South African Airways and South African Diamond Board interrogation of Audit Report 2005/06

STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
14 March 2007
SOUTH AFRICAN AIRWAYS AND SOUTH AFRICAN DIAMOND BOARD INTERROGATION OF AUDIT REPORT 2005/06

Chairperson: Mr T N Godi (PAC)

Documents Handed Out:
South African Airways (SAA) annual report for 2006
South African Diamond Board Annual Report (available at www.sadb.co.za)

Audio recording of the meeting Part 1 & Part 2

SUMMARY
Members of the Committee met with representatives from South African Airways (SAA) and the South African Diamond Board (SADB), in order to discuss the various issues that were raised by the Auditor General during the previous financial year. Members asked SAA to state how many board meetings and executive committee meetings took place during the financial year, and also asked for clarity into whether the members of the board and the executive committee provided sufficient time to the company. Members also raised the issue of performance bonuses, and asked SAA to state why R60 million was allocated to paying performance bonuses when then the company was making a loss. Other issues raised included irregular contracts that were paid to suppliers, SAA’s non compliance to the Public Finance Management Act (PFMA), and SAA’s pending court cases.

Members questioned the SADB on various issues ranging from the issues regarding the issue of the London stockpile, the credit control policy, and the weaknesses in the asset management.

MINUTES
South African Airways
Mr P Gerber (ANC) said that the SAA financial statements were shocking, and that the external Auditors that were appointed by SAA came out much more critical than usual. The external auditors stated that there seemed to be a discontent amongst staff members, unapproved procurement transactions, and unrecorded liability. SAA should state how many board meetings took place during the financial year.

Mr Khaya Ngqula (CEO: SAA) replied that he did not have the exact numbers off the top of his head

Mr Gerber pointed out to Mr Ngqula that there were 7 meetings, and asked him to state how many executive committee meetings took place during the financial year.

Mr Ngqula replied that there were 24 executive committee meetings

Mr Gerber then asked Mr Ngqula to state how many executive meetings he personally attended.

Mr Ngqula responded that he was present at 5 of the meetings, which dealt with operational matters.

Mr Gerber said that according to the annual report SAA had 11 board members; however it appears that some of the board members appear to have lots other interests. SAA should therefore elaborate on the commitment of its board members, since board members seem to have an average of 20 directorships in other companies, 
 
Mr Ngqula replied that it was not his responsibility to follow up on the actions of the board members, however it is to be noted that the minister of public enterprises approved a new board shortly after the compilation of the annual report.

Prof Gerwel added that the shareholders appoint the board, and that there was satisfaction with the commitment of the previous, however if it is found that a board member is defaulting on his responsibility, then action would be taken.

The Chairperson asked SAA to state how many of the previous board members were retained
 
Prof Gerwel replied that 4 members of the previous board were retained

The Chairperson then asked SAA to state whether the members of the executive committee provided sufficient time to the company.

Mr Ngqula replied that the executive team is currently at a transitional period and is constantly rebuilding itself. There is without a doubt satisfaction with the amount of time that the members of the executive have provided company.

Mr Gerber asked SAA to comment on the 7 Jumbo jets that have been taken off service.

Mr Gareth Griffiths (Chief Financial Officer) replied that the jumbo Jets are still in the fleet

Mr Gerber then asked SAA to state whether they were planning on purchasing any new aircrafts.

Mr Griffiths replied that SAA was not planning on purchasing any new aircrafts

Mr Gerber asked SAA to state why R60 million was allocated to paying performance bonuses

Mr Griffiths responded that SAA had a rigid budgeting policy in place, and had contractual agreements with the employees in which it was stated that they would be given a certain amount in bonuses at the end of the financial year.

Mr Gerber stated that the process was unethical in that a company cannot pay out large sums of money for performance bonuses when the company’s performance is low.

The Chairperson asked SAA to state whether they had a performance appraisal policy in place.

Mr Ngqula replied that there was an appraisal policy in place and that all bonuses were paid in appraisal of staff.

Mr T Mofokeng (ANC) stated that one cannot sign a performance bonus at the beginning of his contract

Mr Ngqula replied that that is an issue that needs to be taken up by the board

Mr Gerber asked SAA to comment on the R2.2 million renumiration packages on pg 101 of the annual report. 

Mr Griffiths responded that the packages were for different years; however there is a mistake in the report, which fails to state the difference.

Mr Gerber asked SAA to state whether they were aware of any more mistakes in the annual report.

