Marine & Living Resources Fund: hearing; & Quarterly briefing by the Accountant-General of National Treasury

PUBLIC ACCOUNTS STANDING COMMITTEE
16 AUGUST 2006
MARINE AND LIVING RESOURCES FUND: HEARING; AND QUARTERLY BRIEFING BY THE ACCOUNTANT-GENERAL OF NATIONAL TREASURY

Chairperson: Mr T Godi (ANC)

Documents handed out:
Department of Environmental Affairs and Tourism 2002/3 and 2004/2005 Annual Report (available at www.environment.gov.za)

SUMMARY
A hearing was held on the Marine Living Resources Fund, since the 2002 and 2003 annual reports were qualified, and the 2004 and 2005 reports were disclaimed. There was a distinct probability that the 2006 report would also be disclaimed. Members considered the reports under the main topics of governance, personnel issues, management information systems, policies and procedures and performance management and reporting. The new management team had come into office in May 2005 and confirmed that although there were some serious deficiencies in systems, staff skills and financial reporting, it was working to overcome these. The Committee concluded that there was a need for a review of the structure and role of the Fund within the Department of Environmental Affairs and Tourism, since many staff were simply seconded across and policies applied without sufficient thought on their impact. The future of the Fund hinged on the successful implementation of new programmes in April 2007.

A Quarterly Briefing was given by National Treasury, which reported that it had done an overview of the AG’s 2004/05 report. In total, there were 30 unqualified and six qualified reports from the 36 Departments. The major issues were listed and identified, by Cluster. The challenges National Treasury faced included lack of appropriate skills and knowledge; capacity and resource constraints; poor communication; lack of support by management and auditing committees, ineffective Auditing Committees and accountability from accounting officers. It was clear that legislative and institutional frameworks had to be supported with effective oversight and enforcement, that financial management must be linked to performance management and there was a need for a better understanding of audit reports. More oversight structures were required to prioritise interventions and give increased support to Departments by National Treasury. A full description and analysis of the steps that National Treasury had taken was presented. These included steps to set up internal audit frameworks, to facilitate planning between Departments, to establish a risk management framework and other structures to assist learning, an asset management framework, assistance asset registers, formulation of guides and practice notes and performance information. The South African Management Development Institute initiatives were summarised. With effect from 2007/8, templates would be given out to the Departments, the annual reporting cycle would be shortened and a comprehensive reporting basis established. Much progress had already been made but there was a need to focus on empowering oversight structures to ask relevant questions and critique Treasury. Members raised questions on materiality, and commented on the time when the Auditor General’s reports could be made available.

MINUTES
Marine Living Resources Fund: Hearing
Governance Arrangements
Mr P Gerber (ANC) reported that the Department of Environment and Tourism (DENT) had not tabled an annual report for the Marine Living Resources Fund (MLRF) for four years but had now managed, over the last two months, to put together a report. The 2002 and 2003 annual reports were qualified and the 2004 and 2005 ones were disclaimed. In all probability the 2006 report was going to be disclaimed as well. The obvious question was whether this entity was still viable.

MLRF was a public entity and therefore must be completely transparent and correct in its financial accountability, showing value for money for the public. MLRF had been set up in the late 1990s when it was common for Departments to hive-off some of their activities; often to avoid the need for complying with financial rules and regulations, affirmative action and tendering procedures.

MLRF’s main income was derived from levies on fish products, the annual government grant and the proceeds from the sale of confiscated products. Its staff were seconded from DENT. It would be in the interests of the public if it fell under the control of DENT.

MLRF had conceded that its systems of internal control and risk management were not effective. It had alleged that the Auditor-General (A-G) was responsible for the failure to table annual reports for four years. Mr Gerber asked DENT and the A-G to clarify this position.

Ms Pamela Yako (Director-General (DG):DENT) said that it was unclear what was expected of MLRF, and, given the challenges MLRF faced, there was a need to revise the current arrangement. This was however, a topic for another meeting. DENT had not tabled reports for four years and she had therefore tried to comply by tabling the combined report when she and her team came into office on 1 May 2005. She admitted that problems did exist, but stressed that was taking steps to redress them.

DENT and the A-G could continue to blame each other, but she would take responsibility for certain of the failures to comply with the rules. She confirmed that over the last few years, financial statements were not submitted on time and the financial controls were inadequate However she assured the Committee that the current year’s report would be submitted on time.

Mr Shauket Fakie (Auditor-General) said that all audit commitments would have to continue, regardless of any delay in submitting audit reports. .

Mr Gerber commented that MLRF had purchased, but subsequently abandoned, an accounting system for R3.2 million. It now indicated that it would spend a further R5.2 million on another system. He queried why a cheaper system could not be found. He added that only 34 of its 70 staff posts were filled.

Ms Yako replied that her predecessor had written to this Committee on 1 February 2005 citing problems with the financial system that made it impossible to produce reports. Her predecessor had instituted legal action against the consultants who set up the system. Ernst & Young had now developed a new system that should be fully operational by 1 April 2007. The price of the system was determined by the market.

Mr Gerber asked why MLRF’s Audit Committee had met only twice during 2004/5, instead of four times, citing “management unavailability”.

Dr Monde Mayekiso, (Deputy Director General: Marine and Coastal Management, DENT) said this was a difficult question to answer. Ms Yako added that this related to their predecessors in office,  so she had no idea why they were allegedly unavailable to attend meetings.

Mr Gerber asked if the public was getting value for money for abalone if MLRF received R25 per kilo in levies but sold abalone for R700 per kilo. He suggested it should review the costing levels to make this fishing more worthwhile for fishermen. He felt that poaching resulted from such a large gap in the prices.

Dr Mayekiso replied that MLRF was not happy with the low levy it received but was unable to raise it as MLRF had to develop cost-recovery framework by March 2007. The levy could be increased thereafter.

Mr A Ismail (Chief Financial Officer (CFO): MLRF) added that it was not MLRF’s main role to sell abalone, and it had only started to do so two years ago. MLRF was developing new strategies with regard to abalone, in consultation with the A-G as this was a stock issue. Once the policy document was in place and had been signed by the A-G, MLRF would deal with the matter more appropriately..

The Chairperson commented that it really did not help the Committee when Departments spoke mainly of future events and plans.

The A-G clarified that it was not the role of his office to approve policies, although it would provide input if needed.

Mr Gerber suggested that it would be useful for MLRF and DENT to do a cost-benefit analysis of the administration of the abalone industry.

Ms Yako agreed that such analysis would be useful to assess the costs to the taxpayer, as well as analyse how much of the species remained. It was not only a financial matter.
 
Personnel Issues
Ms A Dreyer (DA) commented that only 34 of the 70 posts in MLRF were filled, and the A-G had highlighted skills shortages as being a major cause of many of the problems. She asked if MLRF had done a skills audit.

Ms Yako replied that the figure of 70 was a proposed optimal number. The new team that took office in May 2005 had discovered that the structure of the organisation was incorrect, but this had since been rectified. All new recruits had the necessary skills, but existing staff had not. Existing staff had attended a course in September 2005, achieving good results. Those who lacked adequate financial skills were redeployed to other parts of the Fund.

Ms Dreyer said that many Departments faced high turnover rates and asked what retention strategies MLRF proposed.

Ms Yako replied that retention was problematic but MLRF had a programme to improve its institutional culture, which had been identified by employees as an area of concern.

Mr H Bekker (IFP) asked the CFO if his office would be able to draw up future financial statements without assistance from consultants.

Mr Ismail replied that when he joined the Fund on 1 May 2005, the entire financial function was outsourced. Under his control, this function was taken back by MLRF on 1 October 2005. All reports were now produced internally.

Implementation of new Management Information System
Mr D Gumede (ANC) asked how the implementation of the system would add value to the organisation.

Mr Ismail replied that there were two systems being developed that were scheduled to be completed in November 2006, and then tested in April 2007. One was the Marine Activity System and the other was the financial system. These systems would add value to the Fund by ensuring control.

Mr Gumede asked how MLRF was going to ensure the accuracy of the information from the systems.

Mr Ismail replied that the systems had built-in checks and balances that were reported at every stage. MLRF was also implementing a three-phase reconciliation system to ensure that any discrepancies were captured.

Mr Gumede enquired how MLRF would ensure the reliability of the personnel involved.

Ms Yako replied that the disciplinary processes regulated the conduct of the personnel.

Mr Ismail added that the governing legislation defined certain roles and responsibilities, such as the authorisation of permits.

Policies and Procedures
Mr R Mofokeng (ANC) said that most of MLRF’s problems arose from policies and procedures not having being followed. He asked whether MLRF had any processes in place to review its policies and procedures. He considered that a completion date should be fixed due to the high staff turnover, and stressed that he expected definite answers.

Ms Yako replied that DENT’s personnel and administrative policies were directly applicable to MLRF. However, MLRF was developing its own financial policies.

Performance Measurement and Reporting
Dr A Nkem-Abonta (ANC) commented that the report contained no indication of pre-determined performance objectives. Performance measures had to match objectives. The Committee wanted to see programmes initiated and reasons for spending. Instead, MLRF had only reported that they had demolished illegal buildings. He enquired whether MLRF had documented and defined its objectives.

Ms Yako replied that the main issue was the quality of information and whether it was in line with MLRF’s stated objectives.. She took full responsibility for any lack of clarity, and stated that this clearly must be resolved. The reporting was based on the strategic plan, which contained all of the objectives.

Dr Nkem-Abonta asked if the objectives were couched in such a way that they could be measured, and whether MLRF had an information gathering system in place to report on its performance measures.

Dr Mayekiso replied that the objectives were measurable but that no information gathering system existed.

Dr Nkem-Abonta argued that no assessment could be made under those circumstances, and that the next report would arguably then have the same deficiencies.

Dr Mayekiso clarified his statement, as there appeared to be a misunderstanding. DENT did have a performance measuring system. However, MLRF did not have financial and procurement systems, which were necessary in order to measure some of the MLRF activities.

The Chairperson said that there was a need to review the way in which MLRF was structured, and its role within DENT. It was staffed with personnel from DENT and DENT’s policies were simply applied to the fund without much consideration. MLRF had really struggled to stand on its own feet. MLRF’s future success would hinge on the implementation of many important programmes in April 2007.

National Treasury: Quarterly Presentation
Mr Freeman Nomvalo (Accountant-General: National Treasury) reported that National Treasury had undertaken an overview of the Auditor General’s 2004/05 report. There had been 30 unqualified and six qualified reports from the 36 Departments. The qualified reports related to Central Government and to the Justices and Protection Services Cluster.

On closer analysis of the qualifications in the Justices and Protection Services Cluster report, the Department of Correctional Services had eight major issues, of which five involved asset management. In Central Government, most of the major issues arose from the Department of Home Affairs, where the analysis was hampered by the fact that there was not enough documentation to complete the audit.

National Treasury also indicated that the Auditor General had highlighted certain points of emphasis, and had indicated the extent to which Departments were responding to issues. The reports showed that 31% of the major problems arose in asset management, 20% were in income and expenditure, 13% were in information systems and 6% were in internal auditing. Nineteen matters of emphasis were found in Parliament, the Presidency and the Department of Foreign Affairs both had eleven issues; and the Department of Provincial and Local Government had seven.

In the Financial and Administrative Services Cluster, Statistics South Africa had 14 matters of emphasis and the South African Management Development Institute had ten matters. In the Social Services Cluster, the Department of Labour had nine matters of emphasis;the Department of Education and Social Development had eight; and the Department of Arts and Culture had seven. In the Justices and Protection Services Cluster, the Department of Defence had 68 matters of emphasis (44 of these in asset management), the Department of Safety and Security had 20 and the Department of Correctional Services had 16 matters. In the Economic Services and Infrastructure cluster, the Department of Minerals and Energy had 21 matters and the Department of Housing had nine.

Among the provinces, 34.52% of the issues raised in the qualifications related to asset management, 20.97% to accounts receivable and revenue and 15.48% related to transfer payments (including the Division of Revenue Act).

Mr Nomvalo cited the main challenges National Treasury faced as a lack of appropriate skills and knowledge; capacity and resource constraints; poor communication; lack of support by management and auditing committees (ACs), ineffective Acs, and ensuring accountability by accounting officers through oversight.

Some lessons had, however,  been learned. Legislative and institutional frameworks were essential but were inadequate on their own. They had to be supported with effective oversight and enforcement. There was a need to link financial management to performance management as well as to ensure that there was a better understanding of audit reports. More oversight structures must be set up to prioritise interventions and increase support to Departments by National Treasury.

Mr Nols Du Plessis (Chief Director,Specialist Functions: National Treasury) added that Treasury had reacted to these challenges by setting up an internal audit framework to help increase capacity building. It would also establish a Chief Audit Executive Forum to market awareness of internal audits. It would adopt a cluster approach to internal auditing to get the Departments to plan together. A Public Sector Audit Committee Forum would be established.

For risk management (RM) and fraud prevention, a risk management framework would be set up to give guidance. 211 RM personnel would be skilled with fundamental knowledge. A RM forum would be established to encourage peer learning and a RM Solution would be set up to develop risk registers in provincial and national departments. An internal control framework would be developed to assess the status of internal controls in departments.

For asset management, a framework would be developed to increase and improve service delivery. It was also important to develop asset registers and Treasury was assisting those departments that did not yet have the registers in place. Practical learner’s guides and awareness workshops would also operate. Asset management support units and forums would be established, as well as asset management policy and procedure checklists. Case study material would be developed to foster skills development.

National Treasury aimed to help departments with their annual reports and financial statements, by drawing up guides and practice notes on materiality and significance. To improve supply chain management (SCM), a policy strategy to guide procurement reform was being developed. There would also be practice notes and guides for accounting officers. Free courses would be run for building the capacity of 1677 SCM personnel and a SCM forum would be set up. In future there would be monitoring of contracts in excess of R100 000. For transversal systems, steps were being undertaken to address control weaknesses and there was a project under way to address anomalies.

Mr Du Plessis added that Treasury was in the process of developing a manual giving consolidated guidance for the formulation of performance information for all spheres of Government. This would follow up Cabinet’s decision in December 2004 to develop mechanisms aimed at ensuring that audits adequately indicated whether expenditure succeeded in delivering on Government’s policies and priorities. Large-scale training interventions would be set up, supported by the establishment of a dedicated unit to provide ongoing assistance and feedback to institutions.

A Cabinet Memorandum in January 2006, on audit outcomes for 2004/05, noted transgressions in the non-tabling of annual reports and financial statements. Accounting officers were to submit corrective actions to their executive authorities and these authorities had to implement procedures to monitor progress in addressing audit concerns. The A-G also had to provide analysis of trends, problems and solutions as a result of the audits.

Some of Treasury’s capacity building initiatives included the South African Management Development Institute (SAMDI) Financial Management Training Strategy. SAMDI would enter into partnerships with training providers; oversee the development of training material; oversee the presentation of courses and provide post-training support. Treasury would provide human resource support and financial assistance over the MTEF period 2005/06 – 2007/08. Five training providers would be appointed and courses would be packaged into structured programmes.

 Mr Nomvalo concluded that significant progress had already been made, but focus was needed in empowering oversight structures to ask relevant questions and critique Treasury. There had to be increased capacity building and skills development across government, along with increased support to Departments. National Treasury had taken a decision that this would be the final year where they would give such guidance during the financial year. From 2007/08, templates would be given out at the beginning of the financial year. The annual reporting cycle had to be shortened and there must be focus on asset management to ensure a smooth transition to a comprehensive reporting basis. Finally, there should be strong and effective enforcement of legislation.

The Chairperson commented that in the future it would be preferable for the Committee to have first received sight of the Auditor-General’s Report, so that the Committee was better guided when considering the Departmental reports. The focus areas would then have been clearly highlighted by the A-G’s report.

Mr Fakie said that the earliest date would be the end of October, but that he could prepare, for the Committee, a rough analysis on the reports received in September, with a more detailed one in November.

Mr V Trent (DA) commented that if the AG raised an issue in an audit it was arguably ‘material.’ He asked how the Committee could, without the A-G’s guidance, decide whether a was material.

Mr Fakie said that it was important to go beyond pure financial evaluations and management and ask Departments to focus also on their overall objectives and service delivery. The sooner these ideals were made part of reporting frameworks the better.

Mr Nomvalo agreed that this was critical. Treasury was uncomfortable that the framework for performance reporting had not been completed yet; it should be completed in September. In response to Mr Trent, he agreed that if the A-G did raise an issue it was material. However, that issue had to be looked at in conjunction with other issues to improve service delivery.

The meeting was adjourned.