, but the issue was the lack of consistency in the implementation of the prescripts. There was something wrong at the source of the prescripts because on the Office of the Chief Procurement Officer’s website, there had been practice and instruction notes, but they had been removed in recent years. This caused shocks and disturbances in the process, which made it difficult for SOEs to exercise the prescripts.

The FFC’s effectiveness and value as a commission were proportional to the effectiveness and will of the legislative and parliamentary committees. The FFCs recommendations did not go to departments or SOEs or executive branches of government, but to the legislative branches of government. The bills could be enacted only after the FFC's recommendations had been considered.

He said they were open to interactions with the executive branches of government, but the only problem was the issue of independence. Perhaps the Committee could assist them in maintaining their independence so they would not become an entity under National Treasury.

Ms Tshabalala said the primary role of the FFC was important, but as an independent advisory institution which the government needed to consult regarding the divisions of budget, the Committee would have wanted to understand the type of advice the FFC provided so that it could see the extent to which they did their work. She was not happy with the responses from the FFC, and said the Committee needed to enquire more about the role of the FFC from National Treasury and the DPE on the extent to which they assisted them in respect of the SOEs.

The Chairperson said the Committee might invite the FFC to engage with the Committee more on their role soon. He thanked them for availing themselves for the meeting and for their report, and allowed them to exit the meeting.

DPE on its annual report and financial statements for 2021/22

Mr Phumulo Masualle, Deputy Minister of Public Enterprises, said the Acting Director-General would present the DPE’s annual report and financial statements for 2021/22. It was a year when things had begun to get back into motion after the disruption caused by the lockdown of the past two years. Some of the challenges to the Department remained resilient, but it had managed to make progress in addressing some of them.

Ms Jacky Molisane, Acting Director-General, DPE, presented the annual report and financial statements for 2021/22. She said the Department had maintained a sound governance and compliance framework on how it utilised its resources, as it had obtained an unqualified audit opinion with findings in the 2021/22 financial year. The AGSA had identified two audit findings affecting the auditors' reports on the financial statements, and those had subsequently been corrected. The AGSA had also identified one audit finding affecting the auditor’s report on the predetermined objectives, and the report was subsequently adjusted.

On the analysis of expenditure, she said the spending for the period ending March 2022 was 99.4% (R39.1 billion of R39.3 billion). The total spending, excluding payments for financial assets or transfers made to SOCs as at end of March 2021, was 87.3%. R218 million was for departmental operations and R38.8 billion was for equity injection for SOCs. The R38.8 billion was used by the SOCs to settle government-guaranteed debt, of which R31.7 billion was for Eskom, R4.1 billion for SAA, and R3.1 billion for Denel.
The under-expenditure of R252.2 million was primarily related to CoE due to vacant posts, as appropriate candidates could not be attracted with specialised skills, as well as reduced travelling expenses because of the COVID-19 restrictions, and capital assets due to the delay of international delivery for information technology (IT) equipment. The spending on transfers and subsidies was 97.4% of the budget, which was for households and departmental vehicle licences paid to the municipality.
Ms Tshabalala said the Chairperson and the Committee Secretary had been temporarily disconnected from the meeting, and had asked her to facilitate the progress of the meeting until they reconnected. She allowed the Members to ask questions to the Department.
Discussion

Mr Cachalia wanted to know if Eskom’s new board had met, how often it would meet, when the Committee would get a chance to engage with it and how often that would happen. What measures were in place to ensure the independence of boards? Could the Committee access all the completed shareholder compacts, and how soon could this happen?

How did South Africa compare against South Korea, New Zealand and Sweden as the best international examples concerning performance agreements with SOEs? How much had preferential procurement in terms of black economic empowerment (BEE) and non-essential labour in the entities cost the DPE in the 2021/22 financial year, especially in the distressed entities like Eskom, Transnet, Alexkor and Denel?

He also asked for an analysis of the overlaps, gaps, and syncs between the DPE’s initiatives and the President’s Council on the SOEs and the National Energy Crisis Committee, and how the efforts to stabilise, reposition and supposedly turnaround differed materially from previous efforts in the past three years in terms of inputs and outputs. He also asked for the details of the ‘green shoots’ at Denel.

Ms Malinga requested the DPE to first address what the AGSA had referred to as a lack in their financial statements. She asked them to clarify why they had submitted financial statements with misstatements. She said the SOEs were overseen by the Department, but it had done much better than the SOEs, which meant that the Department was a ‘bad parent’ and needed a crash course to help them set an example for the SOEs. She wanted to know the involvement of the supply chain manager in the irregular expenditure of R32 million, and what the self-review application for the appointment of service providers was.

Ms Mkhwanazi asked for assurance that the Shareholder Management Bill would be enacted. She wanted to know what the Department’s plan was on its unachieved targets, and asked for its response to the AGSA’s comments on the Department’s inability to do its oversight work. What consequence management actions would be implemented by the DPE to deal with the AGSA’s recommendations?

Ms Tshabalala said that considering the deteriorating energy availability factor and the unprecedented load shedding that was not a direct consequence of a poor strategic direction and purpose, what would the main functions of a board be? Were there direct consequences of operational inefficiencies that could be traced to the Eskom workforce?

Why was the DPE using an increase in the energy availability factor and a reduction in load-shedding as metrics to measure the competence of the Eskom board? If indeed the increase in the energy availability factor and the reduction of load-shedding were metrics for measuring the competence of the Eskom board, why was the term of the old Eskom board extended while the energy availability factor was deteriorating and load shedding was implemented between 2019 and 2021?

Seeing that Eskom wanted to repurpose some of the old coal power stations into renewable energy projects, one would have expected the composition of the new board to reflect this by striking a balance between competencies in engineering and renewable energy technology, but it did not seem like the new board addressed that. Why had this balance not been factored into the appointment of the new Eskom board?

She said the expenditure on Programme 1 (Administration) was R29.8 million, which was lower than the adjusted appropriation and under the expenditure accord on all sub-programmes except the office accommodation, which was recorded as an over-expenditure of 16.6%. The under-expenditure was attributed to vacant posts and projects that could not commence during the year. The over-expenditure on office accommodation was due to accruals for municipal services (water and electricity) that had to be settled. While the under-expenditure was significant in Programmes 1 and 2 in relative terms, in absolute terms, it was driven by Programme 3. What was the DPE doing to ensure that this would not recur in the future regarding risk management?

She wanted to know what consequence management actions would be taken against the senior management that did not adequately review and monitor compliance with applicable legislation, resulting in the Department incurring unauthorised and irregular expenditure. What would the DPE do to ensure that the R3 billion liability of SAA was appropriated, which would also lead to the finalisation of the partnership with the strategic equity partner?

DPE's response

Deputy Minister Masualle said the new Eskom board had met, especially given the urgency and seriousness of having to deal with the energy crisis in the country. The new board would also present itself to the Portfolio Committee as soon as possible. The shareholder compacts could be made available to the Committee by the Ministry.

The main function of the new Eskom board was to be the accounting authority of Eskom, and to give overall leadership to the entity on its affairs. They also had a duty to ensure that all the operational activities would be executed and reported on, and that they would provide overall policy frameworks from within the activities. The view of the Ministry, having consulted Cabinet, was that the men and women appointed to the new Eskom board represented the mixture of skills considered relevant and necessary to help Eskom towards a better state of health.

Using the energy availability factor as one of the instruments to determine performance was one of the key challenges currently faced by Eskom. One of the key targets of the newly appointed board would be to turn around its performance and increase the energy availability factor up to 75%. This would ensure that generation would be increased enough to ensure that energy generation would continue to improve and there would be a lesser burden of load shedding. This would require a greater focus in each generation unit to ensure effectiveness and consistency in producing and providing the grid with electricity.

Ms Molisane said when the DPE undertook its shareholder compacts, they had ensured that they undertook international benchmarks with companies similar to the international standard so that their targets would be empirical and scientific. She said they would submit the analysis of the overlaps, gaps and syncs in writing to the Committee.

When the AGSA undertook the audit of the Department, the entities were at different stages of their own audit processes -- for example, Eskom and SAA were currently being audited -- so the numbers provided were consistently revised until the finalisation of the audit. The misstatements identified by the AGSA were a reflection of that, and in the future, the Department would have to plan around synchronising its financial statements with the entities. However, it would not be perfect at this stage because the different entities were facing different challenges, and some of their audits would take longer than others.

The Department had also established a CFO forum with the entities, where they identified and shared best practice and lessons learnt within the portfolio, because it was not good that one SOE would be struggling while another would be doing very well. The Department believed this would also help the entities improve their financial status and synchronise their progress.

She said the Shareholder Management Bill would see the light of day, and the Department would inform the Committee of its progress. The DPE had conducted pre-screening on all its entities’ board members before they were appointed, and a proper vetting process had been followed. The root causes identified by the AGSA would be the Department’s primary focus, but they would need to ensure that their planning was aligned with the strategic objectives of the national framework and government’s strategic intents.

Consequence management was one of the areas the DPE was scrutinising and ensuring that disciplinary processes would be undertaken where there were cases that were proven, and all the necessary evidence was provided. The DPE needed to tighten up, especially on procurement matters. Some issues were currently under investigation, and the Department was waiting for the report on the outcomes of the investigations and would act on the recommendations.

The DPE was looking to set aside the contract involving the R32 million in irregular expenditure, and the matter had been escalated to the courts. On the R3 billion SAA liability, she reminded the Committee that when SAA went into business rescue, the original amount it had required was R14 billion, and R10.5 billion had been provided, so the entity was waiting for the balance, which was the R3 billion.

She was confident about the ‘green shoots’ at Denel, because the DPE had seen some of the strategic partners who were reluctant to engage with the entity in the past coming to the party and willing to engage with the Department. The order book was already approaching about R12 billion and increasing, and there would be some other initiatives that the entity would undertake with clear interventions of turning around the entity to ensure it would take its rightful place.

She asked Adv Melanchton Makobe, Deputy Director-General: State-Owned Companies Governance Assurance and Performance, to provide more details on the Shareholder Management Bill, the vetting of board members and contractual matters, and on the cases that were before the courts.

Adv Makobe was unable to comment due to technical issues.

Deputy Minister Masualle requested that the DPE make written submissions to the Committee on the outstanding matters.

Ms Tshabalala said when changing the board of an entity in the middle of a crisis, the Department needed to ensure that it put in people who would be equal to the task at hand and could actually solve the crisis. She requested all the outstanding information to be submitted in writing to the Committee, including the shareholder compacts, and the information by Mr Cachalia.

She warned the Acting DG of the DPE about being ‘confident’ that certain things would happen and interventions would be made, because the Department had made such promises in the past and failed to deliver.

She thanked the Deputy Minister for always availing himself to the Committee, thanked the Department for its presentation, and allowed them to exit the meeting.

Draft fourth term programme

Mr Disang Mocumi, Committee Secretary, read the draft fourth term programme of the Committee.

The Chairperson thanked Ms Tshabalala for facilitating the progress of the meeting while he was disconnected, and asked for a mover and seconder for the adoption of the programme.

Ms Tshabalala requested the inclusion of the study tour of the Committee in the draft programme, even though it was still being negotiated with the House Chairperson. She also requested the Committee to start attending physical meetings, especially with entities such as Eskom and Denel, as there were Committee rooms available in Parliament.

The Chairperson said the study tour was still a proposal until it was adopted and until a go-ahead was given by the House Chairperson, so it could not be included in the Committee programme. The Committee had applied for venues to hold physical meetings and was still awaiting a response in that regard. He asked for a mover and seconder for the adoption of the programme.

Ms Tshabalala moved the adoption of the programme, and was seconded by Ms Mkhwanazi.

The Committee adopted its draft fourth term programme without amendments.

The meeting was adjourned.