Mr Griffiths replied that there were no other mistakes

Mr Gerber asked SAA to comment on the figure on pg 101, which was paid to individuals who were asked to leave the company.

Mr Griffiths responded that was paid to a Mr Viljoen, who left the company in 2004.The amount paid was for the salary and the settlement.

Mr Gerber then asked SAA to provide an explanation into the incentive bonus paid on pg 107 of the annual report

Mr Griffiths replied that the amount should be viewed in respect to the previous year’s profits, in that it should have been accrued in the previous year; however it was placed under the current year.

Mr Gerber asked SAA to state how much the company lost in 2005

Mr Griffiths responded that the numbers were currently unavailable

Ms A Drayer (DA) stated that according to the external auditors several inefficiencies were raised which included irregular contracts that were paid to suppliers and were not at all evaluated. SAA should comment on the matter and state why there was such a great deal of irregular expenditure.

Prof Gerwel replied that there was indeed irregular expenditure and SAA is trying to correct the lack of systems that exist in the company. The Company is plagued with serious irregularities; however the board is doing the best it can to sort out the issues.

Ms Drayer asked SAA to provide details on what is currently being done

Prof Gerwel responded that the company had improved on its internal audit system, and has also set up a risk office, which ensures that there is PFMA compliance across all sectors.

Ms Drayer then asked SAA to state whether they believe they have sufficient staff that can implement policies effectively

Mr Ngqula replied that the company did have the necessary staff and disciplinary action has been taken on those involved in fraudulent activities. It is also important to note that SAA has recruited a chief risk officer, and a new head of recruitment officer.

The Chairperson asked SAA to state whether there is a comprehensive list of contracts

Mr Ngqula replied that there was a list of contracts, which can be forwarded to the members Committee.

Ms Drayer then asked SAA to state whether they incurred any losses as a result of the expired contracts.

Mr Ngqula responded that the company had indeed incurred losses as a result of the contracts

Ms Drayer asked whether it was possible for SAA to provide a timeline in which the losses will be calculated

Mr Ngqula replied that it was very difficult to asses the losses.

Ms Drayer stated asked Mr Ngqula whether he was personally accountable for the losses.

Mr Ngqula replied that he held himself personally accountable, and has several meetings with the board, in which the matter was addressed.

Ms Drayer requested for a detailed report which proves that steps have been taken to address the matter, and action has been taken towards the individuals that are responsible for fraudulent activities.

The Chairperson noted Ms Drayers request and stated that SAA should provide a report together with a list of names within a week of the hearing.

Ms Drayer said that according to the independent auditors, the procurement systems at SAA did not comply with the PFMA. Therefore SAA should state on whether there are any shortcomings in SAA’s procurement policies.

Mr Ngqula replied that the board was definitely aware of the shortcomings; however SAA has placed new procurement policies which have been approved by the board.

The Chairperson then asked whether the issue of assumption of authority with regards to procurement has been addressed.

Mr Vishnu Naicker (Chief Risk Officer) replied that the issue has been addressed, and also SAA has improved its monitoring and compliance division through the implementation of a new procurement system.

The Chairperson also asked for clarity into whether the list of legislation with respect to compliance has been completed.

Mr Naicker replied that the list had been completed, and a team has been established to ensure that there is compliance to the PFMA across all sectors.

Ms Drayer asked SAA to comment on the progress on the investigations into the procurement process by the external auditors.

Mr Ngqula replied that SAA took disciplinary measures against the individuals involved.

Ms Drayer then asked SAA to comment on the supply and the installation of the Closed Circuit Television Recorders (CCTV).

Mr Naicker responded that the issue came about as a result of disgruntled bidders who felt that they were treated unfairly during the bidding process.  An investigation was launched after which it was discovered that nothing fraudulent had taken place.

Ms Drayer asked SAA to comment on what happened to the report on the investigation

Mr Naicker responded that the matter was submitted to the audit committee, which found that all the valid processes had been followed.

Ms Drayer then asked SAA whether they were satisfied with the company that won the bid, and whether they believed that the company met all the tender requirements.

Mr Naicker replied that SAA was indeed satisfied with the company that won the bid

Ms Drayer stated that one of the requirements for a bidding company is that it has to operate at a national level, however the company that that won the bid was a small company based in Gauteng, which is not one of the requirements.

Mr Naicker replied that an independent tender board chose the winning company, and SAA believes that the board took the right decision.

Mr Drayer further stated that the winning company had amended the price of its product during the bidding process.

Mr Naicker responded that he was not aware of the matter

Ms Drayer asked whether SAA had done a risk assessment of the company prior to the bidding process

Mr Naicker replied that there was no risk assessment taken.

Ms Drayer asked SAA whether they had an idea into how many directors were in the company

Mr Naicker replied that he had no idea, and that SAA assumed that the correct procedures had been undertaken during the tender process.

Ms Drayer stated that the company only had two directors, and had a turnover of R2 million per annum. She also asked SAA to state whether they knew of how many assets the company had.

Mr Naicker replied that he was not sure about the amount of assets the company had

Ms Drayer stated that the company had no assets at all, and requested that SAA should provide details of the company, since the public needs to be made aware of the matter. It is unjust for a small company to be charged with providing security to thousands of people.

Mr Naicker corrected Ms Drayer by pointing out the fact that the small company only provided CCTV. Security is handled by a totally different company which has a completely separate contract. 

The Chairperson stated that the point Ms Drayer was trying to make was that there was not a rigorous process during the bidding process.

Mr Naicker said that with the new systems in place, the issue will not occur again.

Mr Gerber asked SAA to state whether the head of marketing still had the power to bind the company into large contracts.

Mr Ngqula replied that the situation has already been rectified, and checks and balances have been put in place in order to address the matter.

The Chairperson asked SAA to state whether appropriate measures had been taken to address the issues regarding the budgeting process, as raised by the Auditors.

Mr Griffiths stated that the auditing process was flawed in that they did not run a thorough into the budgeting process. It is important to note that there has been a new process that has been implemented, which includes a peer review system.

The Chairperson asked SAA to comment on its ticketing pricing system

Mr Ngqula replied that the challenge with the ticketing system is one of supply and demand. The online system provides discount which aim to benefit the customer, by cutting off the travel agent fees.  Before price is determined SAA looks at its cost structure, and compares it to the competition.

Mr Mofokeng asked SAA to state how much the company has allocated to the SAA open.

Mr Ngqula replied that the SAA open was part of the companies marketing, and the figures will be disclosed at a later stage.

Mr Mofokeng asked SAA to comment on the renumiration package paid to management on Pg 41 of the annual report.

Mr Griffiths replied that he did on have the details of the renumiration package.

Mr Mofokeng asked SAA to comment on the salary increase listed on pg 99 of the annual report.

Mr Ngqula responded that the salaries were restraint of trade, in which an agreement was made to pay the people who came in before 2004.

Mr Mofokeng asked SAA to state why an aircraft was bought under an operating lease instead of a finance lease.

Mr Griffiths replied that under an operating lease, the risks and benefits associated with ownership remain classified.

Mr Gerber asked SAA to comment on how much Mango airlines is costing the company

Mr Ngqula responded that the matter was not raised in the current financial report, therefore the question is irrelevant.

The Chairperson stated that the question was not irrelevant as SAA has all the relevant information regarding the matter, and can be provided even at a later stage. 

Mr Ngqula replied that it is a matter that needs to be taken to the board.

The Chair stated that all the Committee needs is information, and the matter does not require approval from the board.

Mr Trent (DA) asked SAA to comment on how they have successfully managed to turn a huge loss in one financial year, into a huge profit, followed by another loss.

Mr Ngqula stated that SAA has been in a period where cost cutting measures have been put in place.  The strike in 2005 and the increasing price of oil have contributed greatly to the loss during the financial year.

Mr Trent then asked whether the sale of air crafts had anything to do with the loses
Mr Ngqula stated that the sale of aircrafts had nothing to do with the losses.

Mr Trent asked SAA to comment on their relations to SAA express.

Mr Ngqula replied that there were no relations apart from the fact that SAA handles the ticketing and ground handling for SAA express. 

Mr Trent asked SAA to state whether the issues of contingent liabilities with the South African Revenue Services (SARS) had been cleared up.

Mr Ngqula responded that all the issues with SARS had been cleared.

Mr Trent asked SAA to comment on the progress regarding its pending court cases, especially the one with the US Justice Department.

Ms Lisa Zondo (Legal Counsel) stated that there various court cases in which SAA is involved in. Some will be speedily resolved; however others will take a long time to process. Investigations into the anti-trust issues with SAA will take a long time, and there is no capability on quantifying on what the liabilities may be.

Mr Trent asked SAA to comment on the progress made with regards to the competition commission.

Mr Ngqula replied that all issues with the commission have been resolved, and SAA is busy compiling a compliance programme.

The Chair thanked the members of the SAA delegation for the co-operation in clearing up some of the issues raised by the auditor general. 



South African Diamond Board

Ms Drayer stated that according to the Auditor General, there were weakness in the asset management, and asked SADB to state how they plan to rectify the matter.

Mr Sleeking replied that the assets were moved from one office to the next. The matter was resolved in les than a month after the report was presented.

Ms Drayer stated that she accept the answer, however the matter still was not corrected until it was noted by the auditor general.

Mr Pule said that according to the Auditor General, assets could not be physically verified. Therefore SADB should provide clarity on who is tasked with the verification of assets.

The Chairperson stated that the board has said that all assets have been traced and can be verified. However SADB should state whether all the issues raised by the auditor general have been fixed.

Mr Selekane replied that there had been measures taken to deal with all the issues that were raised, and also SADB has contracted people to attend to certain issues.

Mr Mofokeng added that according to the Auditor General, there was a lack in the monitoring controls, SADB should state on whether the matter has been rectified.

Mr Selekane that the matter came about as a result of the late budget submission, this was because the chairman was out of the country, and was unable to approve the budget.  The matter has since been rectified

Mr Mofokeng then asked SADB to comment on their strategic plan

Mr Selekane replied the SADB is currently in a transitional process in that a new entity of the SADB has been established, in which new board members have been appointed, and implementation of a strategic plan is currently underway.

The Chairperson asked SADB to comment on its human resource plan in place.

Mr Selekane replied that part of the long term strategic plan of the SADB was resourcing the new entity. SADB is currently recruiting in order to improve on its long term strategic plan in terms of human resources.  The long term plan strategic plan has not been approved by the outgoing board.

The Chairperson said that according to the Auditor General, the board entered contract with an IT company, in which the contract was signed by a junior official without the delegated authority. SADB should elaborate on the state of the contract and why a junior official signed the contract.

Mr Selekane replied that the contract was part of a consultancy service, and was signed by a financial manager; however it was not the person that the department had deployed and the contract only run for 3 months.

The Chairperson asked SADB to state whether the current changes affect contractual any obligations with the diamond board, since according to the Auditor General there is no credit control policy at SADB.

Mr Selekane replied that there were nine policies that have been approved by the board. The policies however were on a draft stage when the Auditor General visited.

Mr J Mthethwa (Financial Manager) added that the Auditor General also indicated that they were waiting for board approval, which has already happened.

Mr G Koornhof (ANC) asked SADB to state whether all the policies have they all been complete, and also to state on how many audit committee meetings are attended by the Chairperson annually.

Mr Mthethwa replied that all policies had been debated, after which they were implemented.

Mr Selekane added that there were 6 different committee meetings held in a year, and attended meetings whenever available. During the previous financial year there were more meetings that took place than what is mentioned in the annual report, and also 50% of them were attended by the chairperson.

The Chairperson asked SADB to comment on the amount owed of R60 000, and also to state what has been done to solve the matter.

Mr Selekane replied that the case has been referred to debt collectors. The debt originated in 2003 when a client who was a licensed dealer presented a rough diamond under the pretence that the diamond was temporarily imported and had to re-exported.  SADB performed several investigations and it was concluded that the Diamond was actually a South African stone; SADB therefore persisted to collect the debt and took the matter to the debt collector.
 
Mr Gerber asked SADB to comment on the issue of unpolished diamonds, found on Pg 25 of the annual report, and also state where the diamonds are being imported from.

Mr Selekane replied that the diamonds came from different countries, and only 15 % are from South Africa.  The diamonds are part of the total production from all the De Beers mines.

Mr Gerber asked SADB to state the progress regarding the issue of the London stockpile

Mr Selekane replied that the matter has been debated several times, and many meetings have taken place in order to address the issue.  A report on the matter will be available to members of the Committee when it is available.

Mr Mofokeng said that the fact that the issue has been debated for 13 years and yet there is still no resolution was unacceptable.

The Chairperson stated that it is the Department of Minerals and Energy which is supposed to respond to the matter, and as a result of the Committee’s full schedule, there has not been sufficient time to meet with the Department of Minerals and Energy to resolve the matter.

Mr Koornhoff said that the Department of Minerals and Energy should not be the only entity that provides an answer; national treasury should also be held accountable.

Meeting Adjourned.