Health Department Annual Report: hearings & Research and Capacity Building Project: briefing

STANDING COMMITTEE ON PUBLIC ACCOUNTS
22 February 2005
HEALTH DEPARTMENT ANNUAL REPORT: HEARING; RESEARCH AND CAPACITY BUILDING PROJECT: BRIEFING

Chairperson: Mr F Beukman (NNP)

Documents handed out:
None

Summary
The Committee first considered and adopted the minutes from its previous meeting. Members were then briefed on the parliamentary research and capacity building project available to them, and were informed that the first researcher would start work on 1 April 2005.

A deputation from the Department of Health answered questions from the Committee and the Auditor-General’s office on irregularities identified in the Auditor-General’s reports on the 2002/03 and 2003/04 financial statements of the Department. The chief areas identified as problematic were non-compliance with the Division of Revenue Act, lack of fixed asset management, lack of policies and procedures in terms of transfer payments to NGOs, the internal audit function and under spending in the South African National AIDS Trust.

Lack of capacity within the Department was identified as a problem, and this impacted on capacity building for provinces and NGOs. The Department assured the Committee that it was taking steps to ensure that NGOs submitted financial statements. The Auditor-General pointed out that there were still some financial statements missing from the 2002 financial year.

There was as yet no fixed asset register, but the Department undertook to perform a comprehensive stock take by the middle of the 2005/06 financial year. In terms of the South African National AIDS Trust, the Committee expressed grave concern at the fact that the funds had been unused since its establishment in 2002. There had been fruitless and wasted expenditure in the Trust, and the Department was requested to look into this as a matter of urgency, as this was a disciplinary or possibly criminal matter. The Department agreed to report back to the Committee on the issue, and the Committee would then make a recommendation in respect of the funds.

MINUTES
The Committee considered and adopted the minutes of the meeting on 16 February 2005, with technical corrections.

Mr D Gumede (ANC) remarked on the tabling of a letter from the Chairperson of the Ad Hoc Committee on the Auditor-General. Its substance was the same as that of a letter already processed by the Committee and he asked the Parliamentary procedure for its re-surfacing in another Committee.

The Chairperson pointed out that Ms Hogan had given him the letter for information purposes, and that it had been tabled as such.

Mr Gumede pointed out that the Committee had dealt with a letter of identical substance and asked what should be done, as the Committee was an arm of Parliament.

The Chairperson said that the matter had been raised with the Ad Hoc Committee. The Standing Committee on Public Accounts (SCOPA) had agreed on a resolution and this had been adopted by the House. He suggested the issue be put on the agenda for the next meeting.

Dr G Woods (IFP) pointed out that the issue involved the original draft of the report on the arms deal. The Auditor-General had originally released part of the report and this had led to the SCOPA resolution. The matter had been more or less closed. The balance of the original draft had now been released, and new discrepancies had been alleged. This was the reason for the letter from the DA. A new set of issues was being raised.

Mr E Trent (DA) said that he had not been in the Committee for the first hearings, but that this letter dealt with his concern that the Auditor-General’s office was under attack and its integrity questioned. He believed this was not in the best interests of the country or the Auditor-General. He had written the letter in his capacity as a Member of Parliament, as was his constitutional right. He had made it clear that he was not passing judgement. He also pointed out that Ms Hogan would contact the Auditor-General for his opinion.

Ms T Tobias (ANC) agreed that an MP had a right to ask questions, but pointed out that Mr Gumede had been asking the legal implications of re-opening a closed matter. She suggested the Committee seek legal advice, and asked about the standing of issues of information – should they simply be read?

Mr V Smith (ANC) said that he felt that, if the letter was for information, it should not be discussed in Committee, but that the Ad Hoc Committee should deal with it. He suggested that this question be asked by the Ad Hoc Committee when seeking legal advice, as he was concerned about dragging the arms deal back into SCOPA. He suggested the information be noted and it be taken off the agenda. The Committee concurred.

Research and capacity building
Mr Ntsikela (Parliamentary Capacity Building Project) explained that the Project was the result of an agreement between Parliament and the African Capacity Building Project, and had been started in September 2003. The Project was in the process of recruiting researchers specifically for this Committee, and one would be starting on 1 April 2005. The agreement provided for six researchers, and the research department had dedicated four to specific Committees, including SCOPA. Members were requested to relay specific training needs to the Project through the Chairperson.

Mr S Fakie (Auditor-General) remarked that a researcher from an Australian university had also been doing research on public accounts and suggested that the new researcher share some of the study tour.

Annual Report of the Department of Health hearing
Ms L Mabe (ANC) explained that the hearing was based on the 2002/03 and 2003/04 annual reports, and had been convened for a number of reasons. The Department of Health had received a qualified opinion on its accounts from the Auditor-General and it had not appeared before SCOPA in the last two years. Significant matters arose from the Auditor-General’s report, such as problems with internal auditing and fundamental non-compliance with the Division of Revenue Act (DORA), which was a major problem since 91% of the Department’s budget was allocated to the provinces. There was also no compliance with the Public Finance Management Act (PFMA) and Treasury Regulations in respect of transfers to non-governmental organisations (NGOs), and there had been no disclosure of frivolous and wasteful expenditure of R571 114 in terms of the South African National AIDS Trust, as required. What were the problems in compliance?

Mr T Mseleku (Director General) reminded the Committee that he had only taken office in January 2005 and that he might have to call on his Deputy Directors General in some instances. He noted that there were not necessarily problems in terms of the Department’s main budget, but that problems related more to transfers to NGOs, and that this would be strengthened.

Non-compliance with DORA
Mr E Trent (DA) emphasised that non-compliance with DORA was a problem, and showed a fundamental deficiency. In July and August 2003, the Auditor-General had expressed concern about this non-compliance as 90 – 95% of the budget was allocated to transfers. The Auditor-General had issued a 165-page management letter in 2002/03, summarising the problem areas as inadequate financial control, inadequate business plans, inefficient guidance from the Department and inadequate site monitoring visits. The SCOPA recommendations from 2002 had still not been resolved. The internal audit committee had requested management to submit action plans and action dates. SCOPA had submitted questions for oral reply in 2004, and had received unsatisfactory replies. Why was it not possible to monitor the use of grants in terms of DORA?

Mr Mseleku replied that it was possible. Very close monitoring, including site visits, was done in terms of other grants, such as the Nutrition grant. There was a lack of capacity in the Department, but steps were being taken to build it for monitoring and on site visits, and matters relating to compliance. Many steps had already been taken, such as the withholding of transfers and letters to accounting officers in the provinces. He had personally suspended payments in three provinces. There had been a problem in respect of withholding between the National Treasury and the Auditor-General, but this appeared to have been resolved.

Mr Trent asked whether non-compliance could have resulted in fruitless and wasted expenditure.

Mr Mseleku replied that, to the best of his knowledge so far, there was no indication of fruitless and wasted expenditure.

Mr F Muller (CFO) said that there were two audits of the conditional grants, one at national level and one at provincial level. He was confident that fruitless and wasteful expenditure would not occur.
Mr Trent said that, if 95% of the Department’s budget was transferred to the provinces, it was surely incumbent on the Department to track provincial audits.

Mr Fakie said that, at the provincial level, responsibility for fruitless and wasteful expenditure rested with the province and provincial legislature. It was also important to note that the transfer payments were conditional transfers, so there was an element of responsibility on the part of the national Department. He could not convincingly state that there was no fruitless and wasteful expenditure at provincial level. Disclaimers had been issued in respect of the Eastern and Northern Cape, and qualified opinions had been given on the Western Cape, Free State, North West and Gauteng. The underlying reason for this was often lack of supporting documentation. In the North West, the province had disclosed a R3.7 million authorised loss, and the Auditor-General had been unable to verify it. Without supporting documents, it was difficult to conclude that fruitless and wasteful expenditure had not occurred.

Mr Mseleku agreed that the Department should share some responsibility, but pointed out that the Department accepted the reports from the accounting officers in each province. The extent to which monitoring was understood was an issue, as provincial departments could take offence.

Mr Trent asked what steps had been put in place for the future and whether the Committee could expect a substantial improvement in 2005.

Mr Mseleku said steps had been taken to improve compliance. He could not guarantee that this would have impacted positively on the 2004/05 report, but he would guarantee it for the financial year for which he would be personally responsible. He had been assured that it would have a significant impact on the upcoming report.

Mr Trent asked what response had been given to the internal audit committee’s request for an action plan, and if none, why not.

Mr Mseleku replied that the internal audit committee was experiencing an increasing rate of movement of people, and the Department was looking to raise capacity in this regard.

Mr Muller said that the audit committee had been kept up to date on the progress of the monitoring process.

Mr Trent remarked that the Department had twice listed capacity raising as an issue. According to the Auditor-General’s report, there was a 16.4% vacancy rate for key personnel, which translated into approximately 208 unfilled posts. What was the Department doing to remedy this?

Mr Mseleku replied that the Department was doing everything in its power to fill the posts or draw expertise from contractors. In its restructuring processes it was trying to strengthen certain areas identified as problematic and prioritise strategic areas.

Fixed Asset Management
Ms L Mashiane (ANC) asked why the fixed asset register had not been integrated with the basic accounting system and when this would happen.

Mr Muller remarked that the question of asset management was a sore point. It was customary for government Departments to use transversal systems provided by National Treasury, such as the Persal system used for salaries. The National Treasury system did not satisfy the requirements of the PFMA, however. The Department had procured the LOG-TEK system, but this did not interface with the National Treasury system. It was really a question for the Treasury to make available a useable system.

Ms Mashiane asked why there was no inventory lists in staff offices as this could be seen as creating space for assets to be misplaced. How was the movement of assets controlled?

Mr Muller replied that the audit period covered the full financial year, and that the LOG-TEK system had been instituted towards the middle to end of the financial year. The system would be in operation by the end of the financial year.

Mr Fakie placed on record that his office’s observations on the fixed asset management shortcomings went much further than a lack of interface. They had identified the fact that not all assets had been bar-coded or tagged, and there was a breakdown in control.

Mr Muller replied that the Department was doing its best to comply, but that the physical move in the 2004/05 financial year would cause additional problems.

Mr Mseleku said that the Department had waited to stabilise offices after the move, and that a re-inventory would then be done. The situation would have to be updated just before the end of March, so that the Department could start the new year with an inventory.

Ms Mashiane asked whether management would have a mechanism to update or renew the asset register on an ongoing basis and how this would be verified.

Mr Muller replied that assets would be identified and the Department would then ensure that all were tracked.

Ms Mashiane asked whether there were guidelines or policies and procedures in place for fixed assets and inventory. Mr Muller replied in the affirmative.

Mr Fakie said he understood the Department’s attempt to clean up the system and do a stock take. It was important that this became the opening balance and that National Treasury approval be obtained. The Department should indicate the timing of the stock take. He had found Mr Muller’s answer too facile as at the time of the audit, there had been no formal policy in place and he wondered when this had been put in and when it had taken effect. Mr Muller undertook to forward the date to Mr Fakie.

Ms Mashiane referred to the problem with staffing and asked whether there was a staff component specifically dealing with the management of assets, and if not, when this would happen. Did management do a physical inspection of assets?

Mr Mseleku said that he was in the process of doing an inspection of all buildings and assets, but that this was not based on audited financial management. The Department would have to follow the process suggested by the Auditor-General. He agreed that capacity would need attention and undertook to audit the situation and revert to the Committee.

Mr Muller said that there were staff available to manage assets, and that more staff would be recruited if necessary as the Department regarded the position as important.

Ms Mabe said that timeframes impacted on the work of the Department. There should be an asset register for the country, and this would depend on Department asset registers being available.

Mr Smith supported Ms Mabe. Mr Muller had said that the staffing matters were important and that appointments would be made by the end of the financial year. This was within thirty days and Mr Muller had thus made a commitment to Parliament that the situation would be rectified by the end of March. Departments needed to understand that they were taken literally. SCOPA would regard the matter very seriously if this had not been done by 1 April.

Mr Trent said that he believed that what the Auditor-General had said was the bottom line and asked whether the Department would be able to do a major stock take before the end of the financial year.

Mr Mseleku said that he noted the Committee’s concerns about answers to questions and felt that Mr Muller had meant before the end of the next financial year. It was a priority, however, and he could say that, in the first half of the financial year, it should have been finalised. The stock take would not be completed by the end of this financial year because it also required interaction with National Treasury and their approval. It was, however, a top priority. He was not personally aware of what was already in place. Within the first three months of the new year, the Department would have embarked on the stocktaking exercise.

Transfer payments to NGOs
Ms Mabe asked what the Department had put in place to ensure that staff adhered to policies and procedures, and when these policies and procedures would be implemented. How had the Department addressed the problem of non-compliance by staff and why had management not supervised staff on transfers?

Mr Mseleku replied that he saw one of the difficulties with transfer payments as the balance between capacity and controls. Many community-based NGOs might never be able to achieve the standards required and it was necessary to first build capacity in the Department. No transfer payments would have been made without authorisation by the Director General.

Mr Muller said that NGOs had been trained to draft business plans, and the Department was ensuring that provision was made for an audit fee and the appointment of an auditor. It had further specified that, if an NGO wanted to use Departmental funding, it would have to bring its year end in line with that of the Government, i.e. end of March, so that reports were received within cut-off times. The unit within the Department had been strengthened and it had been emphasised that there could be no leeway in dealing with NGOs. To the best of his knowledge, there would be no problems in 2004/05. He had the assurance that all outstanding balance sheets had been recovered from NGOs.

Dr K Chetty (Deputy Director General: Health Service Delivery) confirmed this and said that payments were to be withheld if statements had not been received. Gaps had been filled where weaknesses had been identified.

Ms Mabe asked what follow up mechanisms were in place. Nine NGOs had not submitted audited financial statements for the 2002 financial year, so there seemed to be some inconsistency.

Mr Mseleku said that the information referred to the change in the financial year-end, and at the time the audit was done, the years had not coincided, so there had been no audited statements. The Department’s requirement that financial year-ends coincided was a corrective measure.

Ms Mabe said that NGOs were submitting audited financial statements and the Department was building capacity. She would have expected to have the non-submission by the NGOs in 2002 indicated as a note.

Mr Fakie pointed out that the nine NGOs that had not submitted statements were out of a sample of eleven and this was a very high occurrence. It was not a problem that was few and far between. It was a valid concern that the year-ends were not co-terminus and the Department was making an effort to bring them in line. By the audit in July 2004, the 2002 statements had not been submitted, so this was really a bigger problem.

The Chairperson asked what the Department’s follow-up plans were in this regard.

Mr Mseleku said that, with the information from Mr Fakie, it was a bigger problem than he had realised. He suggested that the matter was one with which to persist, and he took the responsibility of ensuring that, where possible, previous statements were brought in, or funding would be stopped to those NGOs. He suggested that he would submit a preliminary report on this later in the year.

Ms Mabe asked why the Department had not already withheld those funds.

Mr Muller replied that there was a difficulty in respect of NGOs that received once-off funding, and who were then obliged to submit annual reports. Staff in the unit now knew that it was definitely not correct to transfer funds if the necessary documentation had not been received.

Ms Mabe said that she was not happy with this response as she expected funds from the national fiscus to be properly accounted for. In addition, an amount of R29, 982 million had not been used from donor funding and she asked why not.

Mr Muller replied that, in the case of European Union and Belgian funding, the donor agreement was signed and then transfer of funding was made. This ran into the future. The Department had a plan for spending the funds and the money would be spent into the future. In the previous year, the balances had been reversed. The programme in question was coming to an end now, but the European Union had not yet appointed an auditor to facilitate the last part of the donor funding.

Ms Mabe asked when the Department would be finalising its procedure manual for transfers.

Mr Mseleku replied that he believed the manual was already there for training purposes, but, if this was not so, he undertook to produce one within the next three months.

Internal audit
Mr B Pule (UCDP) said that the risk assessment process had not been completed and management was reported to be in the process of developing a risk management strategy. Had the internal risk committee been established, and, if so, when, and what was its brief?

Mr Mseleku replied that one of the first matters he had dealt with when he had come into the Department had been a risk management plan. The committee had been established in March 2004 and was chaired by the Chief Financial Officer. A strategy had been developed and he himself was working through the first draft. It would be finalised by the end of March.

Mr Pule asked whether the Department had a three-year rolling plan and whether this had been accepted by management.

Mr Muller said that the plan had been signed in 2004, but had been submitted much earlier to the audit committee and discussed there. It was agreed that the Department would function on the plan but that it was a living document and would be updated from time to time.

Mr Mseleku said that the audit plan for the current year was being finalised, so by the start of the new financial year, the Department would be moving into the new plan.

Mr Pule pointed out that, according to the Auditor-General’s report, the plan had not been adhered to.

Ms A Muller (Office of the Auditor-General) said that, in terms of the internal audit plan, twelve audits should have been done annually, but only two had been finalised, so the Department had not complied with the plan.

Mr Pule asked whether staff was sufficiently skilled and, if the work was outsourced, whether there had been some skills transfer.

Dr Chetty replied that the Department was looking at getting posts filled and was trying to match post levels to those in other Departments. They were also working on staff retention. The Department had a co-sourcing agreement with Price Waterhouse Coopers that contributed to capacity building, and had a learnership programme through the Department of Public Service and Administration (DPSA).

Mr Pule asked for clarity on whether the Department now had everything in place, as the Committee would not expect to see the same problems in the next report.

Dr Chetty replied that strategies were in place and the issue was being dealt with continuously as it was an ongoing problem. The Department continued to ensure that posts were filled as soon as possible and to get skills through its co-sourcing agreement.

Mr Pule asked what these strategies were.

Ms Chetty replied that the Department was looking at the levels of posts to match other Departments as part of their recruitment strategy. As soon as a new post was created, an attempt was made to keep the individual in the Department. If the vacancy still developed, the post was filled as soon as possible. The Department was also trying to build capacity through its learnership programmes.

Ms Tobias asked how the internal audit committee would be held responsible, as the performance audit system had not yet been implemented.

Mr Fakie agreed that some elements of performance information were disclosed in annual reports and said that this was part of the rollout of the PFMA. Until full rollout, it was difficult for audit committees to fulfil their mandate. The role of the audit committee was currently principally focussed on risk management and identification, and proper follow up mechanisms in terms of their findings, and ensuring that corrective measures were taken.

Ms Tobias asked what control mechanisms there were for under spending in terms of transfer payments.

Mr Mseleku said that the National Treasury had initially viewed funds as provincial funds, so there had been a conflict between the Treasury and the office of the Auditor-General.

Mr Fakie agreed that clarity was needed on the role and responsibility of the transferring Department in terms of DORA and the mechanism to be put in place should conditions not be complied with. It had been found that withholding funds was the best punitive measure.

Dr M Blecher (National Treasury) said that personnel capacity was an issue in terms of conditional grant transfers. Each conditional grant needed a strong management team, and there had been tremendous instability in the management teams in the Department of Health. To date, several of the grants did not have strong enough management teams and a number of additional steps would have to be taken to address the problem.

Mr Mseleku suggested that the issue was a serious one for discussion in Government. The provinces felt that the amount of energy required in reporting mechanisms for conditional grants was greater than could be justified. Detailed project management was required, and the Departments should ask provincial departments to do all of the project management as part of their existing structure.

Dr Chetty said that, in the structure of conditional grants, transfer payments were made to provinces, but no portion was kept aside for proper management so this was taken from existing Departmental funds. Funds were required for project management at provincial level.

Mr Fakie remarked that he understood that the new Division of Revenue Bill before the National Council of Provinces would illuminate the issue.

South African National AIDS Trust (SANAB)
Mr Smith reminded the Committee that the Trust had been formed with R20 million in 2002, and that R10 million had been added to this. R300 had been spent that year.[I SUSPECT THIS FIGURE IS INCORRECT. PERHAPS R300 000??] In 2003/04, the Department had received a donation of R769 000 and interest of approximately R2 million, while no money was spent other than administrative rent and professional services. According to the Auditor-General, the Board of Trustees had never met. The problems in respect of the conditional grants and DORA were reappearing here. No questions had been raised about the lack of use of this money. He asked if the Department was aware of the under spending and when it had become aware of it.

Mr Mseleku said that, broadly speaking, he suspected that part of the problem was the level of people involved, as this made it difficult for them to meet, and suggested that the structure of the Trust should be reviewed. It was a further difficulty that the accounting officer was also a member of the Board. He regarded the need to deal with systems and processes to allow spending of the funds as urgent. The fundamental problem of the membership of the Trust should be looked into, as should its Constitution.

Mr Smith asked for a timeframe to finalise the composition of the Trust, and asked whether the R30 million should not be moved elsewhere.

Mr Mseleku replied that the review would be finalised by the end of April 2005.

Mr Smith said that, since the Trust had been formed in 2002, nothing had happened, but over a half a million rand had been spent on rent. The premises had never been used. Had this been categorised as fruitless expenditure by the Auditor-General? Fruitless expenditure could lead to disciplinary action and/or criminal steps against the accounting officer, and he asked whether the Committee should be looking for a culprit. Fruitless expenditure would be viewed very seriously and he asked what official was responsible.

Mr Mseleku replied that a number of factors had led to the problem. On the establishment of the Trust, staff had had to be appointed, and these had now moved into the premises. Because the Board had been unable to meet, measures such as control measures and budgets were not in place. Fundamental problems related to the fact that premises had to be paid for, as they had been contracted. It was thus more of a structural problem.

Mr Smith asked the Department to give the Committee a progress report on the establishment of the Board and its budget and strategic plan. An indication was needed of what the Department intended to do. When this was received, the Committee would make a recommendation on the R30 million. He reluctantly accepted that no single official could be identified, but he felt that someone must have authorised the transfer of the R20 million, and left the state of affairs from September 2002. Someone should be seriously reprimanded for under-utilising R30 million.

Mr Trent agreed and found it difficult to believe that a transfer could have been made before the administrative capacity was in place. When the Committee had asked the Department about this the previous year, they had been told that there was a unit within the Department that handled the SANAB matter, and the intention was to merge the units. This did not happen. He suggested the Director General follow this up.

Mr Fakie pointed out that someone had also decided to hire premises and pay rental. In terms of the Treasury regulations, he questioned whether the Department had gone through the processes required for fruitless expenditure, as this had not been disclosed in the report.

Ms Mabe confirmed this and said that someone had deliberately not disclosed it. She agreed that it was not possible to use over a half a million rand on a non-existent entity, and asked who had benefited. She believed someone should be held responsible, and asked the Department to assure the Committee that steps would be taken.

Mr Mseleku requested the Committee to allow the Department to answer by the end of the month, and assured them that he would do so personally.

Ms Tobias urged the Department to encourage NGOs to follow the basic principles of financial management and felt it was reasonable to impose conditions on organisations receiving funding. Some way had to be found of managing the fixed assets register. The Department was ultimately accountable and she asked to what extent it had moved from the initial problems. She encouraged ongoing performance audits.

Mr P Gerber (ANC) asked about the relationship with the Department of Public Works in respect of the rental of the building for the Trust.

The Chairperson referred to the problems in respect of the accounting officer being involved in the activities of the audit committee and asked what steps had been taken to rectify this.

Mr Mseleku replied that it appeared members of the audit committee should function alone and that the accounting officer should come as required. In practice, the committee insisted that the accounting officer be present at every meeting. In his experience, if this route was followed, there would always be tension between priorities.

Mr Pule asked for clarity on whether the accounting officer could delegate to the audit committee.

Mr Mseleku replied that the audit committee was there to assist the accounting officer.

Mr Trent said that a huge number of management letters were sent when audits were done, and he asked if these were read and taken note of by the Department as a whole, and discussed with the relevant managers.

Mr Mseleku replied that, in his understanding, management letters were critical and had to be shared with managers. He was unable to comment on whether this had happened in the past.

Mr Muller said that when management letters were received, they were disseminated and sent to the specific cluster managers.

Ms Mabe asked how many learnerships had been established in internal audit and asset management.

The Chairman pointed out that the Department was very important in terms of service delivery, and thus for the Committee, and expressed his understanding that it had had a long period without an accounting officer. The Committee looked forward to the report back as promised by the Director General.

Mr Gerber pointed out that there was an Act on the statute books that assisted police force and defence force members in their financial obligations when on active service. Their obligations were placed on hold and the interest charged on them limited. He suggested that this Act be amended to include young doctors as they finished university.

The meeting was adjourned.