Denel, SASSA, DFFE, Alexkor & Land Bank 21/22 Annual Report: AGSA Input; SIU update on SABC investigations

Meeting report

Ms Madidimalo Singo, Business Unit Leader, AGSA, introduced the presentation. She was in charge of the Alexkor and Denel audits. She was accompanied by: Ms Nomthandazo Ndlovu, Deputy Business Unit Leader: Alexkor, AGSA; and Ms Chisitso Kurebwatira [spelling unconfirmed], Deputy Business Unit Leader, AGSA.

Ms Singo remarked that with the Alexkor audit, it was previously a section 43 audit, meaning that it was an audit where the AG opted not to audit Alexkor. The board had then appointed Ngubane, a private audit firm, to conduct the audit. Colleagues from Ngubane Incorporated were present in the meeting. All the section 43 audits appointing private audit firms were required in terms of regulations to obtain concurrence from the AG regarding private firms appointed. Recently, with Alexkor, there was a request that the AG take over the audit from Ngubane. That was after the AG had provided the necessary concurrence, and it had recommended some quality control measures that should be put on the audit. The AG accepted the engagement of its taking over the audit. From the 2021/22 audit, the AG would be conducting the audit of Alexkor, and taking it over from Ngubane Incorporated. She also highlighted that the audit of Alexkor was delayed, and it would be presenting the audit outcomes for the 2021 financial year. The delay in the audit outcomes was primarily due to the delay in the submission of the financial statements. The AG was currently busy with the 2021/22 audit for Alexkor, on which it would then brief the Standing Committee on Public Accounts (the Committee) once that audit was concluded.

Ms Ndlovu briefed the Committee on the Alexkor audit outcome for the financial year 2021/2022.

Audit opinion history

The audit outcome of Alexkor for the 2021/22 financial year was still outstanding. The previous year’s audit outcome in 2020/21 was qualified, which was an improvement compared to the disclaimed opinions from the years before that.

Overall message on the audit outcome 2020/21

The audit of Alexkor for 2020-21 was significantly delayed and was only concluded in May 2022.
This was mainly as result of the late submission of the consolidated and separate annual financial statements (AFS) for audit by management. The overall audit outcome for the 2020-21 audit has improved from a disclaimer audit opinion to a qualified audit opinion. The improvement in audit outcomes is mainly attributable to management having implemented some of the recommendations made in the prior year audit.

Although the AGSA noted an improvement in the audit outcomes, the consolidated and separate annual financial statements submitted for audit for the 2020-21 financial year still contained material misstatements in a number of areas such as environmental rehabilitation liability, inventories, trade and other payables, taxation, net cash flow from operating and financing activities as well as disclosures of impact of prior period errors for property, plant and equipment and intangible assets. These material misstatements have resulted in the entity receiving a qualified audit opinion as management did not ensure that there are adequate controls over the preparation of the consolidated and separate financial statements and compliance with laws and regulations.

For purposes of the 2020-21 audit, we noted that there was inadequate oversight by governance structures over preparation and review of the consolidated and separate annual financial statements as the entity did not have a fully constituted board as required by section 66 of the Companies Act and the chief executive officer at the time was acting as the board and the audit committee was vacant/not established. The AGSA did not commend the executive authority for appointing the board and the audit committee subsequent to the finalisation of the audit.

The entity has experienced high staff turnover and this has impacted the timely submission of
the annual financial statements for audit as well as the ability to ensure that there are adequate
controls to ensure that the appropriate disciplines over financial reporting and monitoring are
in place. Overall there is an urgent need for the entity to stabilise the key management positions
(e.g. CFO) in the finance department as well to improve the overall internal control environment to ensure that the entity prepares credible and reliable financial statements. The AGSA encourages management to put in place an audit action plan to ensure that it addresses the root causes of the repeat material misstatements in the annual financial statements that have led to a qualified audit opinion. Currently the entity does not have an internal audit function and we recommend that the entity establishes or appoints an internal audit function to support the audit committee in their oversight function.

Alexkor’s performance

According to the annual integrated report of 2020-21, diamond production remains Alexkor’s priority. It did not achieve the following indicators related to that area: Land and mine production; deep-sea production; mid-waters production.

The entity had not achieved its target production in turn, which resulted in non-achievement of the revenues target, this would also impact operational and capital funding for future projects. Recent estimates of national expenditure 2023 (ENE) suggest that the entity was struggling to meet the average benchmark of 45 000 carats per annum. This was mainly due to capacity issues such as lack of funding for exploration activities, impact of Covid-19 and maintenance of old infrastructure.

Irregular, fruitless and wasteful expenditure

During the 2020-21 audit, the audit did not identify material non-compliance with legislation
relating to procurement and contract management and there was no irregular expenditure
incurred in those respective years. A significant portion of irregular expenditure incurred in previous years was also condoned by the National Treasury (NT). The controls around prevention of fruitless and wasteful expenditure should be strengthened as we have noted an increase in the fruitless and wasteful expenditure.

The unaudited figures are reflecting a potential increase on the fruitless and wasteful expenditure as well as irregular expenditure, the AGSA would like to urge management to strengthen controls to ensure compliance with key legislation.

Discussion

Ms Kurebwatira wanted to highlight that most of the issues raised came from the Alexander Bay Mining (Alexkor RMC JV), which was an incorporated entity that did not properly comply with the Public Finance Management Act (PFMA), so there was a control issue with that entity.

The Chairperson asked when the AGSA anticipated bringing the audit up-to-date.

Ms Ndlovu said that AGSA had already started with the planning of the audit, and it was working to finalise the audit within the next few months. It would then be able to report back to the Committee. The audit had already started, and the AGSA was looking to finalise in mid-May, before the submission of the 2023 financial statements.

The Chairperson remarked that the Committee had had issues with Alexkor before; it had appeared before the Committee on the issue of late submission or non-submission. He then suggested that the Committee await the conclusion of the audit process underway, and then conduct a hearing with Alexkor on the basis of both the current audit and the upcoming audit. Thus, if there was any change, the Committee would be in a position to cover ground on both fronts, because it might end up having a “hearing in a vacuum”, only to find that there were changes. He was not preempting the audit, but he thought it would be a better use of the Committee’s time to wait.

Briefing by the AG on the financial statements for Denel, 2021/22

Ms Singo was also leading the team conducting the Denel audit. She said that the 2021/22 audit was outstanding. The primary reason for that was if one looked at the 2020/21 financial year, the financial statements were only submitted 18 months after the year-end. In 2022, the financial statements were only submitted eight months after the year-end. For 2021, the AGA received the financial statements in November 2022. For 2022, the AGSA only received the financial statements in January 2023. Part of the reason for the delay in the submission of the financial statements was the continued operational and solvency challenges that Denel was experiencing. That had resulted in an exodus of skills, thereby impacting the ability of the entity to prepare financial statements. She observed that the AGSA was working with Denel in ensuring that the audits of the two outstanding financial years also got up-to-date, and it finalised those as soon as possible.

Mr Fhumulani Rabonda, Deputy Business Executive, AGSA, briefed the Committee on the Denel audit outcome for the financial year 2021/2022.

Mr Rabonda did not go through the outcome itself, because the AGSA was of the view that those previous outcomes were not recent, because the available outcomes were for the year ended 31 March 2020. That was more than two years ago, and it was of the view that it should rather talk about matters that were more recent.

Overall message

The audits of two consecutive years are outstanding (2020-21 and 2021-22). Denel did not timeously submit the annual financial statements (AFS) for auditing for the 2020-21 and 2021-22 financial year. The financial statements for the 2020-21 financial year were due on 31 May 2021 but were only submitted 18 months later on 30 November 2022. The financial statements for the 2021-22 financial year were due on 31 May 2022, but they were only received on 31 January 2023 (8 months later).

[Please see the presentation for details.]

Mr Rabonda added that the AGSA now had the outstanding statements, and the audit was about to commence. The plan was to have that completed, and to have issued the audit outcomes by the end of July 2023. However, the entity was also planning to submit the 2022/23 financial statements in May 2023, and had requested that if possible, the AGSA could report on all three financial statements for this financial year at the same time. That could add a month to the AGSA’s timelines, and it would then finish around August 2023.

The AGSA encouraged the board to implement measures to ensure that it returned to normality with the timelines of submitting financial statements, having been that late. That was why the Denel board had committed that for the 2022/23 financial year, it would submit by the end of May 2023.

Funding

Denel has listed bonds issued as part of the domestic medium-term note programme
with a limit of R3 300 000 000 and guaranteed by the South African government (the
shareholder). The government has settled most of the issued bonds during the past few
years. The remaining bonds worth R100 million are held by Aluwani Capital Partners with
the following maturity date:
• DENG88 matures on 23 September 2023: R100 million (Aluwani)

On 2 February 2022, Denel’s listed bonds were suspended from the JSE over its failure to submit its annual financial results for the 2020-21 financial year. The non-submission is a breach of the JSE's debt-listing requirements, which stipulate that state-owned companies must submit their AFS within seven months after the end of the financial year. The suspension means the holders of the bonds cannot trade Denel's bonds on the JSE's secondary market nor can Denel sell more debt on the primary market. Should any of the remaining investors call on their bonds, this will be a call against the guarantee to be paid by the government.

National budget allocations (Budget speech and MTBPS)

During the 2021-22 financial year, Denel was allocated R3 billion for the settlement of guaranteed debt and interest under the domestic medium-term note programme (bonds). This reduced Denel’s government guaranteed debt to R290 million as at end of March 2022.

A further R204.7 million was allocated to Denel during the 2022-23 financial (through the medium-term budget policy statement [MTBPS]) to settle a portion of the remaining government guaranteed debt plus interest. The remaining government guaranteed debt is R100 million which is maturing on 23 September 2023. Furthermore, Denel was allocated R3.4 billion from the MTBPS to pay off debt and complete implementation of its turnaround plan.

Audit opinion history

Mr Rabonda observed that the audit opinion from 2019/20 and further back did not represent the current state of the entity, because they were three years old. There had been disclaimers for the past three years prior to 2020/21 and 2021/22.

Discussion

The Chairperson said the dilemma was the state of affairs at the state-owned enterprises (SOEs). Alexkor had a late submission, and Denel was the same. South African Airways (SAA) was in the same basket of problems. It was the “highest level of disdain” in terms of doing the right things. It was the absence of consequence management on the part of the powers that be with so far as the management of the SOEs was concerned.

Ms A Beukes (ANC) asked for clarification on the annual financial statements: According to the AGSA, there was a capacity problem in Denel. What was the current status? Denel submitted financial statements for 2021 and 2021/22. Was there a change in the quality of those statements?

Mr Rabonda replied that what caused the capacity challenges was that when the entity was experiencing financial challenges, it lost a lot of staff members. There was a period where employees were not getting paid. That affected not only the technical side, but also the management and financial sides as well. To be able to provide financial statements, Denel had to hire consultants, who then came and helped it to file the financial statements. On the quality side, the AGSA could not say with certainty the quality of the financial statements because those had yet to be audited. With the outcome of the audit, the AGSA would be able to give a clearer picture of the quality. From what management had said to it while Denel was submitting, the root causes of the disclaimer that had been seen in 2019/20 had not been addressed. Denel had addressed qualification areas that spoke only to preparation of financial statements and consolidation. There were still a lot of areas that had not been addressed. That was according to what Denel indicated upfront with its submissions, so that the AGSA could be able to scope the audit appropriately. 

The Chairperson asked when the AGSA expected the completion of the outstanding audits.

Mr Rabonda said the AGSA expected to complete the audits by the end of July. It was doing both audits at the same time; i.e. the 2020/21 and 2021/22 audits. Management indicated that it wanted to submit the 2022/23 statements by the end of May. Denel requested that if possible, it wanted the AGSA to incorporate it into the ongoing audit, and report it at the same time. If that was practical and got adopted, it may move the audit timelines by a month. The AGSA would then report by August. It would be pushing its July timeline for the two audits that Denel had already submitted.

The Chairperson said that there was a fundamental risk in the negotiating process as an established statutory process, in the sense that auditing must not be at pleasure and comfort of the auditee, wherein their terms take precedence. If that was the case, it must be about them not cooperating, particularly in the SOE space. In Hamlet, there was a very apt line: “Something is rotten in the state of Denmark”. Here, he could say that “Something is rotten in the state of SOEs”. He hoped that the AG did not fall into the trap of that being normalised. That was why one was of the view that the PFMA itself, in allowing for late submission, needed tighter regulations on what could be delayed, or how a delay could be endorsed. It could not be open-ended, with the one-page letter which said “absolutely nothing”, and then there was a delay.

Ms Singo wanted to say that the AGSA was concerned, because a delay not only impacted the areas that her colleagues were talking to, but it also impacted heavily on accountability and oversight, to the extent that those entities were not able to present the financial statements for audit. That in turn impacted the AGSA’s ability to conduct those audits. Equally, impacted those charged with governance and oversight responsibilities, in ensuring the necessary oversight was exercised over the entities that the AGSA was talking to that day. The AGSA encouraged the Committee to engage with the relevant accounting authorities to ensure that those financial statements that were delayed were not only submitted, but the quality thereof was such that it would add value to the oversight processes. She felt it was important to emphasise the point that the Chairperson raised, and also the impact that the AGSA was seeing with the delays in submission, especially as it related to accountability and oversight.

The Chairperson said the Committee would prioritise accountability and oversight. There was a need for a very frank discussion between the Committee and the Department of Public Enterprises, and the boards of the entities, particularly Denel. He was deliberate in asking for the slide showing the history of Denel’s audit outcomes to remain up, because it told one exactly of the problem. As long as Denel remained in that way, it was a problem.

Briefing by the AG on the financial statements for SASSA, 2021/22

Mr Lourens van Vuuren, Business Unit Leader, AGSA, introduced the presentation. He was part of the team responsible for the audit of the South African Social Security Agency (SASSA).

Mr Faizel Hassen Jogee, Senior Manager, AGSA, presented a briefing document.
FIndings - compliance with legislation or performance information.

Audit outcomes

As in previous years, SASSA achieved an unqualified audit with findings. Findings mostly related to compliance with legislation, or with regards to the performance information.

Regarding the findings on reporting: The actual achievement reported for the percentage of new grant applications processed within stipulated time frames differed from the supporting evidence provided for audit, as a result the accuracy of the reported achievement for that indicator could not be confirmed.

Impact: In-accurate systems to track application turnaround times has a direct impact on service delivery by the entity, this is due to some undetected delays in providing social assistance to citizens. This is also aligned to public outcry on delays of processing of their applications by the agency.

Performance against targets

In 2021/22, 72.5% of targets were achieved, and 27.5% of targets were not achieved.
Key targets not achieved:
- Number of children below the age of 1 in receipt of the children’s grant
- Number of social relief of distress applications awarded.
- Percentage of Covid-19 Special Relief grant applications processed.

Impact of targets not achieved:
- The targets not achieved have an impact on delivery of services to the public in alleviating poverty and providing necessary social assistance in a timely manner for those in need.

Financial health

Revenue:
- Debt- collection period >90 days at SASSA
- Average debt- collection period was 100 days at SASSA.
- More than 10% of debt irrecoverable at SASSA.

Expenditure:
- R1.6 million of expenditure was fruitless and wasteful (2021/22)
- Average creditor-payment period = 30 days.

With the fruitless and wasteful expenditure in 2019/20, the R320 million increase was around an amount of R316 million. That amount was related to material irregularities, and it had to do with the payment to a previous service provider, Cash Payment Services (CPS). This was initially determined to be irregular expenditure, then in 2019/20, it was moved to fruitless and wasteful expenditure, because there was no benefit received. At the same time, it was also removed from fruitless and wasteful expenditure to a debtor, because the court pronounced that R316 million should be recovered from that supplier. From 2020/21, one could see a big reduction in fruitless and wasteful expenditure, because that amount was now included in the debtor’s amount, and was subsequently impaired in the debtor’s amount. It was impaired in the debtor’s amount because the recoverability of that amount was “very slim”.

Irregular expenditure

In 2021/22, SASSA incurred R55 million in irregular expenditure. This was a decrease compared to the R73 million incurred in 2020/21.

Impact:
- Breach of five pillars of procurement – Equitable, Fairness, Cost effectiveness, Transparency and Competitiveness: R54.45 million.
- Other: R176 552 in respect of awards not approved by delegated officials and expenditure incurred without purchase orders.

Consequence management

Of the R994 million irregular expenditure, R652 million relates to 362 cases submitted to the NT for condonation, and SASSA is awaiting the response on these cases. That included the R419 million to do with physical security and various smaller amounts that formed part of the 362 cases, upon which SASSA was awaiting the condonement, and then the write-off with the financial statements.

With material irregularities, one of the largest amounts was R74.8 million, where payments for social assistance service fees were made for services not rendered.

[Please see the briefing document for further details.]

Discussion

The Chairperson said that the Committee would need the AGSA team, at a later stage, to give a consolidated briefing on material irregularities, across the departments and entities where the AGSA had instituted them, and seen them come to a logical conclusion. He suggested that the Committee see the expanded mandate on the Public Audit Act (PAA) as an enabler on one hand, but at the same time, it needed to arrive at a particular conclusion. He suggested flagging the issues around material irregularities, and then the Committee would look at those at a later stage.

Briefing by the AG on the financial statements for DFFE, 2021/22

Ms Thabelo Musisinyani, Business Unit Leader, AGSA, introduced the presentation. She was in charge of the team responsible for the audit of the Department of Forestry, Fisheries and the Environment (DFFE). She was accompanied by Mr [name unclear 1:34:10] Engagement Manager, AGSA.

Ms Musisinyani presented the following summary of the DFFE’s performance:

The overall audit outcome of the department remained stagnant, with the department receiving a
qualified audit opinion.

Over the years from the 2018/19 qualification areas. The AGSA commends management for the reduction in the qualification areas in the current year; however, the internal control environment must still improve to address the remaining areas.

The gradual reduction in the qualification areas is a reflection of the efforts by management to improve the quality of the financial statements submitted for audit through improvement of the monitoring of the financial statements’ preparation; and ongoing strive to ensure that the financial statements are supported by reliable and complete information that has been quality checked.

Another key initiative was the centralisation of the reporting of various processes to the office of the
chief financial officer, which streamlined expectations and ensured consistent reporting processes.
Management should maintain the efforts implemented so far and continue to build on these
implemented processes.

Irregular expenditure has consistently been qualified over the past years under reflection, while capital
work-in-progress has been consecutively qualified since last year. Management must ensure that the
information required to support these balances is compiled timely and, whilst prioritised in the action
plan, the consistent implementation and monitoring thereof will be key in preventing repeat findings in
these areas.

There was also an increase of the irregular expenditure incurred in the current financial year, which
also contributed to the increase in the overall irregular expenditure balance.

Management of DFFE must continue with their efforts to ensure and effect consequence
management through covering all the required matters in this regard. This includes ensuring
that the efforts in this regard also cover the instances of non-compliance and recent years’
irregular expenditure.

Findings on the audit of the annual financial statements

Irregular expenditure
The department did not account for irregular expenditure in the notes to the financial statements, as required by section 40(3)(i) of the PFMA. The department did not implement adequate internal control systems to identify and record all instances of irregular expenditure incurred in both the current and prior years. This resulted in the irregular expenditure disclosure being understated. The full extent of the misstatement identified could not be quantified and the AGSA was unable to confirm the amount of irregular expenditure, stated at R5.4 billion (2020-21: R4.8 billion) in note 24 to the financial statements, by alternative means.

Capital work In progress
The department did not adequately account for the project related costs as required by MCS chapter 11, Capital Assets. The department did not consider whether expenditure incurred during the construction of immovable tangible capital assets was directly attributable to the construction of the assets. As a result, the department inaccurately accounted for direct and indirect costs that resulted in the misstatement of capital work in progress. The AGSA was unable to determine the full extent of the misstatement of capital work in progress, stated at R226.1 million (2020-21: R156.9 million) in note 33.2 to the financial statements as it was impracticable to do so. Consequently, the impact on capital commitments stated at R222.7 million (2020-21: R265.1 million) in note 19 and the prior period errors stated at R272.9 million in note 33.2 to financial statements could not be determined.

Programme 7 – chemicals and waste management
Indicator: Percentage waste diverted from landfill sites (prioritised waste streams). Some planned targets for indicator percentage waste diverted from landfill sites (prioritised waste streams) as per the approved revised annual performance plan and the performance against the planned target were not reported in the annual performance report. The AGSA was unable to obtain sufficient appropriate audit evidence for the achievement of 12.52% tonnes of waste tyres diverted reported against the target of 15% waste tyres in the annual performance report due to the lack of accurate and complete records. We were unable to confirm the reported achievement by alternative means. Consequently, the AGSA was unable to determine whether any adjustments were required to the reported achievement.

Irregular expenditure

During the year under review, the department incurred irregular expenditure amounting to R888 million, which was disclosed in the financial statements. The analysis of irregular expenditure shows that irregular expenditure increased by 238%, compared to the prior year amount of R263 million.

[Please see the briefing document for the full details.]

Fruitless and wasteful expenditure analysis
During the year under review, the auditees incurred fruitless and wasteful expenditure amounting to R9 million, which was disclosed in the financial statements. The analysis of fruitless and wasteful expenditure shows a significant decrease when compared to the prior year.

The DFFE incurred R9 016 000 of such expenditure: Fruitless and wasteful expenditure was incurred by DFFE due to work not completed by the implementing agents, depots that are non-compliant and overpayment of suppliers.

Discussion

Mr A Lees (DA) said that the issue of waste tyres had been a “nightmare” for a decade. Members would probably recall the failure of the first service provider to deal with scrap tyres. The levy charged on the sale of new tyres going directly to that service provider. That provider had a management company that was “making a huge amount of money”, but the scrap tyres were not being sorted out. The budgeting model was changed so that the scrap tyre levy now went into the fiscus. There was a budget allocation to the DFFE to deal with scrap tyres. It seemed that that was simply not working. Mr Lees’s report from tyre dealers was that the agents who were supposed to collect the scrap tyres did it on an infrequent and ad hoc basis. The scrap tyres were building up all over the country, with tyre merchants unable to dispose of those in any other way, particularly not in landfill sites. The whole process was “a mess”. Was the AG of the opinion that the model was once again failing, and that there was a need to look more carefully about how the model was constructed? In particular, the levies were pouring into the fiscus, but not being ring-fenced for that purpose. The Committee would have to submit questions to the Minister of Finance on what the levy revenue was, as compared to the actual dealing with scrap tyres. Did the AG feel it was bad management and competence of the DFFE, particularly not ensuring that the money was spent properly? In one instance, money was paid for a site which could not be used. Or was there a need to relook at the model?

An AGSA colleague who was using Ms Musisinayani’s device responded. He thought that the model was being failed by having fewer processors and a lot of depots that were storing tyres. Some of the programmes that were supposed to ensure that the majority of the tyres being stored at the depots were processed had ceased to operate. His understanding was that there were two big cement factories that were heavily reliant on the tyres, and unfortunately, those factories invested quite a lot of money into those processors to ensure that they received a share of the tyres from the DFFE. Unfortunately, that process failed. If one looked at the ratio of the number of individuals responsible for the waste tyres versus the responsibilities that they were supposed to uphold in terms of monitoring and the processes, then one would realise that the Waste Bureau did not have enough project managers. Such monitoring processes did not happen on a regular basis. There were not enough depots that the DFFE was going to have versus the processors. A lot of processors who were in existence had since closed shop. If there was a way of encouraging the number of proccessors, then there would be a proper system of recycling the tyres that had been stored at the depot sites.

The Chairperson asked the research team, working in collaboration with the AGSA team, to look into the issue of underspending: For example, the KwaZulu-Natal (KZN) Department of Transport had underspent at some point, by about R1.7 billion. Now, there was underspending reported for the DFFE. The Committee needed to look at that, because there was “a lot of underspending in a sea of problems”. He asked the research team, Content Advisor and the AGSA team to look at the underspending. Some might say that it was good that departments did not underspend, but underspending was a problem because departments budgeted consistent with an annual performance plan (APP). If departments were falling short of their targets, in a situation where there were service delivery challenges prevailing, then that in itself was a finding, and something to look into. He suggested that the Committee look into that, and get a full schedule of the underspending. It could also work with the NT, then have the research on underspending circulated to Members in about two weeks’ time. The Committee could also then get written submissions on the reasons why departments and entities were underspending.

Briefing by the AG on the financial statements for the Land Bank, 2021/22

Ms Nopakamo Matanzima, Business Unit Leader, AGSA, introduced the presentation. She was accompanied by Mr Nicholas Mokwena, Deputy Business Unit Leader: AGSA, Ms Ziyanda Vitshima-Tsengwa, Deputy Business Unit Leader, AGSA. All three delegates were on the team responsible for the audit of the LB.

Ms Matanzima said that the LB performance information was not subjected for audit. The main reason for that was the LB was granted a section 92 exemption by the NT to not table the corporate plan. The LB previously defaulted on its obligations with lenders. The LB was currently resolving what it termed the “liability solution”. That was still in progress. Once that debt default had been cured, the LB would be able to submit its corporate plan, and be subjected to audit. The AGSA had only looked at the financial statements, and not necessarily at the performance information of the LB.

Ms Vitshima-Tsengwa presented.

Funding

Land Bank obtains its funding from interest income charged on loans, which is mainly driven
by the size of the gross loan book. The bank earned R2.61 billion (2020-21: R3.03 billion)
from interest income in the 2021-22 financial year.

The bank also generated an investment revenue of R357 million (2020-21: R204 million) in
the 2021-22 financial year.

In 2021, the bank also received a capital injection of R3 billion from the shareholder, the
National Treasury.

The shareholder committed a capital injection of R7 billion over three years (R5 billion in the
2021-22 financial year, R1 billion in the 2022-23 financial year and R1 billion in the 2023-24
financial year). This commitment, however, comes with the condition to re-establish/entrench
the development and transformation mandate of the bank.

Overall message

The overall audit outcome of the bank has improved when compared to the prior year, from a qualified audit opinion with findings to an unqualified audit opinion with no findings. The qualified opinion from the prior year was due to a material limitation of scope in testing of the gross loan book as the AGSA was unable to obtain sufficient appropriate audit evidence on repayments and disbursements by one of the service-level agreement (SLA) partners. This was mainly due to one of the SLA partners refusing to provide the supporting documents for auditing. As part of testing opening balances in the current year audit, the bank was able to reach an agreement with the SLA partner and the audit team had access to the supporting documents. The AGSA was able to obtain supporting documents for both the prior year and the current year, and are satisfied that the prior qualification has been resolved.

There were no material adjustments in the 2021-22 audit; however, going concern remains
uncertain as the bank has not been able to finalise the liability solution.

During the AGSA’s review of the expected credit loss (ECL) model, the AGSA did not identify material
misstatements or areas of International Financial Reporting Standards (IFRS) 9 noncompliance on the overall ECL figure presented in the annual financial statements. The AGSAmade management aware of the findings identified in the components of the ECL model and that the incremental impact of these findings on the overall ECL was not material. The AGSA recommended that management keep track of these findings, how they were addressed and also conduct a review of the updates prior to adjusting the implemented models.

The bank's underperforming loans decreased from R11.33 billion (2021) to R4.99 billion
(2022), which resulted in an impairment release of R800 million of the reported R1.3 billion.
The profits reported in the current year mainly relate to this accounting adjustment and may
not be sustainable in the future. As discussed with management, the decrease mainly results
from the bank’s customers that have moved their loans to other banks. The bank appears to
be losing part of the book that is performing better and might be left with underperforming
loans, which may cause sustainability challenges.

The AGSA encourages the bank to consider rehabilitation and recovery of the non-performing loans
to improve the quality of the loan book. It also recommended that the bank work on a
strategy focusing on its new business model, which will enable recognition of new business
to improve performance and financial viability of the bank.

Going concern

The bank is still operating under a state of default which occurred during April 2020. It is
unfortunate that the liability solution intended to cure the default has taken longer to
conclude than initially anticipated. However, with the support of the shareholder, the bank
and its advisors continue to work together with lenders to find a solution that is suitable for all
stakeholders.

As part of the auditor’s responsibility, the AGSA assessed the financial viability of the bank
by considering the following favourable and unfavourable factors:

a. The bank managed to service its operational costs during the year.
b. The bank managed to make payments to the lenders over the three-year period,
which reduced funding liabilities from R41 billion in 2020 to R36 billion in
2021 and to R29 billion in 2022.
c. Although there is no firm commitment from the lenders not to call upon their debt,
the bank received a letter from the lawyers representing some of the lenders
indicating their support for the finalisation of the liability solution.
d. The minister/shareholder indicated support to the Land Bank by committing to
inject an equity contribution.
e. The bank is in a net asset position and thus remains solvent.

Based on the above considerations, the AGSA concluded that the bank is a going concern,
but a material uncertainty exists due to the liquidity challenges.

Audit of the annual performance report

In the current financial year, the Minister of Finance exempted the Land Bank from submitting a corporate plan in terms of section 92 of the Public Finance Management Act 1 of 1999. The exemption applies until the bank has cured its default position. In this context, the bank did not have an approved annual corporate plan for the 2021-22 audit as a result of the exemption, and the audit team could not perform the audit of predetermined objectives.

[Please see the briefing document for the full details.]

Irregular expenditure

During the year under review, the entity incurred irregular expenditure amounting to R8
million, which was disclosed in the financial statements. This was broken down as follows:
- Irregular expenditure incurred amounting to R7.6 million. This related to an expiration of the contract where management applied for approval from the National Treasury to grant an extension for three years. The National Treasury did not approve the three-year contract in full, and only approved two years to allow Land Bank Insurance to follow and finalise competitive bidding processes in acquiring this service.
- Expenses (of R685 900) were incurred on a single source in contravention of SCM Instruction Note 3 of 2016-17 due to the extension of a contract without the approval of the National Treasury, as well as the deviation from the procurement process without the approval of the National Treasury.

Discussion

Mr Lees did not understand the going concern concept. There seemed to be a bit of “fancy footwork” going on. Could the term “going concern” be explained to the Committee again in terms of the liability solution being spoken about? How did the AGSA get to the conclusion that the LB was a going concern, given that it had about R7 billion worth of bailouts in the past few years, and again last week? Presumably, without the bailouts it was not a going concern. He did not understand what the liabilities solution was.

Sometimes borrowers were referred to as lenders. Generally, most people were loyal to their bank. Mr Lees used himself as an example: He started off with a Post Office savings account, then in 1974 he opened an account with Barclays Bank, which was the predecessor to First National Bank (FNB), and he remained a client of FNB. People did not move banks very easily. In some cases, banks had quite a hold over people, and it was “very difficult” to move banks. The AG flagged risk to the LB’s profitability and sustainability. If the borrowers who were servicing their loans from the LB were moving to other banks, was the AG aware of what the LB was doing to prevent that from happening by making it attractive for those borrowers not to move to commercial banks (where they might be getting better deals or better service)? It was correct of the AGSA to raise the issue of the moving of borrowers from the to the LB, but what was being done to stop that? If the LB landed up with a whole lot of borrowers who could not service their debt, then that could mean bankruptcy.

Ms Matanzima replied that the liability solution related to how the LB defaulted to certain payment obligations in April 2020. That triggered a cross-default of a substantial amount of all of the LB’s borrowings. The LB suspended the payment of interest as well as the capital across all its facilities. Therefore, the LB had loans that were payable in five years instead payable on demand. That meant that all the lenders now had the right to recall all of their loans, and the bank should pay them. However, to prevent that situation, the bank was negotiating with the lenders to ensure that that did not continue or happen. The LB called that a “liability solution”, but in layman’s terms it meant the restructuring of debt from all its lenders, whether it was locally or internationally.

On the borrowers: A new LB board had been appointed by the Minister. The board was working on the whole repurposing of the bank in terms of their strategy. The strategy had been approved by the board, and it had also submitted the strategy to the Minister of Finance, in order for the Minister to approve the operating model of the bank. The strategy also introduced blended finance. The strategy was still underway, and was going through the approval process. The LB board would be able to talk to the Committee about how far it was with the strategy. There was a plan in place to ensure the stability of the bank going forward.

Mr Mokwena said that the LB being a going concern was an area that the AGSA had been worried about since the bank defaulted in 2020. For the AGSA to come to the conclusion that the LB was a going concern, it had to interrogate the actions that were taken by management, and also the activities taking place over the years. As much as the AGSA said the LB was a going concern, it knew that there was a risk, hence the conclusion that as much as the AGSA said the LB could operate as it had been doing over the years, it was high-risk. The AGSA had therefore highlighted [unclear 2:25:10] the matter of asset guarantees. When it came to the action taken by the bank to prevent the new borrowers leaving, it was a case of the repurposing of the bank. For the LB to be able to get good customers, the bank needed to demonstrate that it had good governance, stable entities, and that it was addressing the issues around its mandate. The LB was currently trying to do that; it was repurposing the bank and ensuring that it was enforcing its mandate, so that it could get good customers.

The Chairperson observed that a number of SOEs were cited as going to be receiving cash injections in the budget speech. There was a long list of them: South African Airways (SAA), the LB, the South African Post Office (SAPO), etc. He suggested that the Committee set a date to get a briefing from the NT on the financial interventions, including the takeover of Eskom debt, so that there was broader clarity on that.

Mr S Somyo (ANC) asked if Government was “delaying the inevitable”. Looking into those listed risks, looking into the quantum of indebtedness of the LB, the diminishing customer base, did the AGSA think that the LB would be able to fully meet the standard of venturing into liquidity? He took the AGSA’s point on the solutions the LB was working on, and the declaration by the LB in the numbers in their financials. Was the inevitable not being deferred in that instance?

Ms Vitshima-Tsengwa observed that the risk was there, hence the AGSA noted when it engaged management that the risk was something management needed to look into. Looking at the LB going through the repurposing strategy, it was something that was key to the LB to ensure that it brought in business, and ensured that the entity was going to continue in the foreseeable future. Even with the plans, the risk still remained as long as the liability solution remained unresolved. Further, the risk was still there as long as the bank had not shown improvement in getting more customers. The bank did have a strategy in place to respond to the risk, and it was something that the AGSA continued to look into as part of the audit process.

Mr Somyo said that he was asking his question because if the bank did not get back to “tightening its own screws” around those problematic elements, then the bank might return to its previous standing of a deeper problem. Additionally, he was asking that question so that the AGSA could have a stern approach to the current situation of the LB.

Mr Mokwena replied that the matter was on the AGSA’s radar. It was busy with the matter of the LB. The risk was there, and hence the AGSA was close to that process. He thought that the collaborative effort between management and the shareholders would be important. Such effort would go into trying to manage the situation, and to take into account the strategic importance of the bank when one looked at the role that it played. The AGSA noted Mr Somyo’s comment. It would be close to the LB, and it would make sure that when that risk came, it would alert the relevant parties.

The Chairperson checked if all of the entities had been covered. The Committee would be in touch when the hearings were scheduled, as and when new matters arose. He asked the AGSA to please note the issues that the Committee had flagged. The Committee’s team would be in touch on those areas.

SIU investigations at the SABC

Adv Andy Mothibi, Chief Executive Officer (CEO): Head of Unit, Special Investigations Unit, (SIU) was joined by Ms Gina Pretorius, Programme Manager, SIU; Mr Leonard, Lekgetho, Chief National Investigations Officer, SIU; Dr Jerome Wells, Chief Legal Council: Civil Litigation, SIU; and Mr Kaizer Kganyago, Head: Stakeholder Relations and Communications, SIU. Various lead investigators were also present in the meeting.

Ms Gina Pretorius presented. Since the SIU had presented the information to the Committee previously, it highlighted in red where there had been changes and progress made since its previous presentation to the Committee. There was also a new slide on the savings and cash recoveries that the SIU had made. The presentation covered the following contents:
- Overview of Impact of the SIU’s investigations;
- Summary of savings and cash recoveries;
- Reporting milestones;
- Current status of civil litigation per matter;
- Criminal and disciplinary referrals;
- Governance report;
- Status of SIU invoices.

Overview of Impact of the SIU at the South African Broadcasting Corporation (SABC)

Civil litigation instituted in SIU’s name
• Civil litigation in court in regards to contracts valued at R711 188 035 (which is not necessarily the full amount to be recovered as the court considers J&E order).
• Successful judgements in multiple matters in the High Court.
• R27 122 965 cash recoveries.
• R150 701 738 savings to the SABC by defending claims.
• The SIU and SABC have agreed on a process to consider settling pending matters.

Evidence of criminality referred to National Prosecuting Authority and Asset Forfeiture Unit (AFU)
• 6 AFU Referrals (R100 000).
• 29 NPA Referrals.

Evidence of misconduct referred to the Accounting Officer
• 24 Disciplinaries referred against 14 officials
- 5 executives left
- 2 officials dismissed.

Evidence of any other transgressions referred to relevant authorities (Institute of Directors, IRBA, SARS, various regulatory bodies, Financial Intelligence Centre).

Presidential Report presented to the Office of the President
Proclamation (Procl) R29 of 2017
           1) Interim Report 21/09/2018
           2) Final Report 6/12/2022
Procl R19 of 2018
            3) Interim Report 30/11/2018
4) Final Report 14/06/2019.

Reporting Milestones

• Proclamation No R29 of 2017 (the investigation scope covered a multitude of matters and commenced on 1 September 2017)
• Interim Presidential Report: Submitted on 21 September 2018
• Final Presidential Report: Submitted on 6 December 2022

Ms Pretorius noted that the only change was that the final Presidential Report on Proclamation 29, that went to the Presidency in December 2022; all reporting obligations were concluded there.

Referrals to Date: Civil Litigation, Phase 1

There was an overlap in matters one to three, which all involved Mr George Hlaudi Motsoeneng. In the column Viability of civil action, the text was highlighted in red to show changes since the SIU had last reported to the Committee.

Other matters which showed changes were:
- SekelaXabiso (a financial institution);
- Vision View;
- Lornavision and James Aguma;
- K Moodley and others (also related to the Lornavision matter);
- Bessie Tugwana (also related to the Vision View matter);
- Gekkonomix (Pty) Ltd trading as Infonomix;
- Audrey Raphela;
- Mott Macdonald.

[Please see the presentation for details.]

NPA Referrals Made by the SIU

The investigation has produced evidence to support the 29 criminal referrals to the National Prosecuting Authority. The details of the matter below can be shared as the suspect, a former SABC Executive, has been charged, namely Sully Miranda Motsweni.

In respect of the remaining criminal referrals they involve private companies who contracted with SABC, its Director and former SABC Directors (executive and non-executive), the combined value of the cases is approximately R267 million. The charges vary from theft, fraud, contravention of the Companies Act and the PFMA.  These NPA referrals were done between May 2018 and June 2020. The SIU has requested the NPA to allocate a dedicated prosecutor to deal with all the SABC prosecutions.

[Please see the presentation for details.]

In respect of the investigation relating to the Success Fee Paid To Mr Motsoeneng the SIU made the following criminal referrals:
Evidence pointing towards criminal offences committed in respect of the payment of the success fee, by;
• 3 former SABC officials, and
• 2 former Board members have been referred to the NPA on 9 June 2020.

Disciplinary Referrals to Date

This was a recap of what had been presented to the Committee previously.

[Please see the presentation for details.]

Phase 2 Investigations

All of the outcomes of those matters had already been presented to the Committee, so Ms Pretorious did not go into detail.

[Please see the presentation for details.]

Referrals to Date: Civil Litigation, Phase 2

The changes in the following matters were presented:
- SABC Security Contract Mjayeli Security (Pty) Ltd;
- K Kweyama and 3 others/ SIU (related to the Mjayeli Security matter);
- TNA Media (Pty) Ltd;
- SABC Legends payments;
- Irregularities regarding the Lease of the SABC Offices in Nelspruit from Rybak Properties;
- Review application by George Hlaudi Motsoeneng against Public Protector & Others;
- Irregular payment of Mr Motsoeneng’s legal fees.

With phase 2 disciplinaries, the only movement was that the SABC elected not to proceed with disciplinary action against Ms Irene Lesabe. The SIU was engaging with the SIU to find out the reasons for that decision.

SABC Governance Review

Adv Mothibi presented.

During the course of its investigations, the SIU requested the services of Governance Experts to conduct a review on the governance structures in place at the SABC, the failure thereof and how it contributed to the position of the SABC.  This was communicated to the SABC Board at the presentation done on 12 February 2020.
The review period for the governance review was 1 November 2011 to 31 March 2019. The scope of the review  was 146 policies identified that were pertinent to the SIU’s investigations. The detailed scope and mandate are set out in the Governance Report. 

The SIU submitted the Governance Review Report to the Former SABC Chairman and thereafter the Former SABC Board. The SIU is cognizant of the feedback from the SABC that during this time the SABC has also simultaneously performed work on the governance at the SABC. The strides made by the Former SABC Board in improving governance were also reported to the Office of the President.

Adv Mothibi added that in the main, the governance review focused on what the presidential proclamation authorised the SIU to investigate, which was maladministration and malpractice. It was called a governance review in the legislation, but in a sense, it was really to ensure that the SIU reviewed the governance process as a whole, if appropriate. What the SIU needed to do further was to re-engage whenever the board was appointed, and to re-engage with management.

Breakdown in Ethical Governance

Adv Mothibi presented on the various areas of governance where there was a lack of ethical governance, as well as statistics on policies (e.g. outdated policies and high risk functions).

With regard to behavioural aspects, especially as it related to willful disregard, the SIU indicated instances of various behaviours, such as dishonesty, PFMA contravention, and abuse of power.

Adv Mothibi added that the statistics on behavioural aspects were addressed in detail in the SIU’s final report. If need be, the SIU could go into detail on that issue for the Committee. The SIU would engage with the Committee in parallel with engaging with the SABC management.

[Please see the presentation for the details.]

External Monitoring and Oversight

To ensure actual implementation and its efficacy, monitoring should not only reside in internal SABC structures (given the lessons learnt), but also external oversight bodies (Board to report on certain issues to Presidential DPE Task Team).     

These bodies and monitoring mechanisms could include –
1. Sending SIU report to the Auditor General, for them to consider in their audit plan
2. Extending reporting lines for Internal Audit, to the Department of Public    Enterprises dedicated structures / officials
3. Allocating forensic practitioners to Internal Audit capacity, and including focused probity audits on high risk areas (areas identified in report).

Observations

• Existing policies and procedures at the SABC were bypassed by the Board and Senior Managers, which led to the financial woes of the Corporation.
• There was a general abuse of power at the SABC by the Board and Senior Managers, which promoted unethical behaviour, and caused a variety of problems. 
• Controls were repetitively bypassed through management override, collusion or abuse of power between those in power, or inaction and passiveness from other officials. 
• The limitations of segregation of duties is an internal control measure and reinforces the importance of maintaining a culture of awareness and enablement of officials to act when non-compliance occurs.  • Without an ethical culture, the efficacy of internal control measures is compromised.  

The SIU also made systemic recommendations, such as how employees should be empowered by explaining what constitutes unethical behaviour and what the result of such can be on the Corporation, and how policies should be updated to prevent risk from a governance and audit perspective.

[Please see the presentation for the details.]

Adv Mothibi added that what the Committee had seen was that the SIU was doing an evaluation of an investigation against the proclamation [presumably R29 of 2017, so that it closed the loop, and ensured that it had delivered as expected by the proclamation, and it had covered all the areas. It would do that with the management at the SABC. The SIU wanted to continue to monitor the issue of consequence management, so that all those who had been pointed to were held to account relating to civil recoveries, disciplinary actions, NPA referrals and all others. In that day’s meeting the SIU had focused at length on the issue of maladministration, and malpractice (which included issues around governance failures). The SIU had seen in various state institutions that it had investigated that it was very important to close its investigations in that way, and dive deep into the maladministration, malpractice and governance failures. Those would help the state institutions themselves, the shareholders, and the Committee in continued monitoring of improvement. The SIU expected the SABC board, as the accounting authority, and the SABC management, to include all of that into what could be called a corporate improvement plan. Such a plan needed to have timelines, responsibilities, controls to be improved, and it would need to be monitored going forward. That would ensure that there were prevention measures going forward. Additionally, the issue of monitoring and evaluation became critical on an ongoing basis. While the formal investigation was done, the outcomes were still monitored, and the civil litigation process was ongoing. The SIU wanted to ensure that the disciplinary processes were implemented appropriately. Lastly, he observed that the SIU’s business value chain included the aspects of prevention, where it would interact with the SABC to ensure that there were prevention measures that were put in place.

SIU Invoices on current and previous proclamations

Ms Pretorius presented the figures for Proclamation R29 of 2017, R19 of 2018, and Proclamation R58 of 2010. The presentation also noted that the line items “legal fees” included legal fees incurred by the SABC who instructed Werksmans Attorneys and various Junior and Senior Counsels to litigate in matters. The SIU and SABC used the same attorneys and counsels to save costs, hence all the invoices for both SABC and SIU’s legal costs coming through the SIU. In some cases, these matters were actually initiated by the SABC and SIU later joined in the litigation.

[Please see the presentation for the details.]

In closing, Adv Mothibi observed that with all of the state institutions which the AG presented on (except for the LB), including Alexkor, Denel, SASSA, and the DFFE, the SIU was investigating all of those institutions. The SIU would engage with the AGSA so that it really showed synergy. Both the SIU and the AGSA worked in that space (forensic investigation and financial accountability) with a respective mandate, entities needed to be able to come to the Committee and say that a specific thing caused an impact to such an extent that a multi-pronged approach with the SIU, the AGSA and others would ensure that the entities’ work had the necessary impact, and they were able to prevent maladministration, etc. from happening. The exception was when the NT allowed entities to be exempt from presenting corporate plans. There were some inefficiencies that the SIU had noticed, and the Committee would have heard about that, particularly in SASSA. There was mention of referrals to the NT, and investigations were conducted. SASSA was advised to appoint a legal firm, and the legal firm did its work of advising. The SIU had seen that type of situation, and would be engaging with the SASSA management, so that it could show management that had it referred to the SIU, SASSA would not have seen a “to-and-fro” that was costly. Being advised to get a legal opinion on whether to take action, the SIU would immediately have made that finding, and then made the recommendation.

Discussion

The Chairperson said that the last remark on cooperation between the SIU and the AGSA was well-taken.

Mr Lees commented that Ms Pretorious referred to the legal costs being shared to keep the costs low. He was “glad” that she thought that R23 million was low.

Closing

The Chairperson remarked that the presentation helped with the SABC meeting that would take place the following day (Wednesday).

The Chairperson remarked that it was clear that SOEs were in trouble, and that should be cause for concern. One would have thought by now that SOEs had made significant strides in improvement, but it had not happened. The Committee would continue to have those engagements.

The Committee Secretary would circulate any further announcements, and the Committee would be having an in-person meeting on Wednesday.

The meeting was adjourned